Shared Services Center
Encyclopedia
A shared services center – a center for shared services
in an organization – is the entity responsible for the execution and the handling of specific operational tasks, such as accounting, human resources
, payroll
, IT
, legal, compliance
, purchasing
, security
. The shared services center is often a spin-off of the corporate services
to separate all operational type of tasks from the corporate headquarters
, which has to focus on a leadership and corporate governance
type of role. As shared services centers are often cost centers, they are quite cost-sensitive
also in terms of their headcount, labour costs and location selection criteria.
, IT services, facilities, logistics
, sales transactions) on the basis of a service level agreement
(SLA) with a costs charge out on basis of some type and system of transfer price.
Shared service centers are deployed for a variety of reasons:
Reported cost reductions of costs of services organized in shared service center are as high as 70% of the original costs, but average about 50%.
Shared service centers are not to be confused with corporate staff departments. Different from staff departments, shared service centers have measurable outputs (by quantity and quality), with costs per unit of service provided. Tasks not organized in shared service centers include corporate control, corporate legal, management development policy, IT-governance and other support typical for the statutory duties of the executive board.
Shared services training:
Many organisations in private and public sectors use a competency-based training course to identify and fill skill gaps. The SSO Pro course is one that looks to do that with an industry-relevant certification.
(SLA), but the approval of the SLA is a reserved power of the executive board. This is to balance the overall budget of the firm as well as to avoid budget gaming between the managers of the business unit and the shared service center.
A common mistake is to grant the shared service center a status equal to that of business unit or division. This creates confusion as it conflicts with the primacy of the units responsible for managing market opportunities. Also shared service centers better should not report to their corresponding corporate staff department (with the exception of the financial shared service center) as this creates the risk that the corporate staff department uses the shared service centers to deploy functional authorities. Managers of business units, respectively division will then perceive the shared service center as an implicit control device, impairing the quality of services.
It is equally important that deploying a shared service center in a multi-unit organization makes the executive board accountable to the managers of the business unit respectively the divisions for the performance of the shared service centers. This is because the use of the services of the shared service centers is mandatory, the executive board reduces the scope of resources of the business units, whilst the accountability of the manager of the business unit for business performance remains unchanged.
In the accounting system a shared service usually will have the status of cost and investment center. As some shared-service centers, e.g. for purchasing and for customer service, dependent on their activities, actually perform value-creating activities, to the judgement of fiscal authorities, transborder transfer prices may be subject to taxation.
Shared services
Shared services refers to the provision of a service by one part of an organization or group where that service had previously been found in more than one part of the organization or group. Thus the funding and resourcing of the service is shared and the providing department effectively becomes an...
in an organization – is the entity responsible for the execution and the handling of specific operational tasks, such as accounting, human resources
Human resources
Human resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations...
, payroll
Payroll
In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...
, IT
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
, legal, compliance
Compliance (regulation)
In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Regulatory compliance describes the goal that corporations or public agencies aspire to in their efforts to ensure that personnel are aware of and take steps to comply with relevant laws and...
, purchasing
Purchasing
Purchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations...
, security
Security
Security is the degree of protection against danger, damage, loss, and crime. Security as a form of protection are structures and processes that provide or improve security as a condition. The Institute for Security and Open Methodologies in the OSSTMM 3 defines security as "a form of protection...
. The shared services center is often a spin-off of the corporate services
Corporate services
Corporate services are activities that combine or consolidate certain enterprise-wide needed support services, provided based on specialized knowledge, best practices, and technology to serve internal customers and business partners....
to separate all operational type of tasks from the corporate headquarters
Corporate headquarters
Corporate headquarters is a term used to describe the entity at the top of a corporation to take full responsibility for the overall success of the corporation, ensures Corporate Governance...
, which has to focus on a leadership and corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
type of role. As shared services centers are often cost centers, they are quite cost-sensitive
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
also in terms of their headcount, labour costs and location selection criteria.
Overview
A shared service is an accountable entity within a multi-unit organization tasked with supplying the business unit, respective divisions and departments with specialized services (finance, HR transactionsHuman resources
Human resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations...
, IT services, facilities, logistics
Logistics
Logistics is the management of the flow of goods between the point of origin and the point of destination in order to meet the requirements of customers or corporations. Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and...
, sales transactions) on the basis of a service level agreement
Service Level Agreement
A service-level agreement is a part of a service contract where the level of service is formally defined. In practice, the term SLA is sometimes used to refer to the contracted delivery time or performance...
(SLA) with a costs charge out on basis of some type and system of transfer price.
