A Discussion of Key Concepts in Evaluating the Feasibility of Shared Services
A solid business case provides the foundation for implementing a successful shared services organization. This is the first session in an HR shared services learning series that ScottMadden is presenting in conjunction with Shared Services & Outsourcing Network (SSON). In this session, we cover the elements of a good business case including examining current costs, projecting costs and savings based on your future design, and conducting sensitivity analysis to understand possible outcomes. This presentation provides detailed guidelines and lessons learned for developing a sound business case.
For more in this series, please see:
HR Shared Services Technologies
The HR Business Partner
HR Shared Services Expansion
Shared Services Customer Satisfaction
Post-Launch Success Factors
View More
Building a Business Case for Shared Services
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- Contact: treyrobinson@www.scottmadden.com
adithyamathai@www.scottmadden.com
Business Cases in a Shared Services Context
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- The development of the business case in a shared services engagement will most often follow a common set of steps regardless of the industry or functional area of study.
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- Assessing the Current StateUnderstand current processes, activities, and technology used
Analyze time activity information to understand headcounts, FTEs, and costs for current processes and activities
Collect volume metrics to benchmark and assess current productivity in area of study
- Creating the Resulting Business CaseLeverage current state and future state headcount and FTE analysis to identify labor changes
Use baseline of sites to evaluate future labor cost structures and potential site costs
Create baseline implementation timeline
Collect technology cost data for both current and new technology
Assess range of potential implementation results
- Developing the Future StateIdentify areas of opportunity for process efficiencies
Analyze results of assumed process efficiencies on headcounts, FTEs, and costs
Understand future uses of technology (current and new)
Develop range of possible sites for future Shared Services location
Business Cases in a Shared Services Context (Contd)
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- Developing the business case can be broken into three elements calculating the benefits, identifying the incurred costs, and developing the necessary sensitivities.
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- Questions to Consider
- Benefits
- What is the best approach to benchmark process efficiencies?
Beyond headcount reduction, what other quantifiable benefits can be achieved in implementing Shared Services?
Costs
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- How does the business want to view the costs incrementally to the project or incrementally to the business?
What major groupings of costs should be considered?
Is it important for the business to separate recurring costs from non-recurring ones?
- Sensitivities
- What are the key variables the business is most concerned about? (e.g., technology costs, ability to reduce headcount, site location, etc.)
How does timing impact the initiatives ability to generate benefit for the business?
Establishing a Current State Baseline
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- In order to develop a baseline of the current state and use this to compare against external benchmarks during future state, three key elements are required for success.
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Determining Future State Savings
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- In quantifying the benefits the organization can receive from implementing Shared Services, the reduction in headcount is often the largest and most important.
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- Headcount Benefits (Labor)
- Typical headcount benefits by the numbers:
70-75% of total savings are derived from labor
15-30% reduction in headcount through implementation of Shared Services
Labor arbitrage opportunities create benefit beyond simply reducing headcount
- Other quantifiable benefits can include
- Technology
Savings associated with sunset of older or unused technology
Savings driven by reduction in licenses required for given technologyVendors
Savings associated with consolidation and optimization of contracts across the organization
Site
Savings associated with departure from a building or lease of a floor
How Should Benchmarks Be Used?
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- Using benchmarks for labor reductions maintains an unbiased and transparent approach.
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- Conservative Savings
- Aggressive Savings
- Benchmark
Internally
- Benchmark Against Industry
- Benchmark Against Leading Practice
- Advantage
- Disadvantage
- Ensures easier acceptance that change and implementation is possible
Allows implementation to leverage processes and tools based on leading processes within the organization
Enables improvements without wholesale process re-engineering
- Hinders ability to show potential for large gains in the business case
Minimizes benefit for leading internal group as they are the benchmark
Limits the realm of possibility for the organization, potentially providing only a short-term solution
- Forces business to look externally for comparisons
Limits comparisons to similar companies with similar demands
Provides potential benefits to all internal groups
- Hinders ability to show potential for large gains in the business case
Minimizes potential benefits to achieving current industry best practice
- Provides leading comparisons to force business to consider all possibilities
Ensures business takes a more aggressive view towards change
Maximizes savings potential and provides strong business case
- Requires more effort to drive internal buy-in on savings potential and potential for success
Maximizes potential change required to reach leading practice
Increases potential technology investments
- Benchmarks should not reduce or eliminate the use of common sense.
