UK Local Authorities and Shared Services: Cost-Cutting – Myths, Realities and Escalating Risks?

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With personal experience of delivering around a dozen 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 blog will re-explore the risks associated with achieving the twenty percent savings which themselves very large, even before considering wider political risks. 

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?  Also just how risky are Shared Services programmes? 

Oracle saved USD 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.

RISKS

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. 

CONCLUSION

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.

16 responses

  1. Pingback: Reflections on my top 20 blogs in nearly three years of blogging « Dr Alf's Blog

  2. Pingback: A Hard Look at Why Dozens of Local Authorities are Collapsing in the UK – John Gelmini « Dr Alf's Blog

  3. Pingback: Why Dozens of Local Authorities are Collapsing in the UK – John Gelmini « Dr Alf's Blog

  4. Dr Alf,

    really excellent article. With regard to ICT support for shared services this may become easier with the advent of cloud-based services via the G-Cloud programme, in fact amalgamation of organisation systems might be the ideal time to off-premise shared infrastructure. There are some articles on our blog your readers might be interested in: http://in.kahootz.com/blog/bid/216554/Developing-shared-services-in-the-public-sector

    John Glover

  5. Pingback: UK Government’s Strategic Vision for Shared Services and Twelve Open Questions? | Dr Alf's Weekly Blog

  6. Brilliant. The article is of up to 1500 words of a chatty style – not too academic. Previous A5 publications can be viewed at http://www.acses.org.uk. Please send article to me – barrister@lawandgovernance.co.uk. By end of next week will be fine. I’m sure if you copy/paste your and Dr Alf’s response into a suitable article, I will run the two articles, one after another. Your photo/logo/contact details to accompany article will also be helpful. Thanks again.

  7. These are excellent contributions from John Gelmini to the debate and response from Dr Alf.

    Will John Gelmini be comfortable in writing a short piece repeating his comments and Dr Alf’s response in a suitable article for publication in the forthcoming Association of Council Secretaries & Solicitors publication? John G’s photo/contact details will also be published.

    Dr Alf’s article and profile will be featured in the forthcoming ACSeS publication and John G’s contributions, especially re Scottish and TUPEcomments are quite instructive in that debate. Thanks.

    • Dr Mirza,

      Thank you very for yor positive feedback. I too hope that John summarizes his contribution into a separate article.

      I think that we all agree that it’s critical to stimulate effective public debate, comparing the risks & rewards of the various options. A few key themes are:

      1. Big Government
      2. Lean Government
      3. Shared Services
      4. Outsourcing
      5. Off-shoring/ globalization
      6. Localism/ Big Society

      Thanks

      Alf

    • Dr Mirza,
      I would be happy to do as you suggest,please let me have the article length you want and where to send it,which I will do in conjunction with Dr Alf Oldman via his blog or in whatever way you both agree.
      Regards
      John A Gelmini

  8. Alf,
    I would agree that everything you say needs to happen because to achieve the savings through shared services or vitualisation there needs to be a helicopter style view of all the costs and causes of costs as well as proper organisational intelligence from trusted sources such as Experien who today, for example were reported in the Daily Telegraph as having identified that up to 157,077 council houses have been illegally sublet leading to a £2 billion gbp cost of the fraud to the taxpayer.

    Identifying other areas of waste like this would result in quick wins which would give the taxpayer immediate respite whilst the painstaking work of more considered risk assessment, green and white papers, parliamentary scrutiny and legislation could take place in parallel

    • John,

      Thanks. There are obviously lots of examples of broken processes & huge opportunities for waste reduction.

      Perhaps, “Lean” is currently the most effective improvement methodology at the moment but I would caution against investing in Lean until the Government clarifies its overall strategy for the Public Sector.

      Isolated pockets of Lean activities supported by localized consultants is clearly not the most effective value for money on a national basis, in my view. When I think about it, I seriously struggle to see how localized solutions are ever going to be most effective from a value-fo-money perspective.

  9. John,

    Many thanks for your support and detailed posting.

    In the short blog, I was concentrating primarily on Shared Services in Local Authorities and the increasing risk associated with this type of transformation programme. I made the point that Shared Services needs to be part of the organisation’s strategic approach to business/services.

    I would argue that much of what you describe needs to part of a comprehensive reform strategy, at the national level. At the moment, the Coalition Government has announced overall cash envelopes but no over-arching Public Sector Strategy. I would expect the steps to include:

    1. Overall reform agenda/headlines, as part of a political manifesto

    2. Translation of reforms into properly costed and risk assessed policy statements (green and white papers)

    3. Appropriate debate and leglisation in parliament (bills)

    4. Commissioning and delivery of the change and transformation programmes, with effective governance, political sponsorship, risk management, and appropriate funding to bring in external specialists and consultants, where the skills are not available in house

    Given the experience of the NHS earlier in the year, I would expect to see seriously divergent views from the various stakeholders.

    What seems to be happening at the moment is a piecemeal and uncoordinated approach from a national or strategic perspective. Personally, I am still unsure about localism/Big Society (especially costs & services). I still envision vast swathes of the Public Sector eventually outsourced, and possibly off-shored, although this may take several terms of parliament/government etc.

    Bringing this back to Local Authorities who are actively investing in Shared Services, these are very risky times indeed, and it is for that reason that I am specifically recommending independent risk assessments from suitably qualified and experienced independent professionals.

  10. Local authorities should indeed be using someone such as yourself to help them find the savings that so far they are still failing to make.

