Risky business
Do the risks and complexities of shared services outweigh the potential benefits? Dr Alf Oldman outlines the pros and cons and looks at the lessons learned from other sectors
With personal experience of delivering around a dozen Enterprize Resource Planning (ERP) and Shared Services implementations, earlier in the year I wrote a series of blogs on the above theme, which seemed to capture some serious interest. Given the Summer’s increasing global risks of double-dip recession, wobbly banks & sovereign debt over-hang, it is timely to take another look at the subject.
UK Local Authorities were very much in the media limelight earlier in the year as they responded to Central Government cuts of circa 25%. Depending upon the political colour of the Local Authority, attitudes to cost-cutting and service reduction varied. Most Local Authorities were looking to Cost-Cutting before turning to reducing community services.
High on the Cost-Cutting agenda has been increased deployment of Shared Services. Indeed the Government has encouraged sharing of Back Office Services, like Finance, Procurement, HR, IT etc.
Many commentators have seriously questioned whether Private Sector savings of thirty to forty percent are realistic for Local Authorities, and consensus was converging towards more realistic levels of circa twenty percent. This article will re-explore the risks associated with achieving the twenty percent savings which themselves very large, even before considering wider political risks.
This article questions whether Shared Services are indeed a panacea for Local Authorities. Will savings be realized or will they prove to be illusory and more mythical? Also just how risky are Shared Services programmes?
Oracle saved $2 billion by implementing Shared Services Worldwide, using their ERP applications. They highlighted the four keystones of Shared Services:
1. Simplification
2. Standardization
3. Centralization, and
4. Automation
Shared Services programs are large, complex, costly and immensely risky. There are two critical elements, (1) Technology, usually around implementing a Best Practice version of a tier 1 ERP system, like Oracle or SAP, and (2) a parallel programme of Change/Transition to the Shared Services model. It is important to stress that the Public Sector’s record in deploying Shared Services has been mixed, and that has probably been in the more relaxed regime of the last Labour Government. Also the Public Sector record on implementing Technology programmes has been patchy.
Let’s take a look at some of the huge risks associated with implementing Shared Services which will bring the twenty percent cost savings into closer scrutiny.
1. Strategy:
Oracle identified that Shared Services needs to be part of the organization’s strategic approach to products and services. Shared Services is most effective in organizations with multiple lines of business. Oracle suggested that smaller organizations should perhaps look at Outsourcing for a more cost-effective solution.
I get the impression that many Local Authorities have chosen Shared Services as a means of achieving Cost-Cutting rather than as part of a strategic vision. Shared Services is a long-term business decision. I hope that Local Authorities look critically at Shared Services vs. Outsourcing. The governance model for Local Authorities collaborating on Shared Services will be critical. Local Authorities of different political colours will be committing for the very long-term to make Shared Services a success.
2. Environmental & Political Context:
The external and internal contexts for delivering successful Shared Services are immensely challenging and verging on hostile.
The political imperative is for short-term, self-financing results, with concepts of Spend-to-Save out of favour. Projects with a four-year pay-back period will realistically be pushed out to five years plus with risks crystallizing and post implementation audits will probably look to the original cost-cutting justifications as spurious – cost savings will not materialize.
The internal context for a colossal transformation programme is equally challenging, with Local Authorities down-sizing aggressively, employees and unions will be likely be hostile to new ways of working. Also the next four years will see significant changes in the leadership in Local Authorities, with the Government increasingly challenging on Value for Money from Chief Executives in Local Authorities.
This is all before taking account of increased global risks of double-dip recession, wobbly banks & sovereign debt over-hang.
3. Technology:
Technology both in terms of infrastructure and systems will be paramount to the success of Shared Services. Local Authorities will face high levels of attrition in specialist staff, with highly skilled professionals moving to better paid opportunities in the Private Sector or even overseas.
The current approach to contractors and consultants is likely to be severely tested. Local Authorities who turn to the contract-market in desperation are likely to pay penalty prices.