Shared service centers are deployed for a variety of reasons:
- to reduce costs of decentralization, to increase the quality and professionalism of support processes for the business,
- to increase cost flexibility for supporting services,
- to create a higher degree of strategic flexiblity.
Reported cost reductions of costs of services organized in shared service center are as high as 70% of the original costs, but average about 50%.
Shared service centers are not to be confused with corporate staff departments. Different from staff departments, shared service centers have measurable outputs (by quantity and quality), with costs per unit of service provided. Tasks not organized in shared service centers include corporate control, corporate legal, management development policy, IT-governance and other support typical for the statutory duties of the executive board.
Shared services training:
Many organisations in private and public sectors use a competency-based training course to identify and fill skill gaps. The SSO Pro course is one that looks to do that with an industry-relevant certification.
Specific requirements
To reap the benefits of a or multiple shared service centers sets specific requirements to the resource allocation process in the internal organization of the firm. A critical issue is that the manager of a business unit and the manager of a shared service center will prepare a service level agreementService Level Agreement
A service-level agreement is a part of a service contract where the level of service is formally defined. In practice, the term SLA is sometimes used to refer to the contracted delivery time or performance...
(SLA), but the approval of the SLA is a reserved power of the executive board. This is to balance the overall budget of the firm as well as to avoid budget gaming between the managers of the business unit and the shared service center.
A common mistake is to grant the shared service center a status equal to that of business unit or division. This creates confusion as it conflicts with the primacy of the units responsible for managing market opportunities. Also shared service centers better should not report to their corresponding corporate staff department (with the exception of the financial shared service center) as this creates the risk that the corporate staff department uses the shared service centers to deploy functional authorities. Managers of business units, respectively division will then perceive the shared service center as an implicit control device, impairing the quality of services.
It is equally important that deploying a shared service center in a multi-unit organization makes the executive board accountable to the managers of the business unit respectively the divisions for the performance of the shared service centers. This is because the use of the services of the shared service centers is mandatory, the executive board reduces the scope of resources of the business units, whilst the accountability of the manager of the business unit for business performance remains unchanged.
Deployment
The deployment of shared service centers requires that the managers of the business units respectively the divisions develop the competence to be a professional principal of the shared service, knowing how to articulate their demand and what value services have to their business.In the accounting system a shared service usually will have the status of cost and investment center. As some shared-service centers, e.g. for purchasing and for customer service, dependent on their activities, actually perform value-creating activities, to the judgement of fiscal authorities, transborder transfer prices may be subject to taxation.
Cost charge
With respect to cost charge out a critical issue is that costs charged based on activity based costing (ABC) do not provide an incentive to the shared service center to be efficient because ABC implies that the costs of non-used over capacity will be charged out as well. It is better to cost charge out on time-driven activity based costing. The superior solution for cost charge out is cost allocation based on the deployment of a corporate wide general ledger, which includes the recording of the internal use of resources for products and customers. This method eliminates the effect of double marginalization inherent to transfer prices and subsequently improves the performance of the firm.Standardized processes
Another critical issue in shared service centers is the way processes are standardized. At the end of the day shared service centers have to contribute to the competitiveness and the (financial) performance of the firm. As competition shifts to innovation of business models and in relation to this there is a higher dynamics in the composite customer value proposition to be performed, changes in the customer value proposition need to be translated timely and effectively in (back office) processes. As a consequence standardization of processes cannot be based on "best practice processes" as used to be promoted by IT (enterprise systems) but need to be based on basis of modularity.Coordination of demand and supply
In practice the coordination of demand and supply of services between business units and shared service centers, as expressed in a SLA turns out not to be effective, this only serves a generic capacity planning. In sync with the shift in business firms from budget-driven strategy execution to strategy execution based on validated cause-effect diagrams, the specific performance of shared service centers needs to be defined through cause-effect relations, linking the customer value proposition to back-office processes and vice versa. In this way, beyond definging shared service centers as costs centers, the contribution of shared services centers to competitiveness and performance can be established and controlled. Also this is an enormous boost to the morale and motivation of workers in shared service centers.See also
- OffshoringOffshoringOffshoring describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Even state governments employ offshoring...
- Offshore development centerOffshore Development CenterOffshore development center is one of the business models by which a provision of offshore programming is undertaken.An ODC is made up of a dedicated team of programmers and developers who have been hand picked to complement the customer's skill set and culture...
- OutsourcingOutsourcingOutsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...
- Shared servicesShared servicesShared services refers to the provision of a service by one part of an organization or group where that service had previously been found in more than one part of the organization or group. Thus the funding and resourcing of the service is shared and the providing department effectively becomes an...