The New Administration's Shared Services Opportunity

The shared services revolution began in the late 1980s with the adoption of commercial off-the-shelf (COTS) enterprise resource planning (ERP) software packages by leading commercial enterprises. These highly standardized and scalable technology platforms fully integrate administrative functions and entire business supply chains, thereby enabling consolidation of redundant information technology (IT) infrastructure, business processes, and organizations across a large base of shared services organization (SSO) customers. The cost and service improvements enabled by SSOs are achieved through

• standardization, such as standardized systems and transactions;
• simplification, such as streamlined processes and fewer disparate systems, databases, and organizations; and
• technology leverage, including processing more transactions electronically, making greater use of partnerships with best-in-class providers, and extending to self-service.

The earliest SSOs were created to serveat an arms-length, business-like basisthe business units from which they were created. Some of these internal SSOs have become so successful that they have transformed themselves into commercial providers of the same services to customers external to their host enterprises. Today, more than 80 percent of the Global 2000 largest companies receive back-office support from either an internal or an external third party SSO.

Whether internal or third party, an SSOs sole mission is to provide services to its customers as efficiently and effectively as possible. This relationship has two benefits illustrative of the economic law of comparative advantage: the organization that sheds its back office to an SSO enables itself to focus resources more squarely on its core mission and the things it does best, while the SSO does likewise.

Private-Sector Trends

The following global trends in the private-sector shared services environment have important implications for government:

• Shared services are driving significant cost, productivity, and service gains in the global economy. The privatesector reports the following benefits:
• Most shared services initiatives save 1530 percent of costs.
• Productivity improved more than 10 percent for 89 percent of users.
• Quality improved more than 10 percent for 82 percent.
• Customer service improved more than 10 percent for 79 percent.

Moreover, these benefits are increasing as SSOs mature and take greater advantage of scale and technology leverage for growing volumes of services, transactions, and customers.

• SSOs are becoming multifunctional and encompassing entire business processes. The earliest SSOs managed a few basic transactions processed by ERP systems, such as financial management (FM), travel, and payroll. As they gained acceptance, more services have been assigned to SSOs. They are simultaneously moving up the value chain into highervalue, decision-support services, such as research and data analytics, and encompassing entire business processes, such as loan servicing, collections, and claims processing in the financial services industries.
• Shared services follow a predictable evolutionary path from consolidation to standardization, to optimization, and finally to virtualization. As SSOs mature, they get better at using sophisticated management tools to measure and continuously improve productivity and smarter about using external business partners to drive services to best-in-class performance.
• Internal SSOs are consolidating into larger-scale, thirdparty SSOs. Due to their larger scale, transaction volumes, and investments in IT, third-party SSOs enjoy significant cost advantages over internal ones. Experts report that a large number of internal SSOs are failing to meet their business objectives and are ripe targets for consolidation. The consolidation trend is expected to continue into the foreseeable future and drive significant concentration in the commercial shared services environment.

Global Government Shared Services Movement

The shared services wave is breaking on the shores of all levels of government in Australia, Canada, New Zealand, and the United Kingdom. Global government adoption is following a similar evolutionary path to the commercial sector, beginning with consolidation of IT modinfrastructure and applications and gradually moving up the value chain to capture entire business processes. The highest payoff and most widely adopted government shared services, as in the commercial sector, are FM, human resources (HR), acquisition, and IT. Government adoption rates for next-wave shared servicessuch as facilities, customer service, real-estate, supply chain, and legal servicesare at about 20 percent and growing. The global government shared services environment has the following characteristics:

• Global government investment in shared services is increasing at more than 20 percent per year, led by Europe (34 percent), Australia (27 percent), Canada (26 percent), U.S. state-local (23 percent), and U.S. federal (20 percent).
• U.S. state-local growth is accelerating due to recession- impacted revenue shortfalls. The National Association of State Chief Information Officers has identified consolidation and shared services as top tough times strategies for state governments. More than twenty states have consolidation or shared services initiatives under way today.
• The United Kingdom government reports that by 2016 the majority of the transactional elements of Corporate Services will be delivered through a handful of professional shared service organizations. Some of these organizations will remain inside the public sector, but many will be outsourced.
• Government SSOs are becoming increasingly multifunctional. A 2007 Accenture survey found that 64 percent of single-function government SSOs plan to become multifunctional.

