Mini Case: Building Shared Services at RR Communications

Week 3 Lesson

IT SHARED SERVICES

IT SHARED SERVICES – OVERVIEW

According to Accenture (2005), shared services is the consolidation of support functions from several departments into a standalone organizational entity whose only mission is to provide services as efficiently and effectively as possible.

So, what is IT Share services?

IT shared service is a strategy in which non-core functions (e.g., tasks, or projects) commonly performed by various units in an organizations are given to a department within an organization to be efficiently executed, providing cost saving, and customer satisfaction value.

IT core functions might include network management/maintenance, desktop management, software management, change management, IT capital planning, user training, help desk/incident management, disaster recovery, and a plethora of other services we sometimes take for granted (Roit, 2009).

In short a centralized model for IT shared service must have some autonomy to strategize and maximize resources utilization, bringing value to the corporation. A shared service model is always centralized; it runs as an independent business unit with their own budget and bottom-line accountabilities to the parent organization; it has a customer-centric mind-set, and its job is to provide high-quality, cost effective and timely service. A shared service could compete for internal or external services. It is called in-sourcing when services are requested from internal users and out-sourcing when requested from external uses.

The goal of this section is to provide the student with insight and understanding on how to successfully establish an IT shared service.

IT SHARED SERVICES - PROS AND CONS

Some of the Pros and Cons from the parent organization's standpoint are presented in the table below:

PROs from an Organization's Standpoint	PROs from an IT Shared Service Unit's Standpoint
· Standardization - Uniformity of Services · Service improvements and cost reductions · Functions are focus to the "core competencies" of the shared-service unit · It has the potential to become a profit center (if organizations decides to offer these services externally) · Professionalism - due to customer centric model	· Increased efficiencies - due to standardization · Increased control - due to centralization · Decreased personnel requirements - due to centralization of operations · Improved economies of scale - due to concentration of purchasing power, HR, and other specialized functions · Personnel development targeted toward service management
	

 

CONs to the Implementation of an IT Shared Service

· Becoming a disruption of operations flow. · Instilling an "us vs. them" subculture mentality, deteriorating the provider-customer (i.e., internal user) relationship. · Moving work to a centralized location (creating time, or resources, waste or duplication) · Lengthening the time it takes to deliver a service · Additional cost associated with management bureaucracy and overhead · Extraordinary start-up cost (Expensive to initially implement a newly centralized shared service unit. · Loss of control from other business unit

If IT shared service is successfully implemented, service improvements should be realized in processes, quality, time, customer satisfaction, and cost savings.

 

IT SHARED SERVICES – ORGANIZATIONAL SUCCESS FACTORS

In order to define success, one should first understand the goals and objectives of the initiative and how these align to the organization's strategy. For an IT shared service endeavor to be successful, its technical function must be thoughtfully integrated and aligned to the organization's business aspect

A needed service with not incremental intrinsic value beyond costs savings should be outsource, while services that provide an edge to the organization's business should be considered as candidates for shared service. For example, a company wanting to retain critical knowledge and skills, as well as control, within the organization will opt for creating a shared service unit rather than outsourcing the services, or projects.

AN INTEGRADED MODEL OF IT SHARED SERVICES.

Our textbook presents in figure 7.1 an IT Shared Service Conceptual Model, where a common business function/service, such as "e-forms," is leveraged by multiple business units or departments. The model suggests that IT shared services is best viewed as an "interconnected layers of [business] services" that are built on top of operational processes, and common IT infrastructure, each providing unique services to support the end user; this conceptual model is presented in the block schematic below.

In short the End User Layer depends on the Operational Support Layer, and the IT Infrastructure Support Layer and effective coordination is critical for the successful implementation of shared services. The model also suggests that if one of the components in the supporting layers fails, then the IT shared service would have failed.

RECOMMENDED STRATEGIES FOR THE CREATION OF AN IT SHARED SERVICES ORGANIZATION

1. Create a transparent process for goal alignment. Right at the outset of the shared services, articulation of explicit goals that are aligned to the organization's strategies and are accepted by both the business and IT units are critical to move forward. "Without goal clarity, transparency, and alignment the shared service organization will champion one set of goals over another (i.e., IT goals over business' goals, or vice versa), creating animosity between the parent organization and the shared service provider"

2. Develop a comprehensive investment model. The investment for the establishment of an IT shared service is substantial and requires sophistication, understanding, and commitment from the business.

IT shared service common cost includes a start up cost and ongoing operational cost. In order to measure the cost savings and benefits that an IT shared service has brought to the company, it will be critical to establish baselines for the existing services. Its effective implementation depends on the size of the organization and its successful implementation might take a year for small companies with two locations, and up to 5 years for major international organizations with dozens of locations.

