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Shared services centers helped companies eliminate redundancies. Now the web may eliminate the centers.

1Sep

What's in a name? Ask Donald Janson, director of the artfully named Common Administrative Resources (CAR) unit at Ingersoll- Rand. CAR by any other name would be known as "shared services," but Janson says that given the highly independent nature of the eight divisions that make up Ingersoll-Rand, and the fact that "shared services has, for a long time, been associated with centralization," the Woodcliff Lake, New Jersey, company decided that new terminology was in order. While the concept--consolidating functions in the name of efficiency--is still valid, Janson says that "shared services" is hamstrung by too many "bad connotations."


But CAR is more than a euphemism; it's an embodiment of what many observers say is the next wave in shared services. And unlike the first wave in the early 1990s, this one will have little to do with centralization.


Instead, Web technology promises to eliminate much of the transaction processing traditionally handled by shared services centers by pushing finance, human resources, and myriad other processes out to individual employees and managers--and even to suppliers and customers. Online forms will not only capture but also act upon the information that employees enter, so that shared services centers can offload data-entry duties and focus on customer service, exception handling, and process improvements.


Ingersoll-Rand's Web- enabled expense reimbursement system from IBM, for example, allows employees to view their American Express bill online and transfer charges onto their expense account with the click of a mouse. That triggers an automatic payment to American Express, while cash reimbursements appear in employees' paychecks. "We have eliminated the accounts-payable process from travel," notes Janson, who previously oversaw shared IT, HR, and finance processing services at Westinghouse's Telecomputer Center in Pittsburgh. And after Westinghouse bought CBS in 1995, Janson designed and implemented the broadcasting giant's shared services center in Manhattan to handle finance transactions.


In a similar vein, Ingersoll-Rand uses an E-procurement system from Oracle Corp. that allows any authorized employee to order indirect materials (such as office supplies) from online catalogs. "Just about everybody can be a buyer now," Janson says. The system is up and running in the company's Huntersville, North Carolina, shared services center, and was being rolled out to 22 additional sites this summer. Janson hopes to deploy the same sort of system for direct materials--the inventory needed for manufacturing--beginning in October, but admits it won't be easy. "Direct materials is much more complicated to address," he says, "and will require bleeding-edge technologies."



Instant Gratification

At Atlanta-based Southern Co., which has had some form of shared services in place since the 1950s, Web technology is fast becoming an important part of the mix. "Even mundane things like making changes online to your insurance plan or your 401 (k) account have allowed us to wring out a lot of costs," says Allen Leverett, vice president and treasurer of Southern. And the company uses Web-based surveys to measure the efficiency of internal business systems and procedures, which also helps to save money by reducing paper and survey-processing costs. Leverett says that in today's culture of instant gratification, employees prefer the asynchronous nature of the Web. "They don't have to set up a time to talk to someone in shared services. They just use the information on the intranet."


"The Web allows for this self-service approach," Janson says, which promises to greatly reduce the manual processing that has been so much a part of shared services operations. If centralization ushered in efficiencies, this new Web- based form of decentralization may, paradoxically, increase them even further.


That's not to say that centralization was a bad or unnecessary step. Shared services became popular a full decade before Netscape's 1995 initial public offering awakened the business world to the potential of the World Wide Web. By 1990, about a dozen Fortune 500 companies had consolidated certain support functions--notably finance and human resources--into physically discrete service centers whose primary purpose was to standardize transaction processing.


Finance folks loved the results of this first wave, and the popularity of shared services soared throughout the 1990s. Since then, the basic concept of standardizing and consolidating common processes has expanded to encompass many other areas of the business, notably IT. A recent survey of 50 Fortune 500 companies by Deloitte Consulting and International Data Corp. revealed an average return on investment (ROI) of 27 percent for traditional shared services projects, driven in large part by head-count reductions averaging 26 percent. "The shared services concept is now embedded," says Bob Gunn, co-founder of Boston-based consulting firm Gunn Partners.


Industry observers consider Gunn the unofficial father of this first wave of shared services, thanks to ground-breaking benchmark studies that he and partner Greg Hackett conducted in 1987 and 1989 while at A.T. Kearney. Even then, says Gunn, "centralization was a dirty word." The more palatable "shared services" term, he claims, evolved from a phrase that occurred to him in the shower one day.


But it was the huge financial rewards, not clever terminology, that made traditional shared services a hit, particularly among companies with scattered or disparate business units. One of the early movers in shared services, The Dow Chemical Co., based in Midland, Michigan, replaced 400 financial service centers around the world with just 4 global centers in 1994, eliminating 70 percent of finance positions. Frank Brod, vice president and controller, says that Dow's initial goal was to cut processing costs by 25 percent. "We were a bit surprised," he says, "to find that we've reduced costs by 50 percent."


Knight Ridder, the San Jose, California-based newspaper chain, also began building a shared services organization in 1994 to serve its 31 newspapers and corporate headquarters. "We are now at a savings run rate of about $20 million per year," says Steve Stone, assistant vice president/shared services.



