By Cindy Su, Managing Consultant, Talent and Organization Consulting, Aon Hewitt

The concept of "shared services" has become a way of life for most organizations and industries in recent years. Shared services can be defined as the pooling of certain service resources within a company or organization, such that several units of the firm share services that previously existed separately in one or more of those units. The HR shared services is one important component in the three-pillar model (HR Business Partner, HR Center of Expertise, and HR Shared Services) that is widely used by top firms in developed countries for maximizing the value of HR services to the larger business needs of the company.

The major decision points as to whether or not to share particular services is whether a process is core or non-core, whether internal customer intimacy would be lost, and whether the shared services can generate enough value for the firm in the long run.

For the Chinese companies undertaking this journey of strategic transformation, "shared services" does not just mean "economies of scale" and "efficiency enhancement." In fact, "shared services" is one of the most important parts of HR strategy and it will ultimately impact business in its core competencies, employer branding, and employee engagement.

The journey to an HR "shared services" model from the traditional HR function model represents a huge change, which must be carefully managed.

To some extent, the change from a traditional HR delivery model to a "shared services" mode is fundamental – changes apply to almost every important aspect of an organization, such as corporate culture, management style, service delivery model, process, and technology. From our leading practice cases, we have observed a number of common challenges and problems during the transformation to a shared services model. These challenges apply whether the reason for the change is globalization, mergers and acquisitions, integration, employee satisfaction, or cost controlling.

The journey toward a shared services model can be generalized into five distinct phases: strategy; feasibility analysis and business case formulation; shared services design; implementation; and maintenance. In this paper, we highlight the key people- and governance-related challenges that an implementation team should focus on in each of these stages. Some of the most important challenges will be discussed phase by phase.

Challenge 1 – Articulation of Strategy and Commitment to Execution

Shared services implementation typically begins with a strategy articulation exercise. This involves understanding and articulating why shared services need to be established, the broad functional areas that will be covered, the regions that will be affected, and the definition of key objectives and measures of success. At this stage, the project sponsor, key stakeholders, and the core implementation team are identified. Usually a strategy document is developed and key stakeholders are apprised of the context, objectives, potential business benefits, and desired outcomes.

Following are some of the issues that our experience suggests can occur in this critical stage of defining the shared services journey.

1. Inability to achieve buy-in from all stakeholders due to poor selection of project sponsor

In most shared services implementations, the project sponsor is usually the functional head of a geographic region (or another person) identified by the corporate office. This process can lead to the implementation being seen as driven by the corporate head office and thrust onto the region from above, leading to limited buy-in from business leaders concerned with the project.

For example, in the case of a large manufacturing organization, the project sponsor was a regional functional head with close contacts with the corporate office. As a result, the project was always seen as a corporate initiative, resulting in limited buy-in from the affected locations. It was increasingly felt during the design and implementation phase that involvement of the regional CEO as the project sponsor would have ensured better acceptance and commitment from all stakeholders.

2. Ineffective stakeholder identification and involvement

During the strategy phase it is essential that all stakeholders are identified and their inputs are received while the vision and objectives are being articulated. This facilitates stakeholder buy-in during the later phases. If these stakeholders are not involved until a later stage, they may be more noncommittal or stall the project by identifying obstacles rather than suggesting solutions, or by emphasizing how their absence led to business realities not being captured.

In our experience, we have observed that the final customers (other functional heads) need to be involved in championing the implementation or be part of the steering committee. This helps not only in securing buy-in, but also in defining a strategy that takes into account the business realities on the ground.

3. Failure to consider change readiness of the organization

We have observed that in shared services implementations, every subsequent and incremental transformation tends to have goals and targets that are more aggressive than the last. These targets are sometimes defined without taking into account the experiences of previous change initiatives within the organization.

For example, in one case in our experience, the scaling up strategy for shared services involved moving first 30%, then 50%, and finally 70% of the identified functions to a shared services model. What was not kept in mind was that similar transformations in the past had failed. The defined target was based on external benchmarks, rather than the internal ability of the organization to undertake this transformation. As a result, the strategy lost credibility from its inception.

