Contents 1. 1.1 Introduction

1.1 Introduction
1.2 About Caerphilly – Current Situation
1.3 Opting for Shared Services

2.1 Introduction
2.2 Infrastructure costs
2.3 People costs
2.4 Evaluated Cost Benefits
2.5 Fiscal Perils

3.1 The Current Scenario
3.2 The proposed organization of the new service
3.3 Appraisal of options
3.4 Identified benefits of the proposed new arrangements
3.5 Identified risks of the proposed model
3.6 Conclusions

Explain why Caerphilly are considering this model of service provision.
1.1 Introduction
As organizations advance, bureaucracy and administrative load rises up. But administrative and support functions too often do not feel directly responsible for the company’s results and tend to drift into a “comfortable mode” The back-office functions are commonly a mean to change into flexible, responsive, effective, customer-oriented teams.
Shared Services, SAP whitepaper, prepared by SAP’s Business Solution Architects Group.
Shared Services refers to the arrangement of a service by one part of an organization where that service had been found in more than one part of the organization first. Thus the capitalizing and resourcing of the service is shared and the providing department effectively becomes an internal service provider.
1.1 About Caerphilly – Current Situation
The Human Resources (HR), Training and Payroll service is currently provided by around 96 full-time equivalent staff: 61 Administrators, 23 Professionals and 12 Managers. In total, the annual cost of these services to Caerphilly Council is £4.8 million which includes around £2.2 million spent on external providers of recruitment and training services. The purpose of these services is to support the workforce of Caerphilly Council and the annual cost is £511 per council employee. It is worth noting at this stage that the Caerphilly HR cost per employee in the CIPFA 2008 benchmarking survey is significantly lower than the average UK local authority cost.
The HR staffs are committed to providing a good quality service. But administrative processes and the degree of specialization among the professional staff is not as great as in larger organizations.
Local authorities, including Caerphilly, have sought to lessen the burden of cost of central services. If this is attempted just by a continuing budget squeeze the effect would be degradation in the service. When local authorities have rearranged their service internally without any of the advantages of shared specializing and transactions they have taken a lot of pain to maintain quality.
1.3 Opting for Shared Services
The reasons why Caerphilly is considering the shared service venture are as follows:
* There would be a different approach in the exercises that the company performs and also in the execution of the activity performed by various sections of the organization. For example the processes, like training and payroll processes (for Caerphilly are not the major functions of the company) becomes the major responsibility for a shared services organization.
* Quality improvement : because the focus of the employees in one sector also accumulates competence. The methods which are often repeated are usually made better and up-to-date resulting in decreasing mistakes and also deliver on or before time. Administering the intricate activities, ascribing responsible employees, hence discarding faults by acquaintance and easy methods. Therefore with a correct IT system support, The consolidation of all big and important contact and operational data terminates redundancies and opens new doors for analysis.
Martin Hammer, partner at PriceWaterhouseCoopers says “Companies . . . Need at least $500 million in revenues to benefit from the economies of scale that shared services can provide,”. Leading benchmarking and analyst firms have brought to light that about half of the FORTUNE 500 companies have already put in shared services to work and so has Caerphilly. The most regular processes put into a shared services at Caerphilly are (in order of priority) financial affairs, human resources, and information technology (IT). This organization has a high trade volume and touches the highest degree of standardization “75% of the companies using shared services organizations have deployed accounts payable (AP) and accounts receivable (AR) processes” which benefits Caerphilly it also proves as an advantage on legal services, business case preparation, and financial analysis.
Shared Services, SAP whitepaper, prepared by SAP’s Business Solution Architects Group.
Examine the costs and benefits of joining the shared service model. Your answer should consider the likely consequences of joining for employee relations and management control in the organisation.
2.1 Introduction
While considering shared services, it is important to note that, the key is to maintain everybodys attention on costs, not on its allocations.
When allocating costs from a shared service, the important points to focus on are:
1. Customers should be supported with clarity and check on the cost drivers
2. Supply adaptable usages of the resources, maintaining a constant allocation model