According to Bergeron(2003) "Shared services model is a viable option when the savings from reduction in staffing are greater than the overhead of creating a management structure to run the shared business unit"

3. Redraft the relationship. To guarantee that the client's satisfaction remains being a primary goal for an IT shared service unit, customer-centric training should be provided to all IT shared service personnel particularly during the early the early stages of its implementation. This need to be conveyed to the parent organization and all management levels to gain support and commitment with this endeavor.

4. Make people an integral part of the process. The implementation of any shared service organizational unit or department will require many changes across the business, such as centralization of services and personnel, technology redesign, displacement of personnel, sourcing redesign, changes in process, new measuring metrics and key performance indicators (KPIs), training, and perhaps more importantly a cultural change.

A transformation of this magnitude will have a resistance-pushback from personnel at all levels; and to implement it successfully, it will require an organizational change management approach to ensure the new changes are understood, embraced, and finally adopted.

A MANAGEMENT FRAMEWORK FOR IT SOURCING

In the last few years the list of functions for which IT is accountable has grown enormously and could include:

Operations management, systems development, network management, business transformation, regulatory compliance, enterprise and security architecture management, information and content management, mobile and social computing, business intelligence and analysis, risk management, innovation, demand management (Smith and McKeen, 2012)

The increasing demand in responsibilities will require understanding of the various IT functions stage of development and maturity to determine which activities/functions can be performed in-house, or outsourced.

MATURITY MODEL FOR IT FUNCTIONS

There is a general agreement that the maturity model for IT functions has five evolutionary stages: unique, common, standardized, commoditized, and utility.

The evolutionary logic is straightforward and it's presented next:

· Successful, unique functions are copied by other organizations and become common IT functions.

· Common IT functions soon become standardized.

· A "must have" Standardized IT function is a Commodity

· Commodity functions evolve to the Utility IT function stage when delivered by a centralized/consolidated source.

IT FUNCTIONS' MATURITY MODEL: STAGES OF DEVELOPMENT

1. Unique. An unique IT function provides strategic, and/or proprietary, advantages and benefits to the organization; hence, it is commonly performed in house but it could also be outsource to companies with the expertise not available in house, for example: business analysis, application Integration, or knowledge-enabling business process. Examples: Business analysis, System Analysis, Strategy and Planning, among others

2. Common. A common IT function provides common services across the organization, and doesn't have any competitive advantage, for example: printing operations, financial systems (e.g. payroll systems), and HR

3. Standardized. A standardized IT function provide common task/activities bud adheres to a set of standards develop and govern by external agencies. In general an IT shared service provider seek opportunities to promote and standardize common functions to streamline company operations. Examples: billing/payment functions, check processing, facilities management, disaster recovery planning, and data center operations.

4. Commoditized. A commodity function is one that is too risky not to have, and the cost burden of maintaining its availability falls to a secondary plane. There may be many providers of these type of functions. Examples: network service providers, application service providers,(ASPs), universal power supply (UPS), etc.

5. Utility.   A utility function is a commodity deliver by a centralized and consolidated supplier. "Private" utility providers compete in the open market, while "public" utility providers are likely to be single suppliers overseen by regulatory agencies. Examples: Internet Service Providers (ISPs), and Telecommunication Service Providers (e.g., cloud services, and bandwidth on demand)

It is important to note that an IT function maturity stage will vary from company to company,depending on the company's strengths and capabilities; hence, some IT function independently of their stage might be insource or outsource.

IT SOURCING OPTIONS: THEORY VERSUS PRACTICE

As discussed in our textbook, IT functions can be classified as:

1. In-house. Permanent IT staff provide the IT function

2. Insource. Internal IT personnel are brought into the departmental unit to support the permanent IT staff to provide the IT function

3. Outsource. IT functions are provided by an external organization

4. Partnership. It is formed by a private agreement between the partners to complement their IT functions services via a joint venture or the creation of a new company.

So the question is: How IT sourcing options are determined?

The answer is not straightforward and basically determination of the IT sourcing option resides on following decision criteria: flexibility, control, knowledge enhancement, and business exigency.

THE REAL DECISION CRITERIA FOR IT SOURCING

The IT sourcing decision criteria follows two different approaches:

· A "normal" approach, in which the IT sourcing option (i.e., in-house, insource, outsource, or partnership) is decided based on its flexibility, control, and knowledge enhancement.

