“Shared service cooperation in the public sector”

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MASTER THESIS O&MC

“Shared service cooperation in the

public sector”

Mark Kok

University of Groningen

Faculty of Economics & Business

June 2015

Kleine Beer 128 9742RJ Groningen

06-42788398 m.a.a.kok@student.rug.nl

MSc BA track: Organizational & Management Control Student number: 1617184

Supervisor: E. van de Mortel Co-assessor: B. Crom

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Abstract

A shared service center (SSC) bundles activities and provides pre-defined services in order to eliminate duplicate tasks in the different member organizations (Janssen & Joha, 2006; Herbert, 2009; Paagman et al., 2014). An example of public administration in The Netherlands cooperating through SSCs is water boards.

The aim of this thesis is to increase understanding about the reasons behind the decision to establish a shared service center and if its original main goals have been realized.

The research question of this thesis is:

To what degree does collaboration through shared services influence efficiency, improving the quality of service and cost reduction of water boards?

This was researched by interviewing the responsible employees from water boards in the north, east and west of The Netherlands. Because of time restrictions, not all water boards and collaboration initiatives in The Netherlands were researched.

There are three main motives found in literature that drive organizations to establish a shared service center, these being the need for process efficiency gains, cost savings, service quality improvement by focusing on core tasks, and standardization. These factors all influence the members of shared service centers, before a SSC is established.

After an interorganizational shared service center has been established, its effectiveness is influenced by preconditions. These being the governance framework, nature of the principal-agent relationship and level of trust between member organizations.

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1. Introduction

In recent years, shared service centers (SSCs) gained the interest of politicians and public administrations to improve efficiency of their organizations (Janssen & Joha, 2006). Several bodies in the public sector have come together to share services through a SSC, a newly established organization with its own constitution and an objective of breaking even or perhaps making a small profit (Herbert & Seal, 2013). An example of public administration in The Netherlands cooperating through SSCs is water boards. Water boards are public bodies, which main purpose is the care for water management in a certain area of The Netherlands (Rijksoverheid, n.d.). Its core tasks are maintenance and prevention of damage to structures in the water system and wastewater purification (Overheid, 2015).

A shared service center (SSC) bundles activities and provides pre-defined services in order to eliminate duplicate tasks in the different member organizations (Janssen & Joha, 2006; Herbert, 2009; Paagman et al., 2014). Most common motives for establishing SSCs are aims for process efficiency gains, cost savings, and improved service. However, literature states that establishment of a SSC is not only dependent on these motives. SSC development is context-dependent, because the internal and external context influences the motives and preconditions for a SSC. The survival of the SSC is contingent on the organization’s environment and the variety of challenges that was found is quite high (Knol et al., 2014). 1.1 Research question

Water boards have been merging and scaling up in size for many years. In the year 1850 there were 3500 water boards in The Netherlands, in 1995 there were 135 left (Partners & Pröpper, 2005). Currently, there are 24 water boards in The Netherlands, 23 of which are represented by the Unie van Waterschappen (UVW, n.d.). Water boards seek cooperation in order to be better able to take responsibility for their performance, giving insight and being transparent, providing service that is customer-focused and controls costs. They do this in various ways, for example by cooperating in the field of taxes through shared service centers (Unie van Waterschappen, 2005).

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how collaboration in the SSC turned out to work in practice, how this influences efficiency and effectiveness of member organizations and how the coordination of tasks and responsibilities are controlled through governance.

The research question of this thesis is:

To what degree does collaboration through shared services influence efficiency, improving the quality of service and cost reduction of water boards?

The research question will be answered by dividing it into these sub questions: - To what degree does collaboration influence efficiency?

- To what degree does collaboration influence cost reductions? - To what degree does collaboration influence quality improvement?

- To what degree are efficiency, quality improvement and cost reductions present at shared service collaborations from water boards?

This was researched by interviewing the responsible employees from water boards in the north, east and west of The Netherlands. Because of time restrictions, not all water boards and collaboration initiatives in The Netherlands were researched.

1.2 Scientific relevance

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them ideal candidates for working together on the process level and ideal subjects to perform comparative research on. In order to narrow down the scope for this thesis, focus is on how business operations and support functions function in the SSC, not on the contents of how these tasks are performed.

1.3 Social relevance

Cutbacks are a current topic in public administrations. For example, it has been shown that municipalities can realize significant financials cutbacks by collaborating (CAOP, 2015). In another public administration, water boards, it was stated in 2011 in the water management agreement (´Bestuursakkoord Water´; Ministerie van Infrastructuur en Milieu, 2011) that it is the ambition of water boards to realize a cutback in costs for water management and water purification, amounting to €380 million by the year 2020, through collaboration on the regional level. Currently, 45% of this cutback has been realized (VNG, 2015). This thesis will focus on finding out how water boards cooperate in practice and if their collaboration efforts have indeed led to cost savings.

1.4 Thesis outline

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2. Literature review

In order to answer the research question of this paper, “To what degree does collaboration through shared services influence efficiency, improving the quality of service and cost reduction of water boards?”, the main concepts related to the subject have to be defined. In this section, the main concepts of relevance to this thesis will be defined and explored further. First, the concept of shared services is defined. Then, the different motives for establishing shared services are explored. Furthermore, the subjects of governance, agency theory and trust are explored. Finally, after an explanation of what water boards are, this chapter ends with the conceptual model of this thesis.

2.1 Shared services

A shared service center (SSC) bundles activities and provides pre-defined services in order to eliminate duplicate tasks in the different member organizations (Janssen & Joha, 2006; Herbert, 2009; Paagman et al., 2014). It is established when a firm removes support services such as finance, IT, HRM, customer service, facility services, marketing, legal advice and policy development from front-line business units and puts them in a semi-autonomous business unit (Korsten, 2004; Herbert & Seal, 2013). SSCs combine market principles with in-house control. They work at arm's length and can act in an entrepreneurial way outside the control of divisional management but answerable to it through a service-level agreement (SLA), which are pre-agreed upon conditions (Jansen & Joha, 2006; Herbert & Seal, 2013). A SSC can be either intraorganizational or interorganizational. A SSC is said to be intraorganizational when it is shared between different departments of an organization, or interorganizational when services are shared between multiple organizations (Janssen & Joha, 2006; Paagman et al., 2014).

