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A problem shared

Sunday September 26th, 2010

By John Brunning, Solicitor and Rob Shooter, Partner, Technology Law Group at Field Fisher Waterhouse LLP

John Brunning and Robert Shooter look at the potential pitfalls that those responsible for IT in the public sector will need to negotiate in order to make shared services work for them.

With the recent announcement on the reduction in government ICT spend – both in respect of the size of deals and the cost of procurement – the Cabinet Office’s initiative to promote the use of shared services is hugely relevant. However, there is nothing new about shared services. For example, Buying Solutions has extolled the virtues of shared service environments for many years, and Flex, a framework offering a desktop computing environment and range of additional ICT services, is also very well known.

The concept of shared services makes sense in the public sector. There are many functions in public sector bodies (such as payroll, IT support and ICT infrastructure) which could be standardised and organised into a single or small number of service centres, supporting the concept of ‘joined-up government’. Of course, shared services may not be suitable for all authorities – for example those requiring highly bespoke services or with unusually high security requirements. However, public bodies should always consider whether other sections of the public sector could benefit from the services they are procuring.

The benefits of shared services

The most obvious advantage of a shared service framework lies in the economies of scale which arise when a group of public sector bodies leverage their combined size to reduce prices. This may be in the form of reduced costs for bulk purchases of equipment or volumetric pricing for services. Framework authorities will also have greater negotiating power with suppliers, allowing them to achieve a better commercial position than would otherwise have been obtained under an individual procurement.

Coupled with these benefits is the reduced overall time and cost of procurement – once a shared service framework has been set up, only the framework authority needs go through a full tender process (although clearly the added complexity in setting up a shared service environment is initially more time-consuming than a standard procurement). Depending on the structure of the shared services framework, public sector service recipients may be required to procure specific services through mini-competitions; however, these will be based on a pre-agreed contract template where only certain provisions (if any) are negotiable. This greatly reduces the time and cost of such procurements.

In addition to financial incentives, shared services offer the prospect of joined-up government – public sector bodies on a framework will use standardised technology and common business processes run by one or a small number of suppliers. This uniform platform allows information to be shared easily across organisations and the training of personnel on these systems to be centralised.

The drawbacks to shared services

One of the main challenges to creating a shared service infrastructure is the need to ensure public sector bodies do not compete to offer the ‘best framework’. Competing frameworks undermine the underlying principle of shared services: that cost savings should be made through centralising government services. Any public sector body looking to offer shared services should first consider those frameworks currently in existence. If a suitable framework exists, then the organisation should look to take advantage of this existing framework rather than go to market with a new procurement.

From the supplier’s point of view, shared services can be seen as potentially disadvantageous to small and medium-sized enterprises and specialist outfits. Shared service frameworks will often require the supplier to deliver a broad range of services, high volumes, or both. SMEs may be unable to meet these requirements and subsequently be unable to get a place on these frameworks. With an increase in the number of frameworks and a corresponding decrease in the number of individual procurements, SMEs working with the public sector may find it increasingly difficult to survive. They can, of course, attempt to provide services through sub-contracting arrangements, but this approach is counter to the principles set out in the Glover Report, Accelerating the SME Economic Engine, published in November 2008.

Shared services also create a closed market – the services can potentially be procured by a wide range of service recipients who otherwise would have had to go out to market. This is advantageous for those suppliers on the framework, but difficult for those who are not.

Finally, despite the long-term cost savings, for the framework authority there will be an increased initial cost of procuring the services and an internal cost of running the shared services framework. Framework authorities need to think carefully about how to recover these expenses from service recipients or suppliers.

Avoiding the shared services pitfalls

If a public sector body (acting as a framework authority) decides to procure shared services, there are a number of issues which it must deal with to ensure that the project is a success.

The first, and perhaps the most important, of these issues is the OJEU notice. This must cover in sufficient detail the potential shared services which are being procured and the scope of the service recipients to which these services will be offered. If this is not done adequately, the framework authority will be unable to offer such services without risk of challenge – no matter how well the contract is drafted.

The framework authority must also take care when determining the scope of the services being offered: too specific and the services will not be applicable to the service recipients; too generic and there is the risk of providing services which are not of use to service recipients or which can be procured under an existing framework.

Finally, the framework authority will also need to consider the structure of the relationship between framework authority, supplier and service recipient. Will the authority call off services on behalf of the service recipient, or will the service recipient contract directly with the supplier?

The first option, where the framework authority calls off services on behalf of the service recipient, gives the framework authority maximum control, but also exposes it to the maximum amount of risk. The framework authority will need to back off this risk through non-legal documents with the service recipient, such as memoranda of understanding, which deal with pricing, service levels, risk, governance and intellectual property rights.

The second option, where the service recipient contracts directly with the supplier, creates the reverse situation; it exposes the framework authority to minimum risk but also gives it minimum control. To some extent this lack of control can be mitigated by the contract – for example, a framework authority can implement a governance structure at framework level through which it manages the relationship between itself, the service recipient and the supplier.

The extent to which the framework authority implements the options above will come down to its attitude to risk and to the extent it wishes to manage the service recipients which will benefit under the framework.

With the Coalition Government committed to delivering billions of pounds worth of savings within the public sector, shared services should have a major role to play in reducing public spending. However, unless the complex commercial and legal issues which surround shared services are considered carefully and the shared services framework is implemented competently, these cost savings and other benefits can quickly evaporate.

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