The late 1980s were the heyday of corporate decentralization. Anxious to dismantle top-heavy headquarters operations, many companies rushed to farm out support functions. Vital services, such as sales and marketing, human resources, information technology, finance, purchasing, and logistics, were to be paid for by profit centers. In the name of increased accountability, the autonomous division replaced the all-powerful corporate headquarters.
But decentralization had its own downside. Managers created fiefdoms. The corporation lost economies of scale, resulting in redundant resources, operating facilities, information systems, and supplier contracts.
In the mid-1990s, companies set out to redress the excesses of decentralization. Returning to command-and-control centralization was neither attractive nor feasible. The challenge was to combine corporate scale with the superior service, customization, and focus associated with decentralization, at a price and quality standard competitive with the best that the marketplace had to offer. A new approach known as shared services was born.
Shared services is a model for delivering corporate support, combining and consolidating services from headquarters and business units into a distinct entity based on market-like principles. (Exhibit 1.)
The shared-services entity must be able to compete vigorously with outside vendors. Business units are under marketplace discipline in all other respects — they must be free to seek support services that meet the same test. Proprietary standards and corporate culture are out. Best practices are in, if the business units are to gain competitive advantage.
Internal customers can specify their service needs. Providers must meet those requirements, and they can expect to have their performance evaluated using measurable criteria. So structured, the shared-services unit becomes another business unit, perceived and managed as an outside vendor, with no choice but to be competitive on price and service level.