Shared Services Business Model
The shared services business model is a centralized, customer-oriented approach to services shared by various departments within an organization. It is often contrasted with the decentralized business model, whereby each department has its own staff and resources for a given service. However, the shared services model also differs from the classic centralized model. The shared services model has a unique, customer-service orientation toward each department it serves, who are essentially its customers. Some of the services that are often shared under this model include hiring, accounts payable, information technology (IT), purchasing, procurement and sourcing.
Shared services model vs the decentralized model
Under the decentralized model, each department in an organization performs a given service, such as purchasing, for itself. The potential benefit of this approach is that each department has a high degree of control over the service. However, there are a number of significant downsides to the decentralized model. The most prominent is redundancy and the cost associated with it. Providing the same services in parallel within each department fails to take advantage of the economies of scale offered by an organization, especially a large one. Another downside to decentralization is a lack of uniformity and standardization. Of course, an organization can make a company-wide effort to standardize the service provided independently in every department. However, unless the organization is willing to commit to maintaining an ongoing standardization campaign, the various departments may find themselves running their services so differently that they can no longer efficiently communicate or share related knowledge with other departments. This is where centralization has the advantage.
Shared services model vs the classic centralized model
Under both the shared services model and the classic centralized model, the various departments and locations of the organization all draw from the same centralized department that provides a given service, such as purchasing. The main advantage and purpose of the centralized model is reduction in cost through economies of scale and the elimination of redundancy. Another advantage of centralization is that standardization arises automatically. Each department will receive essentially the same service in the same way from the same source. However, there is a significant downside to the classic centralized approach. The quality of the service provided by the centralized department can suffer without a counterbalancing factor, which is where the shared service model shines.
The customer orientation of shared services
Under the shared services model, the shared department, although centralized, has a very different orientation toward the various other departments it serves than it does under the classic centralized model. Under the shared services model, the various departments are essentially customers of the shared service. As such, they are often buying the shared service; negotiating its cost; and evaluating the quality of the service provided. In some cases, the various departments have the option to outsource the shared service to a third party if the internal provider isn’t the right fit for their needs.
The organization often formalizes the relationship between the shared service and its customer-departments with a service level agreement (SLA). SLAs are contracts between customers and service providers guaranteeing an agreed-upon level of service quality. If service quality falls below the stated expectation, the customer/department has alternatives, such as outsourcing the same service. For this reason, the shared services model has the potential upside of encouraging the highest-possible quality of service.
The shared services model involves a significant shift in perspective and resources for any organization. Implementing the shared services model requires a commitment to investing the time, money and training toward making that shift. Furthermore, in some contexts, current employees may have difficulty viewing themselves and their colleagues as buyers or sellers of an internal service. In that case, and in many other cases, outsourcing the shared service may be the best fit.
Understanding shared services
When departments within an organization share a centralized, customer-oriented internal service, the organization is implementing the shared service business model. Because shared services are centralized, experts often contrast the shared service model with the decentralized model, whereby each department has its own in-house providers of a given service, such as purchasing. However, the shared services model also differs markedly from the classic centralized model.
The shared services model, unlike the centralized model, treats itself as an autonomous service provider and each department as a customer. Therefore, providing exceptional service quality becomes a high priority. If the other departments aren’t happy with their service, or otherwise feel the internal shared service is not the best fit for them, they can often choose to outsource the shared service instead.