Expectations are growing around the world that shared services will also enable significant gains in transparency and accountability in government business activities. Queensland, Australia, embraced transparency explicitly to enable more businesslike pricing by service providers through improved benchmarking and performance monitoring and more predictable budgeting for customers. The cabinet office of the United Kingdom has identified improved transparency in resource allocation as a leading measure of effectiveness enabled by shared services in the context of transformational government. In Scotland, transparency has been cham pioned as a direct byproduct of streamlined and standardized processes enabling improved benchmarking and cost control. Many state and local initiatives in the United States recognize transparency gains as a direct benefit or an explicit objective of shared services initiatives.

Shared services initiatives pose significant management challenges that cannot be underestimated. Experts report that a large percentage of government consolidation and shared services initiatives will not achieve their intended benefits. The toughest challenges involve leadership, governance, project management, and the ability to realize savings either by reducing head counts or reinvesting in higher-value purposes. Most experts say that the most important success factor is active, engaged leadership of executives at the highest possible levels.

Another significant success-enabler is structural independence. The record suggests that the most successful government SSOs are created as independent organizationsseparate from mission-related policy or program delivery organizations.

Three of the more successful global government SSOs (Ontario Shared Services in Canada, CorpTechQueensland State Government Shared Services in Australia, and the National Health Service (NHS)/Xansa public-private partnership in the United Kingdom) reflect characteristics and best practices that merit consideration by other government adopters (Table 1).

Shared Services in the U.S. Federal Government

1980s and 1990s

Shared services are nothing new to the federal government. They have roots in the interagency cross-servicing and administrative consolidation initiatives that began in the 1980s as part of the Reagan administrations Reform 88 management improvement initiative. Payroll was an early target of opportunity, as modernized departmental payroll centers at the U.S. Departments of Agriculture (USDA) and the Interior were promoted for use by external customers. Consolidated financial and administrative service centers were created in several departments, such as the U.S. Department of Commerce, where four regional centers were created by consolidating administrative functions from several bureaus. Many of these 1980s-era consolidated service centers continue to operate at various degrees of modernization and have the capacity to be leveraged more broadly as government wide shared services assets.

Cooperative administrative support units (CASUs) were another 1980s innovation that established crossservicing relationships between smaller agencies and in remote locations where it was not cost-effective for each agency outpost to maintain its own dedicated administrative staff. Today, CASUs continue to flourish under the leadership of a national interagency board of directors chaired by the U.S. General Services Administration, numerous local boards of agency users, and a lead agency in each community in which they operate. CASUs provide more than ninety administrative services in more than two thousand communities nationwide.

The government reinvention initiatives of the Clinton administration in the 1990s took these approaches a step further by establishing, with congressional authorization on a pilot basis, franchise funds: administrative units with explicit charters to cross-service external customers on a competitive, business-like basis. The pur pose of the initiative was to promote government-wide competition among common administrative service providers, leading to a more competitive environment, lower cost, higher quality, and more timely services. The pilot authorities were extended permanently in 2005 and remain useful enablers of broader shared services transformation, but the level of franchise fund activities has declined since the late 1990s.

Today, in many large departments and agencies that remain structured in a holding company model (those composed of large, autonomous operating units), the centralized departmental or headquarters administrative staffs that serve the entire enterprise are funded through working capital funds and operatein fact, if not in titleas shared services. Examples include administrative functions at USDA and the Departments of Energy and Justice. A majority of them meet most recognized attributes of SSOs: they provide fee-for-service financing at cost recovery through working capital funds, have customer boards of directors, use some form of negotiated service- level agreements, and are subject to some degree of improvement effort. If some of the lower-value work performed by these administrative staffs were transferred to SSOs, the resources could be repurposed to highervalue missions.