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9 2.2 Motives for establishing shared services

In the researched literature, the most common motives for parties to establish SSCs are: - Process efficiency gains (Janssen & Joha, 2006; Herbert, 2009; Paagman et al., 2014) - Cost savings through elimination of duplicate tasks (Janssen & Joha, 2006;

Strikwerda, 2010; McIvor, 2013; Paagman et al., 2014) and economies of scale (McIvor et al., 2011; Rothwell et al., 2011)

- Improved quality of service by being able to better focus on their core business (Janssen & Joha, 2006, Strikwerda, 2010; Rothwell et al., 2011; Paagman et al., 2014) These motives and their main advantages and disadvantages will be further explored in this section.

2.2.1 Aim for process efficiency gains

In order to define the concept of process efficiency gains, first it is of importance to define what a business process is and what an efficiency gain constitutes. A business process is an activity that cuts across functional boundaries, is vital to the quick delivery of services and promotes high quality or low costs (Jones, 2013). Efficiency is defined by Groot & Selto (2013) as minimizing resource use per unit of output. It is expressed in the ratio between the outputs and the inputs (resources) available, and assesses the organization’s capability to use these inputs (Stroobrants & Brouckaert, 2012; Rinaldi et al., 2014).

According to Stroobrants & Brouckaert (2012), an efficiency gain is a project, activity, process or innovation that generates an increase of the ratio between the outputs produced and the inputs (resources) consumed in producing those outputs. An efficiency gain is reflected in the reduction of the input/output ratio. There are two types of efficiency gains, these being cashable and non-cashable efficiency gains. The cashable efficiency gains release financial resources by reducing inputs or prices, while maintaining outputs and quality of these outputs. Non-cashable efficiency gains are obtained when productivity or output quality increases, while inputs stay similar.

Based on the above, process efficiency gains are activities which work across functional and organizational boundaries, meanwhile increasing input/output ratio. This may be done by cooperation, for example in the form of a SSC.

Advantages. Shared service centers are utilized by client organizations they support, in

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gained the interest of politicians and public administrations to improve efficiency (Janssen & Joha, 2006). Public administrations should work efficiently and effectively (Rinaldi et al., 2014), for instance through internal restructuring or by the creation of decentralized units (Cuadrado-Ballesteros et al., 2013). For this, they may cooperate or set up partnerships such as shared services to increase efficiency. Shared services may lead to more transparent organizations, because the collaboration takes place on the basis of contracts in which price, volume and quantity of the services are specified. This brings more insight into the true needs and costs (Korsten et al., 2004; Janssen & Joha, 2006).

Disadvantages. Main disadvantages include the fact that establishing a shared service

involves significant organizational change (Korsten et al., 2010; McIvor, 2011) which requires organizational and political ambitions to be temporarily adjusted in order to facilitate this change (Korsten et al., 2010). Thus, before initiating a SSC, considerable changes in organizational arrangements, coordination mechanisms, new processes and allocation of responsibilities need to be taken into account (Janssen & Joha, 2006). According to Paagman et al. (2014), grouping similar support processes into centrally provided shared services may increase efficiency and effectiveness. However, achieving cost-efficient operations is a challenging task (Knol et al., 2014). Furthermore, Cuadrado-Ballesteros et al. (2013) found that in Spain, outsourcing tasks to decentralized units did not improve the level of annual efficiency, instead it even impacted the efficiency of local governments in a negative way. Therefore, it is essential that efficiency gains are measured, reported and audited properly (Stroobrants & Brouckaert, 2012).

2.2.2 Aim for cost reductions

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1) Activities and resources to be externalized are generic and do not require specific assets or knowledge

2) Activities and resources are needed on a predictable or programmable basis

3) Transactions are at low risk from losses because uncertainty about the opportunism and capabilities of the provider is low.

Advantages. Outsourcing activities to a SSC can decrease production costs and

decrease an organization’s transaction costs because of economies of scale. Economies of scale relate to the average cost per unit of producing goods and services. An economy of scale exists if the per-unit cost of production falls when the level of production increases (Ross et al., 2011). With the money freed, service levels of the separate organizations can be improved without giving up organizational autonomy (Janssen & Joha, 2006).

Disadvantages. Several bodies in the public sector have come together to share

services through a SSC with an objective of breaking even or perhaps making a small profit (Herbert & Seal, 2013). However, Janssen & Joha (2006) found that expected cost reductions don’t always materialize, and that initial promises of the SSC may go beyond realistic expectations. With the extra coordination efforts that have to be exerted, also come extra costs. Next to this, functions in a shared service are usually awarded with a higher pay scale (Korsten et al., 2004).

2.2.3 Aim for service quality improvement

Paagman et al. (2014) found that in literature, improving the quality of service was ranked in second place after to cost saving, as motive for establishing a shared service. The quality of service was believed to improve due to the focused attention of management, when moving the process to a SSC.

Advantages. As stated earlier, in order to provide services which are

customer-focused, water boards seek cooperation with each other in order to be able to improve these services (Unie van Waterschappen, 2005). Shared services are frequently claimed to improve quality by exchange of knowledge and best practices between member organizations (Paagman et al. 2014).

Disadvantages. Because public servants are placed outside of the organization and

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12 2.2.4 Summary

To summarize, there are three main motives found in literature that drive organizations to establish a shared service center, these being the need for process efficiency gains, cost savings, service quality improvement by focusing on core tasks, and standardization. These factors all influence the members of shared service centers, before a SSC is established. This is summarized in the model below (figure 1).

Figure 1: Main motives for inter-organizational SSC establishment

2.3 Preconditions for the shared service organization

Next to the main motives for establishing shared services between organizations, there are also preconditions and challenges which influence the SSC once it has been established. This topic is explored further in this section.

