29 – Local government shared services. Is it the silver bullet for rate capping? – Part 2

Posted by Colin Weatherby                                                                         950 words

In the previous post, I discussed economies of scale and the cost savings possible through shared services. This post continues the discussion, starting with the implications of front and back office separation.

The history of ‘back office’ and ‘front office’ separation is worth some discussion. According to Seddon, it began with an article by Richard Chase in the Harvard Business Review in 1978. In the article, Chase recommends separating the ‘high customer contact’ and ‘low customer contact’ elements of the service system because of the different operations involved. Low customer contact operations are more efficient and, as a result, have lower costs and it makes sense to isolate them from the disruptive effects of customer interactions if it can be done without sacrificing service effectiveness. However, service effectiveness is exactly what Seddon believes has been lost in many of the cases he cites.

Seddon sees the interface between the front office and back office as the location of most service failure and the source of the resultant failure demand that burdens the service system. He says that information flows from the front office’ to the back office are often incomplete and customers need to follow up or be followed up. The objectives of the front and back office are different – the front office is dealing with ‘flesh and blood’ customers and their needs, whereas the back office is focussed on ‘adhering to rules’, such as delivery of work by a set time, completing the work in a predetermined amount of time, and meeting targets for work performance. This is necessary in order to achieve efficiencies in the back office by optimising the use of labour. It has several inherent assumptions that Seddon believes are often incorrect:

  • The work flowing from the front office to the back office will arrive in the right place.
  • Workers have the required expertise the do the work in the allocated time.
  • Work will be completed within the agreed timeframes.

Isolating back office operations from the variability introduced by customers enables processes to be standardised. However, the context in which they request or receive services is important. When services are efficient but fail to meet customer needs and the customer re-presents or follows up (failure demand), the transaction costs may be less but the service cost has increased by the need to engage in multiple transactions. And in the public service there is no limit to the number of transactions. Services are free at the point of consumption and people will keep consuming until their needs are met. Seddon advises simply getting rid of the front and back office separation where it is creating failure demand. There is no need for a shared service to do this.

So, what are the implications for shared services?

If shared service delivery is proposed as a way to make ‘less-of-a-shared-resource’ savings and this can be done without great difficulty or upfront cost, why not? Entering into a shared service simply to utilise spare capacity available from indivisible facilities or services should lead to questioning of why you provide the facility or service at all.

If shared service delivery is proposed to reduce transaction costs by merging or eliminating back office operations, it is worth asking why those back office operations exist at all. If the service is redesigned around customer purpose and front and back office operations are re-integrated, there may be no benefit from the cost of creating a shared service. Just improve what you already do.

There are some obvious risks in shared services models. If the shared service is at a lower level than one of the customer groups has been accustomed to receiving, they may become dissatisfied. Alternatively, if a service level is raised to achieve a common level, there could be extra costs. A shared service relies on a mechanism for joint governance in the interest of all partners.

Overcoming these risks is a challenge in itself, as evidenced by the experience of the WBC Strategic Alliance. In her presentation to the 2014 MAV Future of Local Government Conference, Donna Galvin the Executive Manager of the Wellington, Blayney and Cabonne (WBC) strategic alliance in regional NSW identified the following challenges for shared services:

  • Industrial relations – moving staff to a company structure? Moving staff to a different location?
  • Governance arrangements of the new entity – need a binding commitment from each partner to buy services from the new entity for a period.
  • Establishment and operating costs – the ROI may be 3 – 5 years – the councils need initial funding to manage the transition and fund the entity.
  • Strong and sustained leadership and commitment from all partners.
  • Ensure all partners are clear on what shared services means, and what the potential benefits might be (start with the end in mind).
  • Base your decisions on a sound business case for change that MUST include your ROI and clearly identifies that service delivery will be more efficient and effective than it currently is.
  • You will need strong and sustained leadership and commitment – it is a long-term transformational change.
  • Provide the resources to make it happen and manage the change.
  • Identify and manage enablers not necessarily in your control (e.g. Industrial, the Act, legal status, technology platforms etc)

The WBC strategic alliance involves four sparsely populated councils surrounding the regional centre of Orange. They have been working in a strategic alliance for 10 years and have completed over 55 joint projects with savings of $5.2 million. They are now at a crossroads as each partner council decides whether it is prepared to commit to a joint venture that commits each council to buying shared services in order to ensure the financial viability of the venture.

Even in circumstances when there are strong economic incentives to join in providing shared services, councils are reluctant. The loss of control over local service delivery and the commercial risks involved can be a strong disincentive.

Chase, Richard 1978. Where does customer service fit in a service operation? in Harvard Business Review, November/December.

Galvin, Donna 2014. Shared services – an alternative model for local government … or not? presented to MAV Future of Local Government Conference. http://www.mav.asn.au/about-local-government/future-local-government/Related%20documents%20%20FOLG%20Summit%202014/Shared%20Services%20-%20An%20alternative%20delivery%20model%20for%20local%20government%20or%20not,%20Donna%20Galvin.ppt

Seddon, John 2014. The Whitehall Effect.

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