Government shared services initiative increased costs, says spending watchdog

Attempts by government departments to share back-office functions have increased costs rather than made savings, a damning report from the National Audit Office has concluded.

Commenting on the report, NAO head Amyas Morse said the initiative had suffered from an approach which led to over complexity, reduced flexibility and a failure to cuts costs.

This was because participation had been voluntary and services were tailored to meet the differing needs of individual departments.

Morse said the Cabinet Office’s new strategy on shared services acknowledged the issues, but warned that it must learn the lessons from past implementation if it were to achieve value for money.

“Only in this way can the sharing of back-office functions have a realistic prospect of contributing towards the government’s drive to cut public spending in the long term,” he added.

The NAO said significant cost and effort had been spent on the shared services initiative. It also criticised the failure to develop the benchmarks necessary for measuring performance.

The spending watchdog examined five of the eight major shared service centres set up between 2004, when the Gershon Review was published, and 2011. A key recommendation of the Gershon Review was that the Government should pursue shared services in areas such as human resources, finance, procurement and payroll.

The report said the five centres had cost £1.4bn to build and operate, 56% more than the predicted £0.9bn.

It was estimated at the time that they would save £159m by the end of 2010/11. However, the NAO revealed that “while, in one instance Government has achieved break-even in a time consistent with the private sector, its overall performance has been varied and the two centres that are still tracking benefits report a measured net cost of £255m”.

The report found that the ability of the shared service centres to make efficiencies was limited by the overhead of running multiple systems and processes.

The NAO also concluded that:

• Most departmental customers had not acted as ‘intelligent customers’, and they would need to build in-house capability “with enough business and technical understanding to manage the services and work with the centres to achieve efficiencies”;
• The software systems used in the centres had added complexity and cost; and
• With the use of the centres being voluntary, departments had struggled to roll-out shared services fully across all their business units and arm’s length bodies. Three of the five centres had not attracted the customers they had expected and two had potential spare capacity of 50%.

The watchdog criticised the lack of clear management by the Government in the past, saying it had been “a factor in the historic poor progress in implementing value for money shared services”.

There had been little actual sharing of services between departments, the report said.

The NAO acknowledged that the Cabinet Office had taken steps to rectify the various issues and had recently gained approval for a new strategy and business case.

This includes a vision of two independent centres with a number of standalone centres and a proposal that all are performance managed by a team within the Cabinet Office.

The independent centres will be created from the foundations of existing Department for Transport and Department for Work & Pensions facilities. The Cabinet Office is to oversee the transition of services currently in departments to the independent centres by the end of June 2014.

The watchdog went on to point out that this approach was ambitious, had “challenging” timescales and contained significant risks (which the Cabinet Office had identified).

The NAO’s recommendations included that the Cabinet Office should – if there was an overall value-for-money case for the taxpayer – seek appropriate authority to mandate the shared services strategy and its implementation.

The watchdog also called on the Cabinet Office to ensure the costs and benefits of the two centres are measured, and that this analysis should be used to drive continuous improvement.

A copy of the report can be downloaded here.