Pay off your private cloud -- by sharing it

The NASA Shared Services Center at the Stennis Space Center in Mississippi is one of the government’s success stories. NSSC provides IT, financial management, human resources and procurement services for more than 18,000 NASA employees.

That means NASA has centralized, agencywide resources instead of multiple, redundant systems run by each division. The bottom line: NASA avoids about $16 million in annual costs, officials say.

NSSC certainly isn’t unique. The Agriculture Department’s National Finance Center (NFC) provides central payroll services for the agency, and another 170 departments in all three branches of government tap into the resource, which issues paychecks to about 655,000 employees — or 35 percent of the civilian workforce — every two weeks.

Adding to the list of cross-agency business services are the Interior Department’s National Business Center and multiple line-of-business sites that consolidate everything from human resources to geospatial services.

With the increasing ease and financial benefits of creating private cloud-based IT services, should other agencies take the leap and use that infrastructure investment to become a shared services (a.k.a. community cloud) provider? After all, the incentives aren’t purely altruistic — encouraging others to share the investment load can reduce capital and operational costs for the host agency. Politics also play a role.

"Especially among the largest agencies, there is interest in gaining some marginal political clout and avoiding [operations] being absorbed by other agencies," said Massimiliano Claps, a research director at Gartner. "They become providers of shared services in essence to avoid becoming users of shared services."

But there are risks. Service providers might struggle to scale their IT and business processes to effectively serve significantly higher volumes. And if cost-sharing clients never materialize or decline to renew contracts, the host agency is left with bills for upfront investments that could ultimately push internal costs higher.

The risks are also worth noting for consumers of the services. Assessing the financial health of a potential provider is essential when deciding whether to sign a contract.

So what does it take to succeed in shared services? Veteran practitioners say there are five key steps.

Step 1: Develop a solid business case

Start with two basic business questions: First, can your agency deliver services at prices that are at or below what potential customers are already paying, and are there enough potential users of the system to achieve economies of scale?

One way to stack the odds in favor of a shared service is to stick with basic business services that fit standard processes. Rebecca Dubuisson, director of NSSC’s Business and Administration Office, said sharing works best for "high-volume, low-touch services" that run effectively from geographically remote locations. Standardized processes attract the largest customer base and are easier to deliver economically.

Setting fees low enough to attract customers but high enough to reduce the provider’s expenses is another matter. The details must be worked out in Step 2, but at the initial assessment stage, agencies might need to make some fundamental decisions to ensure financial and operational viability.

For example, the U.S. Postal Service was an early adopter of the shared services model when it began consolidating its data centers and business services two decades ago. Bob Otto, former CIO and chief technology officer at USPS and now executive vice president of advisory services at Agilex Technologies, said that over time, outside agencies inquired about tapping into some of those services.

"Quite frankly, we told them no," he said. That’s because USPS officials had decided that keeping the services in-house was the best way to maintain the necessary performance levels for the agency’s internal operations.

So far, NSSC has taken a similar stance. Although managers continue to evaluate the viability of offering the center’s services outside NASA, for now it remains an in-house operation.

Even if the early business case shows promise, shared services should be viewed as a long-term investment rather than a project to undertake for a fast return on investment. NSSC took two to three years to stabilize pricing and fully benefit from economies of scale, said Robert Poncet, NSSC’s operations and budget management lead.

Step 2: Determine the proper pricing levels

Many service providers base customer fees, or chargebacks, on a per-transaction rate — for example, a set price for each invoice processed. Providers of IT services often charge a monthly or quarterly subscription fee based on estimated use. But in either case, activity-based cost accounting might be a new skill government agencies need to learn.

To find the right price point for each service, the would-be provider should first document all the costs involved in providing that service and then divide that amount by the number of potential customers to establish an average cost. The provider can use that number as a rough initial estimate for comparing what potential users are spending in their current operations or what private-sector providers are charging.

"If your fees are higher, that’s probably a non-starter," Claps said.

Fees for ongoing services are only one consideration. Providers must also set charges to cover expenses incurred when new customers migrate to the community cloud. They must consider any customizations that might be required to get the two organizations in sync. Many agencies, including USDA, use a separate agreement beyond the standard service contract to recoup those costs.

Also consider how to pay for ongoing maintenance and upgrades to the shared services. For example, Congress recently gave NFC the authority to add a small percentage to its rates that is earmarked for reinvestment in and enhancements to existing operations.

"When we do a technology refresh, those funds could be used for that purpose," said John White, the center’s director.

Finally, although service providers strive for the cost advantages of standardized services, they still need a pricing plan that accommodates any special requirements that individual customers might need. For example, White said NFC might need to manage wage garnishments on employees’ paychecks.

