Service centers supply services to the business units and bill back the costs. There are at least three reasons for having a function provided by a service center rather than by the business unit itself.
First, the level of service a business unit needs may vary significantly over the course of its work cycle. It would be inefficient to have the business unit hire a full-time staff capable of handling a peak load; it makes more sense to staff the service center with people who can move from project to project as needs change.
Second, providing the service may entail special equipment. If the equipment is expensive and is not used to full capacity by any one business unit, it doesn't make sense to have other business units duplicate its purchase.
Third, the service may maintain a corporate standard. The reliability with which the standard is maintained could be increased by having all the business units share the same service center, which would specialize in completing the work in a way that maintains the standard. If a service center exists to maintain a standard, it should publish a guideline document which describes how business units that cannot use the service center (for example, physically remote business units) can maintain the standard.
In each case, the advantages of having a business unit use a service center must be traded off against the advantages of having dedicated members of the business unit do the work.
Service centers and business units would usually interact as follows. The business unit needs a service. The service center estimates how much it will cost. If appropriate, the two organizations negotiate exactly what service is actually provided and what it actually costs. The business unit gets billed for actual costs accrued by the service center.
One attractive aspect of a service center is that the agreed-on costs negotiated with each business unit justify the service center's budget to acquire additional resources. As a result, questions attempting to justify percentages of budget on a macro scale (e.g., ``What percentage of the R&D budget should go to QA?'') are replaced by smaller, simpler questions. In addition, the direct billing gives the business unit the incentive to use the service center wisely.
The person in charge of a service enter may, in practice, hold a title such as manager, director, or VP; in this document the generic term functional manager, or FM, is used regardless.
Editor: John Walker