2000

The Bush-43 administrationsPresidents Management Agendadrove shared services adoption through its e-Government initiative. An initial set of twenty-four common IT solutions was identified where agencies historically made significant individual investments to address needs they perceived as unique but that were, in fact, common and duplicative of each other. An objective of the e-Gov initiative was to transform this agencyspecific behavior into a new model of joint investments in IT designed to meet common, standard requirements shared by numerous agencies (buy once, use many).

The e-Gov program was expanded to include nine common, but more complex lines of business (LoBs) as candidates for standardization and interagency collaborative management and investment. Three of the LoB initiatives adopted shared services business models: FM, HR, and information systems security. The shared services model was also implemented successfully for the e-Payroll initiative (one of the twenty-four e-Gov initiatives), which consolidated twenty-six agency payroll centers into four third-party SSOs (e-Payroll was the next generation of the payroll consolidation initiative that began in the 1980s).

The LoB initiatives were driven as governmentwide IT initiatives, and their focus was limited to consolidation of the applications and, to a lesser extent, the IT infrastructure supporting the applications. This focus enabled progress toward modernizing management infrastructurea necessary first stepbut it did not realize the full measure of cost savings and productivity improvements possible through cross-government consolidation. Moreover, significant infrastructure components, such as the e -Payroll centers, remain served by legacy systems dating back to the 1970s through 1990s, begging for modernization.

A major issue that stalled cross-government LoB modernization in the Bush-43 administration was congressional objection to interagency investments across appropriation accounts controlled by different committees of Congress. These jurisdictional concerns must be addressed directly to enable successful governmentwide transformation in the future.

In addition to the Bush administrations LoB/ third-party/government SSOs, a large number of internal SSOs emerged and evolved in the 2000snot as part of a government-wide program, but through the independent leadership of their host agencies. A few examples include the Internal Revenue Services Office of Agency-wide Shared Services the NASA Shared Service Center, and the U.S. Postal Service Shared Services Organization. In fact, most SSOs designated by the U.S. Office of Management and Budget (OMB) as LoB providers were originally internal SSOs created to serve their host agencies that later morphed into third-party SSOs. Some of these internal SSOs possess size and scale much larger than leading global government SSOs, and they vary widely in maturity and utilization. Given the nearly unlimited scalability of modern technology, significant over-capacity is apparent. The government could be served more cost-effectively by a smaller number of larger, more mature SSOs.

A third type of SSO emerged in the 2000s: thirdparty/commercial SSOs. A few IT companies with software and services meeting stringent federal requirements became eligible to compete with qualified thirdparty/government SSOs to provide FM and HR LoB shared services to federal agencies. These commercial SSOs are capable of offering services and expertise leveraged from their private-sector experience, and they include Accenture, CGI, and IBM, as well as software providers Oracle and SAP.

OMB carefully created a broadly accepted framework to govern competition between government and commercial SSOs for FM and HR LoB services that has avoided many of the pitfalls of the controversial and cumbersome competitive sourcing process governed by OMB Circular A-76. The LoB framework applies only to agency procurements for LoB services that subject a small number of government employees (up to ten full-time-equivalent positions) to the risk of competition. Careful attention to these sensitive issues remains necessary to safeguard the rights of federal employees while promoting the healthy competitive marketplace necessary to drive the full measure of benefits throughout the government.

Most of the federal SSOs identified in this article reflect a state of maturity in Hacketts consolidation to standardization stages. Moving them to the optimization and virtualization stages requires expertise in sophisticated management tools and technologies that is in short supply inside the government. Ensuring continuing roles for private-sector partners and competitors in the federal shared services environment will be a critical success factor for transformation.