3. Service provider should be left to choose for the resource allocation and everyday control
The costs in shared services can be broken down to 2 components:
1. Infrastructure
2. People
2.2 Infrastructure costs
Infrastructure costs are to be put apart from the cost of operations and people costs. “Examples of infrastructure include data transfer, rack space charges, outsourced server monitoring, etc.”
Each item has a comprehensive cost, which is to be broken down among the customers according to an allocation model that best represents the cost driver.
Example: Allocation of Infrastructure Costs
Data transfer into the data center for July cost $100. The allocation model for this infrastructure item is bytes transferred by each customer company. XYZ Industries generated 75% of the traffic during July, while ABC Incorporated generated the remaining 25%. As such, the data transfer bill for XYZ is $75 and ABC is $25.
Racks for housing servers in the data center are depreciated at a rate of $50 per month. Costs are distributed based on the number of servers used by each company. XYZ has 10 servers in place, while ABC has 15. As such, XYZ’s rack charges is $20 for July while ABC pays $30.
Server monitoring is compulsory for data center servers and is charged at $200/server/month. This is billed directly to each company based on their servers in place so XYZ pays $2000 and ABC pays $3000.
In the end, we have this equation to give the operating company cost for each infrastructure item:
ItemCostToCustomer = TotalCostOfItem x (CustomerUsage/TotalUsage)
2.3 People costs
People in a shared service spend their time on 3 things:
1. Project work
2. Ad-hoc tasks, maintenance and incident management
3. Managing other people
Each person working in a shared service has a specific cost. This will typically include:
* Salary & benefits
* Building and space costs
* Equipment costs
Time spent on project work and ad-hoc tasks can be directly allocated to customers, but time spent on people management is harder to quantify. To solve this problem, we calculate the cost of time spent on people management and allocate it among all reports under the manager.
Example: Allocation of people costs
Kate is the manager of the shared service and spends 100% of her time managing people. She does no direct project work and does not complete any ad-hoc tasks. Her cost, including salary, building and equipment costs, is $100.
Kate has 5 direct reports, each of whom have 4 reports, giving a total of 25 staff in her team. Kate’s cost is divided evenly among all 25 reports, adding $4 to the cost of each person.
Kate has no time to allocate among customer companies (she’s done no “real work” afterall). But, her cost is effectively distributed by the work completed for customers since it is allocated to staff who do “real work”.
Keygan reports to Kate. His cost, including salary, building and equipment was $80. With the management allocation from Kate, his cost is now $84.
Keygan spends 50% of his time on people management, 25% on projects and 25% resolving ad-hoc issues. Per the model, 50% of Keygan’s total cost of $84 is evenly distributed among his 4 reports ($42/4 = $10.50 each). The 25% project work ($21) and 25% ad-hoc work completed by Bill are billed to the customers directly.
Steve reports to Keygan and spends all his time on ad-hoc tasks. His cost, including salary, building and equipment was $60. With the management allocation from Kate and Keygan, his cost is now $60 + $4 + $10.50 = $74.50.
Of the ad-hoc tasks performed by Steve, 50% were done for XYZ Industries and 50% were done for ABC Incorporated. As such, Steve ‘s cost to XYZ Industries is $37.25 and to ABC Incorporated is $37.25.
In summary, the allocation of people costs follows these principles:
* All people costs are allocated and paid on an individual person basis. So, a company that uses 25% of Ian’s time will pay 25% of Ian’s cost. This is not the same as using 25% of total time spent by the shared service team and paying 25% of their total cost. For example, if we use resolved calls as the metric to determine ad-hoc time spent and include both L1 (average 300 calls) and L2 (average 50 calls) engineers in the cost calculation there is no potential reward for moving calls from L2 resolution to L1 resolution.
* Time spent on people management (an rough estimate for each manager) is added to the cost of the people being managed. So, you are only charged for actual work being done but we recognise that part of the cost of using those resources is the management team in place.
* Time spent on project work is directly allocated and billed to the customer requesting the project. It’s important to appropriately separate these tasks from ad-hoc time. This ensures that we can see the real cost of project activities and keeps ad-hoc tasks reasonably consistent in complexity (thus evenly cost distributed).
* Time spent on ad-hoc tasks is assumed to be the remainder after calculating time spent on people management and time spent on projects., Cost allocation model for shared services,

