Phil Fersht, CEO and Founder, HfS Research
Tony Filippone, Research Vice President, Governance Strategies, HfS Research
Charles Aird, Managing Director, PwC
Derek Sappenfield, Director, PwC
In today’s business environment, nine out of every ten enterprises have shared services and 97-percent manage outsourcing relationships according to a study released by PwC and HfS Research called “The Evolution of Global Business Services”. However, the majority of these organizations have yet to benefit from combining shared services and outsourcing into one integrated global business services framework.
Corporate executives struggle with competitive pressures to be aggressive in the market, but often lack the required capital to develop important administrative and support processes. In too many instances, corporate functions act alone and fail to provide a convincing cross-functional business case. Other times, functions focus too much on their own operational efficiencies, instead of their contributions to broader corporate objectives. The chart below shows the consequences: 46-percent of organizations have been very effective at leveraging outsourcing to reduce operating costs, but other important benefits – such as transformation, new technology and innovation – lag far behind.
Chart 1: Business benefits beyond cost reduction have been modest with outsourcing engagements to date
Since organizations need to quickly propel their business processes forward (and, in some cases, migrate to shared services or outsource the previous sacred cows), they must evaluate how they can leverage a comprehensive global business services framework to obtain value beyond labor arbitrage, while also bringing consistent approaches to global services strategy formulation, transition, and governance. Enterprises need to bring their functional leaders under a single operating framework to establish, with each other and their service providers, clear innovation and transformational objectives that take into account investment models, gain sharing and governance. In some cases, organizations need to tap into service providers’ best-in-class applications and global footprint. In others, they need to assess the most advantageous locations for their own service delivery.
A well-executed global business services strategy is distinctly different from the narrower focuses of shared services and outsourcing strategies. It identifies corporate objectives and encourages internal functions to collaborate with each other and third-party service providers to create breakthrough, strategic operational capabilities that drive business outcomes that can result in real marketplace differentiation and competitive advantage.
Many enterprises have successfully implemented global business services strategies. A large global consumer products company is particularly well known for developing a shared services organization that has propelled the enterprise’s strategies. It leveraged its third-party service providers to reduce operating costs by up to 50-percent, drive global compliance and leverage innovative, best in class solutions for all global business units. In the process, the shared services function went from being an organization employees dreaded due to continued cost cutting efforts to an organization in which the company’s best employees want to work. All this because the organization delivers significant value to corporate objectives and employees want to be part of that change.
A Well-executed Global Business Services Framework is Closely Tied to Corporate Strategy
In general, senior executives can evaluate the level of impact global business services strategies will have on their company based on three criteria:
Chart 2: Value impacts of global business services
The first criterion is the intended type of benefit a global business services strategy will bring to the organization. The collaborative nature of integrating internal functional strategies and service provider capabilities to achieve corporate objectives is strategic. Global business services strategies require focus to go beyond labor arbitrage in non-core areas such as finance, HR, and IT. Scope will expand to procurement, supply chain, customer service and operations functions to advance market share gains. Global business services strategies’ wider focus on broader business objectives requires cross-discipline coordination, and therefore necessitates strong grounding in corporate objectives to drive decision-making. For example, one large global software and services organization woke from decades of rapid growth to an underbelly of administrative functions that hampered its global competitiveness due to a lack of global, standardized processes and underinvestment in technology to support accounts receivable, procurement and HR. The enterprise realized the lack of standards was creating serious compliance issues in Europe and North America, and making its global commercial clients’ lives difficult when handling invoicing and payments. The company partnered with a large outsourcing organization to make significant investments in technology, and to centralize its functions into regional centers close to its customers.
The second criterion is the intended level of benefit a global business services strategy will deliver to the organization. For some enterprises, the historical manner in which they have delivered the same administrative services is sufficient to obtain objectives. For example, one large insurer’s CFO simply needed to reduce costs and improve management focus, so he chose a labor arbitrage solution that employed little third-party supplier- provided technology. However, another organization’s senior vice president of operations was more interested in transformation, and needed to increase the level of benefits his organization delivered. When he outsourced his print operation, he selected a supplier that leveraged advanced technology to reduce the number of customer mailings and dramatically reduce postage costs.
The third criterion is the level of cross-functional interaction required to drive the necessary results. For example, an HR shared services function is likely to require some interaction between itself and IT for a platform, but little other interaction with other functions. A medical device service provider attempting to significantly improve its cash flow by enhancing order management and inventory management capabilities would likely consider a shared services strategy that relied on closer alignment of IT, order entry and warehousing/logistics organizations.
Remember, global business services strategies are not “one size fits all” as no two organizations’ corporate strategies are the same. As a result, the application of a global business services assessment framework to advance different organizations’ objectives will yield different results. For example, regional operating and compliance differences required a different strategy for driving consolidation and strategic technology to a large automotive company’s North American operation, while its European operation didn’t allow for the same level of consolidation due to differences in European personal financing marketplaces. However, a large insurer made the strategic decision to centralize its shared services in India not only to leverage availability of high quality technical skills, but it also planned to leverage the shared service center as a regional hub to provide new insurance products to the local population. Clearly, different corporate strategies will result in different global business services strategies.
When employing a full-lifecycle global business services framework, it is essential to ensure goal alignment, execution and ongoing governance. As more organizations leverage global business services strategies to align business objectives and obtain economies of scale, outsourcing has become an important tool to accelerate and complement shared services strategies. However, executives should be wary of relying too heavily on uncoordinated hybrid strategies. The goal of a global business services strategy is not only to source globally, but also to leverage shared services, outsourcing and third-party investments to advance the objectives of the enterprise. It is a new and better approach to managing global sourcing.
To learn more about developing global business services strategies, including how to drive enterprise collaboration, perform an opportunity assessment, select the right model, and develop a governance team, download the complete version of “The Evolution of Global Business Services” which was coauthored by HfS Research and PwC.
“PwC” refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only and should not be used as a substitute for consultation with professional advisors.