Why Shared Service Centers Are Growing in Size and Value
The shared services market is growing quickly. US and European firms are either expanding their existing shared service centers (also referred to as “Global in-house Centers” (GICs)) or building new centers. Let’s look at what’s happening and the factors that are driving the growth.
Impact of DIY Movement
First, the do-it-yourself (DIY) trend is well underway in businesses. It drives some US firms to expand their GICs or shared service centers and drives others to move work from third-party providers back in house. As IT becomes more important to firms in a digital world, they want to control more of these functions. Customers are tiring of the factory model with high turnover used by the service providers and want persistent teams that don’t rotate. This allows them to benefit from learning and productivity.
Efficiency is greater in the DIY model, which encourages firms to shift their work from third parties into their own facilities. The market now has firms rapidly growing their own GIC facilities and others investing in new shared service centers. Firms can easily hire competent staff and leaders and thus avoid the high-profit margins of the service providers.
Today, the offshore labor market and surrounding ecosystem is mature; so, it is much easier to find the right skills, leadership and facilities than in the past when building a new shared service center. A few years ago, it was difficult to find and retain the leadership talent; today, there is a surplus of leadership talent. It was difficult and expensive to find the real estate. This is no longer a problem and, some markets have gone from a market of scarcity to a market of surplus. Prices are dropping, facilities are available, fixtures are available. It’s the same with legal support, the tax support, the methodologies and learnings. All these factors are now systemized and are easily accessible. Collectively, the advantage of a third-party service provider dropped dramatically.
Impact Of Digital Model
Another dimension accelerates and compounds the impact of the DIY movement: the shift into the new digital model. Our market research at Everest Group reveals that almost half of new shared service centers set up since 2014 support some component of digital services. In 2013-2014, digital was a component in fewer than 25% of shared service centers.
The shift to digital has multiple components that affect shared service centers:
- Digital models drive work from offshore to onshore.
- Third-party service providers’ FTE-based model doesn’t align well with automation.
The digital model calls for cross-functional, persistent teams. The structure of the third-party providers’ highly leveraged talent factories is structurally incompatible with the need for persistent teams. The FTE / factory-based model is built across tight Standard Operating Procedures (SOPs) designed to rotate teams to keep costs down, educate them and manage talent.
Historically, third-party service providers had the advantage in acquiring and retaining talent. That advantage flipped. Employees now prefer to work directly in shared service centers where they feel they get better pay, better people management and more support on their learning journey. So, the desirability as an employment center now shifts in the direction of the DIY or offshore shared service centers rather than third-party providers.
Companies also now recognize that an FTE-based model doesn’t align well with automation. Some service providers drag their feet when asked to automate functions, as automation reduces their revenues. Clients feel they can move that work into their own shared service facility and more quickly and more thoroughly automate that work. In addition, the GIC / shared service center eliminates misaligned interests in navigating with a third-party provider. Thus, the nature of digital further accelerates the DIY movement.
There is a final aspect driving growth in GICs or shared service centers – at least in the financial services segment. The previous constraints that regulators placed around concentration risk are largely removed. The concentration risk issue applies specifically to financial services firms, but it’s an important segment of what’s happening in the GIC growth.
The regulators signaled that they were uncomfortable with firms having too high a proportion of their talent in one country. But regulators lifted or dramatically eased those constraints, and banks and financial services organizations now have far wider permission to grow those centers. There may still be constraints. But when you factor in automation, which can reduce the number of FTEs per workload for a factor at the low end of 30 percent and at the high end of 90 percent, the concentration issues are no longer a constraint.
Impact Of Rapid Growth Of GICs
Adding all this together, we see a growing movement toward the growth of the size of existing shared service centers and the number of new centers established. Ironically, while the movement leads some firms to shift work away from third-party service providers to their own GICs, it also creates a new temporary market for service providers.
As the GIC marketplace is expanding so rapidly, third-party support is helpful in digesting the growth. It is hardly surprising that third-party service providers are taking note and organizing to serve this attractive market. They attempt to position themselves as partners to this growing market, helping with implementation projects, positioning for work that is not kept in house. It is fair to say that the DIY movement takes work away from the third-party providers as a whole; but as this work shifts, it creates opportunities within the GICs for service providers that are willing to go after it.
It takes time to stand up a shared service center / GIC or expand it, which is why we also see accelerating use of third parties temporarily while these investments mature. However, it is clear that the long-term intent for many of these firms is to expand their offshore centers / GICs and move to their GICs some or all the work currently performed by third parties.
With a growing talent shortage for IT and digital talent in the US, it is understandable that firms are building and expanding offshore shared service centers / GICs. This allows them to address the talent shortage while also satisfying their need for control. The need for digital transformation and lack of talent is so urgent that they are rolling out GIC plans while also expanding their use of third-party providers in the short term.
I should note that not all firms are committed to an in-house GIC strategy, and these firms often expand their use of third parties. There is no standard response to the pressures, and each company finds its own path. However, I see some patterns emerging: more shared service centers, bigger shared service centers and an urgency to address digital transformation, which drives more use of third parties. Mostly, this is a story of lots more of everything in the face of a huge demand to transform.
This article was written by Peter Bendor-Samuel and orginally appeared on Forbes.com
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