When Less is More

Strapped for cash and pushed for further cost reductions, the public sector looks at sharing services in a whole new way.

by / February 3, 2004
The government of Hesse, the fifth largest state in Germany, had an accounting problem -- not a mistake in its books, but an excess of accounting systems.

To solve the problem, the government built a shared service center, which uses enterprise financial software to provide its nine ministries and nearly 800 agencies with all financial data and accounting services needed. The center delivers these functions at lower cost and with better performance than the old systems -- Hesse's service processes invoices for less than half what it costs in the private sector.

Though common in the private sector, the initiative undertaken in Germany -- known as shared services -- is just beginning to catch on in the public sector. Shared services consolidates administrative functions into organizational entities whose only mission is to provide those functions to the rest of the government as effectively and efficiently as possible.

While moving to shared services can be jarring to an organization, a shared services model yields a wealth of operational improvements -- economy of scale, skills and technology investments, flexibility, standardization, and an increase in quality of service. These benefits not only have economic value in cost savings, but in far-reaching strategic implications as well.

Shared services is built around the concept of developing "centers of excellence" for back-office functions, which are meant to improve employee productivity, reduce error rates, increase process speed and reduce cycle times. The centers allow people to develop highly specialized skills, which can be leveraged across the entire shared services organization instead of focused on an individual agency or department. It also allows organizations to rationalize the salary mix within.

In organizations that move back-office functions to a shared service center, management and key employees are freed from routine administrative tasks and can focus on strategic activities that add value to the government's program goals.

Consolidating functions and processes eliminates redundancies and helps reduce costs associated with back-office support functions, as does combining locations that provide the same function. Shared services also reduce back-office operating costs by reallocating time spent by front-end employees on low-value routine functions to higher-impact strategic tasks. Automation and standardization of labor-intensive, low-value functions yields cost savings by removing inefficiencies, eliminating process steps and leveraging technology investments across a larger customer base.

Organizations also standardize service costs using service-level agreements (SLAs) -- a standard practice in a shared service model.

Entering the Vernacular
Public-sector interest in shared services is increasing as governments face a widening gulf between rising citizen expectations and governments' ability to deliver. Funding shortfalls and looming retirement of the baby boomer generation of civil servants are putting tremendous pressure on governments to perform better with fewer resources.

Many governments have made significant investments in technologies, such as ERP systems, to improve productivity. Due largely to pressures of the Y2K scare and legacy systems people worry will "break," however, ERP and similar projects have often focused on technology rather than business process and organizational transformation.

In contrast, few large private-sector companies have invested in new ERP systems without also moving to a shared services operating environment. "Shared services" became part of private-industry vernacular in the late 1980s and early 1990s as part of a re-engineering trend. Private-sector firms began to re-engineer all redundant, non-value-added processes to enforce standardization, and increase quality control and customer service. Functions that often use shared services are accounts payable, accounts receivable, fixed assets, payroll and general accounting. The recession at that time challenged many leaders to get more out of back-office functions. Early adopters included General Electric, Baxter Healthcare and AT&T. The shared services movement accelerated with the growth of ERP software solutions in the mid-1990s. As a result, companies are achieving greater benefits from ERP investments.

Shared services in the private sector yielded consistently positive results. In finance organizations, for example, shared services models led to a significant decrease in operational costs -- the average reduction over a 12-year period was 52 percent.

Shared services can help governments realize the full potential of ERP systems, allowing them to meet increased demand with fewer resources by freeing up funding -- and executive leadership -- so those resources can be redirected toward initiatives that impact citizens more.

Is There a Difference?
When first introduced to the shared services concept, many people ask, "What's the difference between a centralized model and shared services?" They're really asking, "Aren't we doing shared services already?"

While the two models share some superficial characteristics, they differ significantly. In a centralized model, components of individual administrative support organizations are consolidated into one department. End-users typically are not treated as customers or partners. In a shared service center, the only function is to run administrative tasks as effectively and efficiently as possible. Shared services elevates the importance of administrative functions to the highest management levels. Traditional back-office responsibilities take on a front-office perspective, increasing customer focus and employee motivation and ownership.

Is Shared Services Right?
Implementing shared services in the public sector is about undertaking governmentwide business transformation, which involves making political decisions many government executives would rather avoid.

Moving to shared services means committing to organizational transformation. While the benefits are striking, the changes can be wrenching for those affected, and the potential work force challenges are considerable.

To guide the decision on whether to use shared services, government executives should ask themselves the following questions:

  • Does your organization face budget constraints and need to divert funds from back-office to citizen-focused activities?
  • Does your organization face critical staffing shortages from impending retirements?
  • Does your organization suffer from a scarcity of specialized skills?
  • Is there unnecessary duplication of skills in multiple departments or geographies?
  • Does your organization have operations in multiple locations with independent support organizations?
  • Does your organization have above average processing costs for transaction-processing capabilities?
  • Do your organization's administrative support functions process large volumes of transactions?
  • Does your organization have a high management-to-staff ratio in a number of locations?
  • Are a high proportion of our employees located in high-cost areas?
  • Are there increasing demands for services?
  • Is your organization facing significant investments to make necessary enhancements to systems and processes associated with your support services?
  • Are stand-alone entities in your organization foregoing investments in labor saving technologies because they lack the economy of scale to justify the costs?
  • Does your organization suffer from inconsistent delivery of satisfactory service levels?

    Determining Scale
    Once governments decide to make the transformation to a shared services model, they must determine the scale of the shared service organization. This can vary from supporting a single agency, supporting many or all agencies within a government entity, or supporting multiple internal and external entities.

