Centralization might not be the best model for delivering common government services

While not yet officially announced, the Trump administration’s management agenda is coming into focus. Office of Management and Budget Deputy Director for Management Eric Ueland has described four main thematic buckets: government reorganization and reform, acquisition reform, Buy America and IT modernization.  

Within the first bucket is an intense focus on cost-cutting and efficiency improvement aligned with initial Department of Government Efficiency efforts and executive orders to streamline, consolidate and eliminate jobs and functions no longer considered necessary. 

Consolidation of common services across the government will be a major initiative. Executive orders have been issued to centralize acquisition services in the General Services Administration, financial management transactions in the Treasury Department and human resources operations in the Office of Personnel Management. Consolidation should focus on reduced duplication, cost savings and standardization of policy, process and data.

This is somewhat of a shift from the approach advanced in the first Trump administration, which sought to create marketplaces of service providers, initially in financial management, HR, grants and cybersecurity.  

The Trump-1 governance structure established by OMB Management Memorandum M-19-16 (still in effect), created a Quality Services Management Office to establish standards and a performance management framework and serve as gatekeeper approving entrants into each marketplace. While it needs refinement, this model was designed to promote competition among service providers to incentivize continuous improvements in quality and cost-effectiveness of services in the identified lines of business. 

It was also meant to allow agencies freedom to choose their preferred providers – government or commercial – and provided an explicit opportunity for industry to infuse the latest technologies and services, either partnering with government or delivering services directly to customer agencies. This model can be leveraged and significantly enhanced to move to a truly consolidated model for shared services.

The Trump-2 approach centralizes services in government agencies, eliminates customer agency choice of providers and provides uncertain and potentially less attractive opportunities for industry to participate in the common services marketplace. Historically in government, this single provider “monopoly” model has led to suboptimized service quality, cost savings and other business outcomes.  However, a centralized governance structure is needed to get the most out of all LOBs under a shared services model.

Setting aside for the moment serious questions about the capacity and capability of government to manage the startup and operation of centralized services, both approaches – if implemented successfully – could improve efficiency, reduce duplication and free up agency leaders to focus more of their attention on mission performance; however, the marketplace approach would operate more like a true “shared service” model and offer important advantages over the centralized model.  

As reported by Gartner, “The shared services model has distinguished itself — relative to centralized services — around customer service, performance management and continuous improvement.”  These advantages are described in the 2021 Gartner report, “Three Advantages of Shared Services Over Centralized Services,” summarized below:

Advantage No. 1:  Improved transparency, expectation setting and accountability with customer organizations and end users. 

Gartner emphasizes the importance of service level agreements in defining the business relationships between a shared service organization and its customers. SLAs should be driven by upfront standardization of policy, process and data and are negotiated between the SSO and its customers.  Negotiation provides transparency into the end-to-end business process and establishes two-way accountability for tasks performed by both the SSO and the customer.  

In centralized services, work activities in a common function are consolidated into a single delivery organization under the leadership of the “owner” of the common function or LOB. The two entities are not bound together by SLAs, and there is little, if any, negotiation of terms with customer organizations or end users in the consolidation process.  This top-down, one-size-fits-all approach often results in a suboptimal alignment of services with customer needs and expectations and provides customers minimal leverage over service performance. 

Advantage No. 2:  Greater incentive to reduce costs

SSOs operate as quasi-independent service providers at arm’s length from their customers and charge market competitive prices for their services. If not locked into a “captive” SSO, customers have the option of contracting out for the service to other providers. This element of competition keeps pressure on SSOs to continuously improve services and reduce costs to keep customers satisfied and on board. 

In centralized services, the customer organization’s processes, organization and technology dedicated to the service being centralized are all consolidated into the delivery organization. Consolidation produces immediate savings as duplication is eliminated and services are scaled; however, customers are locked into monopoly providers. In the absence of competition, provider organizations tend to grow, become more bureaucratic and less responsive and costs allocated to customers tend to increase.    

Advantage No. 3: Greater contribution to mission delivery  

SSOs are designed and operated as business entities with profit-and-loss responsibility, strong customer focus and incentive to continuously modernize and improve services to respond to emerging customer needs and market forces. Well-managed SSOs view themselves as business partners of their customers who deliver mission value beyond mere cost savings. They make it a point to understand their customers’ business and keep a lookout for innovations that can give customers a competitive advantage. SSOs make their customers’ success a measure of their own success.        

Centralized service providers tend to focus more on internal functional performance than on how well their services meet the business needs of their customers. Their organizations are operated as cost centers, and their performance is measured mostly on cost control. This model promotes one-size-fits-all solutions that don’t work well for all customers and seldom provide competitive advantage or mission value.  

If the administration proceeds on the current path towards centralizing common services, it would be wise to consider how to mitigate the disadvantages of centralization and leverage some of the important advantages of shared services and the marketplace approach in its centralized operating and business models. The Shared Services Leadership Coalition stands ready to work with the administration in addressing these issues in service of realizing the most efficient and effective way forward for delivery of common government services.  

Steve Goodrich is chaiman of the board and John Marshall is founder and CEO of the Shared Services Leadership Coalition.