Most of the functional and shared services leaders in mid-to-large corporates across the globe are facing an existential problem.
On one side, most of the organizations have a sub-optimized shared services model and on the other side, the world is rapidly changing around us which is putting pressure on shared services to reinvent itself to be more agile and innovative.
So, why do we say that shared services models are sub-optimized? Let us look at a Business Case.
XYZ Chemicals underwent a multi-year finance transformation project that involved moving a significant number of jobs from a higher cost location to a lower cost location. Also, much of their lower and mid-level jobs were moved to an offshore location. Some of the mid-level roles were, though, retained in the local setups to provide continuity. And the senior finance managers retained and continued their roles after the transition was over.
Instead of having teams now across the hallway, they were now based in regional and global locations in Costa Rica, Poland, and India.
The Finance Transformation Project saved them a whopping $30million over the duration as presented in this business case.
This is a typical example of many organizations that have undergone functional transformations in the last two decades. Whether the function was IT, HR, Procurement, Travel and Living, or Finance, the storyline tends to be remarkably similar.
The allure of the business case through labor arbitrage is so strong that other shortcomings are often overlooked.
After all, moving low-risk transactional and administrative jobs to a lower cost location is a win-win, made-in-heaven proposal. Just lift-and-shift the work from down the hall to another part of the world.
That is where the myopic thinking starts. Most companies end-up doing a lift-and-shift to a shared services location without transforming them.
Business Case continued
For the next couple of years, XYZ Chemicals struggled with their finance operations. Every day the onsite teams would produce new complaints about how and why the offshore team is incompetent and are under-performing. At one point in time, the head of finance transformation even thought of cancelling and rewinding the entire process and bring back the work from its offshore location.
As the years went by, the teams on both sides eventually settled with the new equation. They now have accepted each other’s presence and are now able to work more amicably than they did in the past.
As the dust settled, one could see that the finance operations were continuing the same architecture as they used to before the offshoring. Only difference in the architecture being: the down the hall team was in offshore locations.
This myopic thinking gets a hundred times amplified when the retained organization and senior leadership do not change the legacy organization structure and do minimal changes to the operating model of the new organization architecture.
Why? Because of the following:
- The new organization structure that managed co-located resources is sub-optimized to manage remote shared services in terms of their global, regional, and local structure.
- The retained organizations continue to run business-as-usual. Instead of having people down the hall, they now have people in a shared services location. Their management styles are not changed. They continue to manage the way they used to do with local teams as they do with remote.
- The retained organizations are made accountable for the deliverables of the shared services. They aren’t necessarily trained on any other leadership skills so they end-up managing shared services relationships through micro-managing the shared services resources. What starts out as QA (quality assurance) often ends up being a full-fledged review and approval of every single transaction.
- The shared services organization is an extended functional organization rather than being a services organization. This one is an especially crucial point to note. An extended functional organization is a play of human capital distribution whereas a services option is not individual personnel based. In most shared services setup, even though it is called a “services” organization, it acts and behaves like an organization made of individual functional resources.
- The operating model is focused on volume of transactions processed rather than improving efficiency and stability. Most performance metrics are driven by transactional number i.e., how many invoices processed, how many recruitments conducted vis-à-vis, how have the services been improved over time. The efficiency metrics are subordinated to transactional metrics. And guess what happens? The governance meetings end-up getting into tactical details which is in line with a normal functional management but goes against the grain of a services organization. After all, how many times do you tell your service provider in other spheres of life about how to manage services? You do not tell your energy services provider how they should deliver electricity at home. You do not tell your banks how to provide you banking services? They why do client organization of a shared services think that they should manage the shared services team through their transactional deliverables.
As you can see that most legacy organizations with shared services have a suboptimal organization structure and operating model.
Now, let us look at the world around us.
The idea of shared services is from the 20th century and labor arbitrage gave companies a strategic cost advantage which helped them to create a competitive edge.
In the 2020s, the world looks quite different.
The business world is rapidly changing around us. Industry after industry is being disrupted by new-age companies that have novel organizational structure and new operating models. Conventional process of buying is being replaced by leasing or renting through SaaS platforms. Brick-and-Mortar store is being replaced by ecommerce.
Digital commerce is massively expanding in all spheres. It is not only possible to buy something from your living room, but you can also get products from half-way across the globe.
Whenever a consumer has a need, the first place they look for information is on the internet. Even when businesses want new products or services, their staff members also, go to the internet.
There is more computing power in your smartphones than the entire US government had in the sixties.
Millennials and Gen-Z who are digitally native are replacing the baby boomers and Gen-Xs in the job market.
These above trends are demanding that organizations become innovative and agile. Organizations also, need to leverage and adopt new-age technologies. As most consumers are on the internet and social media, organizations must have a sound strategy to be able to capture these consumer interaction data points in as much detail as possible. That means external data and huge quantities of those.
