Keeping HR on the inside: the shared services model provides an alternative to outsourcing HR that can yield the same cost savings and customer service enhancements

HR Magazine, Oct, 2004 by Martha Frase-Blunt

Zingerman's Deli, an Ann Arbor, Mich., institution, began life as a modest sandwich shop 22 years ago. But in the interim years, it has grown into an organization of seven separate businesses fielding 400-plus employees. Such growth recently prompted the development of an eighth business--Zingerman's Service Network, or ZingNet.

ZingNet, under separate management, consolidates the Zingerman's information technology (IT), financial, marketing and HR services under one roof. "ZingNet reduces the need for duplication of positions in each business" and therefore cuts costs, which was only one reason for consolidating the functions, explains HR Director Bob Sweat. "We also think this model allows us to provide our high service levels to employees while maintaining a comfort level we couldn't get if we outsourced these services."

The concept of the shared services model--in which a group of companies or business units decide to share common, typically transactional services--has provided an alternative to outsourcing since the mid-1980s. According to the global Shared Services and Outsourcing Network, a shared services association with U.S. headquarters in Little Falls, N.J., more than half of today's Fortune 500 companies have brought shared services into their operations.

Finance and IT departments were the earliest adopters of sharing key services through a centralized administrative hub, because most of their efforts involve simple transactions that are relatively easy to consolidate and centralize.

Likewise, HR is weighted heavily with transactional services such as benefits administration, records management, payroll and training administration. "These types of services make up approximately 65 percent of HR's work, so there is no logic to having them decentralized," believes Barb Quinn, founding partner of the consulting group 22c Partners in Toronto and Vancouver, Canada, and co-author of Shared Services: Mining for Corporate Gold (Financial Times Prentice Hall, 2000).

Beyond consolidating transactional services, the shared services model is moving up the strategic ladder to include activities such as policy-making and strategic planning, adds Quinn.

Ron Bradley, executive director of Corporate Renaissance Group USA, a shared services consulting firm in Tulsa, Okla., argues that many higher-level services lend themselves well to centralized management. "My opinion is that if you can buy it on the outside, you can do it in-house. Recruiting, training--these are proactive tasks that can be scheduled and managed centrally."

But other, more reactive functions will be harder to completely consolidate, he notes. "Activities like diversity management, employee and labor relations, conflict resolution--areas where you need to keep your employees out of trouble--require quick responses at the source of the problem. HR practitioners in these areas can still report to a central office, but you might want them to have a presence within individual business units where they can be close to their customers and problems can be resolved quickly. HR is still a high-touch business."

What a company decides to consolidate and how shared services is structured depends on the size of the company, the reasons for doing it and the culture of the company. For many, shared services provides an alternative to outsourcing that realizes similar cost savings without losing control of people management and data. (For more information on outsourcing vs. insourcing, see "Better out than In?," below.)

A Two-Tiered Approach

Financial services company Capital One, headquartered in McLean, Va., began consolidating its HR activities in 1999, and, in the opinion of HR Vice President Doug Krey, "There is really nothing that HR does that can't be done through a shared services approach."

But to maintain the crucial hands-on role of HR, the company uses a two-tiered approach--one with the centralized hub and another with an HR generalist within each business unit who sits at the table with the unit's senior vice president. HR generalists "know the business and can make strategic decisions about talent management and productivity, and are directly accessible to employees. They focus on the consultative aspects of HR, like employee counseling and change management."

The shared services tier is staffed by "associate relations" experts dedicated to specific business units, handling transactions as well as higher-level activities like staffing, training and performance management. "We segment by business unit because we understand that [each unit's] HR needs are very different--the credit card business's HR needs are significantly different from those of our auto lending business," says Krey.

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Other companies may choose to dedicate experts to geographic regions, he points out. But it's important that these experts share experiences across business unit lines so that associate questions can be addressed quickly and best practices can be consistently applied without costly process redundancies and reinvention.