The Main Features of an Intragroup Service Company

In recent years, major industrial and commercial groups have been looking at administrative and support processes as ne of the key levers to generate efficiency and economies of scale within their systems, free up resources used to improve core operating processes and, eventually, increase investment and growth. This trend of continuous optimization and reallocation of resources has led to many groups creating internal “intragroup service companies” (or Shared Service Companies, referred to in this article as SSC).

SSC are independent organizational entities, delivering services to multiple business units, functions or divisions in multi-business or multinational groups. They have the following features:

• They provide specific services, which are required by all (or most) of the units / divisions of a group
• They are fully responsible for delivering assigned services such as cost, people, and systems management
• They apply contractual agreements, defining the scope, price and quality levels of services

SSCs are usually built with the aim of concentrating and managing, in a more effective fashion, services previously allocated to corporate headquarters and business units.

Generally, these companies are set up to run transactional services, which are not considered “core” for the group but still need specialist know-how and competences. This is why creating a dedicated entity for this purpose not only enhances efficiency but also ensures that the level of expertise required is concentrated in a single unit which then acts as the reference point for the entire group.

Some examples of services allocated to a SSC are as follows:

• Finance (e.g. treasury, foreign exchange, insurance) and administration (e.g. accounts payable / receivable, financial statements, tax)
• IT services (e.g. applications development and maintenance, IT infrastructure management, hardware & software acquisition)
• Procurement (purchasing of goods and services required by all units)
• Real estate and facility management (e.g. buildings maintenance, logistic services)
• Legal (e.g. litigation support and coordination, regulatory compliance, contract management)
• HR (e.g. payroll processing, training execution, compensation administration).
• Customer services (e.g. orders processing, complaints management, etc.)

Interactions between the SSC and its “customers” are regulated through intragroup service agreements, aimed at defining the services supplied, expected quality levels and monitoring mechanisms (e.g. KPIs), governance structure, transfer prices (and any penalty/bonus mechanisms).

Setting up these structures requires a significant change management effort at all organizational levels. Therefore, the first step is to investigate why the top management of a group should consider implementing a SSC.

Reasons behind the initiative

Designing and implementing a SSC is not a minor undertaking: it requires a substantial “investment” in terms of organizational redesign, process transformation, and significant internal coordination.

Nevertheless, successful implementation can generate benefits that significantly overcome the “cost of implementation”. The rewards go beyond mere cost-cutting, to creating a more structured approach towards “service delivery”. The idea is to start with a customer needs analysis (services, volumes, quality) and then examine the most efficient and effective way of satisfying the identified needs.

We can therefore talk about two types of benefits: efficiency and effectiveness.

Efficiency benefits consist of a radical reduction in waste and non-value added activities through concentration, standardization and streamlining of processes:

• Harmonization of processes and redundancy reduction
• Generation of economies of scale (higher volumes, lower unitary time/cost)
• Streamlining and automation of activities
• Best practices sharing
• Improved workload planning and capacity optimization
• Technology integration at group level
• Lower labor costs (in case of shared service center relocation)

Effectiveness benefits are based on significant improvements in the quality of delivery, compliance to service levels required (e.g. execution time, error rate) and creation of competency centers:

• Increase in specialization and technical skills
• Higher accountability for results
• Stronger culture / orientation to customer satisfaction
• More time and resources freed up for business units by taking away
• ransactional and non-core activities
• Improved sharing of information and resources across businesses

Successful case studies show how SSCs can create competitive advantages for the businesses served by simplifying administrative activities, increasing support process effectiveness, and significantly reducing overhead, which can free up resources to invest in growth and operational excellence.

Key strategic steps for creating a SSC

A structured and sound strategy is required to avoid transforming the new company into a bureaucratic source of cost and inefficiencies.

1. Concept Definition

The first step when developing a SSC is to define the scope of the new company in terms of services offered and clients served.

In order to define the range of services to be included in the new entity, the strategic relevance of each activity must be assessed for the business and for the whole group, and the degree of standardization and frequency characterizing each process needs to be defined. This evaluation is executed parallel to a segmentation between core vs. no core activities for BUs or divisions.

