Supply Chain Executives are building “Centers of Excellence” – because they support business strategies!

The term “COE” is often a commonly heard term in supply managers’ vernacular, but it’s interesting to note that Centers of Excellence as an organizational entity have been around for more than fifty years – and evolved first in the form of what was called  “shared services”.

In general, shared services or a shared services center (SSC) refers to a dedicated unit (including people, processes and technologies) that is structured as a centralized point of service and is focused on defined business functions. These functions are supported by IT and IT services for multiple business units within the enterprise. Shared services may come from several different physical locations, and may involve numerous business functions and IT processes. [1]

The definition, structure and scope of an SSC generally are formed first within the enterprise. In many cases, enterprises sometimes engage external providers to consult with various elements of the design, structure, location options and execution options.  In many cases, this is known as “off-shoring”, when these services are located in places like Bangalore, India one of the more common locations for shared services.  Execution and long-term delivery may be managed by internal enterprise personnel or by external service providers, or some combination thereof.

There are two arguments for sharing services:[2] The ‘less of a common resource’ argument and the ‘efficiency through industrialization’ argument. The former is ‘obvious’: if you have fewer managers, IT systems, buildings etc; you are using fewer resources, which will reduce costs.  The second argument is ‘efficiency through industrialization’. This argument assumes that efficiencies follow from specialization and standardization – resulting in the creation of ‘front’ and ‘back’ offices. The typical method is to simplify, standardize and then centralize business processes, often employing technology to increase efficiencies and develop specialization.  Services that can be shared among the various business units of a company include finance, purchasing, inventory, payroll, hiring, and information technology. For example, a central headquarters might control all the hiring for an entire chain of retail stores.  The concept of shared services was introduced in the 1980s, when a number of large companies with multiple business units began looking for ways to reduce their administrative costs. Since then, shared services have evolved into a more comprehensive and flexible tool for improving processes, enabling technology investment, generating profits, and reducing costs.a

A Center of Excellence has a more nuanced definition than a shared service, although it bears some common attributes.  A general definition in a 2019 study of procurement COE’s by CAPS Research involved bringing together experts to focus on a common set of activities, including business intelligence and analytics, technology, risk management, process redesign, e-sourcing, improved skills, P2P purchasing, and SRM, and category management.  A number of executives I interviewed discussed how shared services have evolved in their organizations over the last twenty years or so.

We started in 2012 as a finance back office, which included elements of the procure to pay process.  We then spent the next two years bringing that work together under a shared service construct.  A shared service is a Center of Excellence in effect.  We then expanded the shared service into our human resources world to engage in HR operational work.  We then expanded the scope into legal administration and contract management work. And more recently, we have expanded it to conduct a lot of compliance and customer onboarding, as well as sales and operations.  What started as a 20 person team has expanded to more than 1000 people across five business functions, spanning 300 business processes. – Senior Executive, Financial Services Company

Another executive I interviewed distinguished between “tight” and “loose” definitions of  supply management COE’s that have evolved over time at their organization.

A “tight” definition of a COE is a team that is set up specifically because of the need to combine subject matter experts (SMEs) that requires specialization.  A good example is our procure to pay (P2P) COE that is essentially a PO center, that does tactical transaction work.  There is a tight scope of work and tight work rules.  The COE’s are geographically located to maximize labor arbitrage, and there is a strict discipline for work requirements.

A ”looser” definition of a COE involves building insights for category management.  There is more ambiguity in the outcomes and the ways in which the outcomes are approached and achieved.  These types of COE’s bring together SME’s in a different way – it is less of a transaction with rules, and more about execution of strategies and business processes and tools.  Each type of COE has a different purpose, and needs to focus on the particular type of work that needs to be done, and matching the skill sets with those types of work. – Chief Procurement Officer, Large semiconductor manufacturer

I am currently working on a CAPS study that covers a broad array of industries among respondents that employ COE’s, which emphasizes their role.  I’ll be posting more on this in the future…

[1] https://www.gartner.com/en/information-technology/glossary/shared-services

[2]  Why do we believe in economy of scale?. Thesystemsthinkingreview.co.uk. Retrieved on 2013-07-26