oversight

Efficiencies Realized Through Outsourcing

Published by the Farm Credit Administration, Office of Inspector General on 2008-05-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Office of
Inspector General
 

                    Efficiencies Realized
                    Through Outsourcing

                                     A-07-01




                      Veronica McCain
                      Auditor-in-Charge




                      Veronica McCain

                      A dit   i Ch




                         May 20, 2008
Memorandum                                                        Farm Credit Administration
                                                                  1501 Farm Credit Drive
                                                                  McLean, Virginia 22102-5090

                                                                                                   



                                                                                       
May 20, 2008


The Honorable Nancy C. Pellett
Chairman of the Board
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090

Dear Chairman Pellett:

The Office of the Inspector General completed an audit of Efficiencies Realized Through
Outsourcing. The objective of this audit addressed whether the outsourcing of financial
services to the Bureau of the Public Debt (BPD) improved Agency operations and reduced
costs.

We found that FCA’s decision to implement a shared financial services agreement with BPD
has been positive in improving efficiencies and effectiveness in the Agency’s financial
management services. We recommended the finance team periodically complete an in-depth
analysis to make sure the Agency is continuing to receive the best value.

We conducted the audit in accordance with Government Auditing Standards issued by the
Comptroller General for audits of Federal organizations, program, activities, and functions. We
conducted fieldwork from September 2007 through April 2008. We provided a discussion draft
report to management on March 12, 2008, and conducted an exit conference regarding the
discussion draft report with the Director of Office of Management Services (OMS) on March 27,
2008. We then provided a final draft report to management on April 24, 2008.

On May 13, 2008, the Director of OMS provided me with a memorandum stating that as a result
of the final draft report the finance team conducted a comprehensive evaluation of the BPD
agreement to include all areas recommended in the final draft report. In addition, the Director of
OMS has required the finance team to evaluate FCA’s financial service agreement with BPD
every three years or sooner.




                                                                                               
                                                                                      Page 2

Attached to the OMS Director’s memorandum to me was the evaluation report regarding BPD’s
performance he provided to you. The report included an assessment of BPD’s performance
measures, efficiencies gained, cost trends, and benchmarking. The report concluded that BPD
continues to be the best value for shared financial services. We have reviewed the evaluation
report on BPD and find the information to be adequate to close out the recommendation.

We commend the OMS on their quick action to resolve the recommendation. If you have any
questions about this audit, I would be pleased to meet with you at your convenience.

Respectfully,




Carl A. Clinefelter
Inspector General




                                                                                          
 


                                                    Table of Contents 

BACKGROUND ....................................................................................................................... 1 

OBJECTIVE AND SCOPE ...................................................................................................... 2 

AUDIT RESULTS ..................................................................................................................... 2 
    Conclusions ....................................................................................................................... 2 
    The Outsourcing Decision ................................................................................................... 3
    Efficiencies Gained ............................................................................................................. 4
    Costs of Shared Financial Services...................................................................................... 4 
    Monitoring BPD Performance .............................................................................................. 6

RECOMMENDATION RESOLUTION…………………………………………………………...7 

 
 




                                                                                                                                          

 
                                                  


BACKGROUND


       The Finance Team (FT) within the Farm Credit Administration’s (FCA or Agency) Office
       of Management Services (OMS) provides financial services to FCA. For several years
       the Agency had an interagency agreement with a financial service provider for a financial
       management system.         In 2003, the financial service provider notified FCA that the
       Agency must convert to an upgraded financial management system. Initially, FCA felt it
       was in its best interest to expend the additional resources necessary to upgrade its
       financial management system. However, due to considerable delays in FCA converting
       to an upgraded financial management system, in 2005 OMS decided to review the
       possibility of obtaining financial services elsewhere, notably, from a shared financial
       services provider.

       A shared financial services provider is an organization established to provide financial
       services to other entities. The Office of Management and Budget (OMB) has embraced
       the concept of shared financial services for Federal financial management and has
       designated several such providers as Financial Management Centers of Excellence
       (FMCE). OMB requires that Executive Branch agencies planning any major transition in
       their financial management systems consider using one of the FMCEs. Research has
       shown that the benefits of using a shared financial services provider include: overall cost
       reductions, easier implementation of follow-on system changes, more time for in-house
       financial staff to focus on analysis and support, and more time for agency managers to
       focus on core mission achievements.

