Outsourcing vs Shared Services: What the Numbers Actually Tell You

The shared service center brings all activities, which were being carried out by different business entities before, together under one internal delivery organization that will serve the whole organization. It will be part of the organization from a legal perspective. People will be part of the employees. The center operates under a standardized process model and charges back to internal clients through an internal pricing mechanism.
The centralized services approach is not the same as the mere consolidation of headcounts. Well-designed shared services centers work within the boundaries of well-defined service catalogs, service level agreements, performance dashboards, and governance mechanisms that emulate vendor management processes without the formalities of outsourcing.

Outsourcing is the more rational choice in three specific circumstances:
• Best for simple and repetitive work

• Useful when the company lacks time or management capacity
• Good when the company operates in many locations, and SSC is too expensive
  For Smaller Companies
• Companies with revenue under $500 million may find SSC too costly
• The setup cost of SSC is around $8.4 million
• Takes about 3.2 years to recover the cost
• If work volume is low, investment is not worth it.
  
  Outsourcing is more appropriate for smaller firms or simpler tasks that involve repetition since it involves minimal cost and minimal managerial involvement. On the other hand, shared services are more applicable to larger firms with large volumes of transactions because cost reductions will be realized over a long period of time. Thus, the distinction between the two lies largely in the firm’s scale of operation.

A growing number of large multinationals operate both. This structure is prevalent among corporations generating annual revenues exceeding $5 billion, where shared service centers manage essential transactional activities in areas such as finance, human resource management, and procurement, whereas point processes are delegated to third-party organizations. According to Gartner’s Finance Function survey for 2024, 61% of corporations with revenues exceeding $5 billion use the aforementioned structure.

Key Points

• Many large companies use a mix of both:
• Shared Services (SSC) for main internal work (finance, HR, procurement)
• Outsourcing for specific or specialized tasks
  • This model is common in very big companies (over $5 billion in revenue)
• About 61% of such companies use this mixed approach

  Governance clarity is critical in ensuring success. If internal SSCs and external vendors both participate in any particular chain of processes, gaps in responsibility will not take long to arise. Companies that successfully manage a hybrid model ensure having one process owner despite different modes of executing the process.

Failure rate for transition: The study done by Everest Group, involving 400 changes of service delivery models from 2019 to 2023, discovered that 34% of the conversions from outsourcing to SSC faced considerable disruption during their first year of operation. These disruptions can be attributed primarily to underestimating the need for knowledge transfer (48%) and inadequate process documentation (39%).

What the Decision Actually Comes Down To

• The decision is not just about cost
• The real question is, how much control does the company need?
• Also consider: What happens if control is lost?

When to choose Shared Services:

• When process knowledge improves over time
• When the company is directly responsible for rules and compliance
• When mistakes can seriously affect the business

When to Choose Outsourcing:

• When the work is fully standard and routine
• When external providers are more skilled or efficient

• When the company wants to focus on other important areas

In addition to the cost factor, the decision between outsourcing and shared services depends largely on the level of control required. While shared services provide a superior option in situations where control, regulation, and quality are vital for the success of the organization, outsourcing is an appropriate strategy in the execution of routine activities.

The centralized services approach will always prove superior to the outsourcing approach in terms of costs, quality, and compliance over a period of three years for companies that are of adequate size. Outsourcing is a quicker approach that demands less investment and is suitable when there are no complexities in the function and the firm cannot manage an SSC. There is no evidence in the information provided to prove that one of the approaches is better than the other.