Shared Services has a Math Problem

When people around government talk about shared services, you always hear one big thing – cost savings. In March 2015, the Partnership for Public Service released a report, Building a Shared Services Marketplace, which pegged savings from consolidating “back office” functions – IT management, HR, financial management, supply chain, administrative and planning and budgeting -- at $47 billion over 10 years. Now $47 billion in savings over 10 years is nothing to sneeze at, particularly in these constrained budget times, but what if they’re wrong? What if there are no savings and the cost to migrate is $100s of millions?

The Partnership’s cost savings numbers are calculated looking at $124 billion in annual spend on those back office functions detailed above, cost savings of $56 billion on the high end, with $5 billion in additional savings from “continuous improvement” and $14 billion in migration costs. The Partnership uses a calculation of 26% of “gross cost savings” to arrive at the $14 billion migration cost number. Now I am not an economist (thankfully) but that seems like an odd way to calculate migration costs, particularly now that we have some real numbers from HUD’s financial system migration to the Treasury Administrative Resource Center (a Federal Shared Service Provider).

According to the HUD Inspector General in reports dated February 1 and March 1, 2017, HUD spent more than $120 million to migrate its core financial system to ARC, a system with an annual operating cost before the migration of less than $20 million. In other words, the HUD financial system migration cost at least 6 times (6X) its annual O&M cost. This is a fact and it is the only real example we have in government today. We also know that the O&M cost of the financial system more than doubled as a result of the migration from 0.83% of the budget in FY2012 to 2.20% in FY2016 [1], a near tripling of cost. So using the Partnership’s 26% of gross cost savings calculation you close your book and go home because there are no savings on which to make a calculation. I am not even going to talk about the fact that HUD still performs 97% of its transactions on the legacy systems or that it lost functionality in moving to the FSSP, but you can read about it in the IG reports.

So let’s take our real world experience and apply it to the Partnership’s theoretical shared services savings model. If we have $124 billion in spending on back office functions and it costs 6X to migrate those back office functions to a shared service provider (the real number we learned from the HUD migration) it will cost the government $744 billion to migrate those functions to a shared service provider. Kind of changes the calculus doesn’t it?

Here’s the thing about numbers, you can make them do whatever you want especially if you ignore the facts. If you want to trade in your 1996 Honda Accord and buy a $60,000 BMW, and believe your Honda is worth $30,000 in trade it makes the BMW affordable but you’re kidding yourself. When you realize the Honda’s only worth $2000, it changes the calculus or it should.

Do I believe it’s going to cost $744 billion to migrate back office functions to shared service providers? No, it could be more or it could be less but I know it’s a lot more than $14 billion and the one example we have if applied government-wide says it’s going to cost $100s of billions.

So now, Congress is considering legislation to mandate government use of shared services, more or less as described in the Partnership’s 2015 report, an outdated approach that relies on the erroneous $47 billion cost savings calculation. Would Congress consider the idea if they knew they were mandating more of the same with an upfront price tag of $100 billion or $250 billion or even $744 billion and take decades to break even? The answering isn’t just no, it’s heck no.

So here’s what I propose: Let’s take a step back and rethink how and why government is considering shared services while understanding that technology has changed dramatically over the last decade. Old ideas should be moved aside to make room for new ones. No more forcing agencies to go to federal shared services providers, it’s a square peg in a round hole and by now everyone knows it. Let’s focus on competition and make room for innovation and next generation technologies to come into the shared services marketplace and disrupt it. And let’s be honest about the cost of migration and the challenges that lie ahead.

[1] HUD reports financial system O&M cost of $42.6M in its FY2016 Exhibit 300