Sourcing options for shared services

This article first appeared in the February/March edition of Government News.

By Bryan Pagliano

Pressure is growing on government shared-service organisations to cut costs and improve services. Across the globe and at all levels of government, budget austerity and organisational reforms are pressuring IT and non-IT shared-service providers to deliver cost optimisations and improve service delivery. At the same time, alternative sourcing models — especially cloud computing — are commoditising service portfolios and becoming more attractive.

Shared-service executives need to evaluate different sourcing options to best achieve these outcomes. Government shared-service initiatives can drive economies of scale and process improvement, but they have traditionally struggled to achieve their intended benefits in the planned time frames.

While current budget constraints are prompting more agencies and jurisdictions to consider shared-service initiatives, many are sceptical that promised results can be delivered. This is particularly true when alternatives to internal sourcing, such as cloud computing, offer options that could complement, as well as supplement, traditional shared services. Additionally, many sharing initiatives, particularly whole-of-government shared-service initiatives, are floundering. There are three broad categories of sourcing options for shared-service IT executives to consider.

Internal Sourcing
Here the processes, people and tools used to deliver services are entirely owned and managed by the government shared-service provider, which is often created by consolidating people and other assets transferred from fragmented organisations. Existing government shared services rely mostly on internal sourcing, in which internal staff, managers and executives own the ongoing processes and competencies required to deliver services.

In many cases, they may use external service providers, either in the form of system integrators or contract staff to build systems in the first place and then maintain them. While internal sourcing can leverage capital and can often provide more customised government solutions, alternatives challenge traditional business cases. In many cases, challenges to internal sourcing now even have policymaker support. In multiple jurisdictions in Australia, shared-service organisations are no longer being protected by whole-of-government policy.

The most public example is in Queensland, where expectations are that services from the centralised shared-service organisation should be competitive or “contestable” with other commercial offerings.

Advantages: Internal sourcing offers a relatively high degree of flexibility for organisations that have mature service delivery capabilities. Internal sourcing also retains control over the details; this can be advantageous when shared-service organisations need to respond to scrutiny from public watchdog or oversight organisations. Internal sourcing may also have local economic benefits when the agency or jurisdiction trains and employs citizens.

Disadvantages: Internal sourcing demands a focus on operational excellence requiring constantly “staying ahead of the curve” on skills, technology and processes at the lowest cost levels. This can be difficult to sustain over a long period of time. As well, multiple “cloud first” policy initiatives, along with the success of consumer and commercial clouds, creates a bias toward external sourcing that shifts the burden of proof to justifying continued use of internal sourcing.

This bias further complicates an existing problem for shared-service organisations around customer executive buy-in. In evaluating the internal sourcing option, shared-service executives should consider the size of the customer base as well as the potential customer base. A fundamental business case for shared services is their ability to create economies of scale.

Second, consider the nature of the service offering. For example, how domain-specific are the IT systems and business processes of the shared-service offerings? Finally, how costly is it to transition to a new sourcing option? Governments pay particular attention to the length of time to achieve a return on the investment, often giving priority to short-term budget issues. Right or wrong, government shared-service providers using only internal sourcing options will receive greater scrutiny from agency customers and auditors, as well as from taxpayers in some cases. Executives leading government shared services should regularly review their service portfolio and sourcing strategy to determine if alternatives to internal sourcing exist that would be more cost-effective, agile and robust

Public-Private Partnerships
Public-Private Partnerships (PPPs) are arrangements in which a government agency commits to a long-term relationship with a private-sector vendor (or consortium) to share investments, risks and rewards to build and run a public-sector program.

Most often PPPs are joint ventures in which partners are engaged throughout the duration of the arrangement, combining the skills or capabilities of each partner to serve a mutually beneficial purpose.

For example, Suffolk County council in the U.K. used a joint venture to establish a shared-service unit while also providing future commercial opportunities for the private partner. This model has also been used in North America and Australia for multiagency IT infrastructure projects, such as statewide public-safety radio communications systems.