2.3.1 Governance framework

A challenge for shared services is governance arrangements, which need to function effectively to implement a SSC (Knol et al., 2014). Governance is a type of management control which is defined by Groot & Selto (2013) as “the set of decision rights, reporting requirements and evaluation processes for a specific set of activities, such as the bilateral responsibilities of an interorganizational relationship”. According to Vlaar, Van den Bosch & Volberda (2007), “certain levels of coordination and control are necessary to provide partners in an interorganizational relationship (IOR) with a degree of certainty, stability and guidance”. Inter-organizational cooperation is defined by Edström, Högberg & Norbäck

SSC

Aim for process efficiency

gains

Aim for cost reductions

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(1984) as “the relationship of ownership or common hierarchy which develop between two or more independent organizations as a result of an explicit agreement concerning exchange of resources”. Inter-organizational relationships (IOR) are combinations of resources from otherwise independent entities to accomplish specific purposes (Groot & Selto, 2013), and may emerge from a variety of starting conditions, such as institutional mandate or resource dependence (Ring & Van de Ven, 1994). The ultimate goal of this type of IOR contracting is to eliminate and mitigate relationship risk, from either internal or external sources (Groot & Selto, 2013). Another purpose of this control is the coordination of interdependent tasks between these partners (Dekker, 2004).

A framework of governance is needed for the design, use and interpretation of management controls and their respective signals (Groot & Selto, 2013). It is argued by Dekker (2004) that the chosen governance structure is critical to an IOR’s success. Governance structure is “the chosen organizational reflection of the operational, tactical and strategic responsibilities of both parties to an IOR, and it may specify action controls for who has which decision rights” (Groot & Selto, 2013). Management accounting and control are of substantial importance for the management and IORs (Dekker, 2004), because IOR efficiency can be implemented and improved (Groot & Selto, 2013).

An alternative reason for establishing a governance framework is when life expectancy of an IOR will exceed that of individual agents, making it necessary to formalize informal understandings and commitments (Ring & Van de Ven, 1994). Governance of inter-organizational relationships is a challenging subject when political decision making is involved (Lundin, 2007). Governance relations are specified contractually through a service level agreement (Herbert, 2009).

Service level agreement

The service level agreement (SLA) is an instrument of coordination and operational control between the SSC and its member organizations (Marciniak, 2013), which specifies the services a SSC provides (Janssen & Joha, 2006). It is thus a way to manage inter-organizational cooperation. Working together across inter-organizational boundaries is a popular component of organizational life (Vangen & Huxham, 2003).

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costs of the SSC are shared between member agencies (Janssen & Joha, 2006). The SLA may also specify these transfer prices organizations pay (Strikwerda, 2010). Through a predefined SLA, organizations are able to reduce the control complexity, thus combining the advantages of centralized and decentralized organizational structures (Janssen & Joha, 2006). It is however challenging to operate shared service centers across organizational boundaries, as organizations involved in a SSC are forced to share resources and establishment of a SSC distorts power maximization efforts of the individual organizations, which can be a significant cause for resistance (Knol et al., 2014).

In order to monitor and assess progress of the tasks in the SLA contract, it is key to find adequate measuring and evaluation methods for performance management (Marciniak, 2013). A typical failure is that SSCs focus on costs and budget instead of client satisfaction (Marciniak, 2013), thus, in order to realize the objectives of the SSC, controlling procedures and controls must be in place (Miller, 1999). SSCs need to continually justify their existence and need to commit themselves to ongoing measurement of their results (Marciniak, 2013). Process standardization

Standardization of business processes is often named in literature as a precondition to establishing a SSC (Herbert, 2009; McIvor et al., 2011; Marciniak, 2013; Paagman et al., 2014). Business processes are a set of several sub-processes or activities which are ordered logically. These processes have clearly identified inputs and outputs (Münstermann & Weizel, 2008). Organizations execute these processes to accomplish a particular objective (Rosenkranz et al., 2009) or to achieve a certain business goal (Münstermann & Weizel, 2008). They can be large and interdepartmental, narrow and intra-departmental or cut across organizational boundaries (Rosenkranz et al., 2009).

Business process standardization is the activity of establishing a limited set of solutions to problems (Rosenkranz et al., 2009). It uses standard operating procedures for process activities (Schäfermeyer, 2012) by aligning and unifying variants of a given business process against an archetype process (Münstermann et al., 2010). It increases business process performance (Münstermann et al., 2010; Schäfermeyer, 2012), as well as processing time, cost and quality (Rosenkranz et al., 2009; Münstermann et al., 2010). Standardization makes it easier to lift the process from one organization to another (Rosenkranz et al., 2009).

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(Rosenkranz et al., 2009). The more complex a business process is in terms of task complexity, non-routineness and interdependence with other processes, the more difficult it is to standardize this process through rules and procedures (Schäfermeyer, 2012).

2.3.2 Nature of the principal-agent relationship

An agency relation arises whenever the principal delegates decision-making authority or control over resources to an agent (Jones, 2013). Agency theory is concerned with this principal-agent relationship. Agency theory assumes that all social relations in economic interaction can be reduced to sets of contracts between principals and agents (McGee et al., 2010). Knol et al. (2014) state that agency theory focuses on contractual agreements between agents and principals, where the SSC represents the agent and its member organizations represents the principal. A key assumption of the theory is that the goals of the principal and the agent conflict (McGee et al., 2010).

There are two main problems which may occur in the principal-agent relationship. Firstly, the agency problem arises when agents make decisions that are not necessarily in the best interests of the principals (McGee et al., 2010), or when it is difficult or expensive for the principal to find out what its agent is doing (Eisenhardt, 1989). Agency costs then arise, because the principal has to take costly measures in order to align interests of both parties (Cuevas-Rodriguez, Gomez-Mejia & Wiseman, 2012). This may be realized through the corporate governance system (McGee et al., 2010). Secondly, a problem of risk arises when both principal and agent have different attitudes towards risk, leading to an agent preferring to take different actions than the principal in certain situations (Eisenhardt, 1989).

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16 2.3.3 Level of trust between members

Trust has multiple definitions. Ring & Van de Ven (1994) define trust as “a view based on confidence in another’s goodwill”. Trust is defined by Groot & Selto (2013) as “the belief that a partner will behave as expected in any transaction”. Vlaar, Van den Bosch & Volberda (2007) give a similar definition for inter-organizational trust, “the extent of trust placed in the partner organization by the members of a focal organization”. For this thesis, the definition of Ring & Van de Ven (1994) will be used, which also encompasses elements from the other author’s definitions because of its broad scope.

