Contracting vs. Shared Services: Which Is Right For You?

Managers have been debating the issue for years and it doesn’t look like it will end anytime soon. The debate is over which approach is right for a company: Contracted or shared services. It’s a hard choice — one that depends on your unique situation. But it’s an issue that can dramatically impact your company’s survival. So choosing poorly is not an option.

Keep in mind that both approaches are viable.

Each has its supporters. Each has its advantages. And each delivers services to clients and customers in a cost-effective, timely manner. More important, both can dramatically transform your organization—but only if you get the decision right.

Below we look at the merits of each approach with the goal of helping you make an informed decision:

Shared Services Model

This model refers to situations where a service is found in more than one area of the organization. The funding and resourcing of the service are borne by each area involved. This makes the providing department an internal service provider

The key idea here, obviously, is the concept of sharing. It must include shared accountability of results by all the departments involved. Otherwise, the approach loses its impact. In addition, the provider must agree to deliver services based on key metrics, such as KPIs or cost.

A shared service approach is ideal where you want tight control over processes and outcomes. Think core competencies. This approach also works well for strategic business activities and situations where strict compliance activities matter.

Responsiveness is a big benefit with shared services. That’s because all areas involved are part of the same enterprise and have a close relationship with each other.

But for shared services to work, you must have the right systems, processes, talent, and managerial capacity available.

Contracting Model

Not every company has everything they need for shared services. If you don’t, there’s outsourcing. It involves contracting with a third party to provide an activity, such as providing inbound call center services.

Here the two parties enter into a contractual agreement that calls for an exchange of services and payments. Usually, an SLA is developed.

Contracting works well in situations where you want a fundamental change, need to move quickly, and/or have to reduce expenses. It also works well in situations where the company lacks the systems, talent, processes, and managerial capability to do the job itself.

Often, companies don’t have the specific expertise that a service provider has or the industry contacts the provider knows. Both can be vital to an initiative’s success. So can the transition.

Contracting provides numerous benefits. It’s easier and faster to implement than shared services. It eliminates costly system upgrades and/or future investments. And it increases flexibility by turning fixed costs into variable costs.

The Hybrid Model (Shared Services + Contracting Services)

A third option exists the Hybrid Model. It combines the benefits of both approaches into a single model. By combining the strengths of both models, permits the creation of greater value unavailable through either contracting or shared services.

The Hybrid Model sounds ideal. But it, too, has downsides. As Peter Bendor-Samuel and Eric Simonson, Everest Group, point out the Hybrid Model isn’t applicable in all situations. Sometimes, it’s simpler—and better—to go with either shared services contracting.

But the decision is a little more complicated than this. It’s the extra complication that dooms many of these projects.

Once you’ve made your choice between shared services and contracting, you still have to worry about execution. Sometimes managers get so caught up in winning the argument that they forget about execution.

So your initiative’s success won’t be determined just by the approach you adopt. It will also be determined by how well you execute it.

If you don’t execute it well, it won’t matter which model you choose. The effort will fail. And failure here, as we said before, is not an option.

Not every company has everything they need for shared services. If you don’t, there’s outsourcing help desk companies. It involves contracting with a third party to provide an activity, such as providing inbound call center services.