Less common PPP structures include:

(1) the equity investment model, in which governments invest in private-sector efforts alongside other sources of financing, and

(2) the build-operate-transfer model, in which, financed by the government, a private-sector entity builds a capability and then transfers ownership of that capability as part of the contract after a concession period.

Advantages: A PPP is an appealing sourcing option for government shared-service providers that are looking to leverage a partner’s financial and management resources and competencies, or, depending on national laws, shared-service providers that are looking for a sourcing option to aid in restructuring their workforce by transferring public-sector staff to private vendors.

Disadvantages: The drawbacks of PPPs include the extremely difficult pricing and contracting process, limited switching options once the contract is established, determining how to handle unexpected costs, and PPP’s traditional need, as with PPP civil engineering projects, for a long-term environment that is relatively stable.

In evaluating the PPP option, shared-service executives should determine if there is a mutual overlap of value between government interests and private-sector interests, consider the duration of the asset in question and compare the relative difficulty and risks of a PPP agreement to the costs of building the solution through other sourcing options. In other words, is the difficulty and risk of the PPP arrangement worth the time and expense saved from having a turnkey solution at the end of the negotiations? It should not be seen as a way to supplement a shortage of public budgets.

Here the processes, people and tools used to deliver the services used are supplied primarily, or entirely, by external service providers. Traditionally, external sourcing options, such as full outsourcing and selective outsourcing, have competed with shared services where centralisation policy mandates did not exist. Shared-service customers would often see the provider organisation that used internal sourcing as having inherent advantages, such as a greater understanding of business requirements, a greater compliance with regulatory environments and an overall better workforce alignment around fiduciary responsibility to taxpayers. On the other hand, customers often see external competitors to shared services as being more efficient due to the effects of market forces. There is some truth in both perceptions.

Advantages: Externalisation allows the shared-service organisation to take advantage of predictable cost structures through contracts. Also, externalisation can harvest the benefits of cloud services. For example, IaaS offerings can either fill gaps in a solution or offer more cost-effective options through hybrid IT. Additionally, the service management, analysis, integration and evaluation competencies developed to improve current service offerings through externalisation can also be used to create new service offerings, like hybrid cloud solutions.

Disadvantages: The drawbacks of externalisation are in initiating and managing the change that it brings. For shared-service providers that still rely solely on insourcing, this can be stark. Full use of externalisation requires new strategy, new skills in evaluating and selecting vendors, new contracting skills, and new sourcing management practice when services rather than products become the predominant deliverable. Above all, shared-service executives need to keep their service sourcing strategy up to date through continuous sourcing evaluations. While cost is a key consideration, use an assessment grid to evaluate other criteria such as flexibility, ease of compliance and shared risk.

The Future Will Lie in Between
To lower costs and improve services, you need to determine the optimal blend of available alternatives in your agency’s IT sourcing portfolio by determining. Gartner expects that alternative sourcing options, particularly using cloud-based service delivery models, will experience the fastest growth. In conversations with Gartner clients, a strategic approach to sourcing is emerging.

For each line of service (or system), shared-service executives will compare alternatives based on multiple criteria to select the most appropriate option. The expected outcome of these strategic analyses is that a number of shared services will rely on multiple suppliers and a variety of delivery models. In other words, they will partner with the outsourcing vendors that they traditionally considered their direct competitors.

As a result, some shared services are progressively transforming into multisourcing service integrators, whose core competencies will consist in their ability to design a service portfolio to meet needs. However, the shared services that take this path will need to become much-leaner organisations. Their delivery arm will be increasingly commoditized, and the set of skills they require will move from technical IT operations expertise toward service management and vendor management, IT financial management, and relationship management.

Bryan Pagliano is a research director in Gartner’s government team covering shared services, mobile computing and cloud computing, primarily in the federal space. Prior to joining Gartner in he was Special Advisor to the CTO at the U.S. Department of State.

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