Reeling In Business
Federal financial management centers compete with companies to lure government customers.
Entries in the Forest Service's financial management system can be so inaccurate that in 2002, the agency had to adjust its record for the value of its real property assets by $1 billion. At the time, financial management at the Forest Service was on the Government Accountability Office's high-risk list, and the agency never had received a clean audit opinion. It was struggling to keep straight its various financial systems, which track data such as payments from loggers for timber harvested on national land, fees from ski resorts operating on that land and costs charged to other agencies for Forest Service assistance during emergencies.
Jesse King, the Forest Service's chief financial officer, arrived at the height of that mess in 2001. Part of the problem, he observed at the time, was the Forest Service had 153 financial operating units. Preparing these combined financial statements in a timely fashion required herculean efforts, he says. King came from commercial banking, where consolidation of administrative functions as a means of cost savings was de rigueur. He brought those 153 units to a center in Albuquerque, N.M., in February 2005, which will save $36 million in operating costs annually after recovering the initial investment costs, he says. That's the equivalent of about 700 more park rangers. The Forest Service received its first clean audit opinion for fiscal 2002, helping the Agriculture Department get its first as well. (The Forest Service is Agriculture's largest agency.)
But from the perspective of the Office of Management and Budget, King's ap-proach is not centralized enough. OMB's financial management arm has instituted a use-it-or-lose-it approach to federal accounting, telling agencies late last year that they must either move their financial systems to a designated public or private center for financial management or become one themselves. Linda Combs, OMB's controller, recently emphasized timing during an interview: "We're encouraging them to look at this when it makes good sense to look at a new financial system or [when] upgrading their financial systems."
According to OMB documents, 17 of the 24 largest agencies still host their own financial management systems. Two agencies, the Labor Department and Small Business Administration, rely on a commercial center for hosting, and four agencies use federal centers. Within the next decade, OMB expects most agencies to move their financial management systems to outside providers.
King says the Forest Service briefly considered such a move, but "Our financial management practices were in such poor condition that I'm not sure we would have been able to make a successful migration." He says he would like the Albuquerque center to one day become a federal center of excellence. Meanwhile, the Agriculture Department is in the midst of issuing a request for proposals that will move its agencies, including the Forest Service, to an updated financial management system, which could affect the Albuquerque center.
As agencies consider how to balance their books, their first question is whether to keep finance information under their own roofs or to send it to outside centers. The latter, while strongly encouraged by OMB, presents its own challenges: Like the Forest Service, each agency has its own accounting needs. Financial managers want to make sure outside centers understand how to account for grants, for example, or how to generate reports that meet federal regulations. They also want to make sure centers are prepared to take on new customers, and that they'll provide quality service. If they can get satisfactory answers to those questions, most financial management experts agree that consolidating accounting systems can save money and enable agencies to stick to their primary missions instead of being mired in administrative work.
"It's like a lady's handbag. If you design a unique lady's handbag and send it to the manufacturer, they don't need to appreciate the uniqueness. They just look at the specs and produce it for you," says Samuel Mok, the Labor Department's chief financial officer, who recently hired Oracle Corp. to host the department's financial management systems.
But trusting outside providers with your specs isn't always easy.
Learning to Share
When Wayne Leiss joined OMB as chief of the federal financial systems branch in January 2004, his boss, Linda Springer, who held the position Combs now does, asked him how they should reduce the costs and risks of agency financial management systems. At the time, Veterans Affairs, NASA and the Education Department had experienced high-profile problems putting in new systems. "That's why we said everybody doesn't have to run their own system," Leiss says. Back then, he estimated that agencies could save 25 percent to 50 percent of their annual operations and maintenance costs by taking advantage of the technology and expertise of top-notch financial managers. Today, he says they could save as much as 66 percent.
OMB started designating what it called centers of excellence, or shared service centers, which are federal agencies approved to take on outside customers for administrative functions. The centers for financial management are Interior Department's National Business Center, Treasury Department's Administrative Resource Center at the Bureau of the Public Debt, Transportation Department's Enterprise Services Center, and the General Services Administration. At the same time, OMB began pressuring agencies to shift financial management operations to a center when it came time for a system upgrade. "Mostly I was jawboning, but at the same time, we were talking to the budget examiners," says Leiss, who is now chief information officer at the Commodity Futures Trading Commission. Enlisting examiners meant agencies were unlikely get funding to upgrade their financial systems unless they moved to a center or became one.
Some agencies, especially smaller ones, already had reached that conclusion. "We don't have the IT skill sets to do it, we don't have the infrastructure. We'd have had to create everything from scratch," says Jeffrey A. Smith, chief financial officer at the Equal Employment Opportunity Commission, which uses Interior's center to manage its financial systems. That lets his agency focus on its mission of preventing discrimination. "You've got to decide what business you want to be in," he says.
Michael Graham, vice president for management at the Institute of Peace, an independent organization of fewer than 100 employees dedicated to promoting international peace, says since its inception in 1984, it has outsourced its financial management along with other administrative functions. The institute relies on GSA's center, and Graham estimates it saves about $100,000 a year as a result.
The Office of Personnel Management is the most recent agency-and one of the largest, with 5,000 employees-to move to a federal center. "It wasn't our initial choice, but as we looked at it . . . the analysis showed that it was a smarter decision for OPM to get out of the business of owning financial systems," says Clarence Crawford, the agency's chief financial officer. OPM selected the Bureau of Public Debt to run its financial management systems in August 2005 and expects the shift to be complete in 2007.
