The public sector is seeking ways to maintain its services and programs in today's difficult economic environment. To cope with unanticipated revenue shortfalls, mounting costs and increased service needs from taxpayers, governments are looking to squeeze more benefits from their shrinking budgets by adopting or expanding shared services business models.

Shared services involves streamlining and consolidating key support functions from several agencies or departments into a single, stand-alone entity, with a strong focus on customer service. The idea is to create standardized services -- using common processes, procedures and technology -- that can be delivered faster, and more efficiently and consistently.

In its most recent annual survey of state technology officials, the National Association of State Chief Information Officers found that shared services rank second only to consolidation of services and resources as a priority in 2009.

The shared services approach is attractive because it can reduce overhead and full-time equivalent costs by grouping functions together and operating in a hub-and-spoke model. However, public CIOs face significant challenges to implementing shared services, and they need to evaluate the decision very carefully to avoid four common pitfalls.

1. Misunderstanding Requirements for Federal Funds

When state and local governments use federal funds to pay for shared services, they must allocate and recover costs according to strict guidelines contained in U.S. Office of Management and Budget Circular A-87, Cost Principles for State, Local and Indian Tribal Governments.

One of A-87's purposes is to ensure that the costs of shared resources are allocated fairly and that no one misuses federal funds, intentionally or unintentionally. If state and local governments don't comply with A-87's requirements, they risk having to return millions of dollars to the federal government.

A-87 distinguishes between cost allocation systems and billed-service rates. Because most shared service initiatives use billed-service rates and not cost allocation to pay for themselves, it's important to understand the difference between the two.

Cost Allocation: A-87 requires state and local governments to allocate indirect costs according to a clear and measurable basis. For example, if several counties share an emergency dispatch service, costs can be allocated based on population and the number of emergency calls made in each county. The process is straightforward when state and local governments share one service that has one source of federal funding. The accounting becomes more complex, however, when governments receive funds from multiple sources.

Billed Services: More commonly, state and local agencies bill one another for services provided through shared arrangements. A-87 explains how to account for billed services, but it doesn't instruct state and local governments on how to develop billing rates, which can be set by any reasonable method. A-87 does require government entities to measure the profit or loss on each billed service and provide a refund or credit to the customer, or adjust future billing rates.

Agencies that accumulate more than 60 days of "working capital" from their shared services programs could be considered to be making a profit under A-87. In such cases, if federal funds were used to finance the shared initiatives, the federal government could reclaim a portion of the surplus. Agencies that don't routinely reconcile billed services to actual costs risk significant audit findings and potential refunds.

2. Regarding Technology as a Solution Instead of a Tool

In some cases, state and local governments position shared services as a technology initiative that will immediately provide better and cheaper results. Technology, however, is just a tool, not a solution. Problems are not solved by simply purchasing more powerful computers or more robust software applications.

It's crucial to examine the underlying business processes and modify or replace ineffective