Trust is an important antecedent to collaboration (Lundin, 2007). Nurturing the collaborative process in partnerships is an ongoing process, and a significant issue in this is trust, which is an integral factor to the success of collaboration (Vangen & Huxham, 2003). The ability to form expectations about goals of the collaborating partner, and the partners’ future behaviors in relation to these goals create trust (ibid), and through this trust, exchange performance in inter-organizational relationships is enhanced (Lundin, 2007; Gulati & Nickerson, 2008). Moreover, high levels of preexisting inter-organizational trust lead to increased probability for a mode of governance which is less formal and thus less costly (Gulati & Nickerson, 2008). A concept related to trust is risk.

Risk

Trust and risk form a reciprocal relationship. Trust leads to risk taking, and when the initial expectations materialize, risk taking builds to a sense of trust (Vangen & Huxham, 2003). Managing transaction risks is one of the control challenges in pursuing desired or predetermined outcomes. A method for deliberately generating trust and avoiding control problems before a governance structure is established, is selecting an appropriate partner for cooperation (Dekker, 2004), which should be guided by the reputation of a potential partner for integrity, capability and teamwork (Groot & Selto, 2013). When power differences exist, participants in the cooperation initiative can feel reluctant to trust (Vangen & Huxham, 2003). This specific phenomenon is named relationship risk by Groot & Selto (2013), and defined as the exposure to loss from poor performance by an IOR partner.

Congruency

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and may boost collaboration (Lundin, 2007). It may be formed by the desire of both organizations to join together, in order to accomplish a task that they are not able to, or would rather not, undertake on their own (White & Siu-Yun Lui, 2005). In order to achieve congruency, partners should engage in bonding processes. Through these processes and interactions, trust in the goodwill of others will emerge, as will an understanding of constraints facing the relationship (Ring & Van de Ven, 1994). Congruency will facilitate the cooperation of organizations (Lundin, 2007).

2.3.4 Summary

To conclude, after an interorganizational shared service center has been established, its effectiveness is influenced by factors from its environment and member organizations. These being the governance framework, nature of the principal-agent relationship and level of trust between member organizations. This is summarized in the model below (figure 2).

Figure 2: Main preconditions influencing inter-organizational SSCs

2.4 Water boards

Water boards are public bodies, which main purpose is the care for water management in a certain area of The Netherlands (Rijksoverheid, n.d.). Its core tasks are defined in the Water law (‘Waterwet’), these being maintenance and prevention of damage to structures in the water system (for example water management structures like dikes, canals and polders) and wastewater purification (Overheid, 2015). In 2010, total yearly costs for managing the water system were EUR 7 billion (Ministerie van Infrastructuur en Milieu, 2011).

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The chairman of a water board is called the dijkgraaf, a person which is appointed by the Dutch government for a period of six years. Next to this, the water board is controlled by a committee which consists of a general governance (‘algemeen bestuur’) and daily governance (‘dagelijks bestuur’) (Rijksoverheid, n.d.). The general management is chosen through general election for a period of four years (Overheid, n.d.), and the number of persons in the general management is dependent on the size of the water board. This is decided by the province the water board is in. The daily management is formed by the dijkgraaf and other members chosen out of the general management (Rijksoverheid, n.d.).

In The Netherlands, a multitude of different cooperational forms are possible for public bodies. These are either based on public law through the Joint Regulations Act (“Wet gemeenschappelijke regelingen”, hereafter referred to as WGR), or based on private law through the civil code (“burgerlijk wetboek”). Of the different forms, the public body is the most used cooperational form based on the WGR. This is also the legal form which all SSCs from this thesis’ research incorporate. A public body is an incorporated organization with legal personality, which can function autonomously, hire personnel and agree to contracts or covenants, and organizations participating in the public body can delegate tasks and responsibilities to it. Similar to water boards, the public SSC also has both a general governance and daily governance (VNG, 2013).

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19 2.5 Conceptual model

The concepts from this literature review, as shown in figure 1 and 2, can be divided into two areas which influence shared service centers The first are the motives, which arise pre-SSC establishment and influence the organizations who are planning to establish a SSC. Second are preconditions, which affect the SCC and its members after establishment and in during the lifespan of the SSC. After the SSC is established, its effectiveness is influenced by three main factors, these being the contents and specificity of the SLA, the nature of the principal-agent relationship and the level of trust between member organizations. These relationships are shown in the main conceptual model (figure 3).

Figure 3: Conceptual model

According to the information obtained from the literature review, it is the expectation of this thesis that the factors from the conceptual model will also be present in practice. It is the expectation that:

1. Water boards have similar motives for establishing a SSC

2. When the SSC is established, conflicts may arise from differences in interests

Through interviews conducted with stakeholder employees of water boards and SSCs in the north, east and west of The Netherlands, it will be determined if the two expectations are observed in practice.

•Need for process efficiency gains •Need for cost

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3. Methodology

This thesis is focused on aspects from both theory and daily practice. The research is empirical and analytical in nature, meaning that results from practice are combined with a literature review (Verhoeven, 2011). In this section the methods which were used for research design, data collection and data analysis will be outlined. The research approach is theory development, using interviews in order to further explain how SSCs are establish and work in practice.

3.1 Research design

Research design forms the blueprint for fulfilling objectives and answering questions (Blumberg, Cooper & Schindler, 2011). The literature from chapter 2 is the basis of this thesis. A literature review was conducted which focused on the most frequently mentioned concepts and motives which were found, and during this research multiple other aspects influencing inter-organizational relationships have been found, which in turn have also been incorporated into the literature review.

Reliability of research means a way accidental mistakes can be avoided during research. Validity of research is the way in which systematic errors in the research can be avoided (Verhoeven, 2011). Reliability of interviews is ensured by including the interview questions used in the thesis. The validity of the research has been ensured by using multiple sources to define the central concepts used.

Research from literature and results from practice will be combined in order to answer the research question and sub questions from this thesis.

3.2 Data collection

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wide-ranging problem area and relevant issues, helping to understand the situation that needs to be identified (Blumberg, Cooper & Schindler, 2011). The list with questions can be found in appendix A. Interviewees were asked questions about which motives influenced their decision to collaborate. Next, the main motives from literature were discussed and whether these played a role in the decision. Finally, preconditions were discussed and whether these influenced the collaboration.

