The Shared Services Paradox

Visible savings can hide the cost of poor design and workflow

Published: Wednesday, February 16, 2011 - 06:00

The hordes of companies and governments moving to shared services are dizzying. So many have combined back offices, human resources (HR), information technology (IT), finance, and contact centers that most companies assume this is a good thing.

But where is the evidence?

The theory behind most shared services claims that if an organization combines two similar functions, it can achieve economies of scale. It is why many organizations maintain that simplification, standardization, and centralization are all the right things to do. Certainly budget and financial folks salivate at the prospect of combining “like functions.” But this is yesteryear thinking based on mass production and industrialized service design.

Service organizations see the visible cost savings that can be achieved through shared services. What they don’t see are the hidden costs of poor design, and the poor flow that results. The problem is that costs are not in scale, but in flow.

This is the truth given to us by Taiichi Ohno, mastermind of the Toyota Production System. Economies of flow are superior to economies of scale. Whereas scale focuses on reducing transaction costs, an  economy of flow focuses on end-to-end value as defined by the customer.

John Seddon of Vanguard Consulting discovered that variety of demand is a key leverage point for services. All the simplification, standardization, and centralization that support cost reduction and improvement projects lead to failure demand (i.e., demand caused by a failure to do something or do something right for a customer). It’s an inside-out, top-down way of thinking that makes service management oblivious to the impact and total costs.

When services are shared, demands are often found to be different, even though the function may be the same. Combining like functions (e.g., contact centers, HR, finance, and IT) that have different customer demands does not decrease demand. Failure demand, which typically runs between 25 percent and 75 percent, and the variety of demands are still present: They are “shared” but not reduced.

In industrialized design, back offices are ever-present. This functional design is rooted in the scale thinking that accompanies industrialized thinking. To free up customer-facing front offices, work is passed to back offices. The front office too often can’t actually help a customer and so the waste begins. This waste comes in the form of hand-offs, rework, duplication, and loss of continuity, which increases the time to get service. The act of sharing services increases the scale of this design and, in turn, increases the waste. More failure demand results from customers who don’t receive service quickly, accurately, or sometimes at all. Costs rise as a result.

This doesn’t mean that all sharing of services is bad. However, when we:
• Accept back offices or other industrialized designs
• Ignore the variety of demand in services
• Assume economies-of-scale thinking
• Merge functions in the name of simplification, standardization, and centralization

We run the risk of making a costly mistake.

The best way to approach shared services is to perform a check on your service organization. This gives the organization much-needed knowledge to improve the system through a redesign that eliminates failure demand, suboptimization, and other forms of waste. Once the work design is improved, you can assess whether shared services makes sense or not.

The check approach flies in the face of organizations that first share to get the hoped-for cost savings, and then problem-solve to put out fires later. Worse, IT is often introduced to solve problems that are design and flow problems, which locks in the waste and costs.

Costs drive many decisions in service and government. Sharing services might appear to be a “no-brainer” and is often promoted this way. However, when the thinking is based on a mass-production and industrialized-design mentality, the result is, predictably, less service and more costs.

About The Author

Tripp Babbitt

Tripp Babbitt the managing partner for The 95 Method - Executive Education and Advisors. The 95 Method is about giving organizations a method to use new theories to grow business.  Babbitt can be reached at tripp@the95method.com. Reach him on LinkedIn at www.linkedin.com/in/trippbabbitt

Tripp also has a podcast and YouTube channel called, The Effective Executive.