When CEOs sought cost savings in the past, typically they looked to the direct costs in the business. Individual moves to reduce direct costs might cause limited pain at the business unit level, but the organization could, and did, adapt. However, after several years of cost reduction in many sectors, business units that carry the majority of direct costs are likely to have little left to cut without impairing their ability to carry out their main activities.

The next logical step is consolidation of commonly relied-upon services across the entire organization. Many organizations have effectively reduced the costs of providing support services to their businesses simply by concentrating them in corporate shared services departments. Theoretically, by shifting the workload out of the individual business units and into a consolidated center responsible for servicing the functional needs of the organization, cost reductions could be achieved and service levels maintained, if not improved. This move resulted in a step change in the costs of support services such as IT, HR, and facilities, and was considered to be a best practice.

But this practice has presented many CIOs with a growing dilemma. The boards and executives of many organizations grapple with authorizing continuing investment from shared services functions such as IT without insight as to how such spending relates to the demands of the business units or how it will impact long-term profitability. Regardless of whether shared services are provided in-house or by a third party, organizations need far better insight into these costs and particularly the costs of the IT function, which for many is simply a black hole. CIOs must understand these numbers in support of future IT investment, corporate cost and profitability initiatives, and their own continued career success.

The true strength offered to corporations by business performance management is the underlying collaborative and synergistic efforts of the operational and financial sides of an organization working towards set key performance indicators (KPIs) and performance standards. IT shared services organizations and the business units that they support have a unique opportunity to deliver direct cost savings to the corporation, enhance profitability, and help the CEO, CIO, and each other meet and exceed their own business objectives.

The Case For Focusing On Shared Services

For example, exhibit 1 shows a typical cost center for a telecommunications provider. More than half the costs carried by the center's P&L are allocations from shared services departments or other corporate overhead. Should this enterprise be seeking a modest 5 percent reduction in costs, this manager has only two options: Remove 10 percent from his own direct costs, most of which are to do with people, or lobby the executive to critically examine the costs of the shared services functions.

Despite the gains to be had by building shared services departments and by locating them where the required skills can be obtained at the lowest cost, many organizations still have a limited understanding of the relationships among shared service centers and business units. One reason is that shared service departments tend to plan their resources and budget separately from business units. As the financial year progresses, the capacity of shared services departments and the demands of operational business units can become grossly misaligned.

Frequent realignment of the resources and capacity of shared services functions with the needs of the business units is needed. For this to happen, organizations need to progress towards more frequent reforecasting so that business units are routinely updating the key nonfinancial data that drives their shared services demands. The shared services functions can then use this information to realign their own resource requirements for the coming periods, taking their actual costs through an activity-based costing (ABC) methodology to calculate monthly cross charges that are passed back to the business units.

Exhibit 2 can be used to represent where an organization's shared services functions might lie in terms of their costing and planning. The vertical axis represents the reliability and robustness of shared services costing while the horizontal axis represents the degree to which the planning and budgeting of the business units and the shared services are integrated.

As such, the top left quadrant represents any organization that has already adopted an ABC methodology for costing IT shared services and is highly accountable to the business units. But having implemented a reliable and robust costing methodology, its challenge now is to receive more frequent forecasts of demand from the internal business users. Once IT resources are more closely aligned with the needs and demands of the business units, the company would move to the top right quadrant.

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