Interview sample

In total, there are 25 water boards in The Netherlands, 24 of which are members of the Unie van Waterschappen. There are in total 11 cooperation initiatives, focusing on taxes through a SSC, in which water boards participate (Hefpunt, n.d.). Most of these cooperation initiatives contain a mix of municipalities and water boards. Because the main area of concern of this thesis is the collaboration between water boards, the focus was narrowed to cooperation initiatives where at least two water boards are members. The cooperation initiatives are: BsGW, GBLT, Hefpunt and RBG. All of these cooperation initiatives are joint regulations (‘gemeenschappelijke regelingen’). A summary of which SSCs, water boards and consultancy agency were contacted for an interview, and if they responded positively and timely to the interview invitation, is presented in tables 1 and 2. Furthermore, it is noted in table 2 whether municipalities are part of the SSC and in which SSC the water boards participate.

Organization Function Positive

response?

Includes municipalities?

Hefpunt Teammanager Bedrijfsbureau Yes No

GBLT Manager Bedrijfsbureau/Concerncontroller Yes Yes

RBG Controller Yes Yes

BsGW - No Yes

Table 1: SSCs contacted for the research

Organization Function Positive

response?

Participating in?

Waterschap Noorderzijlvest Concerncontroller Yes Hefpunt Waterschap Hunze en Aa’s Concerncontroller Yes Hefpunt Waterschap Reest en

Wieden

Afdelingshoofd Financiën Yes GBLT Waterschap Vechtstromen Strategisch Adviseur Financiën Yes GBLT Waterschap Zuiderzeeland Senior Financieel Beleidsadviseur Yes GBLT Hoogheemraadschap van

Delfland

Concerncontroller Yes RBG

Adviesbureau Berenschot Managing Consultant Yes -

Wetterskip Frŷslan - No Hefpunt

Waterschap Rijn en IJssel - No GBLT

Waterschap Groot Salland - No GBLT

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22 Veluwe Waterschap Roer en Overmaas - No BsGW Waterschap Peel en Maasvallei - No BsGW

Table 2: Water boards and consultant agency contacted for the research

These interviewees were chosen to participate in the research because they are contact persons for their organizations and thus form the link between the water board and the SSC. Contact persons form in essence the link between the water board and the SSC on the operational level. Because these SSCs were established by the water boards and function as their main source of income, there are close contacts between these organizations. Because of their positions, these interviewees have in-depth knowledge about the history of the cooperation initiative, which is vital for providing information which is relevant for this thesis. The managing consultant was chosen, because he works in a firm which advised for the SSCs Hefpunt, BSOB, BSWB, BsGW and BSGR, making it possible to provide additional insights, as the interviewee was involved in SSCs which otherwise couldn’t be part of this thesis’ research. To ensure anonymity of the consultant’s answers, the interviewee will be grouped together with water board interviewees. This group will be designated with the label ‘WB’. 3.3 Data analysis

Data analysis consists of editing and reducing the accumulated data (interviews and secondary data), to a manageable size. Then a within-case analysis will be done. This means the interviews will be summarized and coded, in order to compare multiple cases and looking for patterns in the research in order to explain similarities and differences (Blumberg, Cooper & Schindler, 2011).

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4. Results

In this chapter, an overview of the research results will be given. The literature review showed that there are motives for establishing shared services and preconditions for the shared service organization. During the interviews, interviewees were asked about these motives, their advantages and disadvantages, and about the preconditions which influence the cooperation initiative. In this section, initially each motive is covered, including its main advantages and disadvantages which were derived from literature. Afterwards, information regarding the preconditions which are most closely related to these motives is covered. This is done for all three motives and preconditions which were discussed in the literature. Finally, additional results are discussed.

4.1 Motives for establishing shared services

Initially, it was asked which main motives played a role in the decision to work together in a SSC. Both SSC and non-SSC interviewees stated the main reasons for making the decision to collaborate in a SSC. The results are shown in table 3.

Motive WB interviewees SSC interviewees Total Rank

Aim for process efficiency gains

4 1 5 4

Aim for cost reductions

5 3 8 1

Aim for service quality improvement 5 2 7 2 Aim to reduce vulnerability 4 2 6 3

Table 3: Main motives for collaborating

As can be seen in the table above, next to the main three motives which were found in the literature review, an additional motive was found during the interviews, which will be discussed in section 4.3.

4.1.1 Aim for process efficiency gains

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One WB employee stated: ‘When you increase your mass, you increase your efficiency’, a similar statement from a SSC interviewee: ‘You can work in a cheaper and more efficient way, because you do it on a larger scale’.

Related to efficiency, as stated in the literature review, there are a number of advantages and disadvantages related to this motive. Interviewees were asked whether these advantages and disadvantages played a role in their collaborations. Their answers are reported on in this section and summarized in table 4 and 5 below.

Advantage Agree (WB) Agree

(SSC) Disagree (WB) Disagree (SSC) Don’t know/no answer Increased efficiency in the organization 6 3 - - 1 Higher level of transparency in the organization 2 1 5 2 -

Table 4: Advantages related to process efficiency gains

Disadvantage Agree (WB) Agree (SSC) Disagree (WB) Disagree (SSC) Don’t know/no answer Adjusting organizational and political ambitions 3 - 1 - 3 Creating new coordination mechanisms and re-allocation of responsibilities 3 - 3 2 2 Properly measuring, reporting and auditing of outsourced tasks 3 - 2 - 2

Table 5: Disadvantages related to process efficiency gains

Advantages

Main advantages from the literature review were a realized increase in efficiency for organizations and an increase of transparency. It was specifically asked to interviewees whether they thought that the cooperation lead to more efficiency and more transparency. Increased efficiency in the organization

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rule is, the more the better. (…) You have to do all kinds of similar activities, no matter how small or large you are’.

Higher level of transparency in the organization

Two WB interviewees agree that transparency increased, five WB interviewees, state transparency has decreased. For SSC interviewees, responses are mixed.

