Shared Gains

Over the last decade, companies have migrated to shared services to cut costs by consolidating support processes. Their new goal is to use shared services strategically.

Wringing inefficiencies from business processes has evolved into an overriding concern for many companies in today's increasingly competitive marketplace. And in Frank Gottschall's view, it's a preoccupation that's well-justified. Gottschall is vice president of payroll services for Federated Department Stores' financial, administrative and credit services (FACS) group, a centralized support resource for the Cincinnati-based retail giant's many divisions. With 120,000 employees scattered across more than 450 stores -- including the Macy's and Bloomingdale's groups -- in 34 states, Puerto Rico and Guam, Federated Department Stores can't afford to run its critical internal services on a mish-mash of systems and processes. "We have to focus on best practices across the company," says Gottschall.

About a decade ago, Federated Department Stores began centralizing and consolidating its 12 payroll support locations into a single shared services center in Mason, Ohio. By 1999, the company had trimmed the number of banks the group used from three to one and installed a single data source for employees seeking payroll, W-2 and 401(k) deduction information. As a result, Federated Department Stores slashed its payroll administrative costs by 25 percent. And it did so without sacrificing service quality: The accuracy rate for the center's responses to internal customer inquiries currently is 99.9 percent, says Gottschall.

Since the mid-1990s, a growing number of companies have turned to shared services arrangements to streamline noncore functions such as HR, employee training, legal services, and real estate leasing and buying. Simply put, this approach assembles a team of support specialists in one physical or virtual location, thereby consolidating expertise that otherwise would be scattered across the organization. "The idea is to create a one-stop shop," says Steve Larson, a Coral Gables, Fla.-based senior consultant in Watson Wyatt Worldwide's technology solutions practice.

Thanks to ongoing improvements in communications technology, particularly Web-based systems, shared service centers are rapidly growing in sophistication. And the bottom-line results they deliver can be substantial. According to The Hackett Group, an Atlanta-based consulting firm, top-quartile companies achieve cost savings of 21 percent to 41 percent by implementing a shared services business model. In addition, these organizations typically reduce the number of transactions that their support departments process by 15 percent to 25 percent as a result of eliminating duplicate job functions.

To achieve that level of success, an organization must put the right technology and business processes into place. Finance executives must collaborate with HR professionals to develop a focused strategic plan. And workers will likely need training in order to handle the changes that a shared services implementation triggers; some displacement of job functions is inevitable as the organization transforms its service delivery structure.

But the rewards are well worth the effort. "With shared services, it's possible to step beyond the basic cost savings that result from standardization and centralization and achieve huge savings and productivity gains that derive from a more holistic process management and continuous improvement approach," says Penny Weller, a Kalamazoo, Mich.-based leader of finance shared services with The Hackett Group. "An organization can focus more on strategic issues rather than administrative tasks."