Shared service centers: Where quality precedes quantity

July 29, 2009

Shared services in a low-cost location? That makes sense at first glance, doesn’t it? But a shared service center established in a high-cost region? Does it work? Yes, it does – let me guide you through Germany for a few of minutes to show you, how. Are you ready for the trip?

What are shared services? What is the difference between them and the outsourcing concept? Let’s explain it in just one sentence: Outsourcing is about letting work done by a third party, shared services (insourcing) are about the concentration of company resources in form of an internal entity providing back-office services to multiple internal partners.

According to a research “CFO-Studie 2007 Reorganisation im Finanzbereich” undertaken by Horváth & Partner, corporations establishing a shared service center (SSC) expect it to bring them the following results:

– Cost reduction (68%),
– Economies of scale (62%),
– Increase of process quality (57%).

Frankfurt1 Shared service centers: Where quality precedes quantity

That corporations want to reduce their costs does not automatically mean that shared service centers are established in low-cost regions. The criteria for choosing a location for a shared service center are similar to those used for choosing of outsourcing destinations. These are as follows:

– Availability of qualified personnel,
– Local cost structures,
– Experience already gained regarding the location,
– Integration with the company infrastructure,
– Political stability,
– Life quality,
– Transport and technology connection.

They can be clustered in three dimensions: cost-related, human-related and related to business environment. All of them are taken into consideration while deciding whether to establish a shared service center in a certain location or not. Therefore, countries having relative high costs compensate this factor by the quality of infrastructure and human capital. No wonder that countries with relative high costs, as US, Germany, Canada, UK, France and some other are among the 50 most attractive global outsourcing destinations, listed in A.T. Kearney Global Services Location Index™ (GSLI).

Let’s now take Germany as an example, as promised before. For a few years this country has been very likely chosen as an attractive location for shared service centers. These and many other companies have decided to locate their shared service center in Berlin, the capital of Germany:

– BASF: (European HR and F&A service center),
– Corning Cable Systems: sales and customer service, serving customers from Great Britain, Germany, Austria and Switzerland,
– Opodo / TRX: ordering and accountig for the German language countries,
– Parexel: European finance shared service center,
– Schindler Elevators: payroll, accunting, IT, marketing, customer service,
– VW Leasing: accounts receivable.

Why is Berlin as popular as a shared services location? The advantages of the German capital are as follows: language skills, low employee turnover rates and relative low rental costs. Let’s take BASF as an example: After considering of many European locations, BASF has decided for Berlin in 2005. Hans-Carsten Hansen, Head of HR explained this decision as follows: “Berlin has more than fulfilled our expectations, especially regarding recruitment of well-qualified staff speaking many different foreign languages.”

There are also many shared service centers of other corporations in Germany, located outside of Berlin.

Quantity meeting quality… Or even: quality preceding quantity… – only this combination works while willing to establish a successful shared service center. That holds true for outsourcing as well.

Magdalena Szarafin
http://www.szarafin.info


Comments

14 Responses to “Shared service centers: Where quality precedes quantity”

  1. Captive vs Shared on July 31st, 2009 5:14 am

    Interesting blog, I’ve been reading that captive centers are either closed or sold to pure outsource vendors. What is the difference between these two?

    Not sure in this economy if companies want to start their own captive centers rather than outsourcing it to offshore/onshore/nearshore vendors

  2. Magdalena Szarafin on July 31st, 2009 6:12 pm

    Thank you for the interesting point in the shared services vs. outsourcing discussion.
    Well, actually, for many corporations shared services are the begin and the end at once – they are not going to outsource them to third parties. The recognize the benefits of outsourcing, however, they experience something, which can be summarized in one word: fear.
    Let me give you some figures from a study undertaken by IBM among finance professionals. Over 60 percent of them indicate concern over losing control of planning and controlling; 40 percent fear a loss of control over sensitive data or potential leakage of that data; and 33 percent perceive a loss of control over the processes and function. Almost 25 percent believe that their corporate culture could not handle that kind of disaggregation, outsourcing would be too expensive, or they do not know a qualified provider. And 20 percent consider their finance functions too unique to be outsourced…
    Magdalena Szarafin
    http://www.szarafin.info

  3. Process Standardization on August 3rd, 2009 7:54 am

    Shared services is a good concept on paper, not sure how many companies are in a position to use it on regular basis. For e.g, I know simple accounting task is been performed differently within a same company and within the same accounting department. Without business process standardization, shared services is just a topic discussed in companies without actual implementation

  4. Magdalena Szarafin on August 3rd, 2009 4:21 pm

    Thank you for the comment. Actually, many corporations use shared services. In Europe there are about 70 percent of bigger corporations.
    Let’s imagine a group consisting of 100 companies: In traditional model, each of them has their own accounting dept. What about establishing a 101st company which would deal with providing accounting services to other companies of the group: it is going on shared resources, it is a shared service center.
    Regarding the aspect of standardization: yes, it is one of the dimensions of shared services. Shared services are defined by standardization, harmonization, economies of scale, service delivery and continuous improvement.

