The article discusses the shared services approach to managing support services within energy companies.

1. As energy companies push to increase efficiencies and reduce costs, a
"shared services" approach to managing support services is paying off for
many companies—cutting costs by as much as 40 percent. Some compa-
nies actually find they can provide improved services at these reduced
costs. However, shared services need to be closely managed by incorporat-
ing best practices to avoid potential pitfalls.
Management theorist Peter Drucker once commented that serv-
ice and support costs in the 1950s accounted for a small percent-
age of total costs. In recent years, automation has helped increase
productivity and reduce costs in direct line operations, driving up
the proportion of service and support costs within
the total cost structure. Simultaneously, the mar-
kets have become more competitive and clientele
more demanding, forcing companies to address
their internal support services.
Oil companies typically have lower Selling,
General, & Administrative expenses (SG&A) than
general manufacturing companies as a percentage
of revenues. Manufacturing companies tend to
add more value to raw materials and spend more
money supporting sales of their manufactured
products (Figure 3). However, oil company SG&A
costs are still large, offering huge potential for cost
reduction. In addition, oil companies often include
some support costs (e.g., elements of exploration
expense) in other cost categories. For instance, the
average SG&A expenses reported by ExxonMobil,
BP, Shell, and ChevronTexaco reported in 2000
surpassed $8.3billion (5 percent of revenues).
As energy companies look for ways to increase
efficiencies in support services (e.g., human
resources, accounting, information technology),
some companies are turning to a "shared services"
model. Shared services can be defined as the
establishment of a new organization to offer sup-
port services to multiple groups within a company
at a lower cost than each group procuring the
services separately. Combining existing resources
from around the company's business units and
operating companies is the most common way the
new organizations are created. Energy companies
are not alone, as nearly half of the Fortune 500
have created shared services organizations to sup-
port financial transactions, IT activities, and
human resources. The general rule of thumb is
that a company should produce at least $500 million in revenues
to benefit from the economies of scale that shared services can
offer.
Support services can be managed as: (1) a corporate-level func-
tion, (2) a decentralized function at line-of-business or business
unit levels, or (3) a shared service. Increasingly, chemical, oil, and
utility companies are adopting a shared services approach to serv-
ice functions—though not all services in these companies are
treated alike along the centralized-decentralized continuum.
Overall, the human resources function is typically centralized;
Energy Executive 2002 | Issue 2 | Page 5
Majors: ExxonMobil, BP, Shell, ChevronTexaco
Fortune 500: Wal-Mart, GM, Ford, General Electric (these are the four largest non-energy companies in the Fortune 500)
Note: All calculations are based on fiscal year 2000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Margin on COGS SG&A / COGS SG&A / Revenues
Majors
Fortune 500
Majors: ExxonMobil, BP, Shell, ChevronTexaco
Fortune 500: Wal-Mart, GM, Ford, General Electric (these are the four largest non-energy companies in the Fortune 500)
Note: All calculations are based on fiscal year 2000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Margin on COGS SG&A / COGS SG&A / Revenues
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Margin on COGS SG&A / COGS SG&A / RevenuesMargin on COGS SG&A / COGS SG&A / Revenues
Majors
Fortune 500
Source: Arthur D. Little, Inc.
Figure 3. Oil Industry vs. Manufacturing Industry
Centralized DecentralizedShared Service
Information
Technology
Engineering
Accounting
Procurement
Facilities
Human
ResourcesEnterprise-
Wide
Division/
Line-of-
Business
Business
Unit
Logistics
ServiceLevel
Centralized DecentralizedShared Service
Information
Technology
Engineering
Accounting
Procurement
Facilities
Human
ResourcesEnterprise-
Wide
Division/
Line-of-
Business
Business
Unit
Enterprise-
Wide
Division/
Line-of-
Business
Business
Unit
Logistics
ServiceLevel
Source: Arthur D. Little, Inc.
Figure 4. Typical Management of Support Services
Shared Services: Payoffs and Tradeoffs