       After analyzing the benefits of outsourcing for its financial services needs and evaluating
       proposals, the Agency entered into a reimbursable services agreement with the
       Department of the Treasury’s Bureau of the Public Debt (BPD), an FMCE, for shared
       financial services, wherein BPD would provide a full range of services including
       accounting and financial reporting, travel management, and procurement. Below is a
       chronology outlining the development of the BPD agreement.

            • November 2005 - The OMS Director issued a decision memo to the Chairman
              and Chief Executive Officer regarding the Agency’s entering into an agreement
              with BPD for financial services.

            • April 2006 - The Agency signed a six-month agreement with BPD to provide full
              service accounting and financial reporting, travel management, and procurement
              services.

            • September 2006 - The Agency signed an agreement for financial services with
              BPD for fiscal year (FY) 2007.




FARM CREDIT ADMINISTRATION ♦ OFFICE OF INSPECTOR GENERAL                                        1

 
                                                  


            • March 2007- Agency management decided to bring procurement services back
              in-house because it was felt for this particular financial service greater
              efficiencies and effectiveness could be achieved.

            • August 2007- The Agency signed an agreement with BPD for FY 2008.


OBJECTIVE AND SCOPE

       The objective of this audit was to determine whether outsourcing financial services to
       BPD improved Agency operations and reduced overall financial management costs.
       Specifically, we evaluated the following:

            • support for the outsourcing decision,

            • efficiencies realized through outsourcing,

            • cost of outsourcing, and

            • monitoring of BPD performance.

       The audit was performed at FCA headquarters in McLean, Virginia, from September
       2007 through April 2008, in accordance with generally accepted auditing standards for
       Federal audits.


AUDIT RESULTS

Conclusions
 
     We found that FCA’s decision to implement a shared financial services agreement with
     BPD has been positive in improving efficiencies and effectiveness in the Agency’s
     financial management services.

       The decision to select BPD as a shared financial services provider resulted in an initial
       cost avoidance in FY 2006 of about $875,000 when compared with the cost of remaining
       with the existing financial management service provider.

       While FT staffing costs have been reduced, and while BPD’s ongoing costs are probably
       less than those that would have been incurred with the prior financial management
       service provider, overall Agency costs after the outsourcing to BPD do not show a
       decline when one considers that several former FT staff members were reassigned to
       other positions within the Agency.




FARM CREDIT ADMINISTRATION ♦ OFFICE OF INSPECTOR GENERAL                                      2

 
                                                   


       To maintain the success of shared financial services, the Agency must continue
       monitoring BPD’s performance and ensure the cost of shared financial services with
       BPD remains the best value.

The Outsourcing Decision

       The Agency’s decision to outsource several financial functions was supported by a
       workforce study and a well considered business case for shared financial services.

       Workforce Study - In June 2005, an independent organization completed a workforce
       study of support offices at FCA including OMS. The resulting report noted issues that
       needed to be addressed with the Agency’s financial management function. These
       included:

            • the need to improve the delivery of complete and reliable, consistent, and timely
              financial management services, especially in the areas of travel and financial
              management, and reporting;

            • the excessive staff time spent in preparing financial reports;

            • the lack of strong program management regarding the movement to and use of
              new financial management systems; and

            • the lack of competencies and technical skills important to the financial
              management function.

       The study recommended the Agency outsource its financial management services under
       a shared service agreement.

       Business Case - As previously mentioned, in 2005 OMS decided to consider obtaining
       a broader range of financial services than just a financial management system. The
       intent was to determine if a service provider could offer an array of financial services at a
       better value than using a vendor’s financial management system and conducting
       financial services in-house. The FT gathered proposals on their costs for financial
       management systems, accounting and financial reporting services, credit card
       management, travel management and procurement. OMS concluded BPD would be the
       best value for shared financial services based on the following:

            • cost,

            • built-in performance measures,

            •   reduction in FT staffing costs,

            • adequate security over sensitive data, and

            • the ability to produce agency-specific reports.