    Shared services whilst helpful will not deliver the required savings because of the application of TUPE and an unwillingness to confront the real issues both in terms of absolute numbers of employees required to deliver a service to best in breed standards, the numbers of layers of management, the creation of non- existent grades to enable plateaued staff to be given a pay rise and the absolute numbers of CEO’s, service directors, Chief Constables, Chief Fire Officers, Directors of Social Services and LEAS.
    TUPE and the public sector trades unions ensure that none of these issues are properly dealt with so shared services simply become a reorganisation of deckchairs on the Titanic with no savings achieved at all.

    To some extent this has been partially recognised north of the border this week with the reorganisation of the eight Scottish police and fire services into one of each.

    What needs to happen in England is that the 43 English County Councils needs to be reduced to 12 county unitary authorities and all districts and boroughs abolished with all services subsumed into these county unitary authorities.

    The excess number of CEO’s needs to be culled and the various assistants and deputies in their “senior leadership teams” culled as well.

    Their payoffs need to be reasonable and affordable and they should not simply be allowed to trouser huge sums and then redeploy themselves into local authority housing associations which they control anyway, which is what has been happening close to where I live and where there has been uproar in the local media but no action.

    The same needs to happen with police and fire services and the interfaces between local authority social services departments and the NHS where there is massive duplication with night call centre operations where in many cases the staff do little more than sleep and devour pizzas. (There is evidence for this in one county council where I worked for 11 months and examined all 8 directorates and these interfaces.)

    Software development, IT services capable of being delivered remotely should be offshored to an appropriate location or locations taking account of available incentives which in China, Malaysia and India make this very attractive.

    GE Money has tens of thousands of British and American trained chartered accountants and CPAs in it’s various shared service centres in Mumbai and a slimmed down group of efficient local authorities could do the same.

    Michael Gove’s Free Schools operate outside of local authority control altogether and all schools with their own budgets could do the same within the current national inspection regime run by Ofsted.

    Schools could come to their own arrangements re bussing children to school and with a critical mass of free schools, self budgeting schools and schools run by private consortia the need for overmanned Schools Childrens and Families Directorates would end at a stroke.

    Printing, the storeage of e-mails, document preparation, storeage of documents in “clouds”, debt collection, legal services for simple matters and a host of other services could similarly be offshored to locations where TUPE did not apply.

    What needs to happen over and above the structural reforms mentioned earlier, Liberal Democrats not withstanding, is as follows:

    1)Abolition of TUPE

    2)Reduction in layers of management in councils from the present level to just 5, all assistant and deputy posts and non existent grades to be abolished. No concealed return via the back door into Housing Associations, “ALMO’s (Arms Length Organisations), Joint Venture companies such as BT Global Services/Suffolk County Council via organisations like SOLACE (Society of Local Authority Chief Executives) to be permitted. All posts must be handled fairly and impartially with a quota applied to ensure fair representation from a wide candidate pool. Membership of secret societies to be outlawed for those in the public service to prevent nepotism,cronyism and conflict of interest.

    3)All services independently process mapped and anything offshorable transferred

    4)Functions which could be offshored but which have an overriding reason to be outsourced within the EC or the UK proper to be outsourced

    5)All schools to be removed from local authority control

    6)Public sector trades unions de-recognised

    7)Each department to be capped in terms of numbers of employees over a rolling year with permissable additions to replace those who have died, left, retired, become mentally incapacitated, hospitalised or been dismissed. District Auditor to have legal duty, resources and powers, to enforce the caps via mandated dismissals of excess staff and directors and managers caught trying to circumvent these caps.

    8)Even more action to reform public sector pensions to bring them into line with those prevailing in the private sector.

    Beyond this there is the issue of Adult Social Care and the shortage of trained social workers.
    Even in Counties like Cambridgeshire, one of the wealthiest counties in the country these people now represent 55% of overall County Council budgets and are still rising.

    Very radical solutions are needed:

    1) Variable taxes on foods and a proactive interventionist policy by the NHS to tackle middle aged obesity which then leads to a need for subsequent Adult Social Care

    2) Transfer of council house dwellers into houses which are the right size (i.e. smaller)

    3) The use of robots in local authority care homes for lifting Adult Social Care recipients,cleaning,toileting,washing,bedmaking,cooking and serving food as already happens in Japan and has been happening for years

    4) Centralised offshored purchasing of mobility aids and equipment to go into houses to enable mobility in people’s homes.

    NOTE:Currently this is done locally in each county, unitary, city and mid-county area, often in conjunction with social workers without proper regard as to costs.

    5) Where people are Adult Social Care recipients and are alone or childless, or where the children have died, or have migrated the idea of offshoring these people to Goa or warm locations where costs are low needs to be actively considered rather than being “kicked into the long grass” by latter day “Sir Humphrey Appleby’s” who regard it as politically unacceptable and by Ministers afraid to confront the public with difficult home truths.

  11. Alf – good analysis. I feel that there is another political risk of an administraton in a Council changing, whether through elections or simply change of Leader. For example, two lib dem Councils may well get together for shared services, only to find that it is a hung Council and a Tory Council wth different Leaders after elections. As I predicted months back, this has seen the demise of many shared CEX initiatives, and has the potential to scupper many a shared services project. I get dismayed at the amount of people who think that a Council CEX has the autonomy of a private sector equivalent. Never underestimate the impact of politics in this environment.
    And you’re right – these risks need to be independently assessed up front. Go in with your eyes open, or go out with a P45!

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