With BPO. Provider. Shared. Services. Inc. (Spin-Off). Shared. Services. Inc. (Spin -Off). Va lue C rea tion ... Managem...
Shared services Inc.?
Strategy& is part of the PwC network
About Strategy&
Contacts
Chicago
Munich
Vinay Couto Senior Partner +1-312-346-1900 vinay.couto @strategyand.pwc.com
Stefan Frey Partner +49-89-54525-0 stefan.frey @strategyand.pwc.com
Gary Neilson Senior Partner +1-312-346-1900 gary.neilson @strategyand.pwc.com
Frederic Pirker Partner +49-89-54525-0 frederic.pirker @strategyand.pwc.com
Dr. Deniz Caglar Partner +1-312-346-1900 deniz.caglar @strategyand.pwc.com
Rio de Janeiro
Dr. Anil Kaul Partner +1-312-346-1900 anil.kaul @strategyand.pwc.com Dubai Per-Ola Karlsson Senior Partner +971-4-390-0260 per-ola.karlsson @strategyand.pwc.com
Paolo Pigorini Senior Partner +55-21-3232-6291 paolo.pigorini @strategyand.pwc.com Sydney Varya Davidson Partner +61-2-9321-1900 varya.davidson @strategyand.pwc.com
Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings — often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for with speed, confidence, and impact. We are a member of the PwC network of firms in 157 countries with more than 195,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com/me.
Andrew Horncastle Partner +971-4-390-0260 andrew.horncastle @strategyand.pwc.com Olaf Schirmer Principal +971-4-390-0260 olaf.schirmer @strategyand.pwc.com
1
Strategy&
4
Related Booz Allen Publications ■ The Shape of the Digital Organization: From Shared Services to Allianced Services
Shared Shared Services Services -- Service Service Offerings Offerings ■ ■
■ ■
■ ■
One-day One-day workshops workshops for for managers managers interested interested in in shared shared services services commercialization commercialization strategies strategies AA five-week five-week “readiness “readiness for commercialization” commercialization” assessment assessment tailored tailored to to your your company’s company’s unique unique requirements requirements Comprehensive Comprehensive shared shared services services strategy strategy design design and and implementation implementation
Booz Allen Hamilton has been at the forefront of management consulting for businesses and governments for more than 80 years. Booz Allen combines strategy with technology and insight with action, working with clients to deliver results today that endure tomorrow With 11,000 employees on six continents, the firm generates annual sales of $2 billion. Booz Allen provides services in strategy, organization, operations, systems, and technology to the world's leading corporations, governments and other public agencies, emerging growth companies, and institutions. To learn more about the firm, visit the Booz Allen Web site at www.bah.com. To learn more about the topics of greatest interest to the business community today, visit www.strategy-business.com, the Web site for strategy+business, a quarterly journal sponsored by Booz Allen.
■
Should I IPO my Shared Services? Best Practices for Business Process Outsourcing: Booz Allen BPO Survey
■
Getting Shared Services Right: Capturing the Promise
■
Shared Services: Management Fad or Real Value?
■
■
Putting Headquarters in its Place: The New Lean Global Core
Shared Services Inc.? From Back-Office to Profit-Maker
Constellation Organization: Organizing to Win in the 21st Century
Contacts Gary Neilson Senior Vice President 312-578-4727 Chicago
[email protected]
Vinay Couto Vice President 312-578-4617 Chicago
[email protected]
Chris Disher Vice President 312-578-4505 Chicago
[email protected]
Frank Galioto Principal 312-578-4603 Chicago
[email protected]
Anil Kaul Senior Associate 312-578-4738 Chicago
[email protected]
Companies have invested millions of dollars and accumulated years of experience in running highly efficient internal shared services operations. Now many are wondering how to unleash the next wave of value. Many believe that the next breakout strategy will take the form of an extended enterprise play (see Exhibit 1), in which shared services will move beyond the walls of the corporation, either as a seller of services to external customers or as a buyer and aggregator of external services for internal clients. This prospect is attracting a great deal of enthusiastic market interest. Diverse investors—including venture capitalists, investment banks and Big Five firms—are placing big bets on the future of business process outsourcing (BPO). The range of strategies they are funding is dizzying, ranging from simple outsourcing to joint ventures to spin-offs, and even the outright sale of shared services operations to third parties (see Exhibit 2). As any corporate development executive who has met with these would-be dealmakers will attest, the shared services value proposition has moved beyond cost reduction; these operations are now viewed as a vehicle for generating substantial shareholder value. Underneath the aggressive deals and value plays lies a set of unwavering, fundamental assumptions. assumptions The first and most important assumption is that outsourcing is here to stay. Despite the early bruises suffered by outsourcing pioneers, the fundamental value proposition of outsourcing is solid and only getting better as technology improves and experience grows.