FARM CREDIT ADMINISTRATION ♦ OFFICE OF INSPECTOR GENERAL                                          3

 
                                                  


Efficiencies Gained

       In November 2005, the OMS Director provided a memo to the Agency’s Chairman and
       Chief Executive Officer in support of his decision to proceed with signing an agreement
       for comprehensive financial services from BPD. The Agency’s goal was to improve
       financial management efficiency and financial services provided to the Agency’s
       managers and staff, and reduce FT staff costs.

       According to the OMS Director and the FT supervisor, there have been several benefits
       from the shared financial services from BPD including FT resources being better utilized.
       For example, the FT:

           •   now can focus on continuously improving the quality of data being inputted into
               the financial system and ensuring financial records reconcile,

           •   has more time to develop financial reports for Agency manager’s, assisting them
               in making better business decisions, and

           •   no longer has to be the primary resources for travel system questions from
               Agency staff.


Costs of Shared Financial Services

       Another benefit the Agency wanted to achieve with shared financial services was lower
       financial management costs.      Financial management costs have been reduced
       somewhat since FY 2005 (prior to outsourcing) with the decline in FT staff accounting for
       the reduction. However, because a significant portion of the FT staff reduction was
       accomplished through reassigning staff to other offices within the Agency, reduced
       financial management costs cannot be projected as overall Agency-wide savings.

       Financial Management Cost Savings - The following chart shows that financial
       management cost savings has been achieved since the agreement with BPD. The chart
       also shows that the savings is attributable to FT staff reductions. Procurement service
       costs are not included in the chart.




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                         Financial Management Cost Comparison from FY 2005-2009


             2,100,000

             1,800,000

             1,500,000
                                                                                                 FT Personnel Cost
             1,200,000

                900,000
                                                                                                 Outsourcing Cost
                600,000

                300,000

                        0
                              FY'05     FY'06      FY'07      FY'08     FY'09*
                              *Projected costs

This chart’s representation is further reflected in Table 1 below.


                            Table 1: Financial Management Costs from FY 2005-2009


                                       FY2005            FY2006           FY2007             FY2008             FY2009


       FT Personnel Cost             $1,294,210        $1,080,196         $774,177          $792,362           $795,870


        Outsourcing Cost              $603,234          $655,613          $577,084          $683,533           $881,438


                Total                $1,897,444        $1,735,809       $1,351,261         $1,475,895         $1,677,308


     The following should be noted:
     FY 2005 - Outsource cost only for a financial management system.
     FY 2006 - In April 2006, BPD began providing comprehensive shared financial services for the remainder of FY 2006.
     FY 2007 - Four FT employees were reassigned to other offices within the Agency.
     FY 2009 - Outsourcing cost is a projection and FT personnel costs are budgeted amounts.


        In FY 2005, prior to outsourcing to BPD, FT personnel costs and the cost for a financial
        service provider’s financial management system were about $1.90 million. Projections
        for FY 2009 show FT personnel costs and BPD costs at about $1.68 million. While FY
        2009 projected costs are less than in FY 2005, four former FT staff members were
        reassigned within the Agency. Therefore, overall Agency costs after outsourcing to BPD
        are somewhat higher when one considers the former FT staff that were reassigned.



FARM CREDIT ADMINISTRATION ♦ OFFICE OF INSPECTOR GENERAL                                                                   5

 
                                                          


         Staff Reassignment - The chart below shows the FT staff changes since the formation
         of OMS and the inception of the BPD shared service agreement. Four FT staff members
         were reassigned elsewhere in the Agency as depicted in the middle segment below. The
         former Chief Financial Officer (CFO) retired subsequent to the formation of OMS. The
         Financial Operations Specialist also retired. The two employees who left the Agency
         represented approximately 22% of the FT personnel cost before the reorganization.

                                              Finance Team Staff Changes

    Assistant CFO for System
    Assistant CFO for Reporting
                                                                   Current FT
    Financial Manager
    System Accountant
                                                                                          Remained 
    Budget Analyst
                                                                                           as FCA 
    Payment Officer                                                 Reassigned            employees 
    Operating Accountant                                            to other
    Financial Assistant                                             Agency
    Voucher Examiner                                                offices

    Chief Financial Officer*                                        No longer FCA employees
    Financial Operations Specialist

*The Director of OMS serves as the Agency’s CFO.



