As government agencies brace for protracted pressures on administrative or ‘mission-support’ spend in the coming years, much of the conversations with government finance executives has focused on how to reduce “shadow” administrative activities done in the field which could theoretically be provided centrally.  Executives argue, rightly, that there is tremendous duplication of effort that creates unnecessary complexity, increases errors and prevents an agency from taking advantage of technology.   But centralization doesn’t solve the problem either; in fact, without standard processes and procedures and robust technology, centralization can create more harm than good (at least from an efficiency perspective.) There is no perfect organizational structure and no singular model for which activities or functions should be centralized or decentralized. The decision depends on the agency’s mission and a particular function’s goals. The key is to ensure that functions are “fit for purpose.”

Fit for Purpose

The benefits of becoming a well-connected organization are tangible and compelling: organizations that have invested more in structural “connective tissue” (elements such as incentives, information flow, informal connection points, and decision rules, forums, and collaborative mechanisms), outperform their peers.  At the same time, cost should be one of many considerations. When measuring a function’s performance, Finance and Procurement leaders should select a limited number of metrics (recommended: no more than five) that link directly to agency mission and keep the team focused on what’s important. Keep in mind that if you restructure your function, it should be because either the current structure is impeding mission execution or it is sub-optimizing the performance of a critical business process.  If your goal is actually to get visibility and transparency into performance, centralization is one of many potential solutions to that problem.

Time for Change

Many government organizations in our network will launch a major organizational redesign initiative in 2012. These redesigns will include expanding Shared Services centers and implementing new ERP systems. However, the ever elusive task of optimizing the structure of corporate centers to meet cost objectives and also drive value for the business is an arduously long and difficult process. Fortunately, we can help facilitate your firm’s journey – contact us to learn more.

What Should I Be Doing?

My advice to CFOs is to be patient when it comes to the centralization decision – pick one specific transaction process (like accounts payable, for example) and run a pilot project.  Benchmark where this activity is done most efficiently (measured by cost, quality and productivity metrics) and assess the cost savings from centralization.  Then, consider a phased approach to centralization if you have a decentralized workforce, taking care to recognize that it may take twice as long as you’d hoped.