Professional Outsourcing Report

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Managing Shared Services

After the strategic decision has been madeabout which governance style to adopt, theshared service itself has an ongoing role incommunicating that governance style tostakeholders, and in specifying howperformance will be measured andmonitored.

Service level agreements (SLAs) can

provide a working structure for the

governance framework. In this way, the shared

services SLA becomes a key mechanism for

both scoping the service parameters and

controlling the SSCs performance.

However, findings from a recent research

project carried out between the CGSS and

the Chartered Institute of Management

Accountants (CIMA) show that SLAs can

play different roles at different times in

the evolution of a shared service.

The SLA sets out the hard points of a

shared service the what, when, where

and by whom. It scopes the nature and

volume of the services activities and sets

down agreed performance standards,

together with quality assurance mechanisms.

The SLA also provides task and output

responsibilities that contribute to the overall

governance framework, along with a basis

for process compliance that can be audited.

Often a series of service catalogues

will specify in greater detail the outputs

and responsibilities of individual activities

covered by the SLA for example, that all

sales ledger balances will be reconciled and

signed off each period. The SLA will also set

out how formal liaison between the parties

(meetings and reports) will operate, and, if

necessary, what procedures are available for

dispute escalation/resolution. The SLA may

also set out how the cost of the SSC itself

will be recovered.

But while a fit-for-purpose SLA should

set out the tough parts the performance

parameters it should also leave sufficient

space for the parties simply to get on with

each other, as they cope with environmental

uncertainty and adapt the service to meet

changing business needs.

This process of customer adaptation

and learning requires mutual cooperation

between the SSC and its customers. However,

different activities require different

approaches, and this is demonstrated in the

following case of how a brewery deals with

its customers.

Beer-Co: A chilled solutionThe Beer-Co Brewery (its name has been

changed for this report) distributes beer

to thousands of retail outlets each week.

The delivered quantities are entered into

a handheld PDA by the delivery crew and

transferred by wi-fi at the depot to the

corporate ERP system. Sales invoices are

produced in a lights out manner and emailed

to customers. Although the transaction

While a fit-for-purpose SLAshould set out the tough parts, the performanceparameters, itshould also leavesufficient space for the partiessimply to get on with each other.

16 Professional Outsourcing Report

A service level agreement should be a touchstone in the relationship between a shared service andits customers. But which form of SLA is right for you? Ian Herbert and Ye Lu present someexclusive research findings from the Loughborough CGSS, and CIMA.

At your service

volumes are significant and based on explicit

knowledge, the system is sophisticated and

both system design and processing are kept

in house and operated by onshore staff.

While these workers are well paid, they are

relatively few in number and the systems are

subject to continual change and improvement

for example, when major customers want

alterations to their routines, or new

technology becomes available.

Despite the largely automatic ERP system

there are exceptions that require manual

intervention. For example, there may be a

dispute with a retailer about, say, the quality

of one delivery, and so a barrel or more may

have to be returned. In this case, a credit

note will have to be issued and the liquor

duty reclaimed from the authorities. But

if the barrel has been used, then the exact

quantities might be disputed, and the

brewery may have to send an engineer to

verify that the cellar conditions in which

the beer was kept were satisfactory.

In such circumstances, negotiating a

resolution involves a good degree of tacit

knowledge and verbal/written communica-

tion being brought together. For example,

does the site and/or the individual manager

have a dubious history of such claims?

However, settling the claim itself is a

labour-intensive process that is carried out

offshore in a captive SSC, operated by a

global BPO provider. The designated workers

are known to the brewery and, if the

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Bottling the right solution: Onebrewery has two different SLAs,governing two very different ways of working internally, and with the external SSC, which is based offshore and run by a BPO provider. But in both cases, flexibility is built in. (Photo: Press Association)

volume of returns increases, then another

full-time equivalent (FTE) may be assigned

to the operation, with the cost being added

to the fixed monthly charge.

The captive centre is governed by tight

SLA terms, such as the time taken to respond

to new calls and to close out individual

reclaims. In addition, all telephone calls are

monitored for quality, and customer feedback

surveys are routine.

In contrast, while the in-house IT-based

process is strategically significant to the

effective operation of the brewery, it has

little in the way of a formal service

agreement. Staff are highly paid professionals

and any operational problems would soon

come to the attention of management.

Mix-and-match SLAsSo in the brewerys case there are two types

of SLA. First, there is the informal, de factoregime that is based on the routines of its

order-to-cash (O2C) process and its well-

documented, proprietary ERP system. Within

this there are interdepartmental hard points

(critical performance indicators), such as

producing the right numbers on time for

the accounting system, together with the

inherent professionalism of the IT staff

within the brewerys corporate culture.

Second, there is the more formal contract

with the operator of the overseas SSC

albeit one that is based on the interactive

and subjective routines of the sales credit

system. In this case there is a prescriptive

SLA with a third-party SSC, setting out

how the service should operate in the form

of aggregate performance measures, with

some flexibility allowed when dealing with

individual customers and changes in demand.

In this contract there are no specific

penalty clauses to compensate for

substandard service, but there is a procedure

by which individual problems can be

escalated until resolved. The ultimate control

is the threat of terminating the deal or not

renewing it at the end of the five-year

contract period.

