Financial management providers ill-equipped to take on large customers

A metric of success for federal shared services is how many agencies are using the capability. Federal financial management shared service providers are facing an uphill battle to meet that metric.

One of the biggest challenges to making this second attempt at financial management shared services in the last decade successful is federal providers’ ability to ramp up in a timely manner.

Interior, Transportation, Treasury and possibly as many as four other agencies are gearing up to accept 40,000 or more new customers at a time over the course of the next few years.

As federal financial management shared services providers, these agencies need help in the form of changes to law and policy to meet those goals.

Experts say only by letting these providers act more like private sector businesses will federal shared services find success.

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“Scalability is always a concern whether you are migrating two or three small to medium agencies or one or two large agencies. The reason it’s a concern is because you can’t really hire any additional resources until you have a signed interagency agreement. So to the extent you have that signed interagency agreement, that’s when you start the ramp up process,” said Joe Ward, the director of the Interior Business Center, one of the four current civilian agency financial management shared service providers. “We really do not have the ability to ramp before we have funding to do so. So scalability is always an issue. However that said, we are looking at some creative ways, working with industry, working with the Treasury Department and working with our human resources folks to do some things in a creative fashion that would allow us to ramp up much quicker and also legally.”

Capacity issues remain unsolved

And Interior isn’t alone, Ward said because few, if any, of the other federal shared service providers have that ability to use “profit” to prepare for the influx of new customers.

In part 2 of the special report, Shared Services Revisited, Federal News Radio explores the long-standing capacity challenges that current and new financial management shared service providers will have to overcome in the coming years to meet the growing demands of agency customers.

The Office of Management and Budget requires agencies to modernize financial management systems only through federal shared service providers (SSPs). In a March 2013 memo, OMB detailed its plans to reduce costs and duplication across the government through the use of federal SSPs.

But many of the same questions limited the success of this initiative in the mid-2000s, including whether the shared service providers have the capacity to handle large cabinet level agencies.

Over the course of the last seven years, no cabinet level agency moved to a federal shared service provider. The Labor Department outsourced to a private sector provider. The Small Business Administration unsuccessfully followed suit to a different private sector company.

But over the course of the next five to 10 years and starting this year with the departments of Commerce and Housing and Urban Development, and the Coast Guard, large agencies are expected to let go of their financial management systems and take advantage of a multi-tenant set up that is widely considered an industry best practice.

OMB and Treasury’s Office of Financial Innovation and Transformation (OFIT), which is managing the financial management shared services initiative, are trying to address the challenges providers face.

Ward said Interior, for example, has asked OMB to help create a franchise fund for financial management services. The franchise fund would let Interior retain earnings from customer payments of up to 4 percent to be used for technology upgrades and other investments.

Ward said Interior currently uses a working capital fund, which forces it to break even every year, and thus can’t prepare for new customers adequately.

Implementation know-how at a premium

But it’s about more than just money and people. The question is whether Interior, Transportation, Treasury or any of the new providers can handle more than one large agency every few years.

Federal and private sector experts say migrating to a shared service provider is extremely complex.

“Technologywise, the capability is certainly there. The biggest challenge there is going to be is the change management and governance, as well as systems consolidation, always produces a financial risk of migrating multiple agencies at one time,” said Kevin Greer, a managing director with Accenture federal services. “All of that are questions still on the horizon, and OMB and OFIT certainly recognize they need to provide a solution to help with scalability to make this really work.”

Greer said OMB’s aggressive implementation plan and federal first model may lose sight of the potential cost savings.

He said one reason for that is the struggle agencies have around capacity and the need to hire private sector contractors. Greer said OMB should instead go with a public-private model.

When comparing the use of public-private partnerships at the state and local and private sector levels to the federal-first model, Greer said the cost savings are greater when the private sector plays a larger role.

Reid Jackson, the president and CEO of CompuSearch, which provides agencies with an integrated procurement system, said the complexity is part of the reason that it takes on average three-to-four years for agencies to migrate to a shared service provider.

Jackson said another part of the reason for the extended timeframe is the non- traditional way providers and customer agencies come together through an interagency agreement.

“It creates real challenges to actually realize savings. How does a client of a shared service center of a financial solution hold that shared service center accountable?” Jackson said. “They don’t have the leverage as they do over a contractor. They don’t have past performance to hold over them, or payment to be withheld. It doesn’t have the contract discipline that dealing with third parties does.”

He added OMB likely will match providers with and customers, but not go as far as assigning them to each other.

FAME process to help agencies

Beth Angerman , the director of OFIT, said OMB and OFIT will not mandate where agencies migrate to, but there are factors that agencies must take into account.