“Candidates” for centralization in a SSC are non core activities; those that are not essential to generating a competitive advantage for the business, need to be performed frequently, and can be easily standardized across the BUs. Some examples could be: accounts payable/receivable, logistic services, IT infrastructure management. However, the boundaries are not always clearly drawn and further services (e.g. expertise-based) can be included if significant advantages from centralization are achievable (e.g. tax, legal).

Once the range of services has been defined, the next step is to decide which clients to serve. Usually a SSC provides support to all group entities, maximizing economies of scale and achieving the optimal level of standardization. Some exceptions could be related to geographical barriers, business peculiarities or potential cultural / language inefficiencies.

Another key step is to generate a preliminary understanding of current processes and costs that will flow into the SSC as the result of the service and clients‘ selection. A high level analysis of process flows, interactions among functions, managed volumes and key existing issues is fundamental to identifying major opportunities for improvement and, as a consequence, to setting precise efficiency and effectiveness targets.

Such preliminary analyses will naturally lead to an evaluation about the most suitable high-level organizational structure capable of delivering services and fostering collaboration across the different entities.

There are various ways to organize a service company. The most common ones are process, client or geography. Each of these three models shows pros and cons: while the first pushes standardization and process efficiency, potentially losing customer/business focus, the others will focus more on client needs, with the risk of limiting extensive process streamlining and standardization initiatives. In our experience, correct organizational model selection depends on several factors (e.g., service mix allocated within the SSC, size of the overall group and type of business, geographical span, etc.). It is common that the final design will embed elements from more than one model.
A this stage, with all key structural elements identified, it is important to launch a clear communication effort with the aim of sharing targets and expectations with the rest of the group. This includes soliciting stakeholder engagement, alignment, and sponsorship to support the next phase.

2. Organization & process design

In this phase, decisions are made about process details, management, staffing and resource allocation, performance measurement systems, pricing logics, and implementation strategy.

Process design requires a compromise between full process optimization and a more tempered, incremental approach. Given the significant effort needed to initially set up the company, it may be preferable to design standardized processes with the objective of ensuring operational continuity (critical during a transition period), leaving transformational activities to a later stage.

Following the logics established in the “concept” phase, all organizational positions, job descriptions, reporting lines and key competencies need to be defined. The next step is to run a staffing analysis to assign resources to the different organizational positions. In building the new organization, significant focus should be placed on defining customer contact points. This role (generally known as Delivery Manager) aims to ensure a good flow of communication between “customers” and “supplier”, particularly during the early stages.

A crucial step in the design phase is to draw up a formal agreement (service agreement) between the company and its clients. This arrangement, far from being an ordinary buyer-supplier contract, aims at regulating interactions between the
service company and the other entities of the group with regards to pricing schemes, service levels, contractors‘ duties, bonus/penalties, and related measurement systems.

The first critical decision when compiling a service agreement is the selection of the right pricing scheme. The choice between available models depends mainly on company objectives, type of services provided and maturity/stability of the businesses. Diagram below shows a simplified description of some typical pricing schemes.

The second relevant issue to manage is setting up a performance measurement system. In designing this infrastructure, the service company needs to identify relevant and measurable quality metrics, set shared and challenging (but attainable) targets, and define the measurement processes, responsibilities, and tools.

When all these steps have been accomplished, the company can define a budget coherent with new organization and projected targets and define a detailed implementation plan.

3. Implementation

At this stage, it is key to determine the best speed of implementation. Is it better to go for a quick and unique step or choose an incremental approach? There is no clear answer at the outset and factors such as stability of processes, size of BUs and service company, management commitment, available resources, expected benefits, and resistance to change all need to be taken into consideration. Group features, culture, and resources must all be carefully evaluated when making this decision.

In general, it is important to understand that transition from a concept definition to an implementation phase will never be clear cut. Indeed, implementation is always about ensuring two goals: managing transition and implementing the to-be state. The first goal is really about making sure that all selected processes are transferred to the service company without adopts operative disruption. Management often adopts temporary solutions, even if not aligned to the desired final stage, to ensure business continuity while specific implementation streams get completed (e.g. IT infrastructure integration and development, training on new roles, new organization launch, etc.).