Exhibit 1 What Will Be the Next Wave of Value for Shared Services? Tried & tested plays to reduce overhead costs by 20-30%
Value Creation
■
Technology Scale
■
■
■
Organization Consolidation Footprint rationalization
■
Integrated platform Webenablement
Demand Management ■ ■ ■
Menu Pricing SLAs Chargebacks
Emerging plays to increase value
Extended Enterprise ■ ■ ■
BPO Commercialization Offshore processing
Exhibit 2 Strategies for Commercializing Shared Services Assets Extent To Which Shared Services Assets Can Be Commercialized
What Booz Allen Hamilton Brings Booz Allen Hamilton helps clients across industries craft and implement strategies designed to optimize their shared services investments. Among our offerings are:
Shared Shared Services Services Inc. Inc. (Spin-Off) (Spin-Off)
Hi
Serve Serve External External Clients Clients via via In-House In-House Shared Services Shared Services
JV JV With With BPO BPO Provider Provider Sale-Leaseback Sale-Leaseback Outsourcing Outsourcing
Traditional Traditional BPO BPO Lo
Keep Keep In-House In-House
Lo
Hi Extent To Which Company Desires Control of Shared Services Assets
2
Exhibit 3
Business Process Outsourcing: The Hype Versus The Reality What Is Publicized What Lies Beneath Since 1932
……T H E B U S I N E S S G A Z E T T E ……
Vol.70 Ed.104
EXPLOSIVE BPO MARKET PREDICTED Experts predict that the BPO market will reach
W H A T’S
300$ Billion by 2004 at a CAGR of %23. They
T H E
D E A L
also expect many new entrants of all shapes
and sizes will compete for market share.
WHAT’S THAT SOUND
Multi-million dollar BPO deals have involved reputable corporations. Among them are: GM BP Unisys BT
Bank Of America Cable & Wireless International Paper Prudential
Companies with equity stakes in shared services / outsourcing ventures have enjoyed high valuations.
High barriers to entry Steep learning curve – Significant upfront asset investment to build scale – High client acquisition costs – Unclear path to profitability Top line growth appear fueled by anchor client acquisitions – Bottom line profits appear elusive – Long lead times to break-even for start-up BPOs—up to 5 years Substantial economic value yet to be captured by BPO clients
There have been reported “rumblings” from industrial companies to spin-off their shared services arms into commercial entities
Second, creating a world-beating BPO play requires a certain degree of critical mass. For a BPO provider, convincing big players to sign-up as anchor clients is a prerequisite for success.Third, switching costs are high; once a company commits to an outsourcer’s platform it becomes very difficult to switch platforms or bring services back in-house. Finally, there is not enough room in the market for everyone to win. Scale and network economies dictate that those who build a viable solution for a given process or function first can effectively raise barriers to competitive entry. If the current outsourcing environment resembles a “land grab,” that’s because it is one. Amidst this frenzy, corporate leaders are left in the frustrating position of having to sort through a myriad of entry and migration options. With all the other core business priorities you confront, can you afford to keep pumping more capital investment into internal shared services just to remain competitive? Should you outsource? Or should you partner with a promising start-up service provider in the hopes of earning a potential windfall when they IPO? Finally, do you go it alone, commercializing your own “Shared Services Inc.”, and spinning it off for a significant gain at some point in the future? We at Srategy& would argue for a very measured and deliberate approach. While a handful of leading companies with top-notch shared services could reap immediate and powerful value by playing in today’s BPO market, the fact is that the hyped up rewards of such a strategy are not easily realized (see Exhibit 3). The decision to commercialize shared services is often make-or-break and is always difficult to reverse. Deciding when to move is as important as deciding what move and using which strategic play.