Why ERP?

The trend toward shared services was further fueled by the adoption of enterprise resource planning (ERP). "One advantage of ERP implementations is that they often result in common processes and services, which provide a good foundation for shared services," says Andre Pienaar, a principal at Deloitte Consulting.


In addition, once data is entered into an ERP system, it is available throughout the company, providing managers with better, real- time data about how the company operates.


As shared services move to the Web, the same benefit accrues, but on a much broader scale, because in the course of their daily activities almost all employees feed data into the system.


But the evolution raises the troubling question of whether those painful and expensive ERP implementations were really necessary. Web browsers and middleware, say some observers, can integrate disparate systems more effectively than ERP, and without the massive reengineering it entails. Gunn says that while ERP providers raised awareness as to the potential of integrated systems, most failed to deliver on that promise. Moreover, ERP providers have struggled to Web-enable their systems.


But most companies still view ERP as a basic requirement for shared services. SAP provides essential support to Dow's shared services strategy, says Brod. "We use the system for every one of our subsidiaries. That gives us a great deal of operating discipline." And while Ingersoll-Rand's effort is heavily based on Web technology, Janson says he hasn't been able to leapfrog ERP. The company needs ERP, he says, to create common processes and data standards, and until each group within Ingersoll-Rand standardizes on Oracle Financials, accounts payable will not be handled by the shared services center. "They have to get on a common system first before we can even consider pulling them into the shared services center."


The actual centers aren't going away anytime soon, either. Ingersoll-Rand is in the process of building on to its existing shared services center in Huntersville, North Carolina, which suggests that the Web hasn't quite evolved to the point where it can replace either ERP or the physical shared services center. The center has 14 staff members and is growing, but that's a far cry from the 500 people at the Westinghouse Telecomputer Center Janson once ran, or even the 150 people at CBS's center. Janson insists that the center's employees will handle exceptions, while Web-based applications distribute routine data-entry tasks to every employee's desktop. "The more we can automate or eliminate rather than pull into a shared services environment, the better off we are," says Janson.



Is Self-Service Really Service?

In theory, the net result of Web-based shared services is less work: while Web-based forms may sound like a burden, they usually replace paperwork that managers must complete anyway. Meanwhile, shared services center employees no longer reenter the data, and many transactions become automatic. This approach is clearly more efficient for the shared services organization, but some question whether it simply redistributes work to employees. "There will continue to be some pushback in terms of how much responsibility individual employees and managers will be willing to assume," predicts Jeff Stoll, executive director of human resources strategic initiatives at Merck & Co., in Whitehouse Station, New Jersey, which in June rolled out a system similar to Ingersoll- Rand's.


Stoll says that while many executives strongly favor moving HR functions such as compensation planning to the Web, "another contingent may jump up just as quickly and say, 'The director of my group is a world-renowned oncologist doing cancer research with 100 people working for him. The last thing we want him to do is sit in front of a terminal and do salary planning. Get some HR person to do that.'"


Such objections are not confined to highly skilled workers. Ingersoll-Rand's Janson expects some resistance from factory foremen who don't want line workers spending 15 minutes at a PC or Web kiosk. What they don't realize, he says, is that employees "are walking up to HR now and probably spending an hour filling out a paper form."


Merck's plan, says Stoll, is to "migrate as much as we can to the Web," but he is quick to point out that there is always a trade-off. Put the transaction responsibility on the shoulders of employees, he says, and "that really drives a lot of volume at the call centers." Consultant Gunn agrees. "Very often, when companies go to shared services--the classic example is HR--and put in a call center, the call center is immediately overwhelmed."


Yet Gunn and most other shared services experts consider that an acceptable, even desirable, trade-off. If the Web can free shared services employees to concentrate on exceptions rather than keying in routine transactions, says Gunn, they can spend more time providing information to help business units perform more effectively. "They become problem solvers [and] process engineers," he says.



Just Outsource It

Ironically, this newfound "process engineering" capability set free by Web technology is often put to best use evaluating whether various business functions should continue to be handled in-house. Outsourcing and shared services have always been related, but the Web promises to make them kissing cousins.


With the proper security in place, application service providers and outsourcers can serve up applications that appear side by side on an employee's desktop with shared services center applications. "The reason for that convergence of shared services and outsourcing is the new technology that drives the New Economy, and the fact that you can now easily move outside the four walls of your business," says Donniel S. Schulman, performance- improvement leader at PricewaterhouseCoopers and co-author of Shared Services: Adding Value to the Business Units.


But even if shared services centers usher in their own demise by moving functions to the Web, to an outsourcer, or to both, they still provide value en route. "You can't outsource something that's broken," insists Ingersoll-Rand's Janson. "You have to fix it first." Shared services centers provide a way to centralize and streamline certain functions. It's cheaper to do that, Janson says, than to pay an outsourcer to figure out what's wrong.


