Shared Services in a Changing Landscape
The current financial crisis is, according to most commentators, far from over and an immediate consequence of the turmoil has been the tightening of belts throughout the private sector and government. In this economic climate it is likely that the public sector will seek to drive efficiencies wherever possible and will increasingly look to the shared services agenda as a way of cutting overheads and streamlining services. The economic downturn will also result in the private sector looking for ways to reduce costs through implementing shared services across business units or looking at the expansion of existing shared service provisions.
Here we focus mainly on the public sector (using UK Government statistics) as the economic downturn and the corresponding increase in the take up of shared services and the resulting benefits are clearer and more demonstrable. However, the comments in relation to procuring shared services and the negotiation of contract documentation apply equally to the private and the public sector.
THE IMPACT OF THE CREDIT CRUNCH AND THE RECESSION ON THE GOVERNMENT'S APPROACH TO SHARED SERVICES
The UK Government has a strong commitment to shared services following the Gershon review and the Transformational Government Implementation Plan published in March 2006, which set out plans for the sharing of corporate services in order to cut costs and improve efficiencies across the public sector. Clearly the plan is working as the 2008 pre-budget report announced that government had achieved £26.5 billion in savings and a reduction of 86,700 civil service posts between 2004 and 2007 (thus over-achieving against the Gershon targets).
The current economic downturn creates an added driver for the public sector to cut costs and get the most value from taxpayer's money. The UK Government's Operational Efficiency Programme (labelled "Gershon Mark 2") was launched by the Chief Secretary to the Treasury in 2008 with plans to deliver another £30 billion in savings looking at the following cross-cutting areas:
- Back office / IT
- Collaborative procurement
- Asset management / sales
- Local incentives / empowerment
The UK Government has also committed to delivering an extra £5 billion of savings through its "value for money" targets between 2010 – 11.
The government's commitment to deliver further savings, supported by the savings already realised, will increase demand for shared services. This provides an opportunity for the private sector and below we examine how the current downturn may affect the government's approach to procuring new shared services projects.
THE IMPACT OF THE DOWNTURN ON NEW SHARED SERVICES PROJECTS
Any organisation’s focus when procuring new shared services projects will, of course, remain on delivering value for money through competitive tendering. Also key to efficiency is clarity around project objectives and deliverables. This has been recognised in a recent report led by economist Dr DeAnne Julius (commissioned by the UK’s Secretary of State for Business) which provides recommendations for government (although the comments do apply equally to the private sector) to reduce bidding costs and maximise value for money by
- agreeing clear and consistent objective
- simplifying bid documentation
- reducing uncertainty around timing
- engaging in earlier and more open communication about desired outcomes and risk allocation
- ensuring commissioning objectives are clear, consistent and balanced
This focus will lead to more emphasis on the earlier stages of the project to ensure that all parties are clear on the objectives and outcomes. This may lead to higher bid costs in the early planning stages of a project which in turn may lead to increased wasted costs for those unsuccessful bidders involved in the tendering process. However, increased clarity around project scope should reduce the number of speculative bidders thus streamlining and focussing the process for those bidders involved in the tender process.
THE LEGAL ROLE IN THE PROCUREMENT AND DEVELOPMENT OF A SHARED SERVICES CONTRACT
When negotiating the contract documentation then there is likely to be increased focus by the shared services procurers on the following issues:
- ensuring value for money throughout the life of the project through mechanisms such as open book accounting, benchmarking and regular project review boards
- due to the real possibility of supplier or sub-contractor insolvency, increased focus on step in rights, termination for insolvency or "financial difficulties" and forms of security such as guarantees
It is also important for the contractor to ensure that it is protected by negotiating suitable risk allocation provisions into the contract. Contractors should concentrate on risk areas such as:
- payments for losses due to client’s delay
- payments for failure by the client to perform specified responsibilities
The clear definition of project scope early in the project will help both parties by providing clarity around responsibilities and thus minimising disputes over responsibility for delay later in the term.
Organisations understand that their businesses are not static and this will also lead to requirements for contracts to be flexible in order to accommodate potential extensions in scope and volume. This is driven through contractual change control provisions which, as far as possible, should provide clear procedures for implementing change.
The key factor for the parties in determining whether the contract will be extended is the price. Organisations will wish to take advantage of any existing pricing discounts or economies of scale whereas the existing contractor may wish for extensions to be based on a new pricing model or on a time and material basis. To reduce the risk of disagreement then it is important that the mechanisms for pricing extensions are considered prior to contract completion and set out in the contract.
HOW PUBLIC SECTOR ORGANISATIONS CAN MANAGE EXISTING PROJECTS IN LIGHT OF THE ECONOMIC DOWNTURN
In light of the drive to increase efficiencies, government (and the private sector) may wish to take advantage of existing shared services contracts and extend the scope of such agreements to benefit other departments. This is evidenced in the UK Government's shared services bulletin (Issue 7 – August 2008) which sets out plans for the Department of Transport to extend its existing shared services centre in Swansea to cover a growth in customer base from 10,000 to 22,000 in the next two years and for the Department of Work and Pensions to provide its standard offering to the Cabinet Office in 2008 and the Department for Children, Schools and Families in April 2009.
This commitment to extend shared services projects provides opportunities for contractors who are currently engaged in the provision of shared services. Whether existing projects can be extended will depend on the parties agreeing to the extra scope and costs through change control provisions in the contract.
A downside of the economic downturn is that there is an increased risk that parties look to existing contracts in the event that there is a dispute. It is, therefore, important that contracts are managed effectively through regular review meetings to ensure they are up to date and reflect the existing position to minimise any uncertainty.
Contractors may wish to review the financial standing of any key supplier or sub-contractors which are used in the provision of shared services. In the event of such suppliers or sub-contractors experiencing difficulties in performing their obligations then it is likely that it will be the contractor that will suffer financial penalties for delay. Such reviews may help to alleviate any potential problems by spotting them early in which case prior warning can be given to the client and suitable remedial plans put in place.
If, in the worst case scenario, the existing contract isn't working and the contractor is not realising the expected benefits then the parties need to engage in a review strategy at the earliest possible opportunity. If it is not in the interests of either party to terminate or to continue the only option may be to renegotiate. Both parties need to be aware of and discuss any problems as early as possible so they can be managed effectively.
CASE STUDY – METROPOLITAN POLICE RECOGNISE THE BENEFITS OF A NEW SHARED SERVICES CENTRE
Pinsent Masons LLP recently advised the Metropolitan Police Service (the Met) on a key transformational project intended to create new, more efficient and effective HR services within the Met.
The project, known as the Transforming HR Programme, involves the introduction by the Met of a new service delivery system based on a Shared Service Centre model. In the previous model each London borough had it own HR procedures. The Met's new HR delivery model will streamline and, where practical, automate standard transactional and informational activities, while enabling increased professionalism throughout the Met. The Met employs over 50,000 people to meet the challenge of providing police services to 7.2 million people and the Transforming HR programme is of critical importance to the Met to enable it to satisfy the needs of a 21st Century police force.
Although the current economic downturn does pose problems, the commitment by the government to expand its shared services take up and the likelihood that the private sector will also increasingly turn to, or expand existing, shared services provision does provide opportunities which, if properly planned and executed, will lead to benefits for all the parties involved. To achieve these benefits the parties need to work together in the early stages of projects to clarify objectives and set a clear procedure and timetable for the contract process.