Could shared services be the change agent that outsourcing never was? State governments are nutting out details of their shared services plans, but they need to shake off outsourcing’s philosophical legacy.
Driven by the never-ending quest to improve efficiency and reduce costs, state governments have been wholeheartedly jumping on the shared services bandwagon. Yet as Queensland passes a major shared services milestone on July 1 and Western Australia closes on an early-August deadline to finalise its own model, it is becoming increasingly evident that shared service success will require care to avoid the disappointment that accompanied outsourcing — the last major business process re-engineering (BPR) fad to hit government.
The July 1 milestone saw a fundamental change in reporting relationships within the Queensland government’s technology services, with support staff now reporting to either the Corporate Applications Support Unit (CASU) or Corporate Infrastructure Services Unit (CISU). These groups are supporting seven governmental “clusters” of interest, into which the state’s 21 primary departments have been grouped. The first target for shared services is a trial of human resources (HR) and payroll software within that state’s Department of Education.
Most other states are now looking into shared services, which may well be the last major strategic opportunity to dramatically change management of IT and other corporate services. Yet while they can offer significant improvements when done correctly, shared services is also a potential minefield, with internecine conflicts promising any number of potential problems down the road.
Learning from the Past
At its core, shared services is about establishing an insourcing relationship in which service providers are meaningfully aggregated into one or more functional units, which then provide consistent services to their departmental customers.
Consolidation of skills became a habit with state and federal governments’ mid-1990s philosophy that IT was a spending black hole and should properly be outsourced to increase efficiency. In those deals, however, corporate knowledge was subsumed directly into the private companies charged with providing outsourced services.
The idea may have seemed logical at the time, but after years of outsourcing many government bodies disown their previous commitment to the model. The Commonwealth government has repeatedly relaxed its one-time mandate that outsourcing become a way of life within government, while South Australia, anticipating the end of its nine-year engagement with EDS, recently said it would never again commit to a whole of government outsourcing deal.
Some $1 billion worth of SA government contracts will now be offered to the market independently, with South Australian IT infrastructure services director Ken Patterson recently quoted as saying there was “no way” the government would repeat the nine-year deal, which had led to the loss of “competitive tension” that would have forced EDS to stay on its toes.
State governments implementing shared services should take heed of the poor performance of outsourcing, which has become more a recipe for mediocrity than a driver for continual improvement.
Internal corporate service units offer the significant benefit of keeping valuable technical skills and organisational knowledge in-house, but they also run the very real risk of being seen to be outsiders — and being treated as such. Without effort on the part of both corporate services units and their customers, this could actually cause IT innovation to stagnate as the shared services units lose touch with the strategies of the individual departments they service.
“You have to have a different mind-set when acting as the owners of a corporate service business,” says Steve Amesbury, manager of information technology with BusinessLink, the NSW shared services organisation that began servicing the state Department of Housing last December, the Department of Community Services in April, and Department of Ageing, Disability and Home Care in May.
The unit has grown from 12 staff in December to more than 600, and is now providing an integrated suite of IT, HR, finance, transaction processing and specialist services backed by consultants that make sure each department’s needs are being met. BusinessLink will eventually service nearly 18,000 NSW government employees.
“There are so many similarities with outsourcing that it’s easy to think of it as outsourcing, but any outsourcer has a profit motive that underlies all of its actions,” Amesbury says. “Shared services are centred around cost savings shared between owners; as owners, [departments] have total visibility into everything we do, and have complete access to our books. However, if we’re no longer seen as an integral part of the organisation, and we’re no longer involved in corporate planning, there’s the potential for us to miss out on opportunities.”
Such us-and-them thinking can be fatal to the process of continuous improvement, and unless it is managed carefully, shared services can cause as many problems as outsourcing did. The key is for shared corporate services units to work hard to stay relevant — and, more importantly, avoid fomenting adversarial relationships that push them outside strategic inner circles. Overcoming this issue will require significant effort on the part of both service providers and their departmental customers, something that becomes a lot easier when departmental CEOs put their full support behind the move.
When Savings Is Not a Dirty Word
Getting that support, however, is another issue altogether. Outsourcing came to prominence in government IT strategising largely because it promised significant cost savings at a time when the new Howard government was hell-bent on slashing expenditure across the board.
This singular focus was a major problem in the actual implementation of outsourcing, since departments found themselves spending around the same on outsourced services, but having lost the operational control they’d had when IT services were managed in-house. Fortunately, this problem should not be an issue with shared services, since the fact that the government is retaining control over IT services units means it can retain control over its long-term strategic planning.
If outsourcing provided a new way for departments to let someone else worry about the IT they were running, shared services promises a far clearer benefits model in that forward planning will rightly be seen as an element of the scope of the service provision. Although such strategic closeness may have been a mooted attribute of third-party outsourcing deals, post-match analyses suggest that was not always the case.
Shared services units will, then, be mechanisms for fiscal improvement, rather than simply being a method for offloading responsibility for IT availability. That means any cost savings will be passed directly on to the government, rather than being absorbed in the balance sheet of a profit-minded outsourcer.