Challenge 2 – The Feasibility Study: The Devil Is in the Details

Once the strategy is finalized, there is a need for a well-articulated feasibility study that helps define the business case. A critical aspect of developing the business case is a thorough understanding of the current processes and the current cost of delivering services. This also involves evaluating various service delivery options and envisioning the future state. Key to identifying the best-fit solution is preparing a business case that is not only quantitative, but also considers qualitative elements, such as various people and change management costs. 

Key governance and people-related activities that are generally overlooked while conducting a feasibility analysis are:

• The need to create awareness of forthcoming change among employees and teams that could be potentially affected;
• Understanding the key challenges with respect to change and thereby the ability to include potential costs of change management and establishing buy-in into the business case by key stakeholders;
• The need for the core project team to convince countries and specific locations to allocate dedicated resources and single points of contact for the program.

A number of specific challenges can arise during this stage:

1. The project sponsor does not walk the talk

A project sponsor may not be completely in sync with the shared services vision, or his or her overall knowledge of implementing shared services may be limited. This may result in his or her commitment wavering, particularly during the important step of creating a business case for change. Uncommitted project sponsors may not create or seize appropriate opportunities to sell the project and secure commitment from critical stakeholders.

For example, a large cement manufacturer wanted to implement shared services for its 15,000 strong workforce in a developing nation. The project was thrust upon the new incoming CEO in the country without appropriate preparation, resulting in his lukewarm enthusiasm for the project. As a result, key meetings and deadlines were missed, the project manager had limited capability to implement the model, and cost overruns began to mount. The problems cascaded and the project did not even reach completion of the feasibility phase.

2. The leaders are clear, the project team is not

We have often observed that the inability of leaders to communicate their vision and develop a shared understanding results in a disconnect between the strategy and the foundations of the business case. For example, a large manufacturer wanted to implement shared services for its north Asian region first before applying the model to other regions, but since the business case created was based on the specific region, it broke down when the company attempted to apply it globally.

A similar disconnect may also arise when the implementation team has been chosen on the basis of the sponsor's comfort level with known individuals, rather than the capabilities needed for the team.

3.  The sponsors don’t consider people and communication issues

The business case for shared services needs to look far beyond the potential financial impact. This is similar to any corporate vision that aims for broader goals than simply financial gain. A shared services business case should look at, in addition to financial numbers, such aspects as quality, delivery, customer satisfaction, personal touch, and user preference. All of these key aspects then need to be communicated to the various stakeholders.

It is also important to tailor the message to the audience. For example, the project sponsor for a shared services project emphasized financial gains and the potential for increased customer satisfaction when addressing the financial community, but changed the focus to quality, customer intimacy, and user preference while addressing the HR community. Such customized communications led to better acceptance among various stakeholders.

4. The project teams have conflicting responsibilities

The project team for a shared services project needs to be completely dedicated to the implementation, so they should be freed from their earlier roles. The project team should not look at the project as a burden that they have to bear on top of their daily work. In addition, should they retain their earlier roles, they may have vested interests that will result in skewed solutions. Conducting a rigorous feasibility study requires intense concentration on particular issues. If members of the team have to continue their line roles as well, they may have a tendency to look for shortcuts and consider only surface issues.

Challenge 3 – The Design Phase: Well Begun Is Half Done

Having established a strategy and business case, the next step in making the shared services model a reality is to define the critical elements. In our view, there are seven critical elements:

It is imperative that these seven building blocks are detailed sufficiently to provide an element-by-element view of how a shared services model will emerge in the future and how each of the elements will play its part. The capability of the project team and appropriate stakeholder interaction are critical during this phase. Since each element has a specific business stakeholder, it is crucial that this team operates harmoniously to achieve the optimal design.

