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With personal experience of delivering around a dozen ERP and Shared Services implementations, this week I am going to look at the risks of Local Authorities implementing Shared Services programmes in these extremely challenging times. Shared Services is being justified on the basis of Cost-Cutting but are the risks likely to outweigh the savings?

UK Local Authorities have been very much in the media limelight these last few weeks. Most authorities are in process of approving their budgets for 2011/12. Depending upon the political colour of the Local Authority, attitudes to cost-cutting and service reduction have varied. For the reader not familiar with funding the UK Local Authorities, Central Government has cut subsidies to Local Authorities by circa 25%. To be fair, poorer and socially deprived Local Authorities have been more dependent on Central Government funding and are arguing that they have to fund bigger cuts.

Most Local Authorities are looking to Cost-Cutting before turning to reducing community services. High on the Cost-Cutting agenda is increased deployment of Shared Services. Indeed the Government has encouraged sharing of Back Office Services, like Finance, Procurement, HR etc. Media attention, this week, has seriously questioned whether Private Sector savings of thirty to forty percent are realistic for Local Authorities, and consensus is converging towards more realistic levels of circa twenty percent. This blog will explore that the risks associated with achieving the twenty percent savings are themselves very large.

This blog 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?

It is important that we clarify what we mean by Shared Services and for purposes of this blog, we shall deploy the Wikipedia definition of Shared Services. The theory behind Shared Services is based on Transaction Cost Economics. For a much more practical insight into Shared Services, the reader is recommended to listen to the Oracle podcast on how Oracle saved USD 2 billion by implementing Shared Services Worldwide. Whilst there is obviously bias, the Oracle interview is very powerful, especially in how it explains the four fundamentals or keystones of Shared Services, namely:

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 program 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. The current Coalition Government seem to be preoccupied with balancing the numbers, with less or secondary attention to Bottom-Up Costing and Independent Risk Assessment to validate proposed strategy.

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.

RISKS

1. STRATEGY: Listen carefully to the Oracle podcast and the reader will understand 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. 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.

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 Central Government 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 Interim Executives/Consultants 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. Imagine dustmen and gardeners all taking time out to log-on to a computer to get to a Self-Help screen? 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. Simplistic views on natural wastage from John Redwood and other politicians do really not stack-up for Shared Services. 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 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. Even within the Public Sector, compare DWP, HMRC, DEFRA and a City Council, they are all very different. In the Private Sector, Finance Directors in FTSE 100 Companies will be used to discussing Financial Models with their Boards, talking about Sensitivity Analysis and Independent Risk Assessment. The situation is different in Local Authorities and the political context is difficult with the media picking up on the National Audit Office’s criticism of Financial Management in the Public Sector.

NEXT STEPS

Whilst I am a very strong advocate for Shared Services, I believe that there is a need for politicians at both the national and local levels, plus the media and others to challenge the robustness of Local Authority plans for Shared Services – ask to see the Sensitivity Analysis and independent Risk Assessment. Many Local Authority Chief Executives, Finance/Resource Directors will move on or retire before the Shared Services program are completed and the new leaders may well challenge the judgement of their predecessors. In my mind, there is probably a need to slow-up a bit, take-stock and get some independent, bottom-up costings and risk assessments. Remember, it’s not just the Shared Services that will fail to achieve their cost savings, it’s the enormous opportunity cost of the effort. Rather than taking a huge risk with Shared Services, perhaps Local Authorities should concentrate their efforts on Front-line Services?

THE BOTTOM-LINE IS THAT THE RISKS ARE REAL AND NEED TO BE PROPERLY AND PROFESSIONALLY MITIGATED.

In this latter regard, it is worth reminding the reader that the UK has one of the most developed Independent Professional Interim markets, with seasoned practitioners in all disciplines, including Finance and Shared Services. It is important to stress that the Independent Professional Interim is truly independent, non-aligned politically and cost competitive, when compared to taking seconded staff from a major consultancy, or indeed commissioning a consulting review. For further comparison between Independent Professional Interims and Consultants, see my earlier blog.

I shall save for another blog detailed discussion of Outsourcing and comparing it to Shared Services.