Shared Services, Centers of Excellence and Outsourcing

The benefits of Shared Services, Centers of Excellence (COEs) and Outsourced Teams are frequently much easier to depict in PowerPoint (or Excel) than to realize in practice for some very important reasons:

Resource Fungibility

Collectively managing the right types of resources can create significant efficiencies and cost savings. However, trying to manage the wrong resources in this manner can create a host of problems, such as resource bottlenecks, loss of critical contextual knowledge, and high staff turnover.

The key to success is to determine which resources are fungible and which are not. Fungible resources are great candidates for Shared Service organizations and COEs; non-fungible are not:

  • Servers can often easily be fungible. Managing them centrally can eliminate provisioning delays, increase utilization and provide common standards for monitoring, maintenance and replacement
  • Engineers are frequently not fungible—at least without finer discernment of discipline. Learning a new language or application takes time (and some times is not even practical based on technical domain)
  • Human resources functions may be fungible or non-fungible. If all your business divisions fall within the same regions and regulation. If not, centralizing HR can slow recruiting and create legal compliance risks
  • Projects Management may also be fungible or non-fungible. Lack of domain-specific knowledge may make project managers non-fungible. However, skill from a strong PMO may trump “context-switching” costs

It goes without saying that fungible resources lend themselves to outsourcing; non-fungible ones do not. Sometimes a fungible service may be replaced entirely with XaaS or Cloud Computing.

Balancing Specialization vs. Service

Shared Service organizations and COEs gain efficiencies through centralized resource planning and common management mechanisms. However, these very same items create inefficiencies for the “internal customers” shared services are created to support. At times, these inefficiencies can become significant enough to drive internal customers seek their own external providers.

Successful COEs balance centralization (sharing) and decentralization (service). They use sharing to create common standards for excellence and to increase resource utilization. They use service models that please their internal customers, making it easier and more valuable to “shop internally” than building (or sourcing) their own dedicated teams. Essentially, winning COEs manage themselves as internal businesses that succeed by building service offerings in response to demand, satisfying internal customers and grow demand for services, and managing delivery efficiently to stay within budget. Winning Outsourcers do the same, but as external service providers.

Managing the Principal-Agent Problem

Any time you delegate management of services to another party you create a “Principal-Agent Problem” (i.e., the delegated party will often have different priorities than you do). Managing this problem with an internal Shared Service organization or COE can be frequently easier than doing so with an external outsourcer.

The key to minimizing the Principal-Agent problem lies in the structure of service contracts and service level agreements. This is true for internal and external teams. While overly loose contracts create inefficiencies, overly strict ones tax both everyone involved with Changer Orders. Overly loose SLAs lead can lead to unsatisfying service—while overly strict ones encourage service providers to increase cost to adjust for risk.

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We have been on “both sides of table” many times over, for over two decades: creating and managing shared services and using them as customers—as internal team members and external business partners. We would be happy to help you leverage this experience to:

  • Determine good COE (and outsourcing candidates)
  • Conduct outsourcing RFIs, RFPS and vendor selection
  • Optimize Service Contracts (internal or external) to your usage patterns and need for flexibility
  • Create SLAs that balance cost, risk and performance
  • Monitor and manage service delivery (as a customer or provider of centralized services)

Contact us to learn more