Shared Services Help Pinch Pennies

The idea that federal agencies should be run more like businesses has been around for a long time. Like lots of management principles it goes in and out of vogue. It’s back in, but this time along with a looming $14.3 trillion national debt and imminent budget cuts across government.     

The specifics of managing down the national debt will continue to be the subject of vociferous debate, but one thing nearly everyone can agree on—regardless of political stripe—is that agencies are going to face substantial budget cuts.

If past is prologue, then the concept of optimizing costs through various sourcing models such as shared services will be an important part of the prescription. The reasoning is it’s more cost-effective when another agency under the departmental umbrella provides services such as financial, human resources and information technology management, or
when outside government entities serve as third-party providers.  

Is the shared-services model really doable, or is it merely a theoretical pursuit that has little relevance in the real world? It can work—and it gets agencies closer to the long-vaunted commercial model—but only if the entities involved recognize critical differences between public and private sector operations, and how those differences affect outcomes.

Agencies and Congress not only must be cognizant of these differences, but they also must have a strategy for managing them. It’s not so much a matter of government’s unique objectives, processes or expected results, but rather the context. Sometimes this complexity presents challenges, but it also can be positive.

The cost-savings opportunity, for example, is orders of magnitude larger than even the largest corporations could achieve. The federal government spends about $80 billion on IT, and the estimated outlay for federal administrative services is at least that large. Cost savings from financial management and HR systems consolidation projects alone is estimated at $5 billion over 10 years.  

Another material difference between the public and private sectors is the constituencies they serve. Both sectors are called on to maximize value while minimizing costs, but for commercial enterprises the path is more straightforward and far less mired in consensus building. Government initiatives are subject to the vagaries of election cycles and shifting political agendas. Federal officials are obliged to appease many masters—legislators, regulators, industry and the electorate—all of whom have some control over the purse strings and many of whom advance contradictory agendas. 

The parameters imposed on sourcing decisions are far stricter in the public sector than in the commercial sector.
Offshoring, for example, is simply not an option for government.

In addition, in industry there are incentives for hitting revenue targets and fulfilling terms of service agreements. But considerably less latitude is available in designing such incentive schemes in government, although some models are emerging. A more realistic approach would be to modify the annual performance assessment review process to measure competencies that align with the objectives of shared-services initiatives. To put it plainly, this would mean structuring the review process to reward executives for budget reductions and shedding functions that can be managed more effectively elsewhere. The status quo, although not intended, rewards empire building, which in a larger head count and broader portfolio of functions often equates to career advancement. 

Understanding the differences between government and industry is only a start. Sourcing decisions require getting the mechanics right. 

Agencies identified as centers of excellence act as fee-for-service providers to other agencies. Together, the customer agency and the service provider agency draw up an agreement or memorandum of understanding specifying the services to be delivered, the requirements and parameters, the unit cost and total cost, the cost assessment methodology, and the time frame for delivery. 

Federal agencies have not typically used traditional chargeback mechanisms, which measure actual spending, to develop budgets and to pay service providers, instead relying on demand management. Executives and managers across government, however, are seeking more effective and accurate methodologies for managing service relationships and costs in a way that drives measurable standards. Service-level agreements, for example, are a fine thing, but are enforceable only when pre-defined financial incentives and penalties are in place. 

Once the ink is dry on a new business relationship with the provider agency or commercial firm, the real work of implementing the agreement and monitoring progress begins. Successful agreements start at the top and remain a priority for senior leaders. 

Performance indicators must be identified, tracked and communicated, and benchmarks and best practices monitored routinely. The notion of measuring the cost of specific services is relatively new to federal agencies, but it is essential in determining whether the organization is best served by insourcing or outsourcing.

There is no doubt that  government is starting down the road to optimizing administrative services from a difficult position. Agencies are rife with nonstandardized and manual processes supported by a patchwork of legacy IT applications in multiple locations. Many are decentralized, where bureaus and offices operate as separate businesses with their own budgets.

But an immense prize awaits these agencies, and by extension their tax-paying constituents, if they take the necessary steps to set out on the right path. 

Kristine Rohls and Dave Mader are leads at Booz Allen Hamilton who work with federal agencies to streamline technology and administrative operations.