There are two types of solution approaches: internal, i.e., measures directed within the company such as service bundling in shared services, and external, measures directed at the markets such as the creation of new tasks.

Third-market capability of shared services is not always assured

Services which are not part of the core business can be gathered into so-called shared service companies within the corporation. This is a measure which is fully in line with profit center orientation and is at first glance a positive step. But experience has shown that these units – even when organized as a legally independent unit, but as an internal service provider within a corporation – do not come close to the benchmarks set by “genuine” or external service providers. The advantage is that they can be measured meaningfully from a benchmark standpoint.

In many cases, internal service providers are expected to provide the service for the corporation’s own units, but simultaneously to realize adequate turnover and profit margins on external or so-called third markets. The business plan for this scenario contains a calculation combining sub-optimal profits within the corporation and high profit margins on the third market. That is a fallacy; as a rule, the relationship is the other way around. Moreover, the third-market capability of the shared service company with its presumably higher margins is supposed to serve as a substitute for falling margins in the core business fields. There are many different reasons why such plans fail. To start with, achieving genuine competitive capability is only possible for someone who is truly in a competitive environment.

The third market is tough, decisions manifested in contracts are irreversible – in contrast to decisions within the corporation. Service providers from within a corporation who operate on the third market are frequently taken to the cleaners by market players. These providers are lacking in experience with respect to pricing and service level agreements as well as in negotiating skills. Once in operation, the envisioned high margins are eaten up by subsequent services and penalties. It is not at all rare to lose money in this situation.

Another effect is fatal in this case: the third-market orientation causes the parent company to be unforgivably neglected in service performance. The best employees of the internal service provider are working for external customers. They are almost never available for internal tasks. As a consequence, the corporation’s business departments once again start to create their own solution know-how surreptitiously. This undermines the objectives of the reorganization, sowing the seed for the next reorganization.