2.4 Evaluated Cost Benifits
The current services cost Caerphilly Council ,£4.8 million. The business plan, after the implementation period would reduce the annual cost for Caerphilly to £3.8 million – a potential annual saving of £1.0 million.
The cost reduction will be achieved in a number of ways:
* The sharing of administrative processes and specialist teams shows that a higher quality of service is provided with less staff. It is projected that Caerphilly will gain around £300,000 annually from efficient use of staff;
* Shared service will provide specialist teams for recruitment and training that will help in the procurement of third party recruitment and training services. It is sure that Caerphilly will gain around £660,000 annually from the shared services.
The shared service will manage the agency staff for the participating in local authorities.The overall saving per local authority does not include this potential gain as it was difficult to see how much the local authority would benefit.
2.5 Fiscal Perils
Given the substantial funds (circa £32m) to set up the Shared Services Centre, it requires a 7 year period of investment to establish. Therefore, Caerphilly should be net gainers to the tune of almost £1m per annum.
Subsequent to the preparation of the FBC there have been two significant developments that impact the financial projections/risks, i.e:-
(i) WAG has agreed to contribute £10m to the implementation costs. However, it is unclear ,whether it is grant or loan.
(ii) Cardiff City and County Council have withdrawn from the project
Assumptions of Caerphilly’s business case which could reduce the potential savings:-
(i) 3rd Party Procurement Assumptions
This is overstated by £150k per annum, still there are certain payments that will not be reduced by a change in service provision.
(ii) Administration Efficiency
The current cost of service will reduce by a minimum of £250k per annum due to the Corporate Services budget proposals.
(iii) Migration/Data
At least £50k per annum will be required for migration costs and termination of existing arrangements for which the model makes no provision
(iv) Additional Costs of Borrowing
It is identified that even with an assumption of a reduction of the costs by the provision of WAG funding; Caerphilly will still be required to borrow extra to fund the proportion of set up costs and to make a provision of at least £50k per annum.
When considering the financial assumptions, £1m savings identified reduces by at least £850k. Therefore, Caerphilly may benefit to the tune of £150k savings eventually.
While considering the above mentioned facts it is clear that the savings and deductions for Caerphilly are much more then the risks involved.
When allocating costs from a shared service, the key aims are:
1. Transparency and control over cost drivers.
2. Flexibility over the way resources, while keeping a single consistent allocation model.
3. Leave choice over resource allocation and daily control with the service provider..
Provide a reasoned decision as to whether Caerphilly should join this venture. Your answer should make reference to the relative success of other shared service projects and existing research in this field.
3.1 The Current Scenario
In the current scenario Caerphilly has a staff of 96 which looks after the HR, training and payroll service spending £4.8 million annually, with a purpose to support workforce. It is the responsibility of HR employees to offer good service. In smaller organizations majority of the work is concerned with administration and the level of efficiency is less compared to the larger.
Shared services for HR, training and payroll services, have been considered as the capacitate aid for the problem faced by Caerphilly, as budget squeezing on the central service would affect the quality.
3.2 The proposed organization of the new service
The proposal is that the aims to be met by reorganising the service into the following related parts:
A Single Transactional Centre which includes a support team for undertaking all administrative tasks, a contact service front who offer advice on HR queries, an on-line service which also gives advice on HR policies, review employment details and carry out certain transactions.
Specialist Service Teams of 30% professionals from the existing, for respective participating authorities, would work on Employee Relations Support, Job Evaluation, Designing Pay and Reward Systems, Recruitment, Policy Design, Training Design and Delivery, Health and Safety, Occupational Health and Management Information Services
Staff Retained by Caerphilly. It is anticipated that around 13senior and professional staff will continue working within Caerphilly, which will rely on the centre to provide all administration, case work and specialist support. The retained staff will advise on the management of change and organisational development, identify resource, skill gaps and develop plans to manage these, evaluate and improve service in response to the needs of citizens.