Experience and expertise should be leveraged for support.
What About Qualitative Benefits?
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- Beyond quantifiable benefits there are also a number of intangible benefits that should be reinforced, even if they cannot be included in the business case itself.
Increases customer orientation
Provides strong customer service with a balance of human interaction and self-service tools
Improves accountability for service and facilitates continuous improvement through the use of metrics and dashboards
Improves customer satisfaction among recipients of service
Creates a one-stop shop for customers with improved accessibilityImproves controls
Introduces more accurate and predictable costs for the function
Incorporates more consistent internal controls across the business
Reduces risks and increases transparency and compliance in processesEnables strategic decision-making
Allows business partners to perform more strategic work
Improves scalability and nimbleness for acquisitions and major change
Accelerates the adoption of leading practices
Permits better and faster decisions based on company-wide metricsEnables further, indirect efficiency
Eliminates redundancies among different business units
Reduces cycle times of transactional processes, potentially impacting external stakeholders (e.g., suppliers)
Reduces overall operating costs while improving accuracy and speed of service
Reduces potential employee training for new hires or transitions
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Calculating One-Time and Recurring Costs
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- As with benefits, labor can get a significant amount of attention when calculating costs for the business case. However, unlike the benefits, costs are more evenly spread among the different areas.
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- Headcount Costs (Labor)
- Labor costs are impacted by, and should therefore consider:
New hire salaries, by position
Retention rates of current staff, by position
Timing of hires and termination
Cost to hire and severance
Transfers in and out
Internal project team costs and composition
- Other costs can include
- Technology
One-time implementation or set-up costs
Ongoing maintenance and service costs
License or hosted costs
Consulting and Project Team
Support for design and implementation
Marketing and Training
Development and execution costs
Site
Leasing and renovation costs
Furniture, fixture, and equipment costs
Site selection travel costs
- Care should be taken with costs to understand if the business is looking for:
Incremental costs to the project or business this can significantly impact non-labor costs, especially associated with technology implementation (e.g., have to factor in IT personnel time and effort into cost)
Recurring and non-recurring costs this becomes more important if costs are ultimately going to be passed on to each individual business unit rather than handled by the parent organization
Evaluating Sensitivities
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- Developing comprehensive sensitivities for the business case enables the project team to sell the concept internally in the organization by showing the range of possible results from the initiative.
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- Cumulative Net Cash (in $000s)
- Cumulative Net Cash with Sensitivities
- Cumulative Net Cash (in $000s)
- Cumulative Net Cash without Sensitivities
- It is easier to disagree and dispute a single dollar-value result and much harder to dispute a range
Enough assumptions are made that wont all result as predicted in the business case
Sensitivities ensure ranges can be calculated and reviewed to understand the largest areas of risk and gauge what it would take for the business case to no longer be appealing
Intent is not to give the appearance that all the variables have been figured out
Sensitivities help convey that there can still be areas of change
Evaluating Sensitivities (Contd)
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- By depicting the impact of key sensitivities, the project team can instill comfort in the outcome even if the precise details of implementation are not yet finalized.
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- Discount Rate
- Implementation Timing
- Future State Headcount
- Transfers In
- Transfers Out
- Technology Costs
- Technology Savings
- Facilities Costs
- 40%
($16.0 M)
- 20%
($13.7 M)
- -20%
($9.1 M)
- -40%
($6.8 M)
- 0%
($11.4 M)
- 20%
(4.0 yrs)
- 10%
(3.7 yrs)
- -10%
(3.0 yrs)
- -20%
(2.7 yrs)
- 0%
(3.3 yrs)
- NPV (as % from base case)
- Payback Period (as % from base case)
- NPV Ranges
- Payback Ranges
n/a
n/a
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- Sensitivities provide guardrails on outcome
Tree clearly identifies those variables that will have largest impact, and therefore will require most of the attention and focus during implementation
Lessons Learned
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- Keeping in mind a few lessons can help ensure that the development of the business case is successful.
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- For more information on Building a Business Case for Shared Services, please contact us.
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