High margin “mid-office” and “front-office” processes require industry “vertical” capabilities Mixed results from Shared Services NewCos
Based on our experience with clients around the globe, Strategy& has developed a framework for evaluating what strategic options make the most sense in light of a particular company’s present capabilities and requirements for success (see Exhibit 4).This framework helps clients build the right shared services/BPO strategy based on their assessments along three critical dimensions. First, a company must consider the capabilities of the supplier base whose offerings match its own service groupings. Then it must gauge the extent to which its current shared services operation is already operating like a competitive business. Finally, it needs to assess the dynamics and sensitivities of the parent company and its core businesses. Depending on where a company comes out on this threedimensional assessment, it should pursue one of four BPO strategies: Traditional BPO, Keep Options Open, JV with a BPO Provider or Spin-Off (Shared Services Inc.) For many, if not most, companies, it makes sense to proceed with caution. Now is not the most opportune time for even the most ready and able companies to bet the farm on a “Shared Services Inc.” strategy without a thorough review. By the same token, no company can afford to stand still. Instead, companies should follow a systematic three-stage path (see Exhibit 5). Stage 1: Become Operationally Efficient Commercialization and outsourcing plays provide the highest payoff to the parent when internal shared services are at the top of their game. To reach that competitive edge, a shared services organization should continue driving toward lowest costs by further consolidating its service delivery footprint, pursuing lower factor costs, standardizing transactional technology architectures and implementing efficient, “lights-out” processes.
2
3
Exhibit 3
Exhibit 4
Business Process Outsourcing: The Hype Versus The Reality
Strategic Assessment Framework: Conditions Under Which Each Strategic Option is Relevant
What Lies Beneath Since 1932……T T
H E B U S I N E S S G A Z E T T E …… Vol.70 Ed.104
■
EXPLOSIVE BPO MARKET PREDICTED Experts predict that the BPO market will reach
W H A T’S
$300 Billion by 2004 at a CAGR of 23%. They
T H E
D E A L
also expect many new entrants of all shapes
and sizes will compete for market share.
WHAT’S THAT SOUND
Multi-million dollar BPO deals have involved reputable corporations. Among them are: GM BP Unisys BT
Bank Of America Cable & Wireless International Paper Prudential
Companies with equity stakes in shared services / outsourcing ventures have enjoyed high valuations.
■
There have been reported “rumblings” from industrial companies to spin-off their shared services arms into commercial entities
Second, Second creating a world-beating BPO play requires a certain degree of critical mass. For a BPO provider, convincing big players to sign-up as anchor clients is a prerequisite for success. Third, Third switching costs are high; once a company commits to an outsourcer’s platform it becomes very difficult to switch platforms or bring services back in-house. Finally, Finally there is not enough room in the market for everyone to win. Scale and network economies dictate that those who build a viable solution for a given process or function first can effectively raise barriers to competitive entry. If the current outsourcing environment resembles a “land grab,” that’s because it is one. Amidst this frenzy, corporate leaders are left in the frustrating position of having to sort through a myriad of entry and migration options. With all the other core business priorities you confront, can you afford to keep pumping more capital investment into internal shared services just to remain competitive? Should you outsource? Or should you partner with a promising start-up service provider in the hopes of earning a potential windfall when they IPO? Finally, do you go it alone, commercializing your own “Shared Services Inc.”, and spinning it off for a significant gain at some point in the future? We at Booz Allen would argue for a very measured and deliberate approach. While a handful of leading companies with top-notch shared services could reap immediate and powerful value by playing in today’s BPO market, the fact is that the hyped up rewards of such a strategy are not easily realized (see Exhibit 3). The decision to commercialize shared services is often make-or-break and is always difficult to reverse. Deciding when to move is as important as deciding what move and using which strategic play.