Monitoring BPD Performance

          Monitoring Performance - To ensure performance goals are being met, the FT
          monitors performance measures within the BPD agreement and has developed a
          “lessons learned report” outlining issues regarding BPD’s performance.

               Performance Measures - Performance measures are an effective mechanism to
               evaluate how well BPD is performing financial services and encourages efficient
               performance from BPD. Performance measures were established for the financial
               system, accounting, financial reporting, and travel services and are contained within
               the agreement. Overall, the performance measures established are adequate for
               the Agency to ensure performance under the agreement with BPD.

               Lessons Learned Report - Another tool the FT uses to monitor BPD’s performance
               is a “lessons learned report.” This report is usually issued quarterly to BPD and is
               used to communicate issues that need to be addressed. The report is continuously
               updated as issues are closed and new ones surface. According to the FT, BPD has
               been very responsive to the “lessons learned report.” The report has also been
               beneficial to BPD because they are able to use the report when working with other
               agencies on common issues.




FARM CREDIT ADMINISTRATION ♦ OFFICE OF INSPECTOR GENERAL                                               6

 
                                                  


        Monitoring Cost - Table 2 below outlines the percentage change, actual and projected,
        in BPD agreement costs from FY 2007- FY 2009.

                   Table 2: Percentage of Change in BPD Agreement Costs


                      FISCAL YEAR          PERCENTAGE OF CHANGE


                       2007 to 2008      18% increase


                       2008 to 2009      29% potential increase



        BPD costs rose significantly in FY 2008 and are projected to increase substantially in FY
        2009. These cost increases are primarily attributed to changes in the BPD pricing
        module in FY 2007.

        From FY 2006 - FY 2009, the Agency will have expended approximately $3.14 million for
        shared procurement, travel, and financial management services. The OMS Director
        stated that after five years with the BPD the FT plans to do an in-depth analysis to make
        sure the Agency is continuing to receive the best value. Since this agreement with BPD
        represents one of the Agency’s largest expenditures, a more frequent periodic
        comprehensive evaluation is appropriate.


    Recommendation Resolution

        On May 13, 2008, the OMS Director provided a memo to the Inspector General
        addressing the draft report. The memo stated that as a result of the draft report the FT
        immediately conducted a comprehensive evaluation of the BPD agreement to include all
        areas stated in the draft report recommendation. In addition, the OMS Director created
        new direction to the FT to evaluate FCA’s financial service agreement every three years
        or sooner.

        Attached to the memo was the BPD evaluation report given to the Chief Executive
        Officer.    The report included an assessment of BPD’s performance measures,
        efficiencies gained, cost trends and benchmarking. The report concluded that BPD
        continues to be the best value for shared financial services.




FARM CREDIT ADMINISTRATION ♦ OFFICE OF INSPECTOR GENERAL                                       7

 
                                                  


       We have reviewed the evaluation report on BPD and found the information provided
       adequately addressed the draft report recommendation which stated:

       Prior to the FY 2010 BPD agreement and on a periodic basis thereafter, the OMS
       Director should provide the Chief Executive Officer with a comprehensive evaluation
       report including but not limited to:

           •   BPD’s performance measures achievement,

           •   efficiencies being gained and any yet to be realized,

           •   an analysis of BPD cost trends, actual and projected, and

           •   benchmarking shared financial services costs with other Federal agencies that
               use shared financial service providers.




FARM CREDIT ADMINISTRATION ♦ OFFICE OF INSPECTOR GENERAL                                       8

 
                                                  




                 R E P O R T
                                                  

           Fraud    |    Waste    |    Abuse    |    Mismanagement 
        




                                                              

                      FARM CREDIT ADMINISTRATION 
                      OFFICE OF INSPECTOR GENERAL 
                                        
               • Phone:  Toll Free (800) 437‐7322; (703) 883‐4316 
               • Fax:         (703) 883‐4059 
               • E‐mail:  fca‐ig‐hotline@rcn.com 
               • Mail:   Farm Credit Administration 
                         Office of Inspector General 
                         1501 Farm Credit Drive 
                         McLean, VA  22102‐5090 




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