Shared services can deliver efficiencies but carry hidden costs, write Muiris MacCarthaigh and Thomas Elsto

Elston, Thomas

MacCarthaigh, Muiris

LSE Research Online

7/20/2016When separate organizations merge their back officefunctionsblogs.lse.ac.uk /businessreview/2016/07/20/when-separate-organizations-merge-their-back-office-functions/“If you are not already thinking about moving to shared services for your organisation, you probably should be.”This advice from management consultants Accenture has been taken up with gusto by many local and nationalgovernments across the globe – particularly since the global financial crisis added new pressure to agency budgets.Shared service arrangements involve separate organizations merging their ‘back office’ support functions, like HR,ICT, finance and procurement. This aggregated activity is then delivered from one location to many “customers,” thehope being to reduce duplication and increase economies of scale.Referred to by previous generations as “common services”, and widely denounced during the heyday of new publicmanagement, when decentralisation and ‘agencification’ were all the rage, today, shared services are once again invogue. Recent reforms include anything from state-wide initiatives, such as those in Denmark and Sweden, orsector-specific projects, such as policing in the Netherlands or healthcare in British Columbia. And the UKgovernment has been at the forefront of the reform trend, most recently with its “Next Generation Shared Services”programme.There have been many successful shared service reforms, but also some failures. In a particularly infamous case inWestern Australia, the change project cost $362mAUD (c.£186m) more than planned, and was eventuallyabandoned as a hopeless endeavor. Recent research in the US found general disappointment with the savingsdelivered by public sector shared services. And, closer to home, a string of NAO reports in the UK, including onepublished in May, also found underwhelming results.What might explain these cases of disappointment, and what can be done about it? In a new research article(Sharing services, saving money? Five risks to cost-saving when organisations share services), we identify anumber of issues that shared service reforms must overcome to achieve efficiency savings:1/31. Don’t underestimate start-up costsThis seems to be widely forgotten when it comes to shared services.Refashioning organizations to enable effective service sharing frequently takes longer, and costs more, thanplanned. As well as pointing to ‘micro’ issues (such as internal resistance), we emphasis the concept of ‘pathdependence’ , i.e. there are explicit and hidden costs to abandoning previous ‘locked-in’ routines and workpractices.2. Transaction costs increaseFor efficiency gains to be realised from shared service arrangements, economies of scale must outweigh anyincrease in transaction costs. And yet there are significant transaction costs involved in setting up shared services,from documenting and codifying existing processes, to agreeing new common operating procedures, writing acontract or service level agreement, and monitoring performance. Even with new technology, there is a risk ofcreating additional layers of management and coordination. Unfortunately reform proponents often overlook thistrade-off, focusing on production-cost savings rather than the transaction-cost burden for clients – a practicecondemned by some government auditors.3. Reduced service qualityInter-agency standardization of back-office processes brings advantages but also risks, including excessive concernfor processes over outcomes and slower decision-making. In other words, rules concerning standardization areprioritized over service quality. And while the motto of the ‘user being the chooser’ is popular, it often transpires thatthe service provider determines what the user can have – ‘the tail wagging the dog’ as it were.4. Functional duplicationBy sharing services, managers are expected to end duplicated activities and eliminate ‘redundant’ capacity. However, the emergence of ‘shadow’ teams in customer organizations, repeating the work of the shared servicecentre, is a common problem that undermines the expected efficiency gains.There are several reasons why organisations might duplicate services, including the desire to maximize autonomy.To do so organizations might ‘decouple’ their public-facing exterior from their internal operations, i.e. pay lip serviceto reforms such as shared services while retaining (and concealing) parallel in-house capacity.5. Opportunity costsFinally, as with any reform, there are opportunity costs to adopting shared services. By expending energy andresources on shared services reforms, governments are not doing other things. Is this sacrifice worthwhile from acost-saving perspective? Might efficiencies be generated through other strategies such as decentralisation to lowerlevels of government or devolving resources to individual agencies? And does major restructuring for sharedservices divert attention away from redesigning frontline systems and processes?Shared services can deliver efficiencies and economic savings, but greater awareness and recognition of the hiddencosts and risks involved are necessary. Our research suggests that shared services should be considered as one ofa range of options for improving administrative efficiency. Sometimes they will be the best choice, but otherwisereforms to in-house provision may be preferable, especially if clients have diverse needs. Furthermore, greaterrecognition of the trade-offs between production and transaction costs, and between inefficient and fail-saferedundancies will improve initial cost-benefit analysis. Finally, resistance to shared services is not simply a “peopleissue” to be dealt with by appropriate change management. It is also an opportunity to engage end-users in reformdesign and implementation.2/3♣♣♣Notes:This blog post is based on the authors’ paper Sharing services, saving money? Five risks to cost-saving whenorganizations share services, Public Money & Management, Volume 36, Issue 5, 2016The post gives the views of its authors, not the position of LSE Business Review or the London School ofEconomics.Featured image credit: U.S. Army CC-BY-2.0Before commenting, please read our Comment PolicyMuiris MacCarthaigh is a Lecturer in Politics and Public Administration at the School of Politics,International Studies and Philosophy at Queen’s University Belfast. M.maccarthaigh@qub.ac.uk  Thomas Elston is a Postdoctoral Research Fellow at the Blavatnik School of Government,University of Oxford. Thomas.Elston@bsg.ox.ac.uk Copyright © 2015 London School of Economics3/3

When separate organizations merge their back office functions

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