According to one WB interviewee who thought transparency increased: ‘We didn’t know how much it cost us, because the costs were everywhere. But now we do. You get an overall invoice, and you have to pay it. That’s an advantage’. In the opinion of the WB interviewees who didn’t agree with the statement, transparency decreased after the SSC started, because costs are now paid on the basis of an overall invoice. As one WB interviewee stated, transparency decreased, because the reports don’t contain a lot of information. Another WB interviewee responded: ‘I just get an overall invoice for the year and each month we pay 1/12th of this. What that number is made up of, I don’t know. I could know what it’s made up of, but I would be none the wiser, because I still would have to pay’.

As for SSC interviewees, one interviewee responded yes, one responded no and the third responded: ‘Yes and no. They get to see all the direct costs. But what is always difficult in these types of organizations is if they attribute costs from their own organization to the product’.

Disadvantages

Main disadvantages from the literature review were an adjustment in organizational and political ambitions, creating coordination mechanisms and reallocating responsibilities and the fact that measuring, reporting and auditing should be done.

Adjusting organizational and political ambitions

Three WB interviewees responded that organizational and political adjustments had to take place, one did not think this. This question was not discussed with SSC interviewees.

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Creating new coordination mechanisms and re-allocation of responsibilities

Two SSC interviewees and three WB interviewees did not think this was a disadvantage in their SSC collaboration, three did. The others did not mention this.

One WB interviewee who thought it was a disadvantage stated: ‘Yes, it does play a role, but it doesn’t take a lot of time and effort. (…) Maybe you would have had to do the same if it was internal.’ This is in contrast to three other interviewees, who stated that there are now more meetings with the SSC than there were when the tax department was still in place. As for SSC interviewees, one responded by saying about adjusting organizational and political ambitions: ‘That’s partly true. But if your political ambition is to reduce costs, then it even fits in your own political ambition.’ As to creating coordination mechanisms, one interviewee stated: ‘I don’t know if that’s a disadvantage. I think it’s something you have to do right once. Once you did, it just works. (…) For us it was just a one time thing’.

Properly measuring, reporting and auditing of outsourced tasks

Three WB interviewees responded that this still could be improved by the SSCs, while two were satisfied. This question was not asked to SSC interviewees.

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28 4.1.2 Aim for cost reductions

Five WB interviewees and three SSC interviewees mentioned reducing costs as a main reason for collaborating in a SSC.

Related to reducing costs, as stated in the literature review, there are a number of advantages and disadvantages related to this motive. Interviewees were asked whether these advantages played a role in their collaborations. Their answers are reported on in this section and the disadvantages are summarized in table 6 below.

Disadvantage Agree (WB) Agree (SSC) Disagree (WB) Disagree (SSC) Don’t know/no answer Initial promises go beyond realistic expectations 2 - 4 3 1 Cost reductions are not as high as expected

1 - 5 3 1

Extra coordination efforts

4 - 2 2 1

Higher pay scales - 1 3 1 5

Table 6: Disadvantages related to cost reductions

Advantage

This question was asked to three WB interviewees and one SSC interviewee. One interviewee from a water board stated that, prior to the SSC, costs were 30 to 40% higher than they are now, which is independently agreed upon by the interviewee from its SSC. Costs are however not always mentioned as a leading motive to work together. One WB interviewee stated: ‘Our governance board did not state that a certain percentage of cost reductions had to be realized, just that something had to be realized, either higher quality, a better product, or better service’. Another WB interviewee stated, that because of cooperation, you can mitigate the fact that you don’t have the capacity to do certain things. Yet another WB interviewee stated that increased efficiency and better service are the main advantages from cooperation. From the perspective of one SSC interviewee, it’s stated that costs decrease because of economies of scale.

Disadvantages

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29 Initial promises go beyond realistic expectations

All SSC interviewees stated that initial promises had been realized. Two WB interviewees did mention that initial promises from the SSC aren’t realistic. Others did not mention that there were unrealistic initial promises.

One WB interviewee states a not realized initial promise concerning cost reductions: ‘At the start of the SSC, a calculation was made about the cost reductions. However, it wasn’t clear from which starting point this calculation was made, (…) so you can never be sure how much your costs reduced’. Another WB interviewee states: ‘We wanted the SSC to work together with municipalities. Until today, this expectation has not been realized’.

As for the reason why initial promises did have been realized, one WB interviewee responds: ‘Our SSC has always been controlled pretty tightly. (…) Governance is crucial. No matter which cooperation relationship you have, if you are not controlling it or you’re not sharp enough, you have a very big chance it goes south.’ Another WB interviewee attributed the realization of expectations to transparency between the partners in the startup phase, stating: ‘If you look at it together, in an open, transparent setting and look at what it can bring us, how we have to design it and how much it may cost and make a budget with a realistic outlook, then it has shown us promises will indeed materialize’.

Cost reductions are not as high as expected

Five WB interviewees and all three SSC interviewees cost reductions were as high as expected or even higher. One WB interviewee stated this was not the case. One WB interviewee did not know if this was the case.

One WB interviewee stated: ‘Before starting with the SSC, we worked with a lot of expensive external temporary workers. We didn’t have those costs anymore.’ However, one WB employee stated cost reductions weren’t up to expectations: ‘People tend to be overly optimistic. Sometimes that means you will be confronted with the fact that it’s all a bit less nice in practice.’

Extra coordination efforts

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One WB interviewee which agreed stated: ‘We didn’t anticipate it. We thought we would put the process out of our organization, and then we don’t have to deal with it anymore. But every week, one part of my day is spent with coordination with the SSC and meetings with other participants in the SSC. Maybe two parts of my day.’ However, two WB interviewees responded that this was not the case and attributed this to the clearness of the SLA. One of them stated this as follows: ‘The board has to realize that when you outsource something, you have to keep away from its substance. Substantively, we established an SLA in which it is clearly stated what the SSC does and what the water boards do’.

Two SSC interviewees agree with the disadvantage, but state it may also become an advantage. According to one interviewee this is the case because the increased distance between organizations means less unnecessary meetings take place. Another SSC interviewee states it is not necessarily a disadvantage as well: ‘What I notice is that when these departments were still inside of their organizations, there was less attention for the product. I think it is now more closely monitored than before. (…) When a new participant joins the SSC, they pay more attention than before, but it decreases over time. I think on average, our participants need about 0.1 FTE of their time for coordination activities’.

