The consolidation of most agencies’ payroll administration into a handful of multiagency service centers more than a decade ago was one of the government’s first success stories in pursuing economies of scale through shared services. But the Office of Management and Budget now is grappling with an unforeseen downside: Although agencies’ costs now are lower, the shared services centers themselves don’t have the funding they need to buy technology upgrades.

The problem is growing as some of the first shared service centers begin to show their age and need modernization. Currently, the four providers handling payroll– run by the departments of the Interior, Agriculture, Defense and the General Services Administration–are funded by per-employee fees charged to the agencies who use their services.

“This was one of the real lessons learned out of the payroll consolidation,” Mark Reger, the deputy OMB controller, told Friday a joint conference of the Association of Government Accountants and the Association for Federal Information Resources Management. “It runs real well. Agencies can keep operating costs down. But nobody wants to contribute enough to build up the kind of fund you need to do system replacements. But there is, this year, a discussion going on at OMB with groups like payroll, among the human-resources line of business, the financial- management line of business and the grant line of business about how to move to a long-term strategic vision for replacing systems and how you find funds to do those kinds of things.”

Reger said even if the agencies that make up the service centers’ customer base were willing to kick in a few extra dollars to pay for large upgrades, there are legal obstacles to doing so.

The funding arrangements the centers have with agencies under the Economy Act or through working capital funds impose caps on how much money can be transferred from one agency to another. Existing laws and regulations are designed to ensure that no agency can “profit” from providing a service to another one. But they have also complicated any effort to build up the large capital reserves now needed to pay for big system upgrades and technology replacements.

“So there’s a discussion ongoing about doing something fairly soon — within the next two budget cycles — to find an answer to this,” Reger said. “We need to organize this in a way that deals with the governance of the whole activity and also creates new possibilities. There are a couple of funds that already exist in the government, including one in GSA, that agencies can tap for certain modernization efforts. The question is: How do we build that? How do we govern that? How do we build some controls around that? But there are groups that have started to actively think that through.”

Understanding health of IT systems

More broadly, OMB wants agencies to think through the current state of all of their business systems and the path toward modernizing them.

Tony Scott, the new federal chief information officer, said his office will soon ask agencies to create “situational assessments” of legacy technology systems across all of the functional areas of the government.

“Information systems are no different than any other investment you’d make in large infrastructure. Like bridges and buildings, they have a useful life and there are things you have to do to sustain them. But they usually don’t get better with age,” he said. “We’re going to ask people to make some assessment of the useful life of those systems, and then we’re going to ask them some questions about their strategy for maintaining, replacing, upgrading or consolidating those assets. You would do that with buildings. You would do that with any other kind of infrastructure and it makes sense to do it with IT. Once we do, we’re going to have a set of choices.”

But Scott suggested that, at least initially, OMB won’t use the assessments to mandate that agencies make one decision or another about their technology systems. Mostly, the objective is to provide agency decision makers outside the CIO’s office with better information about where their systems stand.

Scott, who formerly served in top technology posts at VMWare, Microsoft, Disney and General Motors, said he used a similar process in the private sector.

“When I’ve done this before, the first reaction I’ve gotten from the CFO has been, ‘I don’t know if I want to know all of this, because now there’s going to be a demand for more money to replace all these systems,'” he said. “My advice is, relax. You don’t have to do anything. But you’ve got information now about where you need to prioritize.”

IT system checkups yield more savings than initially thought

But, Scott said, more often than not, the initial decisions to examine legacy system costs and then commit to modernize some of them wound up yielding more savings than decision makers imagined at the outset.

“We rode the Moore’s Law curve and we got two or four times as much in savings as what we were spending to replace them,” he said. “So my pitch is that there can be a real financial benefit to doing this if it’s done the right way and with the right priorities. Just ignoring it is not a good strategy, because the chickens will come home to roost at some point. Payroll is probably the most important application in any organization, and you need to make sure it’s going to keep working. You don’t want to not pay people. It’s just a bad idea.”

The goal of a tighter partnership between CIOs and CFOs to gather and use information to help improve agency management was highlighted in OMB’s new draft guidance implementing the Federal IT Acquisition Reform Act.

Reger said the administration wants to make maximum use of the new law to break down information “silos” between agencies and even amongst the C-suite organizations within agencies. Where that’s already happened, it has created real- world benefits, he said.

“I don’t know how many people realize this, but the federal government did not have an inventory of its property until 2012,” he said. “Working with the agencies and with their CIOs, we published the first one and now OMB has this policy of freeze, measure and reduce, and we dropped 21 million square feet in the first two years. That happened not because of anything we did. It happened because of what agencies did. Once they had access to that data, a lot of CFOs went to the property managers and said, ‘What is this giant empty warehouse over here that’s costing me a bundle to operate and that we’ve already declared as excess property?’ Harnessing that information and starting to use it across a lot of different disciplines is what starts to make a difference.”

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