It’s Time To Fix Corporate Shared Services

Sure there may be selfish or incompetent workers, but the real blame isn’t with the employees. The traditional corporate org structure inherently produces poorly aligned incentive structures and ambiguity. For growing firms, it becomes increasingly impossible to understand;

• What is a shared service team good at and do those capabilities match the org’s current and future needs? Is the marketing department as good as external agencies on price, quality, and timeliness for social media advertising? What about for content marketing?
• How much should this capability cost the company? Companies often try to play it safe when budgeting for functions like IT, starting with the previous year’s spend and adding or subtracting a few percentage points. Odds are they’re significantly over or under investing.
• Are shared service consumers appropriately accountable for the services they request? Meaning, are the product teams that use internal support over-consuming services because they’re getting them below cost or at a fixed allocation? Or are they under-consuming services because they’re hard to get or expensive?
• How does a shared service team know which product teams to prioritize? Is it up to the design team to decide which projects to staff their best talent on? Or an executive without context on the tradeoffs? Who gets to set timelines?

The best of both worlds

The fundamental issue comes from the fact that executives are responsible for evaluating, managing, and budgeting for shared services, not their actual customers. When you have one group paying for something and separate groups consuming it, you lose critical feedback loops, signals, and incentives, resulting in bureaucracy and waste. The healthcare industry isn’t a bad example.

When business units work with external agencies they don’t have these problems. They can pick whichever agency offers the right combination of quality, affordability, and timeliness; expenses show up directly on their department P&L; executives aren’t relied on to budget ahead of time for services that meet the nuanced needs of their business units; and the agency can use pricing signals to know who to prioritize (e.g., if a client pays for expedited service).

But this isn’t ideal either. When you outsource to agencies, you sacrifice control, dedication, and potential cost savings. So which is better?

Companies can get the best of both worlds by empowering their shared services to operate like entrepreneurial agencies within the firm. This isn’t hard to accomplish, all that’s needed are two key changes; shared services must be able to charge business units market prices and business units must have some degree of choice when it comes to who they get their services from.

The how and why

Profit motivates businesses to create things their customers value, it helps us objectively quantify the amount of value created by that business, and it funnels additional resources to good companies for reinvestment, allowing them to grow and create even more value. The same feedback loops and incentives can apply to internal teams. When we allow shared-services to earn a profit from other internal business units a bunch of really good things happen:

• First: Shared service teams are incentivized to maximize the value they provide to the teams they serve at the most efficient spend levels. Before, they’d be primarily incentivized to build clout by schmoozing with executives, growing their team size, and padding their budgets.
• Second: Both executives and shared service teams will have a sense for which capabilities their internal teams are good at. Maybe a marketing team is fantastic at search engine marketing but below average at social media advertising. Teams constantly requesting an agency for certain types of projects will expose that, giving companies a signal to invest in, pivot, or outsource a capability.
• Third: Product teams fully understand, and are accountable for, the true cost of what they’re consuming including the opportunity cost.
• Fourth: It sets up internal services to work with external clients. This can help diversify revenue streams for the company and increase demand for a capability, which can be used to scale and improve that service team. By allowing AWS to be its own business, Amazon’s IT capabilities bring in mountains of cash and provide other teams with a vast array of quality offerings.

For this to work, business units must also have choice in who they work with. If they can’t choose to work with an external marketing agency, companies will never know if their internal team offers equal or better service. Business units will only be able to signal whether paying monopoly prices is better than not doing marketing at all.

Troubleshooting

When discussing these ideas with business leaders, a few common concerns consistently come up. The good news is that they’re all addressable.

#1: Coming up with market prices is too complicated

Setting a price is often simple. Teams may use a markup on estimated cost or they can do a quick pricing survey of external agencies. If anything, precisely tracking hours and receipts to calculate any specific project’s cost is more difficult.

Also, how each team charges is up to them and doesn’t have to be complicated. Some teams may charge by the hour, but many will set a flat monthly fee for different tiers of service. For example, a customer support team may charge $10,000 per month for up to 500 support tickets before they bump customers up to their next price tier.

Certainly this entails more work than simply having finance allocate expenses as fixed percentages each month, but that method will cost businesses dearly in the long-term as incentives become misaligned and managerial reporting becomes less useful, especially as they scale.

#2: Teams charging each other will hurt company culture

When it comes to teams maintaining positive working relationships with each other, it’s worth remembering that businesses tend to have very cordial and collaborative relationships with their external vendors and customers anyway. In a past life working in finance, I had more friendly and collaborative relationships with Chase and Amex than I did with most of our own internal departments — and that’s in the context of a real dog-eat-dog market.

Inside of firms we’re simulating a softer version of a free-market. Teams don’t have to file chapter 11 if they run out of cash, they just have to explain to an executive why they’re behind their targets; they don’t have 100% of their livelihood tied to the profitability of their team the way an entrepreneur would; and if they have a dispute it’s settled internally without anyone going to court.

On the contrary, the increased freedom, improved performance evaluation, and aligned incentives will dramatically improve team culture. Entrepreneurial, innovative, value creating leaders will flock to companies that operate this way, reveling in their newfound responsibility.

#3: It’s a waste of money to pay external vendors while internal salaried employees sit idle

This is true, but only in the short-term. If business units opt to use external providers, the shared service team, and executives, receive a clear signal that adjustments are needed. While the company may still have to cover fixed costs for a few months, they avoid growing and maintaining a bloated cost center that will end up costing more over the span of years, both in terms of dollars and managerial overhead. There will also be monetary benefits when companies keep their business units from underperforming as a result of having to work with suboptimal or overwhelmed internal providers.

Most companies already have some process for allowing business units to request approval to use an external vendor, and that may be good enough. Companies may also try curating a list of preferred external vendors and/or charging business units a small markup for using external vendors as an incentive to favor in-house teams.

This guest blog is written by Rob Solomon. Rob is the founder of Cone, which builds software that enables the practices described above.