Mixed Results and Other Challenges

Federal shared services initiatives have undoubtedly produced salutary business results, but there is very little reliable data available with which to assess them. OMB has estimated cost savings of over $5 billion from the HR and FM LoB initiatives over ten years. The U.S. Postal Service reported savings of over $71 million and reduced the cost of its finance function by 16 to 18 percent. NASA has projected savings of $43 million to date. Similar results may have occurred in other SSOs, but reports are sketchy.

In 2008, the U.S. Office of Personnel Management, the sponsoring agency of the HR LoB initiative, conducted a benchmarking study that assessed the performance of the four e-Payroll centers. This study was a good start, but significantly more work is required to establish a comprehensive and robust performance management framework to enable cost and service comparisons and drive improvements across the entire federal environment.

Customer trust is another issue that must be addressed to enable broader, voluntary adoption. Customers often view shared services as more costly and less responsive than homegrown varieties, and they often raise concerns about insufficient transparency in SSO costing and pricing formulas and real or perceived cross-subsidization issues. At their heart, most customer concerns are about loss of control and reluctance to accept standardized offerings. These common issues present continuous improvement opportunities for all government SSOs.

As noted above, shared services can enable significant transparency gains in the government business environment by eliminating a multiplicity of opaque, program-specific, nonstandard transaction stovepipes and concentrating business activities within a smaller number of standardized, consolidated government-wide platforms. (A more thorough examination of transparency and shared services will be the subject of a later article.)

New Administrations Shared Services Opportunity

The Obama administration has an outstanding opportunity to leverage an inherited base of substantially modernized infrastructure and best practices from the global experience to accelerate federal shared services maturity and drive significant cost, productivity, accountability, and transparency gains throughout the government. An intensive, focused effort can release substantial resources from low-value back-office work for reinvestment to address urgent national needs. The following actions are recommended:

• Create a comprehensive, government-wide shared services vision and road map. The administration should develop a comprehensive vision, strategy, and road map to drive shared service adoption and maturity throughout the federal government. The plan should clearly define the desired end state and objectives linked to stages in the maturity path to be achieved along the way. The plan should set ambitious goals for
• agency shared services adoption, including migration of non-using agencies to SSOs;
• SSO maturity, such as the use of increasingly sophisticated management practices by SSOs relative to industry best practices at each stage of the maturity path;
• improved quality, cost-effectiveness, and transparency of services and costs to customers, relative to best-in-industry and best-ingovernment standards (such standards must be developed); and consolidation of redundant process, technology, and organizational capacity.

The end state should envision a smaller number of larger-scale, multifunctional, third-party SSOs (government and commercial) and significantly reduced numbers of internal SSOs and administrative staff throughout government.

