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Choice Between Outsourcing And Shared Services

Robert Marciniak
Institute of Management Science
University of Miskolc
Miskolc, Hungary
szvmarci@uni-miskolc.hu
AbstractShared services and outsourcing are two different
approaches about optimization of back-office functions in
organizations. In this part of my research I analyzed what are
differences between the two models that determines its using. I
found which are the most important decision factors and how
companies use them. I disclose that companies do not always
need to choose between the two models. There are more options
for companies to link the two models and use synergies of this
cooperation.
Keywords: sourcing, outsourcing, shared services, hybrid model

I.

SOURCING ACTIVITIES

In the last two decades outsourcing, shared services and

offshoring approaches has evolved considerably. While earlier
companies had separate strategies have been for using these
models, today the three models are organically associated with
portfolio approach and consisting the corporate sourcing
strategy together. However what is sourcing activity? I use the
definition of Ilan Oshri:

III.

IMPROVEMENT OF COMPETITIVENESS WITH

OPTIMIZATION

The consulting firm Bain&Company in 2007 research

examined that companies what degree of savings could reach
with transformation of corporate back-office functions.
According to research there are three different options for
companies: the first to reduce companies' use of internal
service functions, the second to redesign the processes and the
third to restructure the organization fundamentally. In the first
case companies must reduce their expectation of support
functions and eliminate unnecessary activities focusing what
could be important for customers and business activities. These
measures are not so difficult to implement in the companies,
but it could create such a market mechanism that facilitates
development of efficient and high-quality internal services and
according to the research these occurs an average up to 25%
savings of the total saving potential. [10]

Sourcing is the act through which work is contracted or

delegated to an external or internal entity that could be
physically located anywhere. It encompasses various
insourcing (keeping work in-house) and outsourcing
arrangements such as offshore outsourcing, captive
offshoring, nearshoring and onshoring. [9]
I think that almost every major company is involved in
some type of sourcing activities and since purchasing has a
profound effect on the operating cost of companies, it has
strategic importance. I argue that we can speak about "strategic
sourcing" to which the activities of companies, that are
constantly being reviewed strategic resources for the operation,
the sources of supply of services. Companies seek out the
optimal position of resources and services may it be within the
organization or outside of it.
II.

METHODS

This part of my research among the sourcing models I dealt

with the choice between outsourcing and shared service
models. Both model endeavor to optimizing of existing
organizational internal services, functions, mostly back-office
activities with lower costs and higher service level. I collected
those aspects that help companies in this choosing decision. I
used mostly literature reviews for this research but some case
studies of companies (EDS, Accenture) helped my work.

Figure 1. Potential savings reaching with reorganization of back-office

functions, Source: [9]

In the redesign of processes it is necessary to decompose

processes and analyze parts of them to decide which parts are
contributing to the business and which are not so important and
could eliminate. Automating of some activities of process is

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often part of this solution. To develop the suitable processes is

generally more difficult than reducing service demand but the
potential savings are also greater, it is about 35% of the total
potential savings. The fundamental restructuring is the hardest
to carry out but typically this has the biggest impact. It can
contribute to 40% of total savings potential. The aim is that the
support services are arranged and organized in the company
that work the best with the lowest cost level. Such restructuring
is when earlier in several countries operated services are
relocated to a regional shared service center. Sometimes the
fundamental restructuring could result outsourcing decisions as
well. [10] Research showed it as well that according to
company managers the shared service model and the
outsourcing model could mean a similar saving possibility but
implement the shared services model is a bit simpler.
Establishing a shared service center is only one option for
optimization of service functions. There are another options
like optimization of business processes and the reengineering.
To decide which processes need to optimize it is worth to
analyze business processes in the viewpoint of volume,
strategic importance and process costs. It is not necessary to
optimize those services that the company can deliver in-house
more cheaper than external providers. But if services are less
important strategically company could consider to buy some
part of services from external providers. However if the cost of
service providing outweighs the level of market competition
then the process must be optimized. In the strategically key
processes the classical optimization methods should be used
because its cooperation with the core activities the
organizational consolidation is not beneficial and outsourcing
could not mean as an option. If the processes are less important
strategically optimized it is used to optimize in the form of
consolidation but a company has to decide which location is
better for service functions, the corporate center or a shared
service center that operates as a separate organizational unit. In
this situation the outsourcing can emerge as a real alternative.
For decision making it needs to analyze the strategic
importance of processes and volume of transactions (the
frequency of delivering and used capacities). [2]
Improving competitiveness and preserving it for long time
companies' leaders should explore these competencies and
ensure the resources needed for cultivation and improvement. It
means that the organizational functions connected to the
competences should remain within the company and do not
outsource but centralize them. By outsourcing the company can
become vulnerable and it deteriorates its competitiveness. So
theoretically an organizational function can be outsourced if it
is not core competence, does not have strategic importance for
the company and in case of having strategic alliance that aims
to replace necessary core competencies mutually. [4] [8] [7]
IV.

