Will shared services disrupt competition?

Software vendors are rattled by the federal government's move to operate financial management systems on a shared-services basis, judging by a pair of op-eds published in FCW late last year. The policy requires federal agencies to follow a "federal first" policy of considering a shared-services provider when modernizing or upgrading financial management systems.

Some industry leaders are concerned that the policy could dramatically affect the $8 billion annual market for government financial services, limit competition and hinder agencies' ability to manage complex programs. There's no hard count of how many financial systems the government maintains, but some estimates put it at about 150, with perhaps thousands of feeder systems sending data to the systems of record.

"Consolidation is a noble goal but not when it flies in the face of efficiency and rationality," wrote Michael Hettinger, then the director of the Public Sector Innovation Group at the Software and Information Industry Association and now an executive at trade association TechAmerica.

Despite concerns on the industry side, the policy is gradually taking shape, with the designation on May 2 of the departments of Agriculture, Interior, Transportation and Treasury as federal shared-service providers for financial management. Treasury's Office of Financial Innovation and Transformation, which is responsible for implementing the policy, is hosting an industry day on May 21 to showcase the offerings of the four providers.

Hettinger recently said Treasury officials are being more realistic about the time frame of moving financial management to shared services. "If I've changed my position at all over the last couple of months, the only change I recognize is they're not trying to do all of this transition in the next year or two," he said.

Moving to enterprisewide shared services is a decades-long trend in the private sector, and the government is trying to catch up. It's easy to make the case for financial management as a shared service because there are governmentwide accounting standards and because "counting money is counting money," said Trey Hodgkins, senior vice president of the Information Technology Industry Council's IT Alliance for Public Sector.

"A lot of industry believes [the shared-services model] holds the pathway for true enterprise technology deployment in the government space," Hodgkins said. "The underlying rules and requirements, certainly the mathematics, and even the technologies are or should be relatively consistent, so the concept makes a lot of sense."

But he added that questions remain about whether vendors will be shut out of a shared-services environment.

There seems to be strong agreement among vendors and government financial executives that some current vendors will not remain in the federal market as the shared-services policy takes shape. According to a poll of attendees at the Federal Financial Systems Summit in January, 86 percent agreed that some financial software products would be squeezed out of the market by the policy.

That puts the onus on the government to make sure there is still strong competition, said Carlos Otal, a managing partner at Grant Thornton who focuses on government finance and accounting. "Treasury and [the Office of Management and Budget] are going to have to figure out, in the long run, how they incentivize innovation in a market where a software vendor doesn't see opportunity for growth," he said.

The government could not offer shared services without strong vendor participation. The systems are based on commercial software and operated by integrators, large IT firms or vendors as hosted applications. "It's not an all-fed environment," Otal said. But if financial systems are operated on a large scale by a handful of providers in the future, such investments "are going to be concentrated around a few clusters rather than spread out across the government."

However, it is still too early to tell what effect the policy is having on government and vendors.

"Many, many agencies have used their own systems for decades," Hodgkins said. "Trying to wean them from those systems, move them into a more common platform and end up with a more enterprise approach to financial services for the entire federal government -- we've got a ways to go before we're there."