Making Internal Services Work for You or
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This column contains excerpts of material written by PSGer Peter Beck after interviewing Mollie Anderson, the Director of the Iowa Department of Administrative Services, and Patti Allen, the Department's Chief Marketing and Communications Officer. My thanks to them!

Recent work with three organizations has caused me to think anew about internal services (or shared services, central services, support services - whatever term you use). Here are three short vignettes from inside each engagement -

• One client was a fiscal shop for a school district. While we were working on other strategic opportunities, it became obvious to us - and them - that the financing of their central shared services was all bollixed up (a technical term). There were complicated "charge back and buy back" systems, calculations and distributions of overhead, and indirect cost plans in place. Sadly, no line managers understood what they were getting charged for and why. And, when we asked the fiscal director to summarize how the shared services were designed, she responded with a blank look.
• Some time back, we were working with a state's general services office primarily responsible for central procurement and purchasing. Here is a verbatim quote from their annual report - "We work with the State's control agencies and are attuned to their requirements. We also attend to the interests of private vendors and contractors. It is clear that there is more to learn about providing the right amount of oversight and balance." In our work with them, we advised them that "balancing" interests served no one well. Their strategic opportunity, we suggested, was to "Deliver Compliance unto Caesar and Deliver Results unto Customers!" - and to intentionally sort out the two. That is, we considered it important that they separate compliance activities from service activities because they have two very different purposes and customers. (And, by the way, we don't view vendors as customers.)
• The last vignette is a positive one. In July of 2003, four Iowa state departments (Personnel, General Services, Information Technology, and the Revenue and Finance Accounting Bureau) combined to create a department with a new name - The Department of Administrative Services (DAS). For many arms-length observers, the name-change may have been interpreted as just another politically motivated merger. In this case, however, the new name coincided with something dramatically different - the introduction of entrepreneurial management and open competition to the department. Gone were the days of General Fund subsidization, yearly appropriations, and cash accounting. Equally absent were the number of Full Time Equivalents, and price limits. Over the past year, DAS has taken the first steps toward becoming a public enterprise, which according to law, is required to compete with other public and private organizations for much of its revenue. According to Mollie Anderson, the Director of DAS, success now depends on "transform(ing) the organization into a flexible, competitive and customer-focused enterprise." More on their experience later.

First, each of these experiences highlights the need for an intentional strategy regarding internal services. To our way of thinking at PSG, internal services can be conceived as falling into one of four broad categories:

1. Enterprise Services are "businesses" owned and operated by an agency or department. They are subject to full competition from other public or private organizations. They are funded and managed like a business - according to a business plan. Prices are not solely based on costs, but can consider market trends, customer resources, customer demand, and value realized.

   Enterprise services operate in a marketplace where customers have free choice regarding their service provider and the amount they consume - choices driven by price, service and value received. If customers of competitive marketplace services choose alternative sources of the service, the activity must reduce its expenditures accordingly. Long-term, if the service is not providing quality service at a competitive price, its business will cease. If it is, it will thrive.

2. Utility Services are centralized monopolies run by an agency or department for the benefit of customers that consume those services. The funding and management arrangements are analogous to those used in public utilities or cooperatives.

   Economies of scale make it most practical for these services to be centralized. Individual agencies or departments are the customers of these utility services, which are provided to support the work of those agencies. Since by definition utility services are best provided from a central resource, customers have no choice in the source of the service. However, they do have a choice over the amount of the service they consume.

   Utility services are funded through an internal service revolving fund so that each customer pays its appropriate share of the total cost of providing the service. To the maximum extent possible, customers are charged for utility services on the basis of the benefit they derive. Each utility service should have a customer board to provide guidance on the types of services to be provided by the utility, service levels required to meet customer demand, investment proposals, and rate proposals.

3. Compliance Activities are those oversight functions that work to achieve compliance with laws rules, norms, standards, and other expectations.

   Compliance services are primarily designed to meet a statewide objective rather than individual agency needs. As such, compliance meets the collective needs of all citizens and is funded by appropriations from the General Fund through a traditional budget process. The customers of these services are citizens collectively, as represented by the executive and the legislature. Other agencies or departments are 'deliverers' or suppliers of that compliance.

