Lee Mergy and Paul Records

  

Lee Mergy is a partner of Marakon Associates, an international strategy consulting firm that advises CEOs and top management on how to manage for value (www.marakon.com); Paul Records was formerly vice president of Human Resources/Organizational Development at Champion International. (International Paper acquired Champion in June 2000.)

Shared service functions such as finance and human resources are more important today than they ever have been to the success of most companies. Consider that shared service units influence how the company manages its human capital (personnel), financial capital, and technology, which are arguably three of the most important components of a successful company today.

Despite their importance, however, shared service units in most companies receive much less senior executive attention than business units. The logic: business divisions generate profits, and that's where top management should focus its time.

No wonder, then, that the complaints never seem to end when it comes to the level, quality, and cost of IT, human resources, and finance support services. Shared service units, lacking senior management attention, tend to create their own set of objectives that may or may not be linked to those of the business units or the overall company. This is compounded by the fact that the managers of these units have not received as much training in making multidisciplinary trade-offs or strategic thinking as general managers have.

We propose that senior executives revisit their priorities and give equal amounts of attention to - and expect equal levels of performance from - their companies' shared service units. In particular, senior executives should require equally high standards for strategic-planning and profit-generating initiatives from their shared services as they do from the business units. Senior management needs to make it clear that their expectations of shared service units don't end at cost targets. Rather, the heads of these units should be expected to act in keeping with the shareholder-valuefocused strategies of the business units and be evaluated on their ability to do so. When this happens, there is a gradual transformation in the mission of the shared service units from service providers to profit partners and creators and a significant change in performance of the overall company.

For example, consider the experience of the IT department within a large, multinational, consumerproducts company. The department was judged almost exclusively on its ability to meet strict cost targets. This meant that in all its dealings with other units, it wanted to keep its expenses at a minimum. At the same time, a key business unit in the company was facing intense, unforeseen competitive pressure and needed timely and low-cost IT support to deliver services in its customer call center. The result? The business unit could not afford and did not receive the support it needed and ended up losing key customer accounts.

Set new standards for management behavior
First, each shared service unit should have a set of valuecreating initiatives, an explicit list of the top three to five opportunities to create value within the company. (By value, we mean activities that generate a return above the company's cost of capital.) The value agenda ensures that the shared service units are focused on those issues and opportunities that are likely to have the greatest improvement in the value of the company and individual business units over time. The agenda should be a written document reviewed with and approved by top management that is focused on key items and has clear accountability, timetables, and deliverables.

Second, to encourage shared service heads to think more like the business unit managers they work with, each shared service unit should provide - in writing to senior management - a clear, multi-year strategy that demonstrates how the unit will work with the business units to continue to add value to the corporation. This strategic plan should explain how the value-creating initiatives are going to be implemented, including:

• targeted customer segments (internal and external to the company);
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• products and services offered (which ones and with what attributes);
• prices charged;
• required expenses and assets necessary to deliver the strategy at the lowest economic cost.

Reviewing these items will allow senior management to assess whether the shared service units are working toward objectives that support -- or conflict with -- those of the business units.

The case of human resources at Champion International
Marakon's work with Champion International, a Fortune 500, multinational, forest and paper products company, illustrates what happens when shared service units adopt a strategic and value-based planning approach. In 1999, Champion was organized into seven major business units and 17 distinct, shared service units. Marakon began a program to work with all of the shared services to help them transition to more of a business model mindset. The key was for the senior executives of these services to think foremost, ``How can I help the company or business unit increase shareholder value?'' This was a difficult transition in that almost none of the shared service units' executives could say exactly how their group was directly contributing to shareholder value.

Human resources (HR) was one of the largest shared services at Champion and represented 25 percent of the allocated corporate overhead for the business units. Year-in and year-out, HR had been directed to cut its budget with little attention paid to whether the baseline budget was too high in the first place, how to correctly prioritize the budget cuts, and where to grow products and services. The following case describes how the HR group made the transition from a cost center to shareholder value creator, armed with a clear strategy and set of value-based initiatives.