With the benefit of the 20th century shared services running out, and the demand of the new-age trends on all businesses, business leaders have started demanding solutions from their functional and shared services leader.
So, how should organizations address this double demand being placed on their functional and shared services organization?
The answer lies in re-invented organization architecture and revamped operating model.
Here are the seven principles that your functional organization must transform on:
- Globally optimized organization: Organizations must review their functional and shared services organization structure specially the management layers and then optimize it globally. In other words, take a strategic approach on what and how roles need to be distributed between global, regional, local as well as virtual teams and centralized teams. On one side, you may have a CXO office organization that is strategic in nature and operates like a corporate/HQ function and on the other side, you may have a global organization that provides shared services to the business.
- Business unit within a shared services construct: Different organization configurations are required for various kinds of services offered by a shared services organization. For the part of an organization that supports the conventional transactional and administrative work, focus must be on efficiency and stability. This space does not need a lot of experiments as the goal of the organization is to make processes repeatable with minimal risk. On the other side, there are organizational needs where data needs to be mined, analyzed and intelligence produced with a quick turn-around. This is where the specific organizational unit is expected to be agile and be in sync with ever-changing scope demands. If you compare the two examples, you will realize the two models have competing values and therefore, a single organizational architecture does not work for them. The two units need to be managed almost like two independent business units. Now, let us add a third type of requirement. Innovation. Innovation by default means taking a risk and experimenting. Having this team being managed the same way as the conventional transactional unit where stability is the focus and it is constructed as a risk-averse unit, will obviously end up in a disaster. These cells should not be confused or overlayed with transactional work as transactional work requires routine, regularity, stability, and repeatability. One-glove-fit-all does not work if transactional work, agility, and innovation need to be done by the same organization. It must be managed by separate and independent units under the same organization
- Culture is radically altered: Most shared services and outsourcing contracts are based on a cost lever. Thus, the culture is also, cost-centric, and conservative. To bring in agility or innovation cost may be impacted and thus, it would need a separate culture. Cost-conscious setups tend to be risk-averse whereas innovative teams need to be experimental. Therefore, if an organization needs to move from cost-conscious to foster a culture of openness and innovation then the culture must be altered.
- Services orientation operating model: There is a reason it is called Shared “Services” and yet most companies, treat the offshore teams as extended functional teams. As you know services need to be measured by service levels rather than by functional yardsticks and therefore, organizational orientation also needs to change. One cannot be expected to perform as a function and yet be measured as a service.
- Reconfiguration of organization structure for retained staff and leadership teams: Retained personnel need to be given new jobs and training for new skills. In their pre shared services role, they may have been involved in managing specific job requirements, but in their new role now, they need to be skilled on facilitation skills. Most people confuse the facilitation skills with quality assurance skills. And this may lead to instances of micro-management. Another skill that the leadership teams need to develop is their ability to manage shared services relationships and performance.
- Business Partnership: Retained and especially leadership teams need to move away from managing resources in a function to providing strategic business partnerships to other functions and operations of a business. These roles need to be created and people need to be trained and developed to think strategically and provide true value to their internal clients. These roles are a combination of internal consulting, facilitation, business advice, escalation points, workforce development and strategic risk mitigation roles. By genuinely thinking like a business partner, these leadership roles can then enable their operational and commercial organizations to remain competitive in the external market.
- Technology: Whether it is social media, IoT (Internet-of-Things) devices or other SaaS based platforms, shared services and functional organizations will need to get out of their comfort zones and think on their feet, on how to embrace new-age digital technology and platforms. Most shares services and functional personnel are still caught in the 20th century business intelligence thinking where intelligence was derived from analyzing internal ERP and CRM data. The world had radically moved on since then. Most of the ERP based competitive edges have been flattened and now companies must depend on external data to get an understanding on how the market behaves and derives insights that can help create competitive advantage. User Experience (UX) or Customer Experience (CX) is now defining new levers to create competitive edge. To mine and understand these voluminous data, you need specialized tools and skill sets. This is an area where shared services can leap-frog easily and become a catalyst for the organization to bridge between the old world and new world.
Most shared services constructs are based on 20th century labor arbitrage thinking and their existing architecture are not necessarily optimized to manage them as a service rather than a function.
On the other side, the world is rapidly changing around us and therefore, most organizations are trying to find ways to keep up with the pace of the changing world and be more agile and innovative.
Business leaders are demanding help from their functional and shared services leaders on how to remodel themselves to remain effective and relevant in the new world.
Shared services and functional organizations do not really have many options left for them. And time is running out fast.
Traditional industries are being disrupted by new players with innovative operating model and reimagined organization structure. So time has come to apply the same principles to shared services and functional organizations as well.
This article is written by Anirvan Sen.
It is edited and keyword optimized by Blanca Monni.