In our experience, the following pitfalls are common to many implementation projects:

1. Reluctance to buy or borrow capability

The project team should be chosen for its ability to design a shared service center, with all of its key design elements. These design elements should be based on past experiences of successes and failures, knowledge of the external business environment in the host location (prevalence/skills/talent pool, etc.) and on internal nuances. Also, during the design phase, the overall interaction with the affected parties significantly increases. Failure to come up with an appropriate design that addresses all success parameters may lead to the eventual failure of the project.

2. Thinking that people will understand

It is really during this design stage that people begin to realize that shared services is going to be a reality and it is therefore essential that customized communication is sent out to all stakeholders. It should be assumed that people will get anxious about changes in the organization structure and in their roles, so all communication needs to be tailored to the different stakeholders and affected parties with the primary objective of addressing the "What's in it for me?" question.

For example, a large automobile company created an entire work plan for change management during the design phase keeping in view such critical aspects as: what is the best communication vehicle to reach the target audience, how to achieve two-way communication, what is the appropriate message for each target, and what is the likely impact.

3. Inadequate impact assessment

The biggest source of anxiety during the shared services journey is likely to be the potential for loss of jobs in the home location where HR services are currently housed. The project team needs to appreciate this issue early on and prepare a concrete plan that addresses the following questions and concerns:

• What roles will be affected (redeployed/redesigned/made redundant)?
• What is the shift between shared services and in-geography roles?
• Will there be clustering of in-geography roles to ensure minimal re-skilling requirements?
• What will be the design of the new organization structure, reporting hierarchies, revised job descriptions and key result areas (KRAs)?
• Do the retained functions, i.e., those not included in the shared services center, have the capabilities that will be needed in the future state?
• What is the likely redeployment plan for the affected roles?
• Cultural considerations — the same change will need to be managed differently in India vis-à-vis Japan.

Challenge 4 – The Project Management Office and Project Management

The success of any large-scale transformation is judged by the quality of change and how smoothly the transition is achieved. Successful transformation is the culmination of a long process of evaluation, design, implementation, and communication. The success of any implementation, and more so in the case of a shared services implementation, is making the necessary mid-course corrections, keeping track of the business case, and ensuring the buy-in of all necessary stakeholders.

In our view, critical enablers that help achieve a successful implementation are:

• Establishing a project management office (PMO) to manage multiple work streams, including setting up infrastructure and building teams for both the new shared services center and the functions that will be retained in the old HR structure;
• Maintaining continuity of the project team;
• Securing the firm resolve of the project sponsor;
• Ensuring consistent communication.

In the absence of the above, we have observed the following challenges emerging:

1. Poor project team continuity

A shared services project usually spans 6 to 18 months in its first phase. Over the course of the project, the project team typically builds up a lot of knowledge about the project, as well as important relationships with key stakeholders. Often the project team members informally divide the responsibility of dealing with various stakeholders among themselves due to previously established relationships. Loss of key project members during the implementation phase will therefore result in key knowledge being lost and the need to rebuild rapport and confidence with key stakeholders.

In our experience, a common pitfall is that when key project resources are lost, the organization tends to hire on the basis of the level of personal comfort that new personnel have with certain stakeholders, rather than strictly on capability. Falling into this trap is detrimental to the project team's credibility, which has been built up over a long period of time. Therefore, to avoid over dependence on particular individuals, the project team should develop a clearly defined succession plan and an adequate transition period.

2. Inconsistency between communication and delivery

The informal grapevine is almost always stronger than the formal channels of communication. It is therefore essential that communications are accurate and transparent, as the interactions between in-geography resources and the project team are maximum at this implementation stage. Loss of credibility at this stage may result in people losing faith in the vision of the project and the wavering commitment of the impacted geography resources.

While unrealistic communication can lead to loss of credibility, it is essential that small victories are celebrated to keep up the morale of the project team and stakeholders. Communications about these small victories should stress how they are leading to the achievement of the overall vision.

3. People share success but not responsibility

Governance structures need to manage both the "ups" and "downs" of implementation. Clear lines of communication need to be established to ensure that problems and issues are communicated to the implementation team and resources allocated to address them.