This allows shared services advocates to paint quite a different cost benefits analysis from that which was possible under third-party outsourcing. And while analysts unanimously warned government bodies against seeing outsourcing as a means to save money, they’re more willing to accept that natural economies of scale could well make shared services a significant cost saver.
“This is different than the outsourcing model where you give IT to someone else,” says Michael Smart, a director with Gartner Consulting. “You’re giving government departments the opportunity to share common systems without incurring additional expense. They can obtain synergies and economies of scale from having those systems provided from a shared source.”
Projected cost savings have been a major highlight of the West Australian government’s current whole of government review, encapsulated within the four-year Functional Review project that the Department of the Premier and Cabinet (DPC) kicked off in mid 2002.
That review has already resulted in some major changes to the government’s structure, with mergers combining the Departments of Education and Training as well as consolidating the Department of Industry and Technology (DIT) with the Department of Mineral and Petroleum Resources. The review has also seen procurement shifted from DIT to the DPC, the creation of a new E-Government Office to ensure future online initiatives follow consistent standards and the abolition of DIT.
Shared services forms a core pillar of the Functional Review, with individual functions within 127 WA state departments set to be aggregated into around a half-dozen corporate services units offering standardised HR, finance, ICT and information management functions.
“Our initial survey, of 26 agencies, showed a wide array of choices by organisations in their operating environments, and also a high degree of customisation,” says Ron Mance, executive director of WA’s Functional Review Implementation Team. “Now we’ve gone to all 127 agencies to do a full mapping of their operating environments, product choices, current contractual arrangements, and so on. Part of the shared services business case is to establish the high cost that exists by maintaining these differences.”
The West Australian government has wasted no time explaining just how beneficial it hopes shared services could become. Its 2003–2004 budget includes detailed savings projections from the Functional Review, including $40 million expected to be saved from corporate services once the units become active in fiscal 2005–2006. Forecasts also project that $8.7 million spent to establish a Corporate Services Procurement Implementation Team will reap some $230 million in procurement savings through fiscal 2006–2007. All told, the Functional Review is expected to save the WA government around $497 million over the next four years.
Such figures may seem optimistic, but BusinessLink’s Amesbury believes it is more than acceptable to expect big things from shared services — as long as you have the scale to make them viable. “I’m absolutely convinced that there are massive savings to be gained from shared services,” he says. “It is largely because of the economies of scale, our ability to negotiate from a stronger base and the adoption of streamlined, common business processes. It gives a lot of the benefits of outsourcing without the pain; it’s a win on both sides.”
Clarifying the Intangibles
By focusing shared services on commodity corporate services — those where there rightly should not be much differentiation between departments — governments are taking the low road to improving operational efficiencies. Aggregating lots of low-cost functions, the argument goes, should significantly reduce the overall cost of those functions.
Yet too much consolidation can be a bad thing. “The economies of scale argument is lost when it’s too big,” says Mance, explaining that the decision to introduce multiple shared services units stemmed from the desire to accommodate slight functional differences between departments. “There will still be a core of sameness, then a perimeter allowing for the differences needed by agencies.”
The multi-service approach will also allow benchmarking between corporate services units, preserving something of a competitive spirit that may egg participants towards continuous improvement.
The WA approach is significantly different from that being undertaken in Queensland, where the ASAP Review is focusing all corporate services within CASU and CISU. Which model is better has yet to be seen, but with few best practice guidelines to follow it is clear that this type of experimentation will be critical in finding the right path towards shared services success.
Yet other, more significant benefits will flow from shared services in a way that outsourcing could never match. For example, they provide a melting pot of soft skills that would have belonged to a third party in an outsourcing arrangement. This has been of particular benefit during BusinessLink’s early days, according to Amesbury. “Community Services had a long-term, end-to-end outsourcing deal, which meant they have an area of expertise in contracts management,” he explains. “Housing was very much an in-house shop, and they have a lot of expertise in the technology. By bringing them together, they’ve complemented each other and strengthened their skills.”
Consolidating myriad skills into a single service organisation also promises to benefit departments through heightened employee morale and retention. For example, churn among WA’s IT staff — now around 5 per cent per annum — should be reduced as shared services workers are exposed to more, and broader, career opportunities than they previously had providing specific services within an individual department.
Intangible benefits or tangible, the shared services movement is gathering steam in a way that has guaranteed its future as a driver of efficiency and mechanism for change long into the future. Just how this change happens will vary dramatically between states depending on their approaches — although in the long term, comparisons between the performance of different shared services models could also help other states identify best practices that are worth following.
However it shapes up, the shared services philosophy offers departmental heads the one thing they seem to regret having relinquished under outsourcing agreements: control of their own destinies.
“Directors-general will know exactly what corporate service provision is costing them, and it is a less risky proposition [than outsourcing] because they have the assurance that they still have control,” says Mance.
“We’ll have very rich information, and this will provide a framework for agencies looking for direction in terms of their future investment in HR, ICT, procurement, finance systems. Any change is always a challenge, but over time we should be able to demonstrate that things are better both in terms of cost and services.”
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