“We recently finished the design of the FIT Agency Modernization and Evaluation (FAME) process. What that process consists of are a series of evaluative models and artifacts that are produced by the agency with FIT’s oversight and assistance to help them get through different gates of identifying if there is a federal shared service provider who will meet their needs,” Angerman said. “The first gate is that of identifying their need to modernize is indeed valid. Then the timing they are planning to do that modernization can be authenticated. Once they pass that gate, we start to look at chemistry between the agency and a possible provider, looking at the requirements that the agency has and the offering the provider has and hopefully making an early match.”

She said the customer agency will decide which provider it goes to. OFIT will provide oversight of all the moving pieces around government, including addressing capacity challenges.

And those factors also are part of how OMB believes this attempt at shared services will be more successful this time around.

Norman Dong, who recently left his position as acting controller at OMB and is now the commissioner of the Public Buildings Service at GSA, said at a June conference on shared services that OMB recognizes it needs to put more rigor in the process of choosing and migrating to a provider in order to simplify it.

“In the past, we probably gave a little too much latitude and a little too much flexibility to the agencies in terms of allowing them to adhere to their legacy requirements and their legacy business processes,” Dong said. “We recognize if this model is to work and we are truly going to achieve economies of scale, then we need to be a little bit more disciplined of what large agencies can ask for and have them bend to the business processes and the requirements of the shared service providers as opposed to the other way around.”

He added OMB expects agencies to take their time over the next five to 15 years and work closely with the providers to migrate their financial systems.

He says the faster agencies try to go, the more risk they create.

Can the private sector play?

But OMB’s expectation that this initiative could take as many as 15 years to migrate begs the question: Why not bring in the private sector to create more competition, innovation and a quicker path to the benefits of shared services?

Dante Ricci, a senior director of customer value at SAP, said there’s still a lot to be determined about the private sector’s role in this initiative.

“It’s not just about the software of one particular vendor. It’s about the ability to utilize the latest technology to let the government garner the most value. We know now that as they have been evaluating this that maybe they will open it up to further vendors,” Ricci said. “The ability for the federal government to gain more governance efforts, the efforts to measure the cost of the shared services, to measure the performance of the providers may give other vendors the ability to jump into the game.”

Ricci said he expects one or more of the new providers that OMB will name in the coming months to use SAP’s federal financial management software.

Currently, three of the four federal providers only offer Oracle software. The fourth civilian agency provider, GSA, is expected to get out of the financial management shared services business.

Lisa Kazor, president and CEO of Savantage Solutions, a provider of federal financial systems consulting, accounting services and one of five federally- certified financial management systems, said the federal-first policy creates unintended consequences — a wide ranging monopoly.

“It’s not just a monopoly about financial systems,” she said. “It’s also all the ancillary systems. Monopolies in the procurement providers, travel, fixed assets as well as any of the financial system consulting, integration and service firms.”

Kazor said the reasons she believes there is this monopoly is support vendors tend to work mainly with one type of software. So even if OMB adds two more financial applications to the mix, the universe of contractors available to support those efforts remains limited.

Instead, Kazor said if OMB opened up the market to the private sector, agencies would not only get innovation and cost savings, but access to new companies across the board.

New role for vendors

Treasury’s Angerman disagreed with Kazor’s perception. She said there will be plenty of opportunities for the private sector to support agency migrations and shared service providers.

“At this point, there is not a plan in place to issue a formal application process to become a private shared service provider. First, we are going to look at who applies a federal shared service provider and if we can position that marketplace to be able to address the demand,” she said. “The role of private sector — and I’m pretty passionate about this — is this whole model is changing, because we have not had proven success in what we are doing today. And having 24 different systems, and maintaining 24 different systems and paying for that, and then looking at, Googling any website including your own, about the failures we’ve had in upgrading financial management system really sheds some light into why we are doing this.”

OMB estimates agencies are spending $8 billion a year and have more than 53,000 people supporting all federal financial management systems.

There is a long history of financial management systems that have failed to meet expectations. In fact, OMB in 2010 reviewed 30 financial systems to ensure they were meeting cost, schedule and performance goals, and ended up rebaselining several after finding they were off track.

Despite this increased oversight, the Government Accountability Office found in 2012 that the reviews had little effect. Auditors said 13 projects estimated no change in their long term costs, and 16 said their schedule remained the same.

So given all of these systemic problems, Angerman said the private sector has to appreciate the changes that are happening, meaning once they were implementing large scale systems, and now they are supporting the agency providers with specific expertise.

Interior Business Center’s Ward said the private sector will continue to play a big role across the shared services providers.

“If industry has any concerns that they’re going to be left out of millions of dollars, my ground truth is that it’s unfounded, because industry always will be a player, not just with me at the Business Center, but with ESC and ARC and everybody else as well,” Ward said. “Whenever we implement and migrate a new client, we have to have their support to do that. I will predict that there will be an increasing need for their support in operations and maintenance more so than there is today. I think these concerns about industry being left out are quite frankly overblown, and that’s from a guy that’s got experience on both sides of the fence.”

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