Shared Services Transformation: Conceptualization and Valuation from the Perspective of Real Options

Abstract

In today's volatile global economy, where many organizations face severe pressure to downsize, the "shared services" model, in which a firm merges common functions performed by multiple units into a single service delivery organization, provides an innovative approach to make business more efficient and effective. To successfully implement shared services, firms need to strategically decide whether and how to pursue various service transformation alternatives such as simplification, standardization, consolidation, insourcing, or outsourcing. In this study, we develop the notion of real options into a unique theoretical lens for conceptualizing service organizations and their transformation in an uncertain business environment. Specifically, we view service organization as a set of strategic options that give the firm preferential access to future transformation opportunities. We create a taxonomy of these options, and introduce a decision methodology for valuing alternative shared services transformation approaches. We illustrate this methodology by applying it in a real business case to justify a global firm's decision regarding the transformation of its finance organization.

Unlocking value from machines: business models and the industrial internet of things

“…While there are some studies on real-options for the valuation of particular services (Su, Akkiraju, Nayak, Goodwin, 2009;Wei & Tang, 23 2015;Wenbo, 2016) Crucial as infrastructure is for the IIoT, there is no substantial body of research.…”

Towards a Well-Founded Valuation of Managerial Flexibilities in IT Investment Projects - A Multidisciplinary Literature Review

“…Specifically the BSM is widely used (e.g., Benaroch and Kauffman 1999;Benaroch et al 2006;Heinrich et al 2011;Su et al 2009;Taudes 1998) to value real options embedded in ITIPs. Subsequently, we explicate how the BSM assumptions relate to ITIPs and suggest relaxed assumptions that better represent the characteristics of ITIPs.…”

“…2 We included the latter two disciplines to our review as both offer focused methodological discussions on extensions in their ROA approaches and do not only apply existing models. 3 The analyses are based on the BSM assumptions as it is most commonly used in the IS literature (e.g., Benaroch and Kauffman 1999;Benaroch et al 2006;Heinrich et al 2011;Su et al 2009;Taudes 1998;Taudes et al 2000). The Binomial model as well as the Margrabe model are generally based on the same assumptions: The Binomial Model is the discrete counterpart of the BSM (cf., Cox et al, 1979) and the Margrabe model relaxes one assumption and allows for uncertain discounted cash outflows following a Geometric Brownian Motion (cf., Margrabe 1978).…”

“…In several articles of the IS field, dcif of ITIPs are modelled to follow GBM (e.g., Benaroch et al 2006;Heinrich et al 2011;Su et al 2009;Taudes 1998). The probability distribution of GBM at any one point in time is lognormal with linearly increasing mean and variance in time (cf., Hull 2009, p. 278).…”

“…They state that, depending on the many parameters, no clear implication on the option value in relation to the standard case of certain dcof can be given. Brennan and Schwartz (1985); Dixit and Pindyk (1994)*; Myers and Majd (1990);Tourinho (1979) Articles where the BSM is used, for example : Benaroch and Kauffman (1999); Benaroch et al (2006); Heinrich et al (2011);Klaus et al (2014); Su et al (2009);Taudes (1998) Uncertain Incomplete Market Certain Childs et al (2001);Guthrie (2007); Henderson (2004;; Hugonnier and Morellec (2007); Merton (1998) Balasubramanian et al (2000; Benaroch and Kauffman (2000); Diepold et al (2011);Hilhorst et al (2006) Dias and Nunes (2011);Dixit and Pindyk (1994); Epstein et al (1998); Ewald and Wang (2007); Metcalf and Hassett (1995);Sarkar (2003); Schwartz (1997) To sum up, in the IS literature we identified some approaches, which modify single assumptions of the BSM and comply with our relaxed assumptions. The same holds for the Finance and Economics literature where we further identified a few approaches that are based on two modified assumptions that comply with our relaxed assumptions.…”