High barriers to entry – Steep learning curve – Significant upfront asset investment to build scale – High client acquisition costs Unclear path to profitability – Top line growth appear fueled by anchor client acquisitions – Bottom line profits appear elusive
■
Long lead times to break-even for start-up BPOs—up to 5 years
■
Substantial economic value yet to be captured by BPO clients
■
■
High margin “mid-office” and “front-office” processes require industry “vertical” capabilities Mixed results from Shared Services NewCos
Based on our experience with clients around the globe, Booz Allen has developed a framework for evaluating what strategic options make the most sense in light of a particular company’ company’s present capabilities and requirements for success (see Exhibit 4). This framework helps clients build the right shared services/BPO strategy based on their assessments along three critical dimensions. First, a company must consider the capabilities of the supplier base whose offerings match its own service groupings. Then it must gauge the extent to which its current shared services operation is already operating like a competitive business. Finally, it needs to assess the dynamics and sensitivities of the parent company and its core businesses. Depending on where a company comes out on this threedimensional assessment, it should pursue one of four BPO strategies: Traditional BPO, Keep Options Open, JV with a BPO Provider or Spin-Off (Shared Services Inc.) For many, if not most, companies, it makes sense to proceed with caution. Now is not the most opportune time for even the most ready and able companies to bet the farm on a “Shared Services Inc.” strategy without a thorough review. By the same token, no company can afford to stand still. Instead, companies should follow a systematic three-stage path (see Exhibit 5). Stage 1: Become Operationally Efficient Commercialization and outsourcing plays provide the highest payoff to the parent when internal shared services are at the top of their game. To reach that competitive edge, a shared services organization should continue driving toward lowest costs by further consolidating its service delivery footprint, pursuing lower factor costs, standardizing transactional technology architectures and implementing efficient, “lights-out” processes.
DIMENSION
KEY ELEMENTS
Market maturity How Competitive Service Offering Is The Supply Capabilities Base? Supplier Economics
Traditional Traditional BPO BPO
Keep Keep Options Options Open Open
JV JV With With BPO BPO Provider Provider
Shared Shared Service Service Inc. Inc.
Highly stable
Undeveloped
Rapidly developing
Emerging
Well developed and tailored offerings Provider has strong expertise and runs low cost operations Highly competitive versus company
How Supportive Is The Parent Company?
Provider has expertise and access to capital but lacks substantial assets On par or less competitive than company Potential for differentiation
Undifferentiated
Service Offering Commercial Capabilities How Compelling Is The Delivery Operations Shared Services Business Stature of Parent in Industry Model? Access to Internal Capital
Incomplete offerings, insufficiently tailored to industry or company requirements
Unsophisticated marketing, relationship selling, pricing and billing Sub-scale operations Fragmented systems High labor costs
Close to scale operations Recent investment in technology
Small to Mid Market
Highly differentiated and industry specific Highly sophisticated
Close to scale operations Integrated back-office Competitive factor costs
Scale operations Integrated back-office Low factor costs
One of the biggest Low
Anchor Clients
Non-existent
Emerging
Identified
Risk Appetite
None
Low
High
In-house Business Unit Client Sensitivities Desire to Shed or Monetize Non Strategic Assets
Uncomfortable and resisting
Cautious but open-minded
None
Low
Stage 2: Become Commercially Capable While many companies claim to run their shared services as a business, few truly have the right processes and tools in place to manage internal customers effectively, much less multiple external customers. The key is to implement market-like mechanisms that give customers—both external and internal—the responsiveness, choice, and flexibility they would expect from an outside supplier. Stage 3: Become Market Competitive The economics of outsourcing have improved dramatically over the last two to four years, and we believe they will continue to improve as technology progresses and outsourcers learn from mistakes of the past. Whatever decision you ultimately make with regard to making your shared services more competitive, you must rigorously and objectively monitor external alternatives on an ongoing basis, keeping a critical eye on the full economic value and cost of the strategy you elect to pursue. At some point, BPO and/or commercialization will likely become inevitable, at least to a certain degree. The trick is to know when and where to move in order to capture maximum value.
Comfortable provided preferential terms are provided Medium High
High
Exhibit 5 Three Stage Path Towards Potential Commercialization Strategic Alliances Business Planning Service Innovation
Capabilities Required
What Is Publicized
Performance Mgmt.
Governance
Governance
CRM
CRM
Demand Mgmt
Demand Mgmt.
Contracting
Contracting
Chargebacks
Chargebacks
Menu Pricing
Menu Pricing
Service Solutions
Service Solutions
Performance Mgmt.
Performance Mgmt.
Lean Operations
Lean Operations
Lean Operations
Process Excellence
Process Excellence
Process Excellence
Stage 1: Stage 2: Become Operationally Become Commercially Efficient Capable
Stage 3: Become Market Competitive
Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities.
These are complex and high-stakes undertakings — often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re
charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for and impact.
We are a member of the 157 countries with more than 195,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us out more by visiting us at strategyand.pwc.com/me.
This viewpoint was first published in 2002, prior to the separation of Booz & Company from Booz Allen Hamilton in 2008, and the merger of Booz & Company (now Strategy&) with PwC in 2014.
www.strategyand.pwc.com details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.