Nothing New under the Sun
The business services version of shared services, also called multi-function shared services, has been around since the earliest days of shared services. In fact, the world's first "shared services" organization invented by GM's Alfred Sloan in the mid 1920s was essentially a global business services model. Of course, human resources didn't yet exist as a corporate function, but the function Sloan labeled General Service Staff included several functions recognizable today, including Real Estate, Industrial Relations, Traffic (logistics), Building (facilities) and others.
The business driver behind Sloan's General Service Staff function also will sound very familiar today, as indicated by these remarks from a March 6, 1924 meeting memorialized in Sloan's autobiography:
"While General Motors is definitely committed to a decentralized plan of operation, it is nevertheless obvious that from time to time general plans and policies beneficial to the Corporation and its stockholders, as well as to the individual divisions, can best be accomplished through concerted effort."
While such a statement seems quite conventional today, Sloan was espousing a major innovation that would later be taught in business curricula as the "divisional model" of organization. It can, therefore, be asserted that the business services model has been in existence as long as the divisional model has.
Why, then, in the new age of shared services, which can be traced back twenty or so years, does the business services model not dominate? On the contrary, only about one in five HR shared services models exists as part of a broader, multi-functional shared services function. And, while this percentage has eased upward slightly over the past two decades and continues to do so, the trend has been relatively flat when compared to the trend in HR shared services model adoption.
Global Business Services (GBS)
That said, there does seem to be recent uptake in the business services model. Driven primarily by globalization, there seems to be renewed interest in what is now being called Global Business Services, or GBS.
I speculate that the GBS trend is driven less by cross-function synergies than yearning for a delivery model through which to achieve what I call "global enterprisation." Similar but different than enterprise globalization, global enterprisation aims to capture enterprise synergies on a global scale. In recent decades, it has been common for organizations to globalize rapidly, largely through acquisitions, without necessarily integrating global entities into the enterprise operating model. The result has been global diseconomy. Or, put another way, a big mess.
Reducing Global Diseconomies
For whatever reason, many of us were taught the concept of scale economies with only half the model -- the good half. In that half, unit costs decrease as unit volume increases. The curve eventually flattens out, but then, in our incomplete education, abruptly stops. But the true economies of scale curve doesn't stop. It actually turns upward, depicting an increase in unit costs with further increases in unit volume. If you don't believe it, ask yourself why the cost per paycheck at a large complex organization is greater than at a smaller, simple organization. The reason, of course, is complexity.
Looking only at half the curve, one might assume that if scale economies are a good thing then global scale economies are even better. But except in rare situations the term global economies is actually an oxymoron. Global diseconomies would be a more appropriate term. Global organizations frequently fail to achieve the benefits associated with a large organization because many are in reality a fragmented collection of smaller organizations.
Through this lens, the appeal of global business services becomes more clear. While the business services model seeks to achieve cross-functional scale economies, global business services seeks to reduce global diseconomies. It turns out, being global comes at a price, and one way seen to reduce that price is to implement a GBS model. Thus, the goal of global enterprisation is not increasing scale, rather achieving synergy. It is, simply put, about moving from being multi-national to truly global.
Go ahead HR, but Proceed With Caution
HR leaders looking to including HR processes under a GBS umbrella should proceed with an open mind as well as caution. In particular, they should be wary of pursuing the same business cases as their functional peers, like IT, finance and procurement.
HR is different than these other functions, but not merely because it deals with people and people issues, though that certainly is a factor, but because of clear differences in its operating environment. Here's what I mean:
- Volume. In almost all cases, the customer base for HR is employees and managers. Some HR shared services organizations provide services to retirees and candidates, but these are few and far between. This, combined with the increased prevalence of self-service tools (more on this below), means inquiry and transaction volumes for HR are generally far lower than IT or finance, for instance. For example, the typical staffing ratio for tier 1 HR inquiry handling representatives is in the 1 : 1,500 - 1 : 2,000 range, meaning one tier 1 representative per 1,500 or 2,000 employees served. Very large organizations often achieve ratios of 1 : 4,000 or higher. At these ratios, it takes a very large organization to demand a large tier 1 contact center staff. If the GBS model design is geared toward achieving lower labor costs, be aware that the sheer number of HR-dedicated staff may be very low compared to other functions, making labor rate savings a relatively minor business case factor.
- Language. For typical global organizations the most challenging aspect of globalizing HR services is language. While the spoken word is necessary across functions, processors who deal primarily with numbers and/or perform purely back-office tasks are less dependent on language skills. Many global organizations employ relatively small workforces in many countries that may have unique language requirements, often making it uneconomical to employ centralized HR service personnel who speak all the necessary languages to serve the full population. Often, language needs alone requires HR servicing staff to remain in country. Needless to say, English-only global organizations are the lucky minority in this regard.
- Customer Base. At the risk of sounding callous, employees and managers, and even retirees and candidates, are captive audiences. Generally speaking, the organization can, with sufficient change management effort, dictate processes and procedures to them. Customers and vendors, by contrast, don't belong to the organization. The organization can't dictate which hardware and software applications they use. In these functions, the best option may be to handle inefficient procedures with cheaper labor.
- Technology. In some ways, HR's IT landscape is well ahead of its corporate counterparts. In many organizations HR is the first, if not only, corporate function to operate using enterprise HR platforms. Another key differentiator is the fact that for most HR transactions there are self-service options in the marketplace. When employees and managers are able to process transactions for themselves, consolidating and/or offshoring processing tasks is no longer the most economical path. In fact, thanks to HR technology advances, the whole physical centralization concept is becoming a solution to yesterday's problem in the world of HR.
This is not to say HR should run away from GBS. The point, again, is that the purpose should be to enable global enterprisation, or enterprise synergy. Organizations globalize HR because they are global, not the other way around. Transaction cost savings through scale economies in HR will not excite anyone on Wall Street, so you're best to focus on a model that creates the desired employee experience and enables the company to manage talent and risk as a global enterprise.