   "Winning compliance" is the strategic approach that should guide the majority of compliance activities. Approaches to strengthen compliance include:

   • Performance measurement and reporting of the level of compliance achieved
   • Negotiated performance plans - to improve compliance
   • An advisory panel of compliers to provide ongoing feedback on compliance norms, policy and operations, and
   • Recognition for those that consistently comply with the standards, rules, and regulations.

4. Leadership Services are primarily designed to look after collective interests, including helping to anticipate, define and shape the future. Typical leadership services include strategic planning, performance measurement, and research/ development. Leadership services are funded by appropriations from the General Fund.

This Internal Services Guide outlines the key differences

Parts of these approaches are already in place inside government, yet not always by design. As you can see, clarifying the category of internal service also clarifies primary customer for whose benefit it exists, accountability, and financing mechanisms. To take the first step, I'd recommend that you:

• Categorize each current internal service by appropriate type (i.e. what it is now; what it should be.)
• Move activities, as appropriate, to enterprise status!
• At the very least, use ONE of these techniques, such as a co-operative board of agency-owners to determine services, set rates and foster accountability.

This is not to say that it is easy. It is upsetting for staff, for leaders - and even for customers. Yet, the pot of gold at the end is worth it. Here's what one pioneer learned.

Iowa's first year experience

Today, more than a year after the creation of DAS, the agency is still on its feet, and continues to overcome the obstacles that open competition presents. For Director Anderson, the biggest challenge has come from the "new way in which our department is financed." Prior to July 2003, the department depended on legislatively mandated funding to fuel its operation. Now the department depends on customers for funding. As DAS has learned, customers can often be more demanding than the legislature. Anderson's new agency motto "best price and best quality" aims at meeting new demands and maintaining a competitive edge to earn revenue.

The second biggest challenge faced in the first year was the transition to become "customer focused and customer controlled." Just one look at the DAS website will prove how far they have come, and the difficult road that lies ahead. The online organizational information explains the shift: "Entrepreneurial management is a customer-focused approach to delivering services in a competitive marketplace. This change reflects a growing trend in both public and private sectors of today's economy to focus on the customer." Also online, customers can access a new catalog that lists the agency's products and services along with the price.

DAS Director Anderson has been careful not to change too fast, by "focusing on the products and services that our agency is best at delivering." DAS personnel have been busy collecting information both inside and outside the agency to determine changes that would help increase value and reduce cost. For instance, in one tough decision, Anderson decided the agency should phase out the auto maintenance business and retool its fleet services. Anderson expects many more changes in the future, and remains optimistic that DAS will remain state government's supplier of choice. "By leveraging economies of scale, making smart investments and managing input costs, we can meet or beat prices elsewhere," said Anderson.

Not all the changes that need to be made, however, will occur within DAS. Customers too must understand that their roles have changed. Customers of utilities need to be active participants, offering DAS feedback on their unique needs and understanding some of the inputs and costs built into the agencies' price structure. In a necessary first step, Customer Councils have been organized to help facilitate a dialog between DAS and state agencies and to decide on utility rates.

There is still a long road ahead for DAS, but even in the first year, there have been successes to report. Entrepreneurial management has already demonstrated value by:

• Saving money through constant competition. DAS has already reduced expenditures by more than 12 million dollars.
• Freeing DAS to make long-term financial decisions necessary to maximize value, such as borrowing to invest in technology or training of employees.
• Forcing continual improvements, because DAS is in competition for customers every day.
• Making DAS directly accountable to its customers. Because its customers can go elsewhere - or buy less.

DAS has succeeded in introducing entrepreneurial management within its organization. Many challenges have been overcome, while others lie ahead. Director Mollie Anderson is ready to confront new challenges and demonstrate to Iowans that "we can be careful with public money, and creative at the same time." All who work within government internal services, or depend on their services, should cheer the DAS2 pioneers on!

If you have questions about the new Department of Administrative Services, or Entrepreneurial Management, please contact Patti Allen, Patti.Allen@iowa.gov