SynFiny Advisors advocates that companies should move from a Shared Services organization focused primarily on accounting to a Global Shared Services (GBS) structure which crosses multiple functions, and which looks for ways to improve end to end work processes while also driving a consistent focus on continually improving cost, quality, speed and governance (in other words, continually improving its customer service, where the customers are the internal Business Units within the company). (See SynFiny Advisors leading practice paper on “Building Blocks to Creating a Successful Shared Services Org” for further details on shared services).
This paper explores ways to drive even greater value from a GBS organization.
Leveraging External Partners for Greater Benefits
In addition to providing greater flexibility, outsourcing to external partners can provide other benefits, if the contract is structured properly and if the external partner is strong in their field. That’s because the service the external partner is providing is their core business. It’s what they specialize in. And because they are providing this service to multiple customers, they can spread their costs across a broader base, thus allowing them to offer a better price, more flexibility and sometimes broader functionality.
Some specific examples include:
- In the IT area, a GBS organization could outsource all of its hardware. This can help a company significantly from a capital and cashflow standpoint, particularly if the contract is structured such that the hardware is paid via an RU that also includes support and other non-capital services, and there are no restrictions on the how quickly the volume for that RU can increase or decrease. The watchout here is if the RU is for the asset alone, or if there are restrictions on how quickly the RU volume can change, then the cost for this service can become an embedded lease which then needs to be accounted for in both the balance sheet and as capital spending. One additional watchout: if the external partner does not have a solid credit rating, then the cost of the RU could actually be higher than the cost of capital for the GBS organization. So be sure to review credit ratings in the outsourcing due diligence process.
- If the IT external partner is strong in their area, they can also often provide better resiliency, redundancy and security than the GBS group could on its own. Again, this is because the IT partner is providing this service across multiple customers, and is thus able to spread the investments required to deliver these benefits across a much broader base than the GBS group could if they were doing it on their own.
- Similarly in the telecommunications area, a GBS group could outsource running all of its voice and data network. If the external partner is a leader in this area, they should be able to bring the latest and best technology to the table, again without any significant investment required by the GBS group.
- In the HR area, the latest trend is to outsource whole HR systems leveraging the Cloud. Companies like Workday can provide suites of different HR processes that GBS groups can pick and choose from. The external partner also ensures the software is up to date with all local country requirements, and schedules regular updates that go out to all of their users. We’ve also seen external providers canvas their users on what new features they would most like to see, and then based on that input, include enhancements in future updates. In addition to providing greater flexibility to the GBS organization, this kind of outsourcing also frees the GBS group up to focus their limited resources on where they can add the most value. The one watchout with moving to this kind of outsourcing is it doesn’t allow for a lot of customization. However, given the number of large multinational companies who have gone to this model, it’s hard to imagine that all of the basic required functionality isn’t already being delivered by the vendors. Furthermore, from an external benchmarking standpoint, it may call into question if any customization that is being done by the parent company is really warranted.
- If the external partner is more of an intermediary, i.e. an external partner who is managing multiple vendors on the behalf of the Shared Services group, then a contract can be structured such that the external partner can earn one time bonuses for driving additional savings that flow to the GBS organization. For example, in the Facilities & Real Estate area, the GBS organization could hire an external partner to handle all of the costs associated with running and maintaining the facilities, i.e. hiring cleaning services, security services, HVAC services, food services, etc. The contract with the external partner could be written such that they can earn one time bonuses for driving down the costs of these third party services beyond what is already built into the contract. The reason this can work is because those savings come out of the other third parties and not the external partner. We have seen contracts that have tried to incent the external partner to drive savings in their own area, but this hasn’t been nearly as successful because doing so reduces the external partner’s own revenue (and in turn, usually their profits).
Creating New Services with an External Partner
If the GBS organization has the right expertise or business knowledge, it can enter into co-development deals with its external partners to create new services or capabilities that the vendor can then offer to other companies. Any co-development agreements could be drawn up such that the GBS organization would receive either a percent of any revenue generated by the vendor from this new service or capability, or a reduction in the ongoing costs they are paying to the external partner for the service, or both.
GBS Enabling Rapid Integration or Divestiture
A strong cross functional GBS organization can give a company greater flexibility and drive greater value in the acquisitions and divestitures area. In the case of acquisitions, the faster a GBS organization is able to take over and integrate the acquired company, the sooner the acquiring company will began to realize synergies. Also, the broader the number of functions/services that are offered within the GBS organization, the greater the potential savings.
In the case of divestitures, the faster a company is able to sell or spin off a business, the greater value it can command. Also, the GBS organization can offer the acquiring or spun off company the ability to continue to provide certain services for a period of time….for an additional fee, of course, which again creates more value for the parent company.
Within the GBS organization, it’s also important where possible to have the same team of people estimating the costs, timing and savings that will be derived in GBS from an acquisition or divestiture, so they can build more institutional knowledge and continue to improve their estimating capabilities. Similarly, where possible the same team within GBS should execute their portion of the acquisition or divestiture, so over time they will be able to more quickly and efficiently complete an integration or spin off.
One final consideration in the area of acquisitions and divestitures is the more services that have been outsourced, the greater the ability to flex up or down the number of resources supporting the services. This can be particularly helpful in a divestiture situation, as it helps to minimize any fixed or stranded costs. Furthermore, having an outsourcing contract that utilizes Resource Units (RU’s) provides more surety on how much the cost increase or decrease will be. And having more confidence in the numbers that are being used in any project economics always adds value from a risk management standpoint.
If a GBS organization has chosen to outsource support for some of its services, and the vendors are strong in their field, the GBS organization can leverage those vendors to deliver more value and greater flexibility to the parent company. The key to achieving this, though, is to create a clear understanding up front with the vendors on the Resource Units (RUs) associated with each service and the cost of each RU. Also, the GBS organization needs to contractually maintain the ability to easily increase or decrease the volumes of the RU’s they are utilizing. Lastly, in a mature partnership, the GBS organization and the vendors can began to co-develop new services and capabilities that can benefit both organizations.
Also, if a company has moved from just a Shared Services organization to a Global Business Services structure, then it can began to offer even greater value in the acquisitions and divestitures area. For example, the more services there are in a GBS organization, the greater the potential savings. Also, the more expertise a GBS organization develops, the faster it is able to execute an acquisition or divestiture. And this expertise also enables the GBS organization to provide more certainty on the estimations that are used in the economics associated with any acquisitions or divestitures.