"There’s also reporting that agencies can do off our reporting center, and they need CPU minutes on our mainframe to do that," he said. "This is tracked and charged on a usage basis."

Step 3: Lock down funding

New service providers have a range of potential funding options, depending on their organizational structure. Agencies can seek congressional funding by submitting an Exhibit 300 request, but "they will have to make a tremendous business case" in today’s economic environment, Otto said.

The Energy Department’s Magellan initiative, a research project that explores the effectiveness and costs of cloud computing for DOE’s science applications, bankrolled the nearly $33 million shared computing resource using American Recovery and Reinvestment Act funds and doesn’t charge users for its services, said Daniel Hitchcock, DOE’s acting associate director of advanced scientific computing research.

However, future enhancements will be funded by users or by contracting with commercial cloud vendors, he added.

Some agencies decide to pay for upfront investments from internal budgets or by transferring savings after consolidating or eliminating outdated services.

Sometimes a hybrid approach is best. For example, NFC’s services for USDA were initially paid for from a working capital fund at the agency. Outside customers paid for migrating to the centralized services and for customizations.

Similarly, NASA headquarters provided an initial investment to keep NSSC service rates as low as possible in the early stages of its operations to minimize budgeting and funding volatility, Dubuisson said. But once the center took off, NASA divisions paid for their services via quarterly transactions throughout the year.

Step 4: Use customer agreements strategically

Well-crafted service-level agreements (SLAs) and service catalogs are essential and complementary elements of a successful plan.

SLAs define the quality and costs of services. "This is a critical point because one of the biggest reasons that agencies are reluctant to go to shared services is the feeling that they are going to give up control and see decreased service levels," said Brian Siegel, federal practice service line leader for infrastructure operations at Deloitte Consulting.

Service catalogs go a step further by describing the full range of services an organization offers and how providers calculate and collect fees for each service. Before they created their own service catalog, NSSC officials found that customers didn’t always understand the individual charges.

"Now they are pretty clear about what goes into each transaction," Dubuisson said.

Service providers need to be ready to adjust SLAs to meet the changing needs of customers. For example, as NASA’s space shuttle program was being scaled back, NSSC worked with the affected customers to assess the impact and adjust chargebacks.

"It’s important that we communicate early and often with [customers] in the budget development process," Dubuisson said. "We need to know what’s happening at their centers that might affect our model."

Service center executives say they routinely update SLAs and service catalogs. For example, USDA renegotiates contracts annually based on the previous year’s volumes, so, for example, fees for 2011 are based on 2010 levels.

"There’s no disagreement, but you’re always a year in arrears when it comes to catching up with volumes that either go up or go down," White said. "But ultimately, it evens out."

The annual review serves a purpose beyond just aligning chargebacks with current consumption rates. "In my mind, this is one of the most significant events" for service providers and customers, Poncet said. The process helps customers understand their rates and feel as though they have a role in setting them, he added.

But before that happens, service providers must review all the line items that contribute to a service’s total cost, including any support fees included in the total chargeback. It’s worth the effort.

"Once customers realize what is going on, their comfort level increases and their anxieties decrease," Poncet said.

Step 5: Create an effective support infrastructure

To keep a high-volume service center running, agencies need a wide variety of support systems to handle everything from billing and payments to tracking and reporting on use rates. The staff and technology infrastructure for those activities might be extensive, depending on the services provided and the number of customers. Those costs must be factored into pricing models and SLAs.

The good news is that commercial applications, including the enterprise resource planning systems that support shared services offerings, often include accounting and administrative modules to help service managers track employee time, customer service volumes, and other key data for properly assigning and summarizing usage rates.

Mechanisms for transacting payments are also straightforward. Service providers and customers often use interagency agreements to formalize services, fees and other aspects of the relationships. The actual transactions might be carried out via the Intra-Governmental Payment and Collection System, the Web-based fund transfer system managed by the Treasury Department’s Financial Management Service.

The size and importance of the support operations mean service providers will need a full-time, dedicated staff for those activities. The personnel commitment can be substantial. USDA’s NFC employs about 650 people directly in its shared service operations and nearly 400 more for ancillary support activities.

Such a group’s job also extends to improving customer service. "A shared services organization must stay on top of customer trends in satisfaction," Dubuisson said. "If you don’t do this, you don’t take your organization to the next level."

Inside a service-level agreement

Service-level agreements provide the financial backbone for shared services relationships. For example, the NASA Shared Services Center uses an SLA to govern its provision of services to other divisions within the agency. One element of NASA’s SLA is a clear description of the services offered and the corresponding rates, as shown in this SLA for fiscal 2011.

Source: NASA Shared Services Center