    The greater the shared service center's scale, the greater the cost savings as investments in technology and people skills are leveraged across a larger number of customers. However, it also drives up the complexity of implementation.

    Public-sector organizations must envision the ultimate scale of their desired shared service centers, but the implementation program itself can begin small -- incorporating just a few functions or supporting just a few departments -- and scale can be added over time. Even on a limited scale, the shared services model provides significant value.

    What functions are best suited for shared services? Eligible administrative activities can be found in a broad range of areas, including: finance and accounting; human resources and payroll; logistic/materials management; purchasing and supply chain; customer service/call centers; training and education; IT infrastructure; other support areas, such as litigation, communication services and regulatory compliance.

    To be most effective and efficient, all business processes associated with those functions -- and the people and technology required to perform them -- should be placed into the shared service organization, which should provide those services across the entire government. There should not be, for example, separate payroll clerks in different government departments -- the shared services organization should be responsible for all aspects of payroll processing.

    Ideal processes for shared services are those with high volumes of transactions -- and thus potential for economies of scale -- and low strategic impact on the organization. Strategic processes typically remain within agencies while transactional processes go to shared service centers.

    Avoiding Potholes
    Governments face many difficulties while moving to a shared services delivery model. The following can be fatal to the project's success: not having a strong business case; treating the project as if it's just another task, not a fundamental change in operations; and accepting less than 100 percent participation from the organization by letting parts 'opt out.'

    Executives must address two critical questions to work toward implementing shared services:

  • What is the business case for implementing shared services?
  • How much change can the organization take on to accomplish its objectives?

    Once executives know their goals, they can determine how to proceed. There is no one right answer. The potentially large scale of shared services and relative newness of the public-sector model may tip the scale toward a phased approach. However, a big bang approach can still be successful for smaller government organizations or those that need radical change and faster returns on their efforts. Key to either approach is careful planning, competent execution and team members who have expertise in implementing shared services.

    CIOs might assume that transition costs will take most of the budget (moving to a new facility, training staff, getting new hardware and office equipment, union contract changes, et al). However, most of the budget -- as much as 70 percent in some cases -- will actually pay for the implementation project team and the new technology used to support the shared services organization, such as a new ERP system. The bulk of costs will be incurred in this implementation phase because of the often-lengthy re-engineering work needed, the large teams required, and the long time frames to implement all the changes, systems and training.

    The Sourcing Spectrum
    Options for sourcing employees for a new shared service center span a spectrum defined by four different strategies: in-house sourcing, co-sourcing, public-private joint venture and business process outsourcing.

    With in-house sourcing, shared service centers are staffed by government employees, and some political, union and internal issues associated with transforming the work force model are minimized. Governments must sometimes learn as they go because government personnel often lack experience in creating and managing a shared service center. What may begin as a cost-containing endeavor could cost more if implementation is flawed or never successfully completed.

    In co-sourcing, the government contracts with a vendor that links the vendor's remuneration to the achievement of benefits, and a long-term relationship with the vendor is typical. The decision-making, transformation process and subsequent running of the shared service centers are a joint effort. Ultimately the government retains control and oversight of the organization, although the vendor has significant involvement in decision-making. Co-sourcing gives governments the benefits of private-sector skills without requiring the employee transfer associated with full outsourcing. It also provides governments a way to pay for the move to shared services, as co-sourcing is usually value-based. By getting an infusion of private-sector skills and linking remuneration to delivery levels, governments also reduce the risk of failure.

    In a public-private joint venture, a public-sector organization mitigates risk and reward by sharing responsibility with a private-sector partner. This form of sharing can be accomplished by contractual arrangements or setting up a jointly owned third-party organization. It is similar to co-sourcing, but the legal construction is different, with control more equally shared between partners. A joint venture is a relatively new model in the public sector, and is generally undertaken when a government wants to be more entrepreneurial. An example is when a government's objective is to have the shared service organization actively solicit and bring on external government entities to further drive down its own costs by spreading the infrastructure and labor costs across multiple organizations.

    In business process outsourcing, employees of a private-sector provider work in the shared service center, and in most cases, employees of the public-sector organization become employees of the vendor providing the outsourcing. While this model is common in the private sector, business process outsourcing in the public sector brings with it a number of challenges -- particularly in transferring workers to the private sector, keeping jobs local and with labor union issues -- but business process outsourcing has potential for governments facing intense pressure to enhance performance and economize in a short time frame. It may be the most effective way to ensure a transformational outcome because it provides a clean slate. Using an experienced outsourcer gives assurance that the typically complex technology investments inherent in implementing shared services will be done right.

    Additionally the outsourcer may already have the infrastructure for administrative systems in place and can implement shared services at a much faster pace. Outsourcers that specialize in shared service projects often reduce costs and increase service levels: A back-office function for a government is a core business -- worthy of significant research and development investments -- for the outsourcer. Finally an outsourcer can often provide greater financial incentives and more career options to employees.

    Take Another Look
    According to most industry analysts, use of enterprise software systems in the public sector continues to grow. The Government Finance Officers Association said governments can benefit significantly from ERP, which can have a positive impact on modernizing public management.

    These points show the importance of taking a closer look at shared services while addressing ERP and other enterprise software systems. The private sector embraced the practice when it began to adopt ERP in large numbers. The benefits --significant cost reductions, productivity improvements and leveraged resources -- are hard to ignore, but public-sector CIOs who pursue a shared services model must be prepared to deal with political considerations and organizational issues to get the job done.

    Given those reasons, many public-sector organizations previously avoided shared services. But times have changed. Because government organizations must meet rising expectations with shrinking resources, it's time for them to give shared services another look.
    Stephen J. Rohleder Contributing Writer