Critics of the rush to centralize, including Rep. Todd Platts, R-Pa., have urged OMB to slow down and make sure agencies are ready to move to centers before pressuring them to do so. Auditors found material weaknesses in the financial statements of all the agencies that host federal shared service centers for fiscal 2005, and critics wonder how the centers can cram even more data onto their already overloaded systems.
When EEOC's Smith was shopping for a financial management center, he found few choices. Smith, who recently announced that Interior's center will continue to host EEOC's systems, says GSA declined to bid because it lacked capacity to take on new customers. (GSA says other factors were at play.) Transportation had only recently become a shared service center and had few customers it could point to as success stories. Treasury had its hands full with the recent addition of OPM's systems. Smith also briefly considered private sector centers, but says he didn't find any with enough experience. He wanted a center with a demonstrated track record of working with federal agencies.
That left Interior's center, which won, Smith says, because it offered the best value.
"If I was at big agency, I'd say, 'Show me a vendor in the marketplace that's ready to take my business,' because I don't think you can find one. . . . If you start to look around, the success stories are far and few between," he adds.
SBA ran into that problem while exploring its options in 2002 and 2003. Stephen Galvan, chief operating officer and chief of staff at SBA, says the agency talked to the Bureau of Public Debt's Administrative Resource Center and was told the center could not take on SBA until fiscal 2005 because of a backlog of work. SBA held a competition and awarded a $2.4 million five-year contract to Corio, an application-hosting service that's now part of IBM.
Today, most federal centers contend that they have the capacity to add customers. Transportation's deputy chief financial officer, Larry Neff, says the Transportation Security Administration's move to the Homeland Security Department created an opening for new customers. He says Transportation's center is actively seeking new customers and recently hired consultants to help with marketing.
Fred Phillips, executive director of Bureau of Public Debt's Administrative Resource Center, says the center can accommodate new customers and expects its current roster of 500 employees to expand to more than 600 in the near future. If ARC took on a large agency, Phillips says, it would use a phased-in approach to make the shift gradually.
Interior's deputy assistant secretary for business management and wildland fire, Nina Hatfield, says: "It's one of those things where you explore customer by customer. We would work on being able to scale up to meet their needs." Contracts with the private sector help the center expand capacity, she adds. Chief Financial Officer Kathleen Turco says GSA now is ready to handle new customers, including large agencies.
CGI Federal Inc., a Fairfax, Va.-based subsidiary of Canada's CGI Group Inc., says it can help federal centers expand by housing data and other services. The company hosts GSA's financial data and its customers' data at a center in Phoenix. "It will help them expand, with us behind them for surge capacity," says Donna Ryan, vice president at CGI Federal. It also offers agencies full financial management services out of its Phoenix center; the Corporation for National Community Service was its first full-service client.
"As with any other small business, the ca-pacity can be enhanced as the need arises," says OMB's Combs. "I think that it puts a little entrepreneurship into the entire process." OMB currently is circulating a draft of its forthcoming guidance on how to move to a center for financial management. The document, which is hundreds of pages long, includes frequently asked questions about how the shared service centers work and a menu of what they offer. The final guidance also will include a sample template for agencies trying to put together a request for proposals for a new financial management system.
"This will give a clearer picture of options and of what centers can offer agencies. . . . It will make it easier to make the transition to a shared service center," says John Sindelar, acting associate administrator at GSA's Office of Governmentwide Policy. "There are still murky areas that need clarification."
Private vs. Public
One of those murky areas is whether a federal agency should trust a commercial center with its financial data. "People tend to be more comfortable with going to another federal agency," says Wayne Bobby, vice president of finance and administrative solutions at Oracle Public Sector, which recently opened an Austin, Texas, center that can host agencies' financial management systems.
Treasury's Phillips is proof. "We're not sure the private sector is yet ready to provide the extensive services we can provide, nor the quality services," he says. "It could be a common perception, the idea that the private sector can do things better, but I'm not a believer in that myself."
"My question is, are they really committed to the long term of this business? They've got shareholders to please," says Irwin T. "Ted" David, former chief financial officer of the National Weather Service and now a consultant. On the other hand, he adds, the private sector has the skill and capacity to handle large federal agencies, as long as companies invest in employees who really understand federal accounting principles.
Bobby says one benefit to using Oracle's center is that it is managed by experts in Oracle software. "When there's an upgrade or a bug fix, those people at the Oracle facility have probably done that 10 to 15 times before . . . those folks at centers of excellence are not as familiar," he says. Commercial centers also may be more motivated to provide quality service because if they don't, they'll go out of business, says Labor's Mok. CGI Federal's contracts with agencies usually are performance-based, so the company faces financial penalties if it doesn't meet service-level requirements.
Andrew Malay, vice president of SAP Public Services Inc.'s federal civilian division, says he expects privately run centers to be the way of the future because they let agencies focus on their core missions, in addition to providing economies of scale. SAP and IBM recently joined forces to start a financial management center in Northern Virginia. It does not have any federal customers yet.
Federal centers say they have the competitive advantage, in part because they have a more intimate understanding of federal accounting. "We can talk the language," says GSA's Turco. GSA's center has experience providing monthly financial reports and working with appropriated funds, for example, she says.
From OMB's perspective, the back and forth between federal and commercial centers demonstrates a healthy competitive spirit. "We're agnostic in terms of what solution the agency ends up on. What we want to make sure is that they've evaluated all the options," says Danny Werfel, chief of OMB's financial integrity and analysis branch at the Office of Federal Financial Management.
Tim Vigotsky, former chief of the National Business Center and a consultant to federal agencies and the private sector, says concerns about the capabilities of federal financial management centers can be addressed through contracts with the private sector.
"It's not just going to be the government all by itself trying to stand up [centers]. Public-private partnerships are key," he says, echoing a commonly expressed sentiment.