DIFFERENCES BETWEEN OUTSOURCING AND SHARED

SERVICES

In the late 70's and early 80's the U.S. companies as a result
of cost-cutting measurements centralized some corporate
functions into corporate headquarters. But his tendency did not
meet the market changes because the companies had to be
close to their customers and markets and diversified operation
had to take out. Therefore, companies turned to diversification

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that satisfied these market demands better. Both outsourcing

and shared services appeared in this time and became popular
among the U.S. companies. The outsourcing as one of the
implemented forms of decentralization an outside company
performs certain service activities for the company. When these
activities are provided by an internal service provider and this
creates a market within the company, we can talk about
application of shared service models.

Figure 2. Shared service from a shared service center (SSC), Source: own
edited

However there is the question, which trends and which

models are more popular today and why. In the last decade
both outsourcing and shared service models live their second
flowering. The focus was changed and moved from everything
thoroughly prescribed agreements to risk-sharing partnering
and creating of joint enterprises. Because of similarities in
objectives and employed instruments, shared services are
called as "internal outsourcing" as well. This approach is
spread over and in the literature there are many cases, in case
of well-known consulting firms - such as Accenture - we could
meet that shared service solutions are treated as a subtopic of
the outsourcing model.
According to Gyrgy Bgel, who is professor of Central
European University, shared services model and outsourcing
largely overlap each other. In a shared service model,
companies organize their back-office functions into an internal
organizational unit (center) because of various efficiency goals.
But if companies do it well internally and know how much is it
then could open the center for other external clients as well. In
this stage shared service center provides services to clients in
market conditions and could be sold for an external service
provider as well. This always depends on decisions of
managers. They take the organizational characteristics and
environmental factors into account. In addition, there are
fundamental trends that determine the movement of the market
and its development. One of these trends is the standardization
of certain services. It facilitates the consolidation of services or
outsourcing them. But the another important trend is the
development of info communication technologies that has the
biggest contribution to the global business operation. There is a
forth and back motion on the service market because
companies are continuously experimenting with service models
and if the used model is not appropriate then refine, modify or
simply switch it with another. [3]

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In fact it is sure that they are very similar to each other in

many ways but there are fundamental differences that are not
only in theory.
TABLE I.

COMPARISON BETWEEN SHARED SERVICE AND

OUTSOURCING MODELS

Figure 3. Outsourcing model, Source: own edited

Although in most cases outsourcing is the response of

companies under cost-cutting pressure but I think so, that
shared service model could provide similar or excellent
services comparable with similar circumstances. Actually both
models are organized along two decisions: one about crossing
the corporate boundaries and the other about the restructuring
of internal organizational hierarchy. The former is the "make or
buy" decision, from where should the company obtain the
necessary services for the operation. In the latter case it looks
clear that company's organizational form influences the choice
between the two models. In a company with centralized service
center it is easier to create a shared service center than in a
diversified organization.

Source: own edited

The outsourcing strategy is driven by two main goals: costcutting and quality improvement. Outsourcing agreements
could form many shapes. At the one end of the spectrum there
are supplier-like agreements. It means company agrees with
such a provider which is similar to many providers on the
market. At the other end of the spectrum there is a long-term
partnership/strategic alliance/joint venture where both parties
of contract share the risks and revenues. The supplier-like
agreements are relatively short-lived and easy-to-make. [12]

I think it is an important question that the relevant services

how important strategy for the company because maybe they
cannot contribute financially to the business but may have
other potentials that could be an important value for the
company in the long term. In this situation the shared service
model could be preferable. In addition, data security is also a
key issue in the case. If outsourcing means a threat to the
security of corporate information, then shared service also get
an advantage.
It is also a significant issue in the choice between the two
models, how mature is the service market and at what price and
quality of service is able the company to perform it. In the
globalized world, this question is still valid although through
the electronic systems companies could serve their clients from
far offshore countries. This is because of the quality of
services.
It seems to me not a negligible factor in the decision what
kind of resources are available for optimization. As the
comparison shows it above, while outsourcing model does not
require investment, in shared service model service center is
often installed by a greenfield investment. The coverage of this
investment is not always ensured. So in an economic crisis or
cost-cutting times outsourcing is an advantage in the choice.
V.

CONNECTION OF MODELS

It is not necessary in all cases to choose ultimately between

the two models. The two theoretical models have multiple
connections in the practice.