Flexibility:

The IT sourcing "flexibility" criterion has two dimensions:

· - Response time (i.e., how quickly IT function can be delivered), and

· - Capability (i.e., the range of IT functionality)

Control:

The IT sourcing "control" criterion has also two dimensions:

· - Delivery (i.e., ensuring that the delivery IT function complies with requirements), and

· - Security (i.e., protecting intellectual assets)

Knowledge Enhancement:

The IT sourcing "knowledge development" criterion comprises:

· - Knowledge development

· - Knowledge retention

An "actual" approach, in which the IT sourcing option is decided based on the "Business Exigency"

Business Exigency    : In an urgent situation, the fastest sourcing option will take precedence. Any of the four sourcing options (i.e., in-house, insource, outsource, or partnership) can be selected; however, partnership is the less likely source to be selected if not prior business arrangement exist.

DECISION FRAMEWORK FOR SOURCING IT FUNCTIONS

"The days of IT being good at all things have long gone....Today you have to pick your spots.... You have to decide where you need to excel to achieve competitive differentiation....Being OK at most things is a recipe to failure sooner or late" (as cited in Mckeen and Smith, 2015, p. 111).

The following decision strategies for sourcing and delivering IT functions are presented next.

1. Identify Your Core IT Functions: Identification of core functions is the first step for the decision framework for sourcing options. Ideally core functions are kept within the organization and would use the in-house sourcing option.

2. Create a "Function Sourcing" Profile: Start by listing all the IT functions and determine if it is (1) a core function, or (2) a future core function. Next, provide the preferred sourcing option for the identified IT functions. As discussed before in-house sourcing option is the preferred sourcing method for core IT functions, leaving by default the other three sourcing options to those non-core IT functions.

3. Evolve Full Time IT Personnel: This strategy is based on the premise that full time IT personnel is a resource which represents a major investment for the company, and therefore its utilization should be maximized or at least optimized. As such, the preferred sourcing approach is "insourcing." Another method used to develop internal IT personnel is based on "Strategic hiring".

4. Encourage Exploration of the Whole Range of Sourcing Options:  This strategy is self-explanatory; companies could choose to explore any of the sourcing option. There is no prescribed guide to determining which sourcing option to use. It is noted that companies choosing to operate within their comfort zone will select in-house sourcing option as their preferred option.

5. Combine Sourcing Options Strategically: This strategy requires to focus on the sourcing of specific IT functions. More and more this strategic approach is becoming more popular since it provides flexibility to address a project's requirement, resulting in a "realizable benefits" such as speed to market.

A MANAGEMENT FRAMEWORK  FOR SUCCESSFUL SOURCING

Key Factors Essential to Effective Management of Sourcing Options

 

Develop a Sourcing Strategy:

Key steps include:

· Use a decision framework. 

· Determine what are the organization’s “core” and “non-core” functions

· Determine “what to”, “where to”, “how to”, “to whom to” source

Develop a Risk Mitigation Strategy: Start by planning the (outsource) work, developing a work breakdown structure (WBS), and creating a network diagram that can provide the inter-relation among activities and a delivery schedule. Next, apply a Risk Management Process as the one suggested by the Project Management Institute (PMI) or any other management process used by the organization.

Key processes suggested in a risk management plan (RMP) include:

· Identify all the activities, roles, responsibilities, and expectations

· Assess the risk by determining the probability of occurrence of the risk and impact to the project if it were to occur. Next determine the risk exposure and prioritize the risks

· Plan Risk Responses, mainly by creating a mitigation plan and a back-up or contingency plan if the risk actually happens. Pulling activities back in-house is an exit strategy that should be considered as a back-up plan.

· Implement Risk Responses by ensuring the risk response plans are being executed.

· Monitor Risk by incorporating an audit trail into the contract to ensure self-correction and protect both parties (i.e., the buyer and the seller)

Develop a Governance Strategy: Layers of governance are critically important for successful sourcing relationships, particularly for offshore sourcing.

· Structure and outsourcing relationship to ensure risk is shared by seller and the buyer, so that both are incented to make it work

Understand the Cost Structures: It is imperative to understand the cost of doing an activity internally (i.e., in-house or insource) vs. the cost when outsourcing it. 

· Understand the true cost of outsourcing by adding other costs such as "relationship management", and "contract management" for an effective comparison in costs.

It is clear that if the activity is more costly to do it in-house, then outsourcing should be considered.

Wrapping Things Up

The process of developing an IT shared services requires a clear understanding of the pros, cons, organizational success factors, and strategies for the successful creation of an IT shared services organization. In particular IT management must know the various sourcing options to their disposal and have a robust criteria to aid them in the decision making process. Furthermore, they should have a strategy in place to effectively manage the sourcing options.

References

McKeen, J., & Smith, H. (2015). IT Strategy: Issues and Practices (3rd edition). Upper Saddle River, NJ: Pearson Prentice Hall

O'Brien, J. A., & Marakas, G. (2005). Introduction to Information Systems (11th ed.). New York, NY: McGraw-Hill.