Learn To Share

Not in the altruistic way, but in the save-big-bucks-through-shared-services way
Magazine Contributor
7 min read

This story appears in the March 2001 issue of Entrepreneurs Start-Ups magazine. Subscribe »

For most of Buck's Unpainted Furniture Inc.'s 41 years of operation, the manager of each location has done the hiring for his or her store. But things at the 40-employee retailer in Minnesota's Twin Cities area have recently changed. Now all hiring is done by a new human resources department operating out of Buck's Bloomington headquarters.

"We had some industry people come in and look at us, and this was one of the first things they recommended," says vice president Ray Buck, 50, one of four brothers who together run the company their parents founded.

The advice isn't surprising. Centralizing company functions-in a manner now known as the "shared services" model-is one of the hottest trends in business today. Those who practice it say they can cut costs while improving the quality of the services shared. The latter of those effects is the impetus behind Buck's move to share human resources among its three stores.

"In the past, with each store handling its own hiring, if you were looking for a new sales-person and some-body came in, you began talking to them and maybe it worked out," Buck says. Most of the time, that was fine. But as employment regulations and issues grew more and more complex, the brothers realized that a shared-services setup would make it far more likely things would continue to work out over the long haul. "There are so many laws now, there are a lot of things that store managers simply aren't going to know," says Buck. "Just the way you handle somebody's application could become a huge thing down the road if somebody says they never got a fair shot at a job. To ward off things like that, human resources was something we felt we needed to have a handle on."

Mark Henricks is an Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for 11 years.

More To Go Around

Shared services is a quickly growing business strategy in many Fortune 500 companies, according to Earl S. Landesman, an Ann Arbor, Michigan, management consultant specializing in the technique. Introduced in the 1980s when companies such as General Electric and AT&T were looking for a way to cut administrative costs for multiple business units, shared services has evolved into a more comprehensive and flexible tool for improving processes, enabling technology investment, generating profits and reducing costs.

In essence, shared services is a simple idea: Centralize administrative chores ranging from finance to document copying that are done in several different divisions of a company. Some companies charge their divisions for these services, setting prices and service levels competitive with outside suppliers. Others even allow internal service providers to peddle their offerings in the open market to other companies. The big payoff, though, is in overall cost savings.

Cost savings can be 50 percent or more, according to Landesman. Shared services does this by creating a critical mass that justifies larger investment in technology, such as computer systems, by allowing for economies of scale and by allowing companies to standardize such things as hiring procedures.

"This is a very fast-developing trend," says Andrew Kris, CEO of Belgian executive search firm Search Xpertise S.A. and an expert on shared services. "It's difficult to find a company that has not either begun to develop shared services or has had it for some time."

You can apply the shared services concept to any administrative function that would benefit from centralization. Any firm that, like Buck's, has more than one location separately handling payroll, purchasing, inventory or hiring could probably centralize those functions at a headquarters office. Administrative tasks that are clumped together can be handled with fewer people.

Sharing services may also help entrepreneurs exploit underutilized internal resources by sharing them with strategic partners. For example, a pizza restaurant located next to a video store can share its in-house delivery service with its neighbor. Entrepreneurial firms can set up similar shared services among other tenants of a building or office park. Cooperatives-such as the Ocean Spray Cranberries Inc. organization, which is owned by more than 900 cranberry growers-represent a further step in the shared-services approach, using a centralized effort to accomplish a function that would be impossible for the constituent companies or departments.

Where To Share?

There are a number of things to remember to effectively use shared services. First, not every business function is suitable for sharing with other companies. Generally, don't try to share with another company any service that is a core competency. For example, a software company probably would not share its software development skill because it would risk losing its competitive edge when other companies learned its hard-won secrets. Also, avoid sharing any function that involves direct customer contact. For example, you generally would not want to use shared marketing services with another company. Even when services are only shared with others in the company, shared services can involve risk. People at other divisions or locations who formerly used and provided the services may well be very unhappy under the new regime. "Many people feel disenfranchised as a result of shared services," says Kris. "They feel that they lose control." The fact is, they do lose control.

Business units or locations that once handled their own services are now dependent on a central location. The headquarters employees who will be providing the services to the separate units may also be discomfited. That's because, under the true shared-services model, other units or locations have to be treated as if they were customers, not underlings. For instance, instead of a home-office purchasing department telling store man-agers that all requisitions must be submitted on the 15th of the month, a shared-services approach would have the home office asking store managers when they would like to submit requisitions. It's a subtle but significant mind shift that not everyone can accommodate.

As a result of a need for different skills, implementing shared services often involves replacing a number of managers. Heads of remote locations who can't stand losing control may have to be supplanted by people with more flexible personalities. It's even more likely that the people who ran the services before they were shared will be replaced. That's because a shared-services operation is run more like an independent business than a typical internal fiefdom. "General management skills, not technical ability, are the key to running shared services," explains Kris.

The costs for putting shared services in place can come from several sources. Financial outlays will have to be made for hiring new people, training existing ones and often installing new technology. The good news is, investments in technology, training and process improvement are easier to justify and more likely to yield positive returns with the help of economies of scale when services are centralized.

Time is another resource shared services consumes. If you're lucky, you could get everything running smoothly in a year. And even after some time has passed, shared services is likely to add to senior management's burden. For many companies, shared services will remain an intriguing concept that just doesn't fit their needs. For others, it will represent exactly the right model to take advantage of a promising opportunity to make the most of home-office skills that other divisions, locations and even other companies can also use.

Buck's has just begun to share services. The company has plans to implement a shared online inventory system that will let each store know not only how many unfinished barstools it has on hand, but also how many stools are in the company's total inventory and where they might be. It's all part of an effort to make the company run better, says Buck. "Number one, we're hoping to be more efficient," he says. "If we're more efficient for [ourselves], we're going to be more efficient for our customers."

The Shared Services Forum at www.akris.com is a large and expanding online source of news, opinions, tips, resources and other information on the subject of shared services for companies at varying levels of sophistication.

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