It’s a concept that dates back more than 20 years and, with a formula that has been adopted by most Fortune 500 companies, there’s no doubt that shared service centres (SSCs) are here to stay. So what is the future for the sector?

 

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Shared services may be delivered via a number of different business models: these may cover the national market only, pan-European markets, sub-regional areas or global markets. And, in a move that takes advantage of the latest technical developments, virtual shared services may also be an option.

 

In the past, there was a trend for pan-European shared services. “However, the places that are most suitable for multiple languages tend to be the very large cities such as London, but cost is an issue here,” says Michel Lemagnen, research director at Oxford Intelligence. “The more recent trend has been towards sub-regional type operations on the one hand (eg Nordics and Southern Europe) and global centres on the other.”

Copenhagen is a good example of a city well equipped to serve the Scandinavian market. Companies operating their sub-regional services from there include the Gillette Group, Colgate-Palmolive and Daimler Chrysler.

Virtual solution

Meanwhile, virtual shared services business models are also being talked about, according to Mr Lemagnen. “Although this appears to go against the grain of what a shared service centre is, it works on the basis that where local input/expertise is required, a satellite function may be established.”

 

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However, he adds, these are apparently still some way off: “It’s too early to say where this market will go. Virtual centres introduce a new set of challenges. People could be based from home but still be part of the shared service centre. You then have to consider how you manage people remotely. Will they be lonely? Are there any performance issues?”

Market advance

 

SSCs are mainly driven by a need to increase competitiveness within corporations. While achieving economies of scale, they can also improve quality and offer an opportunity to consolidate or standardise systems.

 

“A few years ago, shared services started to expand and moved from transaction-based centres to transformation centres,” says Luca Segantini, director at the Shared Services and BPO Association (SBPOA). “Now, the focus is on value-added centres. As a result, the approach is not as simple as it was: while cost saving is still important, CEOs now have to consider whether their shared service centres should be only transaction-processing entities or real hubs of expertise to support the company’s bottom line.”

 

Business process outsourcing (BPO) is helping to drive many of today’s shared service trends. “Once a company has overcome the issues and has a well-run, efficient centre, it then starts to consider whether any more savings can be made,” explains Mr Segantini. “At this point, one process [such as payroll or accounts receivable] may be given to an outside party.

 

“By having shared service centres as the primary interface for internal customers, outsourcing is hidden from customers and the rest of the corporation, so the dialogue continues to happen with the colleague in the shared service centre. Finally, an organisation may be able to go the whole way and completely outsource.”

 

Other trends are emerging at the regional and vertical market levels. Although most SSC work to date has concentrated on a few specific areas of business, there has been a movement to identify new areas of shared services. “There has been a growth in human resources shared services in the UK, the Netherlands and Ireland, but more recently also in central and eastern Europe,” says Roel Spee, director at IBM-Plant Location International.

Changing locations

While the trends for types of services delivered by SSCs is changing, so too is the demand for specific countries and cities. “In the first wave of European SSCs, areas such as Dublin, Amsterdam/Rotterdam and south-east England led the way,” says Mr Spee. “A few years back, these markets (particularly Amsterdam and Dublin) became overheated, with lots of companies setting up shared service centres or operations with similar skill requirements.

 

“The second wave of shared service centres focused on alternative locations, such as Cork, Maastricht, Manchester, Glasgow and Barcelona. Barcelona has risen to prominence because Spain is still quite attractive cost-wise – and it is also an attractive destination for the recruitment of young staff with good language skills.”

 

The Spanish city is now the SSC base for a host of different functions. Accenture operates its SAP solution for Europe from there. Accounting and financial service functions are delivered by companies as diverse as ACS-General Motors, Agilent, Citigroup and Hewlett Packard. And the city is also the centre for technical services and support by Aspentech and ICI Packaging Coatings.

 

Prague is also seen as part of the second generation of SSCs. The Czech capital has a good base of educated people and consequently is the choice of companies such as Honeywell, Ingersoll Rand, IBM, Black & Decker, Baxter, TRW, DHL, Johnson Controls, Tyco Electronics and Philip Morris.

