How can shared services provide better value?

A report from the National Audit Office shows that shared back-office services may not be delivering all the benefits that they should.

If an enterprise resource planning (ERP) system were a car, it would require several pairs of hands to turn the wheel, would head where it wants, and consume more petrol than a fuel-injected Lamborghini.

This may be an exaggeration, but a recent National Audit Office (NAO) report on shared back-office services in central government departments found that these systems were not delivering enough value for money.

It found that, while £1.4 billion has been spent since 2003/04 on delivering back office functions such as HR, finance, procurement and payroll across five data centres (there are eight in total), only £159 million of savings were achieved by these centres by the end of 2010/11. Only one centre broke even within five years.

It is our judgement that many of the benefits generated could have been achieved by other means or with lower investment.” – National Audit Office report

The drive to share HR and other back office services began after the 2004 Gershon review recommended the policy. The Cabinet Office encouraged individual departments to establish their own arrangements, but, in July 2011, it issued a new vision for shared services based on two core cross-government shared service centres, plus a small number of standalone centres.

The five data centres assessed by the NAO were the Departments for Work and Pensions (DWP), Transport (DfT), and Environment and Food and Rural Affairs, plus the Ministry of Justice and Research Councils UK.

The spending from 2003/04 to 2010/11 included:

  • £1.9 million on building and operating the five centres.
  • £648 million on set-up costs.
  • £200 million plus each to build the DfT and Research Councils data centres.
  • £63.2 million to run the DWP data centre in 2010/11.

Poor return on investment

The NAO report found that, despite the substantial investment, the return on this investment has been poor. It concluded: “We found confusion between the centres and their customers as to who should have been tracking the benefits. The expected benefit of the five centres to date was £159 million but we have not been able to determine any overall net benefit.

The road ahead

In July 2011 the Cabinet Office (CO) set out its vision for government department shared services. This envisaged two independent – that is, privately run – data centres providing back-office services.

The DfT one will target small and medium-sized departments and agencies for its customers. The other centre will be based on the DWP one.The CO plans to set central benchmarks and service and accreditation standards for shared services provided by the centres.

The NAO says the CO must make clear what governance and accountability standards and procedures it expects, and adds that “as part of a major business transformation project departments will have to change their ways of working”.

The CO may also face another issue if it fails to move to the two data centres soon, as Oracle upgrade costs of £32 million are due by November 2013.

“It is our judgement that many of the benefits generated could have been achieved by other means or with lower investment.”

At the heart of the government data centres are ERP systems – four supplied by Oracle and one by SAP. The NAO found they were complex, difficult to modify and that only a “small part of their capability” was being used.

“The systems are capable of handling larger volumes of transactions and more services,” added the NAO report. “It is not clear why such expensive solutions were bought. Other small and simpler accounting packages were not looked at to see if they may have provided the required functionality.”

IT issues

There have been a number of widely reported and expensive public sector IT failures, not least the problems the NHS has faced after the current Government decided to scrap its £1.9 billion investment in a new national database.

Once ERP systems are bought – or rather licensed – customers can enter a world of complexity and expense. Richard Thomas, marketing director at the software company MidlandHR, used to sell ERP systems to the manufacturing sector. He says: “They are quite inflexible. They’re complicated and expensive to change and you need an army of consultants to change and implement new processes, who cost thousands of pounds per day.

“Once you go down the ERP route, you’re tied for 10 to 15 years.”

The NAO found that the centres examined were dependent on small numbers of permanent IT staff supplemented by IT contractors. Some relied heavily on ICT providers such as Oracle for development and support.

Thomas adds that the real challenge in merging and sharing HR and other back-office services lies in identifying, aligning, and integrating processes and mapping them on to the IT platform used. It also helps if there’s a good cultural fit between the organisations concerned.

Standardising processes

Public Sector People Managers’ Association vice president Martin Rayson believes that there are three challenges facing public sector bodies when sharing back office systems: cultural, procedural and technical. These can be overcome, he says, by building trust between the bodies concerned and by standardising processes, procedures and policies.

Technically, it helps if bodies use the same application systems for HR, payroll, finance and the like. “The biggest challenge arises where councils are using different HR or payroll systems where there are links between those into other systems,” says Rayson.

Standardisation is essential. PA Consulting ERP expert Simon Fogden says: “The key to providing shared back-office services to multiple customers is standard service offerings. The customer needs to adopt the standard processes that the system is set up to provide rather than seeking to have the service tailored to their perceived needs.”

The implication: once any department introduces an element of customisation or wants to install a new system, any efficiencies likely to be achieved by shared services become more elusive.

As for the main driver behind a move to shared services, saving money, this is achievable by shedding jobs and sharing costs, process standardisation, maximising data-centre use, and better procurement.

Once any department introduces an element of customisation or wants to install a new system, any efficiencies likely to be achieved by shared services become more elusive.”

The NAO report does highlight some savings achieved by the departments and bodies it assessed. For example, the DfT has reduced its headcount by more than 40% and severance costs at Defra, DfT and Research Councils UK were well below budget.

Under-utilisation of services

However, under-utilisation was identified by the NAO as an issue. The report found that “only four agencies and the central department have become customers of the DfT centre since it started operations in 2007”. Two of the agencies do not use the full suite of services available, and the Highways Agency maintains its Oracle finance system while using the DfT for HR and payroll processing and services.

ERP systems tend to have huge processing and data capacities and require a lot of server power to deal with this. The NAO says that the DfT, Defra and Research Councils UK will need more computing power to cope.

One option is to privatise data centres that have spare capacity. The DfT plans to do this with its Swansea data centre – it runs SAP’s ERP system – and says that the Highways and Marine and Coastguard agencies will migrate to the centre after divestment. “Other government departments are also looking at the centre to see whether they should also take up the option,” says the DfT.

Three bidders have been shortlisted: Arvato, Capita Business Services and HP Enterprise Services UK. One of them will have to take the ERP driving seat.

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