A Shared Services Agreement is basically an agreement to share the resources. It is way to reduce costs, increase efficiency and standardize certain processes. The service provider in this case, is responsible for maintaining certain key performance indicators or KPIs such as quality and cost for the utility being shared. The agreement should specify details such as the time for which the service can be used by each party, the security of the service, the split of the maintenance cost etc. This should be done unambiguously to avoid any conflict in the future regarding the same.
When Do You Need a Shared Services Agreement?
A shared service is needed when two or more units of the business are using the same service or utility. There are two main purposes of a shared service agreement – scarcity of resources and standardizing the process. When there is lack of funds to have separate utilities or resources for a particular utility, it makes sense to share the utility among different units that benefit from it. Another reason for sharing a service is to increase efficiency by standardizing the service or utility across different business units. This will make the service more efficient and streamlined.
The service sharing can be done in three ways. Different departments within an organization can agree to share the same service, such as HR or IT. An organization can also centralize a service that can then be shared with other organizations as well. Another way is when different organizations set up and share a service or utility.
Inclusions in a Shared Services Agreement
The agreement is made between the parties that agree to share the resources. There should at least be two parties involved. If the organizations involved have subsidiaries, then the agreement should also mention if it is applicable to the subsidiaries as well.
The agreement is implementable from the date that is mentioned on it. Every agreement will also specify its validity and terms for termination of the agreement. Once the validity has expired, the parties involved can decide whether or not they would like to continue sharing the service and create a new agreement accordingly.
The agreement should also specify the terms under which it can be terminated, who can initiate said action and other details regarding the same.
How to Draft a Shared Services Agreement
These are the steps for drafting an agreement:
- Decide on which services will be shared among the parties involved.
- Decide on a payment structure for the service. This should include both the amount that should be paid for the service and the duration within which it needs to be paid.
- Decide on how the service will be maintained and the role played by each party in its maintenance.
- Specify the start and end date of the agreement. It should also clearly specify what happens to the shared service once the agreement expires and how to renew the agreement.
- The agreement should also specify the benchmark for the services. This is a way to ensure that a certain quality of service is being received by all the parties involved.
- All the involved parties also need to agree on a way to terminate the agreement, if need be, before the term is up.
Benefits of Shared Services Agreement
All the parties involved in this agreement get the following benefits.
- Cost Savings: By sharing a service and centralizing it, the organization can make significant savings.
- Increase Efficiency: By centralizing and sharing certain services, effort duplication is avoided and the efficiency increases.
- Access to Valuable Data: By sharing services, all the data about that particular service is available at a single place. This data can be helpful in making crucial business decisions.
- Increased Expertise: The shared services of utility will be handled by those who are experts in the area and whose sole focus is that service. This adds expertise to the service received by the parties in the agreement.
Consequences of Not Having a Shared Services Agreement
When there is no agreement to share a service, there is duplication of effort, increase cost, lower efficiency and unfair exploitation of the service by just one party. An agreement lays down the conditions for sharing so that everyone involved gets a fair deal. In the absence of such an agreement, there can be a misuse of resources and conflicts arising from such misuse.
Key Terms of Shared Services Agreement
- Services that will be shared among the parties.
- Services charges
- Term of the agreement
- Conditions for discontinuation of service
- Confidentiality clauses
- Force Majeure
Sample for Shared Services Agreement
If you are an organization that is looking to share services within the organization or with other organizations, then you should definitely sign a shared services contract. Download a shared services agreement template here!
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