Dow Chemical evaluates outsourcing alternatives to shared services functions at least once a year, says Frank Brod. This keeps shared services centers on their toes. "If they begin to rest on their laurels, or reduce the pace of continuing improvement," he notes, "they know that there are other alternatives to getting these jobs done."


Shared services centers often are ardent outsourcers themselves. Ingersoll-Rand relies on ADP Inc. for payroll tax services. Merck outsources its relocation services to Prudential and its international tax filing to Ernst & Young LLP. And Knight Ridder outsources its check processing to New York­based Chase Manhattan Bank and its invoice processing to CorPay Solutions Inc. in Livonia, Michigan.


Web technology plays a role there as well. Knight Ridder's invoice outsourcing, for example, is transparent: CorPay customer representatives in Michigan function as if they were in the Knight Ridder shared services center in Miami, provide images of invoices and other documentation for use on the Knight Ridder intranet, and use the intranet to update vendor information.



Whose Business Is It?

Some consultants suggest that a well-run shared services center can act as an outsourcing business in its own right, but managers at Dow, Ingersoll-Rand, and other companies display little enthusiasm for the idea. Knight Ridder has a fledgling shop that helps small newspapers purchase newsprint, which is the sort of highly targeted outsourcing that shared services centers can do well. But Stone says that "it hasn't been huge dollars yet," and insists his center's first priority is providing top-notch service to internal customers. Southern occasionally provides some billing services to municipalities, but that work is "minimal," says Allen Leverett.


In fact, shared services centers are more likely to be snapped up by outsourcers than to act as outsourcers themselves, particularly if they are large and adept enough to handle major business processes for both their parent company and external entities. Last fall, Pricewaterhouse-Coopers assumed control of BP Amoco's accounting and IT shared services group, including its 1,200 employees. Under a 10-year contract, PwC will use the group to provide services , including support for its ERP system, not only to BP Amoco, but to other companies as well. PwC has since acquired the shared services organizations of several other companies, incorporating them into its business process outsourcing (BPO) "Centres of Excellence."


Not surprisingly, Web technology lies at the heart of this trend, too. Moving the entire accounting function to a separate company would be inconceivable if the Web didn't allow such easy access to information both within and across company walls. Web technology has also played another, more subtle role in the growth of BPO by powering the current economic boom. The first wave of shared services took off in the post- recession days of the early 1990s, notes Gunn, when companies were focused on cost-cutting. Today, most companies are focused on making money. "There are so many opportunities for revenue today, and leadership is at a premium," he says. Web-driven shared services can play a valuable role, he adds, but only if companies can give them the appropriate focus and manpower- -no easy matter when so many Web initiatives clamor for attention.



Power to the People


One of the most difficult management challenges at traditional shared services centers is motivating employees. After all, notes Bob Gunn, co-founder of Gunn Partners, such centers drive decision-making authority down to the lowest levels, while the thin layer of management offers little room for promotion or advancement. "Think of the message to the employee," agrees Martin J. Harmer of PricewaterhouseCoopers. "Imagine being told, 'We are going to move to a low-cost center and reduce head count.'" Even the survivors have little reason to smile.


Head counts are likely to go even lower as the Web assumes the transaction-processing duties of shared services centers. But motivating employees may be easier, says Harmer, if the message is, "We are going to build a business around process excellence, and people will be rewarded and promoted based on a career of process excellence."


Keeping Merck & Co.'s 270 shared services employees happy when they moved out of headquarters and into the new Cokesbury Road Service Center was of paramount importance, says Jeff Stoll, executive director of human resources strategic initiatives. "Quite frankly, I thought at the time it was possibly the worst thing that could have happened," he says. "In retrospect, it was probably the best thing."


What changed his mind? Moving to the new shared services center allowed Stoll to form a cohesive team out of the disjointed units once scattered throughout Merck's headquarters. "There was little formal or informal interaction" among the employees in those units, he explains.


To change that, groups of employees at all levels were randomly selected to design everything from the office furniture and cafeteria menus to a dress code and flex- time policy. Unlike headquarters, the new facility did not have indoor parking, so employees were issued umbrellas, ice scrapers, and sunscreens for their windshields. "Individually, [these things] may sound ridiculous," says Stoll, but they helped create a sense of unity.


Advances in shared services aren't just unsettling for the rank and file. Several companies have sold their shared services centers to business-process outsourcers-- a trend that may not sit well with some CFOs. "Shared services have historically been part of the CFO's organization," notes PwC's Harmer. But he maintains that CFOs have better things to do than run transaction processing and support operations.


Others say that if shared services organizations report to the CFO, it can undermine their efforts to operate as independent market entities. Because of their strong finance roots, many such organizations "are not at full arm's-length from the CFO," explains Andre Pienaar, a principal at Deloitte Consulting. This, he says, can stifle a shared services organization's ability to expand into nonfinance functions. Says Don Janson, director of Ingersoll-Rand Shared Service Group, "Shared services should not report to the CFO. If it does, the business units and the center employees look at it as if it is still part of the corporate culture. It should be a separate business, and have a market and customer orientation."

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