    Magdalena Szarafin
    http://www.szarafin.info

  5. Cheap deals of today – Are they really a bargain of tomorrow? | Outsource Portfolio on August 5th, 2009 6:40 pm

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  6. Shared services in Europe on August 6th, 2009 11:21 am

    Can you tell me which countries in EU region can effectively compete with BRIC countries for shared services?

  7. Magdalena Szarafin on August 8th, 2009 10:35 am

    Thank you for your short but in fact very complex question. I would deal it in 2 components:

    1) Cost aspect in outsourcing vs. shared services:
    I would tend to the following opinion: While outsourcing operations, companies mainly look after cost savings. Other aspects as focus on core business, quality improvement and other ones follow the cost aspect.
    The situation is different while establishing shared services: Corporations want the headquarters and subsidiaries to focus on their core business, improve quality, standardize, harmonize and optimize processes. Economies of scale, process standardization and harmonization lead to cost savings.
    Therefore I would formulate the following conclusion: Cost aspect is one of the objectives of outsourcing. This aspect can be an objective of shared services as well but it is more a consequence of establishing them and using of synergies.

    2) European Union vs. global outsourcing locations (BRIC)
    As mentioned before, cost aspect is not as crucial for shared services as it is in case of outsourcing. That explains why many corporations tend to use the brownfield approach rather then the greenfield approach deciding where to establish their shared service centers and establishing them also in high-cost locations.
    I would now pay attention at The 2009 A.T. Kearney Global Services Location Index™. There are 50 most attractive global outsourcing locations listed in it. To determine the attractiveness, the following criteria have been used: financial attractiveness, people skills and availability, business environment. While these three areas are very important in terms of outsourcing, I would say, for shared services people skills and availability, business environment are most important. So, the global competition, where to establish a shared service center would rather take place in the human-related and business-related area in connection with experiences of corporations in different countries and location of their headquarters.
    In this context, I would say, the following EU countries could have a chance to compete with BRIC (sort key: attractiveness in the human-related and business-related area): United Kingdom, Spain, Slovakia, Romania, Portugal, Poland, Lithuania, Latvia, Ireland, Hungary, Germany, France, Estonia, Czech Republic, Bulgaria.

    Magdalena Szarafin
    http://www.szarafin.info

  8. That can be the end of outsourcing… | Outsource Portfolio on August 9th, 2009 7:36 pm

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  10. Shared services in the heart of Catalonia | Outsource Portfolio on August 18th, 2009 4:43 am

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  11. Arunav on September 5th, 2009 3:49 pm

    Hello Magdalena

    I always used to think companies tend to choose low cost location for SSCs. Your article seems to contradict this understanding and is very thought provoking.

    Like you I’m also writing dissertation on SSC and am wondering if you would be ok to exchange views and ideas related to this topic. Look forward to hearback from you soon.

    Many thanks

  12. Magdalena Szarafin on September 6th, 2009 3:45 am

    Thank you for your comment and contact – I wil contact you via e-mail.
    Yes, I am of the opinion that while traditional outsourcing is mainly cost-driven, shared services can be cost-driven but they do not have to be. But: thank to harmonization and standardization of processes they actually achieve cost savings.

    Magdalena Szarafin
    http://www.szarafin.info

  13. Prem Vijoy on September 10th, 2009 4:54 am

    Shared Services Center being established in the Developed countries primarily leverages the cost effectivenes through the Technology. Labour Arbritrage which the BRIC or any Eastern European Countries provides can not be matched with the high labour cost in a developed country like Germany. Its the deployment of BPM solutions on common technology platforms spread across different line of businesses and delivery services through the Hub & Spoke model which ultimately helps Organizations to achieve its objectives of establishing shared services center.

    BRIC countries are ready to provide low cost production centers with same quality, service delivery and SLAs, buts its the cutting edge Technology which helps companies to bridge the gap of labour arbritrage and helps organization achieve hamornization , optimization and standardization of its internal service production units by setting up SSC in their own countries as cited in the above article.

    Thanks,
    Prem Vijoy

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