The context will be enormously challenging to deliver on time, to cost and quality. Exceptions will directly impact on the overall validity of the Shared Services business case.
4. Self-Service:
Manager and Employee Self-Service are a critical part of the design of any Shared Services solution. The solution will require employees from the lowest level to Chief Executive all entering their own personal data for HR, salary and expenses purposes. It will also be an essential part of a Best Practice Procurement solution.
Self-Service in the Public Sector has had a patchy record – at one extreme Director Generals “chickening-out” of Self-Service decisions, at the last-minute – and at the other, when Self-Service processes were deployed, with enormous levels of error condition and colossal backlogs resulting.
Business cases for Shared Services will be both critically and heavily predicated on the successful deployment of Shared Services. Changing the hearts and minds of the employees is always an enormous challenge but in the current political context, the risks are compounded enormously.
Local Authorities are unlikely to have the specialist HR/OD skills in-house to deliver the transition, and will be forced to turn to external contractors or to the major consulting houses, again probably in distress.
5. Self-Help:
Self-Help is similar to Self-Service. The aggressive Shared Services solution will be designed based upon all employees from the lowest grade to the Chief Executive all using self-help screens in order to complete Self-Service. Again like Self-Service, the changes are massive and will require top-class specialist HR/OD skills to stand a chance of success.
6. Expertise:
Expertise in Local Authorities to implement and maintain complex Shared Services solutions will also be enormously challenging. Technically and professionally skilled personnel will probably increase the attrition rate for this important grouping, moving to higher paid jobs in the private sector or overseas. The Shared Services design is predicated on scientific analysis of role-responsibilities and it is critical that potential employees are carefully matched to required competencies.
The Public Sector Shared Services story is full of “square-pegs in round-holes”. Unless Shared Services is set up on a green-field basis, it is likely to be severely challenged or compromised, with the rate of improvement way behind the metrics in the Business Case. It is well-known that Continuous Improvement is always sub-optimal when compared to innovation opportunities in the design of the product or service.
7. Financial Modelling:
The Business Case to approve the Shared Services will be based on a Financial Model of the projected outcome of the investment. There are excellent guidelines in the HM Treasury Green Book but many Local Authorities will prefer to call in Management Consultants to help with the Financial Modelling.
The model looks at the Discounted Cash Flows of all incremental costs, capital expenditure and savings, over the planning period. The savings are calculated by comparing baseline costs per process with benchmark data provided by CIPFA or other accredited sources. The model assumes a “To Be” position based upon being average or in top-quartile etc., in relation to benchmark data and a very big act of faith on behalf of the programme sponsors. Unfortunately, benchmark data is not error free and is distorted by variation in industries or definitions of data capture.
Next Steps
Whilst I am a very strong advocate for Shared Services, I believe that Local Authority Chief Executives and their political sponsors need to be robustly challenging plans for Shared Services.
Chief Executives and their politicians sponsors should ask to see the sensitivity analyses and the independent risk assessment. Challenging the numbers, based upon independent input should be part of the effective governance process - this is different to reviewing the cost, quality and timeliness of the deliverables from consultants. One option is to consider deploying an expert, independent professional, like myself, as a client-side advisor. The bottom-line is that the risks are real and need to be independently & professional assessed and mitigated. Finally, the urgency has increased, given the Summer’s increasing global risks of double-dip recession, wobbly banks & sovereign debt over-hang.
Dr Alf Oldman is a UK based independent executive, consultant, coach, researcher & author, Alf is a Chartered Accountant and a Doctor of Business Administration. With an early career in Financial and General Management, operating internationally, these days Alf concentrates on three core areas of expertise: Financial Management; Transition Management; and Transformation Management (verticals). He has also developed three areas of specialization: ERP; Shared Services; and Outsourcing (horizontals).
http://www.alfoldman.com
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
This article first appeared in 'A Passion for Leadership & Going Beyond Austerity, published in November 2011 by the Association of Council Secretaries and Solicitors (ACSeS).
To order or download a copy from the ACSeS website, please click here.