Higher pay scales

Three WB interviewees and one SSC-interviewee stated pay scales didn’t rise. One SSC interviewee stated pay scales did become higher. Four WB interviewees did not know. One SSC interviewee wasn’t asked this question.

It is mentioned by two WB interviewees that if there would be higher salary scales, it is probable that this is mostly on the management level, a director, or because of a larger span of control. As one WB interviewee stated, ‘It might be that it has happened incidentally, but it did not lead to an upgrading of the entire salary structure’, another stating ‘similar tasks get similar salary scales’.

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functions you can have someone supervising a team of twelve. It doesn’t matter if he then even would be 10 scales higher, he would still be cheaper’.

4.1.3 Aim for service quality improvement

Five WB interviewees and two SSC interviewees mentioned increasing quality as a main reason for collaborating in a SSC.

One WB interviewee noted that the water board thought its own quality of execution was subpar and decided to work in an SSC to improve quality. But this interviewee notes: ‘We thought we did not have the right people for it. (…) The problem is, you take the people with you. 95% of our tax people went to the SSC, thus partly the quality stayed the same. (…) They’re still able to learn, but I thought there weren’t many top quality employees. I still see them working at the SSC’. One SSC interviewee stated that, because of the larger scale of the organization, it was able to invest in more specialized employees.

There is one advantage and one disadvantage related to service quality improvement. Results from the interviews are summarized in table 7 and 8 below.

Advantage Agree (WB) Agree (SSC) Disagree (WB) Disagree (SSC) Don’t know/no answer Exchange in knowledge and best practices 5 2 1 - 2

Table 7: Advantage related to service quality improvement

Disadvantage Agree (WB) Agree (SSC) Disagree (WB) Disagree (SSC) Don’t know/no answer Decreased ability to do ad hoc adjustments - - 2 2 6

Table 8: Disadvantage related to service quality improvement

Advantage: exchange in knowledge and best practices

Two SSC interviewees and five WB interviewees stated best practices were indeed found exchanged in SSCs. One WB interviewee stated it wasn’t clear, while one SSC interviewee did not mention it.

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interviewee said that it is not clear if best practices are exchanged anymore, because no tax employees were left behind in the original organizations, they’re now all part of the same organization.

Disadvantage: decreased ability to do ad hoc adjustments

Two SSC interviewees and two WB interviewees disagreed and two agreed that it indeed was harder to do ad hoc adjustments to the organization. Others did not mention this.

One states: ‘You can’t get a grip on it anymore. It can be the case that the SSC grows autonomously, while you don’t want it. At our SSC we see the quality is subpar. I think you should cooperate on the issues for which you’re too small, but I won’t sing the praises that you should outsource everything which isn’t a core task’. However, two other WB interviewees thought that, although this could be a disadvantage in theory, it is not the case in practice. One interviewee stated this as follows: ‘Yes and no. We know that, if we want the SSC to function properly, they have to know what is expected of them. If you keep changing this, then it won’t go well’. Another stated that the SSC has a bit of freedom to operate their processes, and when big changes have to be made, the general governance of the SSC has to give its approval. Three interviewees responded that they can only give their vision, and the SSC ultimately decides what they do with this vision.

SSC interviewees did not think it was harder to make adjustments for water boards. This is captured in one interviewee’s statement: ‘Our participant determines what is done. We prefer to do things synchronized. But the customer is king, and if the king wants something else, he gets it. How it is done, that’s what we decide’.

4.2 Preconditions for the shared service organization

Three preconditions were found in literature to influence the effectiveness of the SSC. These are the governance framework, nature of the principal-agent relationship, and trust. These preconditions were discussed with interviewees.

4.2.1 Governance framework

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Two interviewees think this particular structure is a part of the success of the SSC, while others do not explicitly mention this. The nature of this relationship is worded by one WB interviewee as follows: ‘Because the members of our general governance are in the general governance of the SSC as well, they manage the process at the SSC, but with our culture in mind’. Another WB interviewee states that the public body is easy to establish politically, but one has to be mindful to have quality in the management of the SSC. The interviewee compares this to the privatization of the NS (Dutch Railways): ‘After privatization, politicians found out that they have a lot less to say about the organization, because legally, they now operate under private law. Previously, you could give direct instructions. (…) But if you then have a director who doesn’t know what he’s doing, it won’t go well’.

Furthermore, two water board interviewees participating in the same SSC state they have a three-layered structure for contact. With this structure, problems are firstly discussed at the lowest level, consisting of contact persons such as controllers, the second layer consists of their managers, the head of resources meetings (‘hoofd der middelen overleg´). If something has to be escalated still, it is discussed at the higher level, consisting of the directors of the water boards. After these levels, the general governance and daily governance exist.

Service level agreement

Each of the SSCs works with an SLA. According to the literature review, an SLA lets participating organizations retain a high degree of control of their process.

Working across organizational boundaries is challenging

Four WB interviewees and one SSC interviewee agrees with the statement it is challenging to operate an SSC across organizational boundaries. Others did not respond to this statement. Especially in the beginning, before the SSC is established it takes a lot of deliberation to mitigate the differences between the water boards and to ensure the right people are leading the new organization. One WB interviewee stated: ‘The challenge is to do good things in a cost-effective way, so the challenge is to seek cooperation in this’. One SSC interviewee agrees, stating that they aim for uniformity, but ultimately the water board decides what the SSC has to do, and this is what makes working with multiple organizations a challenge. Measuring and evaluation methods

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and in this way it is closely monitored if the SSC is on track to realize its tax revenues for the year.

Because tax revenues form the biggest revenue stream for a water board, interviewees state that when the realization deviates from the budgeted revenues, it has to be explained why this is. One WB interviewee deviates from this, stating it is more important that quality is high, the fact that budgets are in control comes in second place. The interviewee states: ‘We think quality is of big importance. (…) We don’t think it’s important if you spend 10.000 of 20.000 euros if that means that you are able to bring in 1 million euros extra. We think like this, because our costs have already been reduced a great amount since starting with the SSC. We still pay a lot less than we did before’.

Two SSC interviewees mentioned quality as a measure which is being reported on. One states that there are reports about budget and about the key performance indicators (KPIs) specified in the SLA. These reports contain data about the amount of time callers have to wait for someone to pick up the phone or how fast appeals have been processed. The other SSC interviewee states that currently the SSC only reports on the progress in tax revenue realization, but mentioned that the SLA is currently being revised and that the SSC plans to include more qualitative measures.

