In-Depth Comparison Between Shared Services and Outsourcing

Posted on:
October 28, 2022
10
min read
Table of Contents
1
What are the benefits of outsourcing to developing countries?
2
What are the challenges of outsourcing to developing countries?
3
Top 5 Most In-demand Developing Countries for Outsourcing
4
What are some successful examples of companies that have outsourced to developing countries?
5
What are the best practices for outsourcing to developing countries?
In-Depth Comparison Between Shared Services and Outsourcing
KDCI Outsourcing
September 6, 2023

Following the economic downturn brought by the pandemic, businesses are looking to turn fixed costs into variable costs by establishing shared services and outsourcing to a service provider.One of many companies that started outsourcing to the Philippines is Zoom. The leading video conferencing service provider of the pandemic era outsourced its phone support in 2020 and has managed to triple its headcount in just a year.Aside from Zoom, there are many more companies with shared service centers that started outsourcing to counter the pandemic’s negative impact on their bottom line.Learn more about shared services and outsourcing to see how combining these two practices can help maximize your business growth and enhance your operational efficiency.

What are shared services?

shared services fingers typing on laptop

Shared services refer to an operational model that allows companies to establish a centralized point of service shared across multiple departments. The goal of shared services is to standardize the workflow across various departments.For example, instead of assigning one IT technician for each department, a company centralizes all IT functions under one IT shared service team which supports multiple departments. By doing this, it streamlines processes, increases productivity, and reduces costs.Imagine there's a bug in your company website. Rather than relying on internal IT technicians with limited knowledge of the company website to come together and resolve the problem, it’s easier to alert a back-office IT team with a fixed standard operating procedure that cuts across all departments to fix the bug.Not only will the single IT team be more time efficient at resolving the issue, the company will also save on costs by only staffing one team instead of providing IT staff for multiple departments. And because there is only one IT team, they are easily tapped in cases of tech problems and can share best practices amongst themselves, improving both productivity and technical expertise.

What are the types of shared services?

There are multiple services that can be shared among the various business units of a company. Here are examples of shared services that companies can standardize and optimize within their organizations:.

Finance

shared services finances, cash, coins, calculator, man on phone

Financial activities used by numerous divisions, departments, or branches of the same corporation are consolidated and standardized under one roof as "financial shared services." It helps businesses enhance productivity, provide timely closure of books of accounts, and make system integration simple.Shared financial services are typically used to manage low-value transactional services such as handling accounts payable, accounts receivable, general ledger, and other data entry-intensive duties.The benefits of this service include cost optimization, standardization, ease of governance, and better control over compliances. In fact, approximately 80% of Fortune 500 companies nowadays employ financial shared service centers.

HR & Payroll

shared services, hands pointing ballpen on paper, calculator on table

All activities affecting an employee's complete employment history, from initial recruitment to final payment at separation and submission of retirement documents, are processed under HR/Payroll shared services.Many businesses, particularly major international corporations, use a centralized payroll system to handle their payroll operations. Under this shared HR/Payroll strategy, employers and senior executives have more control over the costs and expenses of their companies. Also, they get better access to organized and secured data used across the organization in a single platform.

Information Technology

shared services, man holding a laptop, high tech

Every department has different needs for contemporary digital platforms, and as the organization expands, it becomes more challenging to provide seamless technology services to every department. To fully harness the potential of technology-driven innovation, businesses maintain shared IT services that support multiple departments.The most common forms of IT shared services are voice network services like call centers and user services like a help desk. Businesses develop IT shared services for their company and classify them under more general, scalable business units like IT operations or security and compliance. It allows for a centralized troubleshooting and information system that helps fix typical issues, recommends features and tools, and recommend best practices to all departments.

Inventory management

shared services inventory management, man holding clipboard, ballpen, box

When businesses expand beyond their local area, they may require additional warehouses to provide better coverage for their growing customer base. Rather than committing to acquire a new warehouse, inventory management shared services allow businesses to have centralized warehousing.By combining operations, businesses share the burden of shipping and are able to purchase larger quantities at lower rates from local suppliers. This allows businesses to reduce inbound transport costs.

Procurement

shared services, hands, fingers typing laptop, business

To increase operational efficiency and save costs, acquisition and procurement executives in various organizations are increasingly considering a shared services operating model. To supply back office services to a broad group of customers across geographies, back office business operations will be consolidated into a single structure. This is a model that is ideal for acquisition and procurement operations.In fact, procurement shared services have played a critical role in supporting the stability of the supply chain amidst the peak of the pandemic. For example, they helped establish a 3D Print Farm and airfreighted PPE from China to provide more than a million items as mutual aid to more than 40 healthcare organizations.

