Shared services is an operational philosophy that involves centralizing administrative functions that were once performed in separate divisions or locations. Services that can be shared among the various business units of a company include finance, purchasing, inventory, payroll, hiring, and information technology. For example, a central headquarters might control all the hiring for an entire chain of retail stores. The term "shared services" can also apply to partnerships formed between separate businesses. For example, the tenants of an office building might share telecommunications or maintenance service. Shared services are also available on the Internet. For example, Application Service Providers (ASPs) offer numerous business clients access to online applications so they can avoid purchasing special systems and software.
Ideally, companies that implement shared services enjoy significant cost savings by standardizing practices and procedures and by creating economies of scale. Proponents argue that performing a function in one location usually requires less investment in technology and office space, as well as up to 30 percent fewer employees, than performing the function in multiple locations. "Under shared services, a company centralizes back-office functions, such as accounting, warehousing, and even information technology, and treats them as internal vendors," Erik Sherman explained in Computerworld. "The rest of the company can use outside service providers instead, so competitive pressures promote responsive service, and reduced staffing saves money." In some cases, the centralized functions—or shared services organizations—charge the different divisions for the use of their services. Other shared services organizations even offer their services to outside firms on the open market.
Shared services is a popular business strategy. In fact, Elizabeth Ferrarini noted in Computerworld that it has been adopted by half of all Fortune 500 companies. "Centralizing company functions—in a manner now known as the 'shared services' model—is one of the hottest trends in business today," Mark Henricks wrote in Entrepreneur. "Those who practice it say they can cut costs while improving the quality of the services shared." The concept of shared services was introduced in the 1980s, when a number of large companies with multiple business units began looking for ways to reduce their administrative costs. Since then, Henricks noted, "Shared services has evolved into a more comprehensive and flexible tool for improving processes, enabling technology investment, generating profits, and reducing costs."
There are a number of potential drawbacks associated with shared services, however. For example, companies switching to a shared services model often incur the cost of hiring new people and installing new technology. In addition, implementing shared services takes time—often more than one year. Furthermore, as Henricks warned, centralization is not appropriate for every function. Companies should not centralize their core competencies or functions that involve direct customer contact, particularly if outside firms also use the shared services.
The implementation of shared services can also create problems within a company. For example, the employees who used to provide the services in various business units might be upset with the loss of control they experience under the new arrangement. In addition, the headquarters employees who provide shared services from a central location might be uncomfortable treating business units as customers. In fact, switching to a shared services environment requires employees to develop new skills, with an increased emphasis on flexibility and customer service. "To be the preferred supplier—and even to have a secure corporate existence—the shared service has to cost effectively deliver superior results," Sherman stated. As a result, shared services is not appropriate for every business. "For many companies, shared services will remain an intriguing concept that just doesn't fit their needs," Henricks noted. "For others, it will represent exactly the right model to take advantage of a promising opportunity to make the most of home-office skills that other divisions, locations, and even other companies can also use."