Kaplan: Cost shouldn’t drive decision on shared service centres

The decision to set up a shared service centre should not be motivated by lowering costs, according to one of the creators of the Balanced Scorecard, Robert S. Kaplan.

Kaplan says business units should always question why they want to provide a service internally rather than using external suppliers before setting up a shared service centre.

“The answer has to be your strategy,” Kaplan said. “What are you doing differently or better than a potential external supplier of these services?”

Kaplan was speaking at the University of Edinburgh, where several new CGMA reports, including Relevance Regained: Performance Management in Shared Service Centres, were released on November 5th. The event marked the 20th anniversary of the Balanced Scorecard. It also featured Kaplan’s collaborator on the Balanced Scorecard, David P. Norton.

The report analyses the shared service centres of pension fund MyCSP Limited, Network Rail, RCUK Shared Services Centre, Rolls Royce and Royal Dutch Shell.

Relevance Regained found that flexibility of standardised processes is needed to achieve continual improvement. It also found that performance excellence was achieved through a combination of managing through people (leadership, empowerment and communication) and numbers (measures, requisite variety and benchmarking).

The report highlights tools such as benchmarking and standardisation, which are typically used to lower cost.

Kaplan believes cost savings should not be the primary motivation for a shared service centre. He believes shared service centres can add value by performing tasks better than an external supplier could. “I’m not convinced low cost is a sustainable and surviving strategy for internal shared services units,” he said.

“Caught in the middle”

Another CGMA report, Performance Measurement and Risk Management: In Intermediary Food Chain Businesses, found that intermediaries were particularly vulnerable to commercial risk, such as losing customers or suppliers at short notice. Intermediaries try to nurture long-term stable relationships with clients to mitigate risk. Another finding is that performance measurement throughout the supply chain is focused on non-financial measures and the financial measures that do exist often are not widely shared.

“The tension that I observed with these intermediaries is they are just caught in the middle,” Kaplan said. “On the one hand, they have to be low-cost, operate with razor-thin margins; they couldn’t really take advantage of their suppliers in difficult times. They had to try to keep their business and keep prices up, even when retail prices were plummeting.”

“They have lots of measures but no Balanced Scorecard. It’s the problem of not using the framework – they don’t have a structure for organising their performance measures,” he said. 

Kaplan said that he and Norton have done more work to discuss with suppliers and customers what it means to have a relationship rather than transactions, or contract on price or service-level agreements.

Kaplan said the economics of relationships in the food supply chain cannot be sorted out if accurate cost assignments are not obtained down to the supplier level.

“If you can show they are making more money with the suppliers you bring to them, that’s a pretty good value proposition, but you better have pretty good cost assigning,” he said. “So there’s lots (of) opportunity for management accounting to play a great role, particularly as the competition gets excruciatingly tense.”

EVA in Chinese state-owned enterprises

The third CGMA report released Monday, Economic Value Added Adoption In China’s State-Owned Enterprises: A Case of Evolutionary Change, found an improved awareness of capital costs, greater willingness to invest in research and development, and improved asset and operational efficiency.

Economic value added (EVA) by itself, without a Balanced Scorecard, tends to drive short-term operational improvements, Kaplan said.

Kaplan said Chinese state-owned enterprises under the kind of pressures to improve EVA are likely to go for low-hanging fruit. This includes removing unprofitable products, stripping out inefficiencies in the supply chain, getting rid of equipment not being used to capacity and closing facilities whose EVA is below the benchmark. However, this may result in short-term gains rather than long-term benefits.

Related CGMA Magazine content:

“The Future of the Balanced Scorecard”: Kaplan and Norton offer insight into how the Balanced Scorecard can be used to maximise future opportunities.

“A Remedy for the Broken Economics of Health Care”: Balanced Scorecard co-founder Robert Kaplan has applied his performance measurement expertise to the US healthcare system. Find out what problems he discovered – and what solutions he recommends.

“Shared Services: The Keys to Success”: Shared services are no longer solely the preserve of large organisations. So what are the benefits for midsize businesses, and how can they manage a successful transition to shared services?