What is outsourcing?

outsourcing, workers, working, with headphones on

When a company hires a service provider to handle business processes on its behalf, this practice is known as outsourcing. A BPO company is an example of a service provider that helps other companies with their non-core tasks by offering specialized services.Companies outsource for a variety of reasons. They outsource specialized talent that isn't already in their organization, or they outsource to improve productivity for time-consuming tasks like customer support and data management.Outsourcing can also help businesses minimize labor costs. For instance, your business may conclude that outsourcing customer service is more effective than recruiting full-time staff. Your chosen BPO provider will serve as an extension of your business, offering various services, including but not limited to back-office assistance.Alibaba, which Jack Ma founded in 1999, is one of the companies that have offshored their operations abroad. Jack Ma and his team began outsourcing their web development requirements to the US when there was a shortage of web developers in China. Consequently, they were able to build a long-lasting eCommerce infrastructure and became an established online marketplace.

What are the different types of outsourcing models?

Most businesses turn to these three outsourcing models: location-based, relationship-based, and pricing-based. It pays to understand their key differences to find the most suitable for your business.

Location-based outsourcing

As its name suggests, it focuses on how far away or where your service provider is, as defined by their location. There are five types of location-based outsourcing models that can be distinguished based on this standard.

Onsite outsourcing

Onsite outsourcing entails having outsourced staff work alongside your internal employees in your office. This facilitates the speedy integration of temporary recruits into your existing staff and enables easier communication with your management team.

Nearshore outsourcing

This refers to contracting with a company outside of one's region, especially one close by or in the same continent. For instance, US businesses that outsource to Mexico or Canada engage in nearshoring.

Offshore outsourcing

This method of outsourcing involves moving some components of a business to another country. Offshoring occurs when a US-based company, for instance, chooses to establish its remote team in the Philippines to reduce operating expenses.

Onshore outsourcing

Contrary to offshoring, this type of outsourcing enables companies to move their operations to a lower-cost area within their country. For instance, a US tech business could "onshore" its customer service by closing a call center in India and building one in California.

Multiple outsourcing

This outsourcing approach involves contracting services to multiple vendors. The goal is to maximize the company's efficiency by ensuring that different business processes are sourced to the finest outsourcing service providers.

Relationship-based outsourcing

This outsourcing model concentrates on how a company and its third-party outsourcing vendor handle control and accountability during their agreement. There are three types of relationship-based outsourcing models that businesses can consider.

Staff augmentation model

In this model, a company hires or contracts a set number of staff from a service provider for a fixed duration. The service provider supplies the company with staff as needed or at an agreed-upon fee for the project duration.

Dedicated team model

With this approach, the client and service provider agree to divide responsibilities by clearly delineating tasks. For example, the client assigns work to their outsourced team and the service provider has a project manager to oversee the team’s progress.

Project-based model

For this setup, companies entrust a third party with the completion of an entire project. After the company provides specific requirements to the service provider, the service provider assembles a team and oversees project completion before handing it over to the company.

Pricing-based outsourcing

Pricing is vital in outsourcing since it defines the value you can expect from your vendor. However, the pricing structure of outsourced services evolves over time. Below are different pricing models in outsourcing you should be familiar with.

Fixed Price

This is a method of outsourcing a project to a third party for a fixed price. The price can vary depending on duration and complexity but should be fixed prior to the start of service. Such an arrangement is perfect for small to medium projects since it allows for the detailed definition of project requirements, specifications, and timetables before the project even begins.

Time and Material

This approach bills companies for the money and time spent on the project. This is ideal for projects where more flexibility is needed, and the scope has not yet been fully defined. For lengthy projects with shifting requirements, this works well.

Staffing

Under this model, employers can hire staff for a predetermined period. Then, following the project's demands, they can hire extra personnel as needed. This arrangement is best suited for businesses that require additional labor for a project but do not want to hire full-time workers to save on costs.

Mixed Mode

This model combines fixed pricing and time and material models. Any business can use it if they need to finish a project by a specific date but don't have any particular project requirements.

Consumption-based

Under this approach, companies pay for the resources they use. The pricing strategy is more equitable. Instead of just paying for platform access or future service consumption, companies pay for actual usage.

Profit-sharing

In this arrangement, companies provide the service provider a portion of their earnings after the parties work together to achieve mutually beneficial business objectives like raising the company's bottom line.Prior to entering a profit-sharing agreement, companies and service providers define the terms and conditions for profit sharing such as the value increase in sales and percentage of earnings to be granted should said results be accomplished.

Incentive-based

In this arrangement, companies give service providers a bonus for exceeding the service level agreements stated in the contract. This method places greater importance on staff performance rather than on achieving organizational goals. For instance, if a team of agents maintains a high level of customer satisfaction, a client might award them with bonuses.

Shared-risk reward

With this pricing structure, the company and the service provider collaborate and co-fund a project. The client and service provider share the existing and potential threats of the project. In return, the client also shared a percentage of the benefits with the service provider for a predetermined duration.