2. logistics often decentralized; and engineering, IT, procurement,
and accounting managed through shared services. Moreover, in
large companies, centralized functions and shared services exist at
two levels: enterprise-wide (e.g., human resources, facilities, IT)
and by division or line-of-business (e.g., procurement, account-
ing, engineering). Shared services do not have to be managed
enterprise-wide to gain the desired efficiencies (Figure 4).
No major companies use shared services for all support func-
tions, but increasingly companies manage one or more functions
as shared services and selectively outsource certain functions to
third parties. For example, BP, Sempra Energy, and
ChevronTexaco outsource almost all of their IT services. Energy
companies should consider outsourcing non-core services to cap-
ture the functional experience of their partners to provide a bet-
ter, faster, and cheaper service than they could deliver internally
and to enable strategic advantage through future innovations.
One major consideration is the way an outsourcing contract is
structured. Developing a performance-based contract that com-
mits a supplier to final results rather than interim tasks reduces
the customer's exposure and puts the final responsibility with the
supplier. Metrics such as the effect on operating portions of cash
flow and working capital can be tied to the contract, enabling the
customer to gauge the true value of its outsourcer.
Regardless of the chosen approach, implementing a shared
services unit implies a series of major organizational challenges
(Figure 5). Companies must determine the optimal service offer-
ings needed to support entire organizations and force different
groups and business units within the company to make tradeoffs.
Advantages. Cost efficiency is the greatest advantage of shared
services—obviously gained through economies of scale, common
processes and systems, and simplified business policies and proce-
dures. Industry-wide studies show that shared services can reduce
costs by as much as 35-40 percent—both Shell and ExxonMobil
have reported this kind of savings. Some companies have even
been able to provide improved service levels at these reduced
costs. Other benefits include reduction in layers of management
and the ability of business units to focus on core competencies
and customer value (Figure 6).
Disadvantages. Disruption in moving a function into a shared
service is an often-cited problem, resulting in lost time and effi-
ciencies. Loss of control by the business units and an inability to
handle the business unit's specific complexities are other com-
mon pitfalls. Company-specific problems, such as the lack of a
single ERP system, can also impede efforts toward shared
business processes.
Energy Executive 2002 | Issue 2 | Page 6
Long-Term Thinking Short-Term Delivery
Growth Performance
Innovation Efficiency
Flexibility Standardization
vs
vs
vs
vs
Long-Term Thinking Short-Term Delivery
Growth Performance
Innovation Efficiency
Flexibility Standardization
vs
vs
vs
vs
Source: Arthur D. Little, Inc.
Figure 5. Organizational Challenges of a Shared Services Model
I Maximizes economies of scale and scope across enterprise or
line-of-business; 30-40 percent cost reductions have been
reported
I Frees up business units from support functions distractions
I Capitalizes on scale to afford best practices, expertise, and
systems
I Defines desired levels of service with unit pricing known in
advance
I Facilitates data, systems, and process standardization
I Motivates services personnel
I Provides reliable information throughout the organization
I Benefits entire organization since employees in support roles
have specialized training
Potential Merits
I Causes disruption during change-over to shared services
I Reduces control and flexibility for business units
I Requires business units to coordinate/negotiate with third party
I Creates difficulties when adopting “common” practices
I Could overemphasize outside customers at expense of internal
users
I Could distance shared services providers from internal
customers
I Potentially creates intra-company conflict if transfer pricing
issues cannot be resolved
I Could damage efficiency and customer relationships when
things go wrong
Potential Pitfalls
Source: Arthur D. Little, Inc.
Figure 6. Potential Merits and Pitfalls of Shared Services

3. Best Practices in Shared Services
In our experience, the following best practices help ensure
success with shared services:
Business Approach. A truly shared service is operated as a busi-
ness within a business. It has its own P&L, mindset about service,
understanding of customer needs, budget management process,
and accountability for achieving strategic objectives (e.g., cost
reduction, service improvement). Through its Global Services
Business, for example, DuPont has developed a highly successful
business approach to shared services. Support costs are signifi-
cantly lower, shared services revenues continue to grow, and
customer satisfaction levels are high.
Customer Service Orientation. Transforming a bureaucratic
corporate functional department into a service-oriented activity
takes time, a fundamental attitudinal shift, strong relationships,
and a rethink of performance measures, incentives, and rewards.
All successful shared services organizations must align themselves
with the needs of their customers and employ customer satisfac-
tion surveys to understand customer needs. However, the
customer satisfaction metrics must be sophisticated enough to
recognize bottom line impact, not just direct cost savings allocat-
ed to a particular business unit. For example, improving billing
and collecting cycle time and the resulting capital could be more
beneficial to the corporation than simply lowering the SG&A
cost of the support function. An example of customer input going
beyond costs was Shell's recent decision to only allow its shared
services arm, Shell Services International (SSI), to service Royal
Dutch/Shell operating companies. SSI had alienated some of its
Shell customers while marketing its offerings to non-Shell oil
and gas companies for the past few years. SSI's change in busi-
ness model came about after Shell's business units said they were
not receiving the attention they desired and sought more of an
emphasis on their needs rather than those of outside companies.
Service Level Agreements. Business units can better access the
level of service they need and can afford through "service level
agreements." Allowing each business unit to choose from a
limited menu of service options provides a way for that business
to control the level of service it needs and can afford. For exam-
ple, the IT shared services group might offer a choice of help-
desk services at "24 hours a day, 7 days a week" or "8 hours a day,
5 days a week." Since too many choices can raise costs, the
shared services business often starts out providing few if any
choices until it fully understands its customers and the right set
of service levels to offer. In order to ensure that the services being
purchased affect the bottom line, customers should actively work
with their service providers from day one to determine the
appropriate service mix, priority, and expected results.
Common Processes. To achieve the desired cost benefits, com-
panies should adopt a common set of processes and systems
where there is no risk to business advantage or competitive dif-
ferentiation. For example, major companies—e.g., BP,
ExxonMobil, and Shell—are reducing their number of SAP sys-
tems as part of an overall business simplification program that
will lead to greater economies of scale and reduced costs.
Do we think shared services are always the answer? No. It
depends on the company's specific situation and the service areas
involved. But for many complex companies, shared services can
provide a proven way to balance cost efficiency with business unit
responsiveness. Furthermore, there is enough experience now
available to learn from the best practices and common pitfalls
when implementing a shared services approach.
About the Author
Maury Bronstein is a Consultant in
Arthur D. Little's Global Energy
Practice, based in Houston. He focuses
on strategy development and implemen-
tation, change management, and process
improvement.
Contact: (1) 713.646.2271;
bronstein.maury@adl.com
Energy Executive 2002 | Issue 2 | Page 7