Center of Excellence

What is a Center of Excellence?

Center of Excellence (German: Kompetenzzentrum, CoE for short) refers to an organisational unit that pools expertise, methods and standards on a specific topic. It makes this knowledge available to the other areas of a company or group of companies. Typical topics are data analysis, information security, pricing, procurement, sales management or compensation.

The idea behind it: certain knowledge is needed in several places but does not fully occupy a specialist in any single one. Pooled, it is created once and distributed from there. On a small scale this is familiar from an apartment building, where not every household sets up its own workshop, but one well-equipped hobby room with a knowledgeable neighbour is open to everyone. Centers of Excellence are common in growing organisations, in groups with several companies and after acquisitions. In the HR function they are part of the so-called three-pillar model. The other two pillars are the HR Business Partner, who advises individual business units on HR matters, and a service centre for administration. There is no statutory basis; mandate, powers and budget are set by the management.

Tasks and ways of working

• Setting standards: uniform definitions, methods and tools, such as how a metric is calculated in controlling or how a security incident is handled.
• Enabling: training and supporting the business areas until they can handle the task themselves.
• Taking on difficult cases: questions that are too rare or too complex to keep the knowledge available everywhere.
• Spreading experience: making solutions that have proven themselves in one area known in the others.

A CoE enables; as a rule, it does not decide in place of the business areas. If it pulls decisions to itself, it becomes a bottleneck and is bypassed. Binding requirements are needed only where uniformity is itself the purpose, such as security standards or metric definitions. The mandate must then provide for this authority expressly.

Organisational forms and funding

Three forms are common. The central model brings all specialists together in one unit. In the hub-and-spoke model, a small core is connected with designated contact persons in the business areas. The virtual model networks specialists who remain in their business areas through a coordinating body. Which form fits depends on how binding the standards are meant to be and how differently the business areas work.

A CoE is funded through a central budget, an allocation to the business areas or charging according to use. Where several companies are involved, the services are generally charged on within the group. For tax purposes the charge must withstand the arm's length test: the price must correspond to what independent companies would agree for the same service.

Use after acquisitions

After an acquisition, the CoE is a tool of partial integration. Acquired units keep their product and customer relationships but adopt common standards, for example in pricing, procurement or information security. In this way synergies can be realised without merging teams whose value depends on their independence. Integration planning determines which topics are pooled and in what order.

Conversely, the pooling has an effect on the sale of a business unit. If the unit has previously used a group CoE, this access falls away at closing. It must then be built up itself or secured for a transition period through a Transition Services Agreement.

The view of investors and buyers

In due diligence, the question is whether critical knowledge depends on a few people. A CoE with documented standards and trained contact persons reduces this dependency; a unit that at its core consists of one specialist increases it. For groups that promote themselves as a platform for further acquisitions, investors check whether the described shared capabilities actually exist: with a mandate, staff and measurable results.

Practical example

A software group with 180 employees has emerged from two acquisitions. Each of the three companies answers security questionnaires from major customers in its own way, with different policies and changing responsibilities. Tenders are delayed, and the answers partly contradict one another.

The management sets up an information security CoE with three people. It develops uniform policies, answers questionnaires centrally and trains one contact person in each company. After twelve months a common standard applies. A security questionnaire that previously took around three weeks and input from three companies is answered in about one week, and the answers are consistent.

For a later transaction this has a double benefit. In technical due diligence, policies and evidence are available in an orderly way in one place. And the group can prove that the three companies actually work to a common standard rather than merely claiming it.

Distinction from related terms

• Shared service center: pools standardised, recurring administrative tasks such as payroll or accounts payable accounting in order to reduce costs. A CoE, by contrast, pools expertise.
• Staff function: advises the company's leadership and supports it. A CoE works for all business areas and passes knowledge on.
• HR Business Partner: advises a business unit on HR matters. The partner draws on the specialist topics of a CoE, such as compensation or personnel development.

Common mistakes

• No clear mandate. Without named results, the unit comes to be seen after some time as a cost centre without benefit.
• Control body instead of support. If the business areas have to ask for approval for every decision, they look for ways around the unit.
• Founded too early. If a topic is needed in only one or two places, a named person with a clear mandate is enough.
• Knowledge is hoarded instead of passed on. Success shows in how much the business areas can do themselves afterwards.
• Unclear funding. Allocations without a transparent key lead to disputes between the business areas and weaken acceptance.

Frequently asked questions

At what size does a Center of Excellence pay off?

Repetition matters more than size. If the same expertise is needed in several places without fully occupying one person in each, pooling pays off. In small companies this is a role, not a department.

How large is a CoE at the start?

Often two to five people. It should grow only if demand from the business areas rises.

How can success be measured?

By the demand from the business areas, by the share of cases they solve themselves, and by agreed KPIs on the respective topic, such as processing times or uniformly calculated metrics.

Is a Center of Excellence the same as a group function?

Not quite. A group function often has authority to issue instructions to the companies. A CoE works mainly through standards, training and support.

The Roemer Capital view

In growing companies, in our experience a binding standard is missing more often than a CoE. Where the same metric is calculated differently in three places, a binding definition helps first. For a funding round, what counts is that revenue, customer churn and margins are measured in the same way across the whole company.

For groups that have emerged from acquisitions, we prepare the Equity Story, the coherent presentation of the growth and value potential, so that shared capabilities are evidenced rather than claimed. This includes which unit sets which standards, with how many people and with what result. Investors and buyers ask about this in the review anyway.