A common pitfall is that all stakeholders want to join in on the success story, but are reluctant to involve themselves in addressing the problems. To avoid such pitfalls, it is important to ensure that the following steps are taken:

• A clear escalation matrix must be defined, so that decisions can be sent up the chain of command as needed.
• Expert resources are put in place early on, so that proper expertise is available from the beginning.
• Corrective actions are monitored and documented so that they become part of the revised project plan.

Challenge 5 – Sustain, Sustain, Sustain

Having successfully implemented the shared services model, it is imperative for the organization to realize the desired benefits from the new operating model and to derive value from the transformation. The maintenance phase is about realizing the benefits and value that were envisioned during the feasibility assessment phase. Maintenance involves measuring performance against predetermined targets and taking corrective action where required, knowledge management, leveraging best practices, and preparing for future expansion. To realize the key benefits, both the shared service organization and retained entities need to achieve operational excellence and be able to perform their defined roles.

In our experience, we have observed the following stumbling blocks:

1. Lethargy/Burnout

Targets for shared services in terms of cost savings, efficiency, and service quality are usually aggressive and during the steady state there is high anticipation to achieve dramatic results. But it is important to remember that the onus of achieving these results resides with the operations team, not the project team. The two teams have different skill sets: the project team members are typically more driven by delivering on time, on budget, and with quality; while the operations team members are expected to use their strong administrative skills to efficiently manage processes. A common pitfall is the delayed transition of responsibilities to the operations team, leading to burnout of the project team. Managing this transition is critical and should be carried out in a phased manner to ensure a fine balance between a speedy transfer of responsibility and adequate knowledge transfer.

For example, in the case of a large financial shared services setup, the appointment of the operations manager was not given due importance as it was not on a critical path for the project. As a result the transition manager was expected to play the operations role, for which he was a poor fit, which led to lower engagement levels and his eventual departure from the organization.

2. Poor management of career aspirations of the operations team

The roles performed in a shared services setup are mostly transactional and repetitive in nature. Hence the competency and skills required are significantly different to those of the original organization, and the talent management philosophy and HR policies cannot be replicas of those used in the parent organization. In a shared services setup, the focus is usually skewed towards scale rather than domain expertise, leading to career options such as people management and quality assurance rather than movement to function and other domain areas.

For example, in the case of the shared services transition of a large pharmaceutical company, domain experts were hired. They were paid well, and trained at the company's global headquarters. However the job primarily involved documentation and data entry, which were not jobs of interest to the experts in the long term. This mismatch between career aspirations and available career paths led to a spike in attrition rates after a period of sustained operations.

3. The retained organization is incapable of handling new job roles

The expectations of the retained organization are that it will become more strategic in nature, with its more routine functions now performed by the shared services center. But this requires development of new skills and capabilities. Lack of investment in capability development of the retained organization resources during implementation will reflect on the steady state operations.

To illustrate using the case of a leading conglomerate, it was observed that the staff of the retained organization continued handling their regular transactional roles out of habit. The end customers were not really concerned about this; they were pleased to have their needs continue to be met by HR personnel they knew and who worked close by. This situation had two bad outcomes: the functional head was left under the impression that the shared services unit was not fulfilling its responsibilities, and because of its continued routine workload, there was limited bandwidth in the retained HR function to focus on new strategic aspects.

Overall, it is important to articulate clearly the responsibilities and expectations of the retained roles, develop corresponding structures and policies, and devote adequate resources to capability building.

Summary

In each phase of a shared services implementation different kinds of people issues are raised. Some of these issues are related to stakeholders, while others are related to the project team and sponsor. At every stage, it is important to maintain clear and transparent communication with all stakeholders – to increase buy-in, to establish new operational protocols, and to ease the anxiety of personnel about what the changes many mean for them. This article covers some of the many pitfalls that may be encountered along the way and offers constructive suggestions for mitigating them.

Contact us

Cindy Su is an HR Effectiveness consultant based in the Aon Hewitt Shanghai office. She focuses on change management; HR shared service center delivery model; HR process re-engineering; and HRIT solutions. She can be reached at cindy.su@aonhewitt.com.

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