• Develop a robust shared services performance management framework. Consolidation in the federal environment should be driven by a fair, objective, and fully transparent performance management framework. The framework should identify an appropriate number of generally accepted metrics of SSO effectiveness and enable benchmarking comparisons of federal SSOs relative to commercial and government performers. All framework methods and performance data should be publicly available for total customer and stakeholder visibility. The framework should promote competition so that SSO performance relative to objective standardsand ultimately, success in a competitive marketplacedetermines the number and scale of government SSOs required to serve the federal environment.
• Establish SSOs as businesslike, high performance organizations. SSOs should be established as business- like entities with explicit objectives to optimize cost and services to customer agencies while achieving realistic productivity and transparency goals. All life-cycle costs of SSO direct services, investments, and overhead costs should be fully and transparently identified and charged to customers through commercial-style pricing and service-level agreements that specify costs, services, and nonperformance penalties and allow customers to exit for nonperformance. SSOs should operate through common revolving fundssimilar to working capital and franchise fundsthat enable modest retained earnings for various business needs, such as accumulating investment capital for modernization.
• Create an Office of Federal Shared Services (OFSS) . A central office should be created in the executive branch to drive this effort as a comprehensive government-wide transformation program. OFSS should be funded through revolving funds that capture all OFSS expenses for capitalization and charge-back to SSOssimilar to corporate overhead expenses in the private sector. This chargeback feature will create a market-like efficiency incentive to keep OFSS corporate costs to a minimum to reduce drag on government SSOs competing in the public-private marketplace.
• If the politics allow it, legislation should be proposed to divest existing SSOs from their hosts in programmatic agencies and consolidate them into OFSS. Transferring SSOs into OFSS would be controversial because it would be perceived as disruptive to current agency operations and the congressional committee structure; however, freeing government SSOs from host agencies where funding, staffing levels, culture, and career ladders are dominated by programmatic missions is necessary to accelerate their evolution. Legislation should simultaneously consolidate the congressional responsibilities for authorizing and funding OFSS and the entire federal SSO environment in the respective House and Senate standing committees with jurisdiction for government administrative operations and under one appropriations subcommittee in each body. These steps are necessary to provide consistent congressional support and resolve committee jurisdictional issues that have impeded government-wide transformation.
• Establish a comprehensive, customer-driven governance and accountability environment. The plan should establish an OFSS customer board of directors to supervise shared services transformation at the government-wide policy level and operationallevel customer boards for each SSO. The OFSS policy board should be chaired by the director of OFSS, and its members should include deputy secretaries and chief operating officers from cabinet-level departments. SSO-level boards should be chaired by SSO chief executive officers, and members should include chief operating officers from customer agencies. Board members should be vested with supervisory responsibilities for business results and accountability comparable to commercial boards of directors, and their personal performance incentives should align with SSO business objectives to give them personal stakes in SSO success. Boards should have visibility into all SSO business activities and serve as oversight boards for SSO strategic planning and budgeting, capital planning and investments, internal controls and risk management, sourcing, customer pricing and service levels, and performance management. Fully engaged, responsible, and accountable boards can drive improved SSO services and performance while removing acceptance barriers at customer agencies.
• Focus technology investments strategically to modernize the SSO environment. A significant degree of modernization has taken place over the last two decades that can be leveraged as shared services infrastructure. Most SSOs now have modernized ERP platforms in place, but significant gaps remain in antiquated legacy infrastructure that must be upgraded to support the envisioned transformation. As shared services become consolidated into fewer, higher-power SSOs, the challenges of keeping platforms refreshed and modernized will become increasingly cost-effective, lower risk, and transformationalparticularly as cloud computing and other software-as-a-service offerings become feasible. Investments could then be concentrated surgically upon a few, rather than scattered across a large universe of smaller-scale, less-powerful federal SSOs, to drive increasing technology leverage and service improvements. In addition to growing cost and productivity advantages, service benefits of increasingly modernized SSOs would include real-time visibility into all government business activities managed by SSOs readily available to any government employee, citizen, or member of Congress through a variety of self-service and on-demand access channels.
• Ensure a significant opportunity for private-sector investment in the success of federal shared services. The envisioned end state and road map must provide a significant, attractive, and fully competitive market opportunity to attract private capital investment into the success of the federal shared services environment. The market should envision key roles for technology and professional services firms as risk- and reward-sharing partners, suppliers, and competitors to government SSOs. The competition frameworks established to guide public-private competitions for FM and HR LoB services are a good foundation and should be continued and expanded. Innovative public-private partnerships, such as the NHS/Xansa model in the United Kingdom, should be enabled and encouraged.

Final Thoughts

An enormous amount of work is required to achieve a fully transformed, public-private federal shared services environment. The multifunctional transformation envisioned is a long-term propositionan order of magnitude more challenging than the landmark single-function transformation of payroll that required more than twenty years of sustained effort. More than anything else, this transformation will require decisive, visionary, and collaborative leadership between the executive branch and Congressa combination rarely witnessed in government-wide management reform. Perhaps in the current economic crisis and political alignment of Washington, the time has finally arrived.