What is the difference between shared services and outsourcing?

ComparisonShared ServicesOutsourcingCost-effectiveness(Winner: Outsourcing)Businesses are required to invest in their in-house team long term by providing them with training and a competitive benefits package.Businesses can save on their operational costs by having their service provider cover their recruitment, training, facilities, and equipment.Work Culture(Winner: Shared Services)Businesses have full control of the values and culture of their internal teams.Businesses are open to multiple work cultures and may encounter cultural gaps and language barriers.Scalability(Winner: Outsourcing)Businesses have little to no scalability as in-house staff required to scale their operations may be limited.Businesses can request additional staff from a service provider during peak seasons and can scale down during normal operations.Quality Assurance(Winner: Shared Services)Businesses have full control of their quality assurance and can tailor their processes according to their internal standards.Businesses can reduce internal work and give up control over their quality assurance to a trusted service provider.Both shared services and outsourcing aim to reduce costs, streamline processes, and optimize productivity in organizations. However, the two strategies vary when it comes to how well they save on costs, boost work culture, improve work quality, and scale companies.Check out a side-by-side comparison of shared services and outsourcing to help you decide which strategy will work best for your business.

Cost-effectiveness

Outsourcing has been a standard procedure for many businesses seeking to save on costs. By outsourcing, you can take advantage of a service provider's technology, systems, and working space. For example, instead of hiring a full-time graphic designer, you may opt to outsource your graphic design needs and receive it at a fast turnaround time. With a fixed price for each project, you can access their industry-leading tools, QA processes, and multifunctional expertise.Meanwhile, having shared services requires a long-term investment. Since you're building an in-house team, you must invest in their growth and retain great employees. You need to provide them with training, and equipment, not to mention, a competitive benefits package that will help you retain your employees.Outsourcing could be the best cost-cutting measure for you if you have short-term projects and need a specialization outside of your organization. You can save up to 70% on your labor costs by outsourcing to low-cost countries like the Philippines. However, go for shared services if you're building your internal talent pipeline. This will help you develop a workforce that is steadfast to your company's mission and values.

Work Culture

Positive work culture is what drives engagement, job satisfaction, and good results from a team. If you want to maintain a holistic work culture, then it’s important to hire employees and maintain a shared service system.In shared services, you hire and train your own employees so you control the values of the company and their work environment. With a consistent work culture, it is easier to attract and retain talent.Conversely, the work culture in outsourcing is more diverse. Employees adapt their company or team’s work culture. And when you choose to move a part of your operations outside of your own company, you open yourself to multiple work cultures beyond your control.As a result, cultural gaps, language barriers, and differing time zones may affect project delivery. One way to mitigate this problem is to outsource to a country with a strong cultural compatibility with yours, and who can work adjacent to your schedule.

Scalability

Business peak seasons bring a surge in customer demand. When inquiries and sales are skyrocketing, the need to hire additional staff also rises. Hence, scalability is a key consideration for most businesses.In terms of scalability, outsourcing works well for scaling up and down. If you wish to scale up your operations, outsourcing will provide you with backup staff; and if you wish to scale down your operations, your vendor can reduce your staff for you to save on labor costs.Shared services are not as scalable as outsourcing. To scale up, a company must look for suitable talent when there's a new role to fill. The process of sourcing talent is laborious and costly. Meanwhile, reducing staff positions requires downsizing which can demoralize

Quality Assurance

Bigger revenue results from high-quality work. While both shared services and outsourcing can guarantee high-quality output, the difference between the two lies in how much control you wish to have over your quality standards.Because shared services allow you to train employees in-house, you have full control of your quality standards and your QA processes. Though shared services require more time and investment, they allow you to develop standards and procedures tailored to your business needs.Also, because quality standards may require compliance with certain requirements, shared services may offer better responsiveness as everyone is under the same company and are likely to have more seamless communication.On the other hand, outsourcing offers more limited control when it comes to quality assurance. When you outsource and ask a service provider to take over some of your business processes, you reduce your internal work but you also give up control.In outsourcing, the service provider uses the best technologies and best practices to deliver on their promise of quality service. This likely involves management and processes that differ from your internal standards.To help bridge this gap in quality standards, you should work with outsourcing companies who can adapt to your company culture, understand your business needs, and communicate well with you. This is critical in developing a streamlined process that can fully integrate into your business.

Shared Services and Outsourcing: The Verdict

In essence, shared services act as internal support that keeps your business processes and systems intact and accessible to all key stakeholders. On the other hand, outsourcing serves as external support that improves these existing processes and procedures within an organization.Businesses that have remained agile amidst market changes have combined these two approaches. While keeping their shared services center organized, they sought help externally to add expertise and improve efficiency. As a result, they were able to maximize their ROI and accelerate their digital transformation.

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