Focus on costs instead of client satisfaction

A typical failure is that SSCs focus too much on costs. Four WB interviewees agree that this has been the fact. Others did not mention this as a factor.

However, these interviewees state that this is now beginning to change. As one interviewee states: ‘You have to look integrally at quality and budgets, and not view them apart from each other’. One interviewee states that every time there is a meeting between contact persons, quality is stressed as an important factor, so it is not forgotten. One interviewee concludes that the quality level can be derived from the fact how many deviations from budgets there are. Process standardization

Standardization is a precondition for establishing an SSC. Interviewees were asked how this was conducted in their cooperation initiatives.

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different water boards, where the newly intended department heads were in the lead for redefining the processes for the new organization. At GBLT, after making the decision to establish the SSC, employees from the tax departments were placed in workgroups who decided which process should be the leading one to which the other water boards had to concede. At RBG only the current situation was discussed. When new participants enter the SSC, their processes are measured against the processes from the SSC and adjusted if necessary.

4.2.2 Nature of the principal-agent relationship

According to the literature review, a principal-agent relationship exists between water boards and the SSC. A key assumption of this theory is that goals of the agent and principal differ. Two WB interviewees state that there are some problems in the relationship. Three interviewees from the SSC and five WB interviewees agree that this is not the case.

Participants of Hefpunt and RBG do not mention that there are any different goals. One WB interviewee states about Hefpunt: ‘If you would have an external SSC, such problems might exist. But the motivation of the SSC and participants is the same. When the SSC goes into a direction the water boards don’t want, there could be an issue that needs to be intervened upon through the general governance board’. Of the SSC interviewees, one states that the participant decides what its policy is and the SSC only acts on that policy. Another SSC interviewee states that, while there aren’t any big problems, sometimes the SSC wants uniformity and sometimes, not all water boards agree on this uniformity. One interviewee states that principal-agent problems have been mitigated by the SLA and that it is the participants’ duty to monitor if results are accomplished.

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stating: ‘If you ask me if I want to go back to when taxes were done internally, definitely not. (…) I think it now grows too fast, it’s not happening in the correct way, being too fast and uncontrolled. (…) The first few years at Tricijn, I would have graded the process an 8.5, maybe a 9. When it became GBLT the grade went up even more. With the municipalities, growing went at a cost of quality. I don’t know how they can change this’.

4.2.3 Level of trust between members

Trust is an integral factor to the success of the collaboration initiative. In interviews it was asked if the level of trust fluctuated from the start of the SSC until now. Furthermore, it was asked if governance was more informal when pre-existing trust relationships existed.

Pre-existing trust relationships

All three SSC interviewees responded that organizations had trust relationships prior to collaborating. All seven WB interviewees responded that trust relationships existed before collaborating in the SSC. One interviewee stated that their whole collaboration is based on trust. Another interview made a similar statement, saying: ‘The directors of our two water boards had a good relationship. Later, they also took a seat in the board, so there was continuity’.

Type of governance

All three SSC interviewees responded that governance was formal. Furthermore, all seven WB interviewees stated that governance was formal. As one states: ‘Governance is formal, how else would you do it? In this case you have to make all kinds of formal juridical arrangements. (…) In potential, you could incur unexpected costs of a half million euros on an ICT software package. Then the question arise who has to pay for this. You won’t reach an agreement if you only have informal arrangements. (…) It’s too complex’. Next to this, WB interviewees mention there are also informal contacts when it concerns issues not related to the SSC, for example between board members or between employees of the water boards. One interviewee noted: ‘Not everything is directly escalated to the highest formal level’. Risk

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37 Partner choice

According to four WB interviewees and all three SSC interviewees, the partners for establishing the SSC were chosen because of geographical location or the fact they already had to collaborate in areas with certain bodies of water. One interviewee states that collaboration happened because two SSCs merged into GBLT. One other WB interviewee stated that several business case were made to see which partners would be most suited to collaborate with.

Power differences

There are some differences in the way power is distributed in the SSC governance board at all three researched SSCs.

In the case of Hefpunt, all water boards have an equal say in the general governance board. The percentage of the budget they have to pay is based on the amount of work the SSC has to do for the particular water board. At RBG, the participant who pays the most has a bigger vote in the SSC. However, if a decision influences an important process, every participant has an equal vote. At GBLT, costs are divided between water boards and municipalities based on the number of citizens in the area of each participant. This has lead of an allocation of 93% of the budget being paid by water boards and 7% by municipalities. Each participant in GBLT, either water board or municipality, has a place in the general governance board and has an equal vote.

Thus far, at all three SSCs, these power differences have not lead to problems. An interviewee from a water board participating in GBLT however mentioned that from next year, two water boards will merge and two new municipalities will most probably be joining. At this point, municipalities outnumber water boards. The interviewee states: ‘Water boards in the SSC had the same interests. (…) With municipalities in the mix, everything becomes different; they want other stuff to be done first. We don’t agree with each other anymore 100% of the time. As the water boards, we think we should get a bigger vote. We contribute 80% of the budget of the SSC, which means we also want a bigger say in the governance board then less than 50%’.

Congruency

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bonding activities like teambuilding do not take place. The other interviewees did not mention this factor.

4.3 Additional findings

During the course of the interviews, three additional findings were made which weren’t mentioned in literature.

Additional motive: reducing vulnerability

Four WB interviewees and two SSC interviewees mentioned reducing vulnerability as a main reason for collaborating in a SSC.

One WB interviewee stated: ‘The vulnerability was mainly about solitary functions, you don’t have a back up.’ . A SSC interviewee elaborates: ‘If you have a small department in a water board (…) you have one specialized employee for application management. If that person gets sick, you have no one to replace him. When you put the process in a greater whole, you have two or three people doing it, which can also replace each other’.

Additional advantage: taxes are reduced

Of WB interviewees, three explicitly responded that the money freed because of outsourcing taxes to the SSC and reducing costs, did not go back to the water board to focus on its core tasks, but instead has been given back to the tax payers.

Additional advantage: interorganizational connections

“Shared service cooperation in the public sector”

MASTER THESIS O&MC