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On the one hand there is an approach that shared services

model is only an intermediate stage where outsourcing means
the next step of development and business process outsourcing
(BPO) is the end. According to this approach shared services
model is like a journey that sometimes takes for a decade or
even longer but the ultimate goal is almost certainly the
outsourcing of functions to an external provider. The
exception could be the public organizations because there are
other factors in the decision. If the organization is aware of
this from the beginning, then be able to perform restructuring
organizations and can see shared service concept as a business
strategy. In this situation managers of service center will
control not only back-office functions but become creators of
new businesses and if it is successful, it could be value creator
for the parent company not only in-house but at an
outsourcing option as well. But not forgetting the return of
functions into parent-organization (insourcing) as well.
At every moment of operating a service center there is the
opportunity to consider the advantages and disadvantages of an
agreement with an external service provider. If a service center
was lagging behind an external provider in any characteristic of
service than its future is unsure. The only conceptional
difference between outsourcing and shared services is that
shared service centers have internal clients while an
outsourcing provider has to compete for it on the market. [5]
According to David J. Dell and Yuliya Tsaplina there are
three scenarios about operating a shared service center [1]:

The first is when a shared services model is only an

implementation tool for outsourcing. It helps company
to ascertain internal costs, requirements, service levels
and abilities carefully. It also puts the focus on the
accountability. Most of these companies outsource at
least one function to preserve their flexibility of
business and on the other hand to avoid investing in the
technology. It can be observed that the services that
have been organized into shared service firstly and
then outsourced, could ensure better service level,
greater savings and other increased benefits. The use of
shared service centers is increasing along the
organizational development curve, where from the
multinational company, through global company and
international company, till transnational company.

The second is when shared service is an alternative of

the outsourcing model. In this case, the selected
activities of the company is treated as a key
competence.
The
technology
supports
the
implementation of business application.

Third, when a shared service is only a waiting status.

In this case companies use shared services then wait
and watch. There is no control unnecessary. Usually it
applies to immature markets.

The connection between the two theoretical models is that

the shared service model is a complementary of outsourcing
solutions in increasing numbers and the result is a hybrid
model.

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In case of the traditional service delivery models (shared

services or outsourcing), the companies constantly have to
balance between the advantages and disadvantages and always
have to compromise somehow. There are a number of
dilemmas, for example cost reduction versus a loss of control,
dedicated resources versus temporary resources, outsourcing
versus remaining non-core activities, rule-based processes
versus customized processes.

Figure 4. The hybrid model in the base of market orientation and complexity
of cooperation, Source: own edited

Solving this problem in today's leading companies use

hybrid models that combine the back-office outsourcing with
in-house shared service centers. In this situation the
outsourcing providers have to closely cooperate with corporate
shared service centers.
The hybrid model combines the advantages of traditional
models and above all overtake "installation on the cheapest
offshore site" model. Precisely for this reason it is not worth to
handle outsourcing separately in a sourcing strategy because
the two models are connected intimately at this time. If it
happens and a special service led by the two models, it is just
another obstacle in the way of operational excellence and
development of continuous improvement. [5]

Figure 5. Hybrid model, Source: own edited

In the hybrid model some functions (typically front-office

functions) are moved to an onshore or nearshore center that is
close to the company's headquarter in distance, time-zone,

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culture (like Central Eastern European countries) and other

functions (typically back-office functions) to cheaper,
geographically and culturally distant countries (like India,
China, South Africa). Often the former is established in a
shared service center, the latter one with an outsourcing
provider. So the company could use both models but for other
internal functions. [13]
In this hybrid case, on onshore or nearshore locations
higher value-added works have done, while at a low-cost,
offshore location are usually rather transaction works on the
global delivery level. While the former is relatively close to the
market they serve, such services are delivered from here that
needs strong foreign language proficiency, knowledge of local
regulation. In contrast with the offshore locations where centers
prefer those services that transactions, rule-based processes that
do not require cultural or geographic proximity to the
customers or special, local knowledge of the countries served.

Geographically hybrid model: when in certain geographic

areas the services are outsourced, while in others area the
same activities are held in shared service centers. This
solution provides a good opportunity for comparison of
shared service centers and outsourcing providers.
Functional hybrid model: when a company decides about
the future of services depends on its functional area. The
not-basic, repetitive, predictable and measurable activities
are outsourced, while those that are related to the core
business, not-moveable because of data security and
organizational culture are organized in a shared service
center.
Intermediate hybrid model: it is a temporary hybrid model
where the shared service center means an intermediate
stage in the process prior to the outsourcing provider.
Internal change management is operated to disconnect the
relevant activities of the business units and subsidiary
companies, stabilize and analyze them before company
outsource them for a third party service provider.
VI.

REFERENCES

[2]
[3]
[4]

[5]

[6]

[7]

[8]
[9]
[10]
[11]

CONCLUSION

All business organizations like to count fixed, predictable

expenses, but there are some tasks that encounter hidden cost
elements. In the global business environment that question is
no longer available that is it worth to outsource or not certain
activities but rather there is the issue to prove the right to use
certain internal corporate resources.

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Finally the interconnection of the two models could create

such cooperation that effect synergistic on company
performance.

[1]

There are three hybrid models in the markets [11]:

-

Today I think that both outsourcing and shared service

models are justified role among the corporate sourcing
instruments. In the choice it is surely influenced the company
what kind of organizational structure it has, where is the
service located in the hierarchy, how easily can it be organized
or moved into a central point. Surely it influences the decision
that the certain services are important strategically or in datasecurity way or not. Equally important is the factor that
company has the necessary fund to finance an investment of
establishing a shared service center or not, but the fact is also
essential, the market is mature enough or not to serve services
with adequate quality and affordable price for companies.

[12]
[13]

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