Findings from the CIMA-Loughborough

SSC Forum suggest that some SSCs tend

not to use formal SLAs beyond scoping the

service and financially appraising it. Other

organisations use detailed SLAs when they

are also servicing external clients, or are

using SLAs as a formal device in the internal

governance regime. This was the case with

Train-Co, in the following example.

Train-Co: Detailed SLAsWith only 600 employees, support company

Train-Co (not its real name) is a small organi-

sation in SSC terms. However, with around

one-third of its staff scattered around the

world in small startup projects, the key aim

of the SSC is to create unity and integration

around common standards. This is in marked

contrast to the more common rationale

of SSCs being primarily about cost cutting.

Train-Co has created an SLA for each

of its 12 support services, each with three

levels of service: Gold, Silver, or Bronze. This

enables individual teams across the world

to be clear about what support they will get

(and pay for) from head office, and therefore

which support services they may wish to

source locally. At the same time, each SLA

also scopes the responsibilities of local staff

for accounting, HR, IT, health and safety,

marketing, and so on, empowering them

to focus on their core business.

The company puts a lot of effort into

constantly refining these SLAs, and there

is a formal renegotiation of each one as part

of the budget-setting process each year.

Asked if this approach is overkill for

a relatively small operation, the Operations

Director was clear that it was time well

spent, because the SLAs provided a means

We spend a lot of time each yearscoping andnegotiating theSLAs, but oncethats done, wenever refer tothem again. If Ihave to take oneout of my drawer,then the servicehas failed.

Divisional manager,Train-Co

18 Professional Outsourcing Report

of negotiating, rather than imposing, rights

and responsibilities that are normally

mandated in documents such as the

budget manual.

He also said that, once negotiated, the

SLAs were more of a comfort blanket than

a straitjacket. As one of the companys

divisional managers put it: We spend a lot

of time each year scoping and negotiating

the service level agreements, but once thats

done, we never refer to them again. If I have

to take one of them out of my drawer, then

that means that the service has failed and we

cant allow that to happen!

Changing times and relationshipsAs mutual understanding and trust are

established in a shared services relationship,

there should be less emphasis on the

letter of the SLA. Instead, a co-operative

partnership should evolve that is aimed at

continuous improvement and adaptation.

One multinational company of 100,000-

plus employees has abandoned its SLAs

entirely, because they were seen by staff as

stifling co-operation and trust rather than

providing a supportive framework. In this way,

governance became focused on a relational,

rather than contractual, model.

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A worker carries out a spot checkon the print run of a publication.Some newspaper giants, such asthe one featured in the Press-Co case study (page 20),have faced complex challenges as they grapple with the internalprocesses involved with becomingbroader-based digital mediacompanies. Aggregating serviceshave helped some cut costs andoperate more efficiently.

Press-Co: Horses for coursesPress-Co (not its real name) had enjoyed a

long tradition in newspaper publishing but,

due to internet-driven technology changes,

it had spent several years repositioning itself

as a diversified digital media group. Costs

needed to be cut, and senior managers saw

that aggregating the finance activities of its

30-plus business units was an opportunity

to make savings through economies of scope,

scale, and labour arbitrage.

The SSC was set up in 2003 to relocate

finance processes from across the company

in a central UK location that had modest

labour and infrastructure costs, but which still

enjoyed good transport links to the capital.

In conjunction with external consultants,

the SSCs management devoted time to

working with each business leader to draft

SLAs based on the key performance

indicators (KPIs) that would govern relation-

ships between divisions. Yet after a number

of iterations over the years, the SLAs

remained in draft form because they involved

reciprocal rights and responsibilities, to

which the businesses were not keen to agree.

As one senior manager explained: We

tried to write the SLA and, originally, the

business managers said they wanted

a fairly detailed document, but when they

saw it, they realised it involved them having

to do things, and suddenly they werent so

interested! They just wanted one page

a page that said what we, the SSC, were

going to do.

In the end, the SLA expanded to four

pages and, although it remained unsigned, its

primary function was as more of a scoping

document than a formal contract. It was clear

that there was significant formal and informal

dialogue between the SSC and the business

managers. Monthly liaison meetings

monitored service levels and identified

process improvements.

ConclusionAlthough many SSCs naturally progress

from a contractual style of governance to

a relational one, the reverse can sometimes

occur. Some start off informally with SSC

and divisional staff feeling their way through

the initial change process, then, as work

becomes routine, the governance style

becomes more contractual perhaps as

a prelude to offshoring to a captive or to

a third-party BPO provider.

One attraction of externalising processes

through an SSC is that documents can be

drawn up to mandate change in support

functions, while also maintaining control via

performance monitoring and by providing

mechanisms for dispute resolution. The exact

form of SLA will depend on the governance

style of the organisation and the specific

nature of the task.

Next: Transfer pricing as a governance tool.

20 Professional Outsourcing Report

Shared service centres are amanagement challenge, drawingtogether different parts of theorganisation, or organisations,into a single entity that needsguidelines, contracts, pricingand, above all, leadership.(Photo: iStockphoto)

Originally, thebusiness managerssaid they wanted a detaileddocument, butwhen they saw it, they suddenlyrealised it involvedthem having to dothings. Suddenlythey werent sointerested!

Senior manager,Train-Co

Serco Global Services has very quickly emerged as a leading provider of Business Process Outsourcing