There is a prediction, that up to 83 FTE jobs will, therefore, be lost to the borough.
Redeployed Staff It is anticipated that the new shared service will operate with, on average, around 30% less staff. Over the three year implementation period it is intended that those HR and payroll staff who are not transferred will be redeployed to other roles. Financial provision has been made, as an individual has skills and experience that cannot be transferred to another role.
3.3 Appraisal of options
There were three options considered for the proposal, with the following result.
Option Three was the least preferable as it proved to be financially week. But there were no strong financial case for choosing between Options One and Two. The relative strength of Option Two lies in its earlier implementation date which would add to the momentum of the project and reduces the time period. Thus Option Two was agreed upon.
3.4 Identified benefits of the proposed new arrangements
Anticipated Service Benefits
The most obvious reason to undertake such a step is to avail for an efficient and productive HR Service. It will provide a scope and quality of expert support, a different approach in the daily exercises and in the execution of the activity performed by various departments. Paying close attention to identical jobs in an shared services organization achieves efficiency and increase in the productivity.
Existing HR staff within Caerphilly do not have the opportunity to provide this strategic support to place their workforce in the right location which would be then helped by shared service proposals to use their potential to this end.
There would be an opportunity fot the HRprofessionals to specialise. Consequently all front-line services will get support to recruit, develop and make the best use of the employees who work for them.
Estimated Cost Reductions
The current services cost Caerphilly £4.8 million. The business plan indicates that the proposed new service would, then reduce the annual cost to £3.8 million.
The cost reduction will be achieved in a number of ways i.e, higher quality of service with less staff, better management of specialized staff managing training and development of the Caerphilly and third party as well, manage the procurement of contingency or agency staff for the participating local authoritiesm.
The proposed model has been designed with local government for local government, which will fit the needs for support, transactions, identified by local government.
3.5 Identified risks of the proposed model
Service Risks
If the managers wouldn’t adapt the new model in time, they would find it unsatisfactory, which increasea risk of employment law litigation.
Financial Risks
Given the substantial funds to set up the Shared Services Centre, the financial model requires a 7 year period of investment before any savings are achieved. Therefore, the model is predicated on the fact that after the initial seven year period, Caerphilly should be net gainers to the tune of almost £1m per annum, based on the assumptions set out. There are concerns about the operation of the governance model, legal arrangement, Health & safety arrangement.

3.6 Conclusions
Overall, there are a number of notable points that are raised as a result of the review of shared services arrangements. First, this review has presented information that reveals a number of different opportunities which can be considered to suit the respective needs. Also the fact that Caerphilly is commited to the approach and believes in better productivity to the HR services through this model.
Significantly, while there are advantages evident from the successful application in shared services, there are also limitations and risks involved for the same. The focus of shared services has to be by far proven profitable for larger organizations. Additionally, the current information does not specify the extent to which these arrangements are successful and the finer-tuned activities and procedures that might be taken into account in ensuring that broader success factors identified in research till now are applied which is productive.
Thus we can draw an inference that, working closely with the planned structure, keeping mind the risks, Caerphilly should opt for the shared service model as it would deliver better offerings.

BOROUGHS, A. and SAUNDERS, J. (2007) Shared services that work for the business. Strategic HR Review. Vol 6, No 4, May/June. pp28-31.

BusinessWeek Research Services, September 2007, New Era for HR Shared Services

Shared Services, SAP whitepaper, prepared by SAP’s Business Solution Architects Group. – Wikipedia, the free encyclopedia.