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Costs, costs, costs - does anything else matter?

Chris Nuttall
PA Consulting Group
Shared Services & Outsourcing Network - Mature Shared Services e-newsletter
20 September 2008

Budgets are cut, offshoring accelerates to low cost countries, shared services organizations must do more with less, people and technology investments are put on hold. It feels like a race to the bottom. But how far can costs be cut? Surely costs can't be squeezed any more? And what about customer service quality?

A key challenge for users of shared services and outsourcing is that many costs seem to be fixed, especially those for people, facilities and contracting. For many multi-year outsourcing arrangements, even those with volume or consumption-based pricing, service providers have mechanisms for maintaining flat or increasing revenues (e.g., changes to scope or index-linked cost-of-living adjustments).

How can costs be reduced and financial performance improved over the short and long term? Based on recent surveys and client insights, there are five strategies for success:

Set a transformational ambition based on a robust multi-year cash flow baseline

Few shared service organizations build a financial baseline using cash flows. Understanding the impact on the balance sheet, the profit & loss and the cash flow statement is critical in making the right decisions to increase economic profit and shareholder value. Significant value is lost if non-operating expenses are not optimized (e.g., tax-optimized transfer pricing) and if the cost of capital assets are ignored. Many organizations fail to set transformational performance objectives. Lack of ambition is a key root cause of high cost.

Standardize the service catalog and eliminate "concierge" service levels

Customized services are a root cause of significant cost. Many organizations fail to adequately challenge the business case for customization or fail to overcome legacy customization. Service levels are often set to address perceived, rather than true, customer needs. Which would satisfy a customer more - high service levels at high cost or lower service levels at lower cost? Customers are often simply not asked: inadequate customer engagement and research is a significant driver of unnecessary cost.

Eliminate unnecessary and inadequately business-justified customer demand

Customer demand is often left unmanaged, causing significant unnecessary cost. The customer relationship should be business-like, not over-accommodating. Setting service expectations with highly transparent costs is critical. Variable consumption models need careful design to ensure the volume drivers are true levers. Pricing transparency can be achieved through allocations or chargebacks, ideally behavioral-based chargebacks to drive the right customer behaviors.

Maximize supply-side economies of scale and scope

Failure to create and optimize a competitive portfolio of suppliers is a key source of unnecessary cost. Incumbents become entrenched, alternatives ignored. Optimizing the portfolio ensures a balanced mix of strategic and tactical, short- and long-term, commodity and specialized, internal and outsourced suppliers. A large source of unnecessary operating cost is a failure to invest in operational improvements. Supplier investments can be a key source of funds and wise capital expenditures today deliver multi-year expense savings tomorrow.

Build an output-based, performance-driven governance organization with strong leadership, capabilities and competencies

A failure to invest in a high performing governance organization results in higher costs and higher risks. Recruiting and training fewer highly-skilled people drives significant financial performance improvement through more effective customer and supplier relationship management, operations management and commercial management. 

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