For implementation success, it is important that the management recognizes the need to set up transitional solutions, commits to a detailed plan of action, and ensures clear communication between all relevant stakeholders. Everybody in the
company must be aligned with regards to the implementation‘s progress. They need to understand why the service company might not be able to deliver fully implemented processes from Day 1, realizing the timing and expected path of
full delivery. Implementation of the to-be state is not an easy step. Pitfalls in this phase are frequent, given the amount of activities to cope with and the number
of interfaces involved. A detailed planning and a strong implementation team can help avoid and/ or manage the obstacles on the “go-live” route.

In this phase, it is extremely important for the team to interact with whoever designed the concept and the solutions (to ensure consistency), and with the “clients” of the service company to make sure they are always engaged along the
implementation progress.

4. Cost & process optimization

The journey to accomplishing full benefits has not finished yet. Once organization, processes and coordination mechanisms have been settled, a significant effort is needed to further optimize all designed and implemented solutions. Typical levers for process re-engineering may be:

• Process standardization and automation (e.g. automated electronic flow for invoices)
• Non value added activities elimination (e.g. useless controls, reports)
• Function overlap elimination (removed duplicate activities)
• Full adherence to BUs requirements (eliminate not explicitly required activities)
  Technology integration
• Review of the insourcing / outsourcing mix (often, the creation of a service company represents only a first step that can lead to a full outsourcing of specific processes or, by contrast, the creation of an internal service entity might lead to a decision to insource administrative activities which are currently outsourced)

In parallel with process optimization, a cost analysis should be executed to highlight any further room for reductions. Typical levers for this include:

• Contract strategy optimization (e.g. strong use of tenders, alternative supplier scouting)
• Make or buy logics review (e.g. activity internalization)
• Underlying activity simplification (e.g. review supplier scope of work)
• Infrastructural cost optimization (e.g. locations, IT systems)

Following this radical optimization effort, a continuous improvement system should be established and systematically updated in order to make all optimization initiatives sustainable.

Typical issues in the implementation process

The above mentioned implementation process, far from being a straight and downhill road, can become a tricky path, with several issues to be addressed. Typical pitfalls include:

• Inadequate service selection: many companies underestimate the relevance of selecting the right services to centralize. An unwise selection (e.g. centralizing strategic activities) can lead to customer dissatisfaction, operational breaches and “shadow services” (activity duplication). The correct framework can help avoid improper choices.

• Incorrect organizational model: a common mistake is to select a model misaligned with group needs: a company with similar businesses implements a client-based organization, losing significant standardization opportunities.
  Organization is critical for initiative success: peculiarities need to be carefully understood before setting the right model.
• Unclear borderline perimeters: reallocating activities from BUs and corporate into a SSC can lead to “grey areas” of responsibilities, with concrete risk of activity duplications or, worse, accountability holes. A systematic deepening and clarification of “risky perimeters” is needed to clarify all possible overlaps and unclear situations.
• Ineffective pricing scheme: one of the biggest challenges in developing a SLA is setting up the right pricing scheme. An effective scheme provides the client with all the levers to forecast and control expected costs, avoiding
  complexity while remaining legally compliant. The wrong model, leading to lack of transparency and fairness, may compromise SSC efficiency.

• Weak change management: some companies underestimate the potential effects of unmotivated resources. Staff allocated to a SSC can see such relocation as a penalty or a limitation to their career, while on the other side, divisions / BU’s that are not involved in the process could create obstacles along the implementation journey. Managing such behavior, through effective and constant communication with all key stakeholders will minimize the risk of resistance and misalignment. With these elements missing, the whole initiative could fail.

Conclusions

While the benefits of creating an internal SSC are easily understood, the complexity and the risks associated with an unsuccessful design and execution
strategy are not always so evident.

Our experience tells us that creating this type of organizational structure is an effort comparable to initiatives like post-M&A integration or similar, where a significant amount of processes will be subject to change (in the way they are executed, in their ownership, and in some cases in both). This is a huge change management challenge, with potential impact on short and long term operations. In effect, a new company is created.

Managers need to understand that turning and merging group‘s functions into a SSC is not only about changing processes and organization, but it means transforming the culture and the attitude of a large share of employees. Staff will
gradually understand that they provide services and, as every service company in the world, they will soon understand that success depends on one single measure: customer satisfaction.

By Antonio Liguori, Director, Tefen Italy and
Cataldo Tedone, Project Manager, Tefen Italy