Thursday, 23 June 2016

Outsourcing Shared Services increases costs and operational risks

Efficiency pressures in the public sector intensified considerably after the global financial crisis bringing about a drive to reduce operating costs where delivery of services, future needs and change costs were relegated to the second devision and effectively dismissed because of short-termism.

Widely sold as the ultimate solution is delivering operating cost reductions, shared services have been blindly outsourced without strategic planning resulting in increased costs, reduction in quality outputs and users of outsourced shared services losing organisational operational control, yet retaining all the risk should the outsourced shared service deliver fail.

Delays, cost overruns and deteriorating service quality are commonplace and Whitehall needs to make up to the dangerous reality already created under ISSCL 1 and 2 and not blindly throw good after bad by outsourcing Defence Business Services.

Simply - it is too sensitive and better value for the public purse can be achieved by keeping it in house.

Peter Gershon, the British businessman and former government adviser who initially recommended shared services in 2004, agreed that difficulties in implementation meant reform ‘should only be undertaken on a very carefully selected and controlled basis.’

Escalating Start up Costs
A significant number of shared services projects run into delays and significant cost overruns from their inability to identify and control change costs especially where outsourcing includes the need to stand up new IT infrastructures and redesign or refresh organisational design to enable shared back-offices.

For example, shared services in Western Australia cost £185m more than planned. The project was eventually scrapped in 2011.

The Recent NAO report into shared services published on the 20th May also came to the same conclusions.

Increased transaction costs

The blind drive to outsource shared services rarely takes account of transactional costs in their value for money assessment, leading to increased costs to the public purse after outsourcing has taken place.

Organisations incur both “production costs” and “transaction costs.” These reflect the activity involved turning inputs into outputs, and the activity of arranging, monitoring and assuring those processes. Contracting a service to a third party often brings higher transaction costs than if the work had continued to be done in-house.

Reduced service quality
Outsourcing your shared service organisation gives control of your organisations operational capability and resilience to a third party. 

Operational policies which may be critical to a customers outputs and in our case defence need, may not fit with the drive of a third party supplier to cuts costs to maximise profit from the public purse.

A third part supplier will drive generic, cheap shared service solutions that are poorer than the same service previously delivered in-house. 

Loss of opportunity cost savings
In the current financial climate the drive for savings in public services is not going to disappear. 

However the ability to deliver efficient and effective opportunity savings for the public purse disappear if you have outsourced your shared services and lost control of your organisational enabling processes.

Defence Business Services is the Ministry of Defence's enabling shared services organisation and if given a chance can become a transformational engine that deliver quality, cost effective and controlled shared services across defence and security and vetting - but only if it remains in the Ministry of Defence.

If it is outsourced - the private sector will exploit the reliance of defence on its corporate services and shared functions in delivering defence outputs to maximise profit at the expense of the public purse and defence funding.

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