UK Local Authorities and Shared Services: Cost-Cutting – Myth or Reality?

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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.

12 responses

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  6. Hi Alf,

    Whilst I agree with you that local authorities lack the skill to effect radical shared service transformation, I do not agree that 40% savings are unattainable or that we should be prepared to settle for 20%.

    Why do I say this?

    To begin with we have as a country far too many local authorities, far too many police forces and far too many Ambulance Trusts.

    Secondly, as Sir Philip Green was able to identify in just one month Government and local authority procurement is inefficient and loses taxpayers millions by dint of it’s lack of scale economy.
    Currently we have 350 local authorities in this country with the power to raise money and spend it.
    On top of that we have about 8700 smaller councils all of which require buildings, some staff and money.
    The UK is a postage stamp when compared with countries like France and if one looks at a French Department, the equivelent of an English County, one can see that they have 95 Departments whereas we have around 67 County Councils and a number of Unitary Authorities often overlapping County boundaries which take the total to nearly the same figure.

    Given that France is triple the size this would equate to 270 French Departments each with it’s own CEO, each with it’s own buildings, IT infrastructure and service directorates and each with it’s own staff.

    The argument for this UK approach is population density, yet in Scotland, Wales and Northern Ireland we have the Barnett Formula which gives every man woman and child in these Celtic fringes up to £3,500 GBP a head extra to cover the costs of delivering services to these sparsely populated places.

    We have 43 English constabularies and four successive Home Secretaries have tried to get this reduced to a more manageable 12.

    The Chief Constables aided by their masonic friends in the judiciary scuppered Michael Howards plans in this regard by leaking the supposedly secret Ingrid Posen review into police force mergers and rubbishing it.
    David Blunkett was taken to court over his plans which the judiciary said were examples of him acting “Ultra Vires”.

    Dr John Reid, who said the Home Office was not fit for purpose, was outlasted by the Chief Constables and now Teresa May is being warned of a veritable Apocalypse of crime by Chief Constables despite the fact that whilst they were trumpeting falls in crime, police overtime had risen faster than the supposed fall.

    Taking the councils first, there is no case for Districts and Boroughs to exist at all because with G-Biz style tools it is possible to integrate these services in outsourced or jointly held shared service centres as Suffolk is already doing in conjuction with BT Global Services.

    My own work at a 3 star county council in East Anglia suggests 44% overmanning across the board and in looking at Districts and Boroughs the situation is just as bad.

    In two or one star authorities (i.e. most of them), the figures are worse.

    Turning now to Unitary Authorities, these operate in the same geographical area as county councils thus duplicating service provision in overlapping areas.

    Each police force in the UK has two call centres one for emergency calls and dispatching and the other 311 call centre for non emergency calls.

    A similar arrangement exists for the fire service and then there is the question of ambulance dispatching and after hours GP care.

    County and Unitary Authorities each have 2 call centres as well,one for General Enquiries and a second one for pre assessment of potential adult social care recipients.

    Given that Adult Social care represents up to 50% of most county council budgets much more could be done to use CRM to identify obese people and at risk adults in order to divert them away from lifestyle choices which would otherwise turn them into recipients of Adult Social Care.

    Using a combination of VOIP, annualised hours and multi-skilling, a shared service centre covering the work of say 4 County Councils, 4 merged police forces, 4 merged fire dispatching units and 4 county ambulance trusts ought to be possible in a greenfield site, plus staggered shifts using mobile, flexible and homeworking embracing the philosophy of Project Nomad.

    A reduction of staff at lower levels would be 50% whilst at higher levels where the pay is greatest 75% OF THE CEO’s and Chief Constables, Fire Chiefs and Ambulance Trust CEO’s would go.

    IT could be nearshored to a lower cost location and after hours cover would be via automated agents.
    The elimination of Districts and Boroughs would then enable the creation of county unitary authorities which could be merged again until England had just 12 counties,12 police services plus two for London and just 12 shared service centres plus two for London.

    There would have to be rigid headcount and grade caps to prevent the creation of bogus grades to placate plateaued managers and disgruntled staff, but with the will this would be the way.

    • John,

      Many thanks for this comprehensive reply.

      When I wrote the article I was largely thinking about Back Office Shared Services. I picked up the Spectator’s argument that prevailing Public Sector opinion had it that 20% was more realistic than 40%. My article made the case that if the major risks were realized on Shared Services programmes, then even the 20% would be largely wiped out.

      I accept your point that we should not be accepting 20% cost reduction per se when in the Private Sector, a 40% cost reduction would be the target.

      I regard the other points that you make as part of the reform agenda or strategy. This is actually the subject of my next blog.

      In my mind, the normal sequance would be reform agenda (strategy), vision, leadership, transformation, & improvement. Whilst, I can clearly see the Treasury available funding envelopes, I continue to be concerned about how these cuts will be achieved – with no real details on transformation activities, it looks like the majority of the cuts will lead directly to reduction in front-line services.

      Thanks for taking the time to respond

      Alf

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  8. Hi Alf
    I can agree with some of your blog, especially as it concerns one particular form of shared service – i.e. transactional processing based on ERP. While I agree with your assessment of the complexity of these programmes, I’m not sure I would agree with your assessment of the skills within Local Authorities – having worked in and with them for the whole of my career I think many do have the skills and capacity to deliver significant transformation programmes. They may have to source some skills externally but I’m not sure this will necessarily be ‘in distress’. (Incidentally your comment about ‘dustmen’ and ‘gardeners’ is a little forced – surely even Oracle has some employees who cannot readily access a terminal? I think perhaps Local Authorities can be credited with sufficient imagination to deal with that!)

    However I think that limiting the blog to one particular form of sharing does mean that it misses the huge variety of shared services now being implemented in Local Authorities, – shared Chief Executives through to shared professional services like legal, audit and buildings control, shared ICT services and a host of collaborative provision of services from translation services to shared contact centres.

    Local Authorities are extremely compex organisations and are showing great ingenuity by looking for opportunities for sharing across all their services. Because their funding cuts were front loaded into the first year many have had to cut rather than share to balance budgets this year – however I know many who will be implementing sharing to deal with their future budget requirements.

    • Hi Caroline,

      Many thanks for your feedback which I have read carefully.

      The blog was directed at Back Office Shared Services and I would suggest that many of the risks would apply to other functions too.

      Thanks

      Alf

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