 

Despite the obvious popularity of Prague and Barcelona, some insiders are observing new areas emerging on the SSC scene. One option is to outsource offshore to countries such as South Africa, China, the Caribbean, the Philippines and India. However, such moves may attract criticism.

 

“Outsourcing is always controversial as there will be complaints that jobs are being moved outside of the company and sometimes outside of the country, to locations offering low labour costs, such as China, India or the Philippines,” says Mr Segantini.

“Many corporations are therefore avoiding the offshore option. A recent SBPOA survey showed that offshoring is the option for only 6%-7% of global corporations. More companies are choosing a nearshore approach in eastern Europe. In fact, many more companies are choosing the Czech Republic and Hungary than India.”

Hungary ambitions

Mr Lemagnen agrees with views about Hungary’s position as a key player in SSCs. “A couple of years ago, Madrid and Barcelona were flavour of the month,” he says. “Today, they’re not as cost-effective as they once were and the top destination now seems to be central and eastern Europe. Hungary is home to the shared service centre of the year (awarded to Diageo at the Shared Services Excellence Awards 2004). And Prague is also a key centre. Krakow is firmly on the radar screen. Meanwhile, Slovakia is up and coming for German-speaking operations, and the likes of Bulgaria, Estonia and Romania could be part of the next wave of SSC countries.”

 

The development of shared services in central and eastern Europe has been driven by cost, a good technical infrastructure, widely available language skills and membership of the EU. “Although technology allows wider, remote things, the leap to Asia can be too great for some companies,” says Mr Lemagnen. “The question now is to what extent can eastern European cities absorb SSCs before they become saturated?”

Question of politics

Organisations’ internal politics remains the biggest barrier to SSC progress in the European market. “There are often duplicate roles within the same function (at least one per country) and divisional heads see their power diminishing as staff numbers are reduced,” says Mr Segantini.

 

“Although these people have to accept the situation, they frequently start to quietly reorganise themselves – and recruit more people with different job titles. For example, instead of calling someone an accountant or HR, they may get the title of business adviser. Later, when the CEO looks at the accounts, he or she may make a decision to get rid of shared services, as it could be perceived as a costly duplication of a function already existing in the field. A key component in the route to shared services, therefore, is change management and constant support from the higher level of management.”

 

Organisations such as the SBPOA frequently hold one-day meetings at board level to inform businesses of the issues to be overcome in shared services. “In Europe, more companies are going for simple centralisation; and the only way to break the cycle is to turn the internal centre into a business, allowing internal customers to choose between the services provided by shared services and the ones of a third party, if they are perceived as cheaper or of a better quality,” says Mr Segantini. “A good idea is also to benchmark the cost and service levels of a certain process before shared services take over its provision, to be able to have a meaningful comparison when customers start the inevitable complaining.”

Compliance issues

As if company politics wasn’t enough to deal with, SSCs also have to overcome the challenges associated with regulations and legislation. “Sarbannes Oxley has made things more complex and much slower as companies strive to meet the legislation,” says Mr Lemagnen. Such legislation can seriously affect where a company may choose to locate its SSC. With large amounts of money often flying around the system, SSCs are considerably riskier than contact centres in terms of political and economic stability – and these factors certainly have to be considered.

 

“Most of the Fortune 500 companies have recognised the value of shared services and have implemented, or are seriously considering, the concept of shared services,” comments Mr Spee. “We’re now into the phase of smaller multi-national companies considering the value of the concept.” Technical developments are rapidly creating new opportunities in the SSC market. Offshore outsourcing is becoming a reality, nearshore locations are hugely popular, virtual centres are a theoretical possibility, and a high degree of technology-based services could be offered in the future.

 

Mr Segantini says: “With the emergence of e-HR, you could log into a company portal for general information. Then, if you need a second level of information, such as specific country information, you could contact a colleague in a shared service centre. Finally, HR experts would be able to answer the most complex issues.”

 

Such developments will ensure that SSCs deliver, both in terms of cost savings and in providing expertise to an increasingly broad range of businesses.

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