Shared Services

Shared services is a way of organizing support functions so that a single unit provides them to the whole organization, instead of each business unit maintaining its own. Functions commonly delivered as shared services include IT, human resources, finance and accounting, procurement, payroll and facilities. The shared services unit operates much like an internal provider, serving business units as its customers.

Organizations adopt shared services mainly to reduce cost and improve consistency. Consolidating duplicate teams, systems and processes creates economies of scale, while standardizing processes improves quality and control. Shared services also create a need for strong cost allocation, because the costs of the shared unit must be assigned fairly to the business units that use it.

Definition of Shared Services

Shared services is an operating model in which a dedicated organizational unit provides common support services to multiple business units, using standardized processes and systems. The unit is accountable for the cost and quality of its services, often through formal service agreements with the business units it serves.

A shared services unit differs from a traditional central function in its customer orientation. Rather than simply owning a function, it treats business units as customers, defines its services clearly, measures performance against agreed levels and often charges for what it provides.

Common Shared Service Functions

IT is one of the most common shared services, providing infrastructure, end-user services, enterprise applications and support to the whole organization. Finance and accounting shared services typically handle transaction processing, such as accounts payable, accounts receivable and general ledger close.

HR shared services often cover payroll, benefits administration and employee records, while procurement shared services manage purchasing and supplier administration. Many organizations combine several of these into a single multi-function shared services center.

The choice of which functions to share usually depends on how standardized the work can be. Functions with high volumes of similar transactions, such as payroll or accounts payable, benefit most from consolidation. Functions that require deep knowledge of a particular business, such as product-specific engineering, are usually left with the business units.

Shared Services Versus Outsourcing

Shared services keep functions inside the organization, while outsourcing transfers them to an external provider. Both aim to reduce costs through scale and standardization, but shared services retain direct control over the work and the staff who do it.

Many organizations use both. A shared services unit might keep strategic and complex work in house while outsourcing high-volume transactional tasks, or it might act as the internal manager of outsourced providers, as is common in IT outsourcing.

Importance of Shared Services in IT Financial Management

Shared services change how technology costs are incurred and assigned. Instead of each business unit funding its own IT, a central unit incurs most costs and must recover or allocate them to the businesses it serves.

This makes cost transparency and allocation essential. Business units are more likely to support a shared services model when they can see what they receive and what it costs.

Economies of Scale

Consolidating IT into shared services allows an organization to buy hardware, software and cloud services at greater volume, negotiate better contracts and run fewer, larger platforms. Duplicate systems and teams across business units can be eliminated.

These savings are often significant, especially after mergers or acquisitions, when organizations inherit multiple versions of the same systems. Shared services provide the structure to consolidate them.

Cost Allocation and Accountability

Because shared services serve many business units, their costs must be assigned to those units through cost allocation, showback or chargeback. Allocation based on consumption shows each unit what its use of shared services costs.

This creates accountability on both sides. The shared services unit is accountable for delivering services efficiently, while business units are accountable for their demand. Unit costs, such as cost per user or per transaction, give both sides a common measure.