Drug Discount Program: Status of Agency Efforts to Improve 340B Program Oversight

According to HRSA, the purpose of the 340B Program, which was created in 1992, is to enable covered entities to stretch scarce federal resources to reach more eligible patients, and provide more comprehensive services. Covered entities can provide 340B drugs to eligible patients regardless of income or insurance status and generate revenue by receiving reimbursement from patients' insurance. The program does not specify how this revenue is to be used or whether discounts are to be passed on to patients. The number of participating covered entity sites—currently about 38,000—has almost doubled in the past 5 years and the number of contract pharmacies increased from about 1,300 in 2010 to around 18,700 in 2017. In recent years, questions have been raised regarding oversight of the 340B Program, particularly given the program's growth over time.

In September 2011, GAO identified inadequacies in HRSA's oversight of the 340B Program and made recommendations for improvement. Among other things, this statement describes HRSA actions in response to GAO recommendations to improve its program oversight.

For this statement, GAO obtained information and documentation from HRSA officials about any significant program updates and steps they have taken to implement the 2011 GAO recommendations. More detailed information on the objectives, scope, and methodology can be found in GAO's September 2011 report.

The 340B Drug Pricing Program requires drug manufacturers to sell outpatient drugs at discounted prices to covered entities—eligible clinics, hospitals, and others—in order to have their drugs covered by Medicaid. Covered entities are only allowed to provide 340B drugs to certain eligible patients. Entities dispense 340B drugs through in-house pharmacies or contract pharmacies, which are outside pharmacies entities contract with to dispense drugs on their behalf. The number of contract pharmacies has increased significantly in recent years.

In its September 2011 report, GAO found that the Health Resources and Services Administration's (HRSA) oversight of the 340B Program was inadequate to ensure compliance with program rules, and GAO recommended actions that HRSA should take to improve program integrity, particularly given significant growth in the program in recent years. HRSA has taken steps to address two of GAO's four recommendations:

HRSA initiated audits of covered entities . GAO found that HRSA's oversight of the 340B Program was weak because it primarily relied on covered entities and manufacturers to ensure their own compliance with program requirements and HRSA engaged in few oversight activities. GAO recommended that HRSA conduct audits of covered entities and in fiscal year 2012, HRSA implemented a systematic approach to conducting annual audits of covered entities. HRSA now audits 200 covered entities a year, which is less than 2 percent of entities participating in the 340B Program. Audits conducted to date have identified instances of non-compliance with program requirements, including the dispensing of drugs to ineligible patients. GAO currently has work underway reviewing HRSA's efforts to ensure compliance at contract pharmacies, which includes an examination of HRSA's audits of covered entities.

HRSA clarified guidance for manufacturers. GAO found a lack of specificity in guidance for manufacturers for handling cases in which distribution of drugs is restricted, such as when there is a shortage in drug supply. GAO recommended that HRSA refine its guidance. In May 2012, HRSA clarified its policy for manufacturers that intend to restrict distribution of a drug and provided additional detail on the type of information manufacturers should include in their restricted distribution plans.

HRSA has not clarified guidance on two issues. GAO also found that HRSA guidance on (1) the definition of an eligible patient and (2) hospital eligibility criteria for program participation lacked specificity and recommended that HRSA clarify its guidance. HRSA agreed that clearer guidance was necessary and, in 2015, released proposed guidance that addressed both issues. However, in January 2017, the agency withdrew that guidance in accordance with recent directives to freeze, withdraw, or postpone pending federal guidance. In March 2018, HRSA indicated it was in the process of determining next steps related to guidance on the patient definition, but would need additional authority to further clarify guidance on hospital eligibility; rulemaking authority for the 340B Program was requested in the administration's fiscal year 2019 budget proposal.

I am pleased to be here today as you examine the 340B Drug Pricing  Program (340B Program), including issues concerning its oversight. The  program, created in 1992 and named for the statutory provision  authorizing it in the Public Health Service Act (PHSA), requires drug  manufacturers to sell outpatient drugs at discounted prices to eligible  clinics, hospitals, and other entities—commonly referred to as covered  entities—in order to have their drugs covered by Medicaid. According to  the Health Resources and Services Administration (HRSA), the agency  within the Department of Health and Human Services (HHS) responsible  for administering and overseeing the 340B Program, the purpose of the  program is to enable covered entities to stretch scarce federal resources  to reach more eligible patients, and provide more comprehensive  services. In recent years, questions have been raised regarding HRSA’s  oversight of the 340B Program, particularly given growth in the program  over time. According to HRSA, as of January 2017, covered entities had  more than 38,000 sites participating in the 340B Program—almost double  the number reported just 5 years earlier.

Participation in the 340B Program is voluntary for both covered entities  and drug manufacturers, but there are strong incentives to participate:

Covered entities can realize substantial savings through 340B price  discounts—an estimated 20 to 50 percent of the cost of the drugs,  according to HRSA. In addition, covered entities can generate 340B  revenue. For example, they can purchase drugs at 340B prices for all  eligible patients regardless of the patients’ income or insurance status  and generate revenue, such as by receiving reimbursement from a  patient’s insurance that may exceed the 340B price paid for the drugs.  The 340B Program does not dictate how covered entities should use  this revenue or require that discounts on the drugs be passed on to  patients.

Incentives for participation by drug manufacturers also are strong  because they must participate in the 340B Program to receive  Medicaid reimbursement for their drugs. According to HRSA, most  manufacturers that produce outpatient drugs have participated in the  program since its inception.

HRSA also requires program participants to meet certain conditions set  forth both in law and agency guidance. For example, covered entities are  prohibited from diverting 340B drugs—that is, transferring 340B drugs to  individuals who are not eligible patients of the entities. Similarly, to help  ensure covered entities receive discounts to which they are entitled,  HRSA has issued guidance (referred to as “HRSA’s nondiscrimination  guidance” throughout this statement) prohibiting drug manufacturers from  distributing drugs in ways that would discriminate against covered entities  compared to non-340B health care providers, such as by imposing  minimum purchase requirements or other restrictive conditions.

In a September 2011 report, we identified inadequacies in HRSA’s  oversight of this program and recommended actions that should be taken  to improve oversight and ensure appropriate use of the program. Since  then, we have been monitoring HRSA’s progress in addressing our  recommendations and have testified about this at hearings before the  House Committee on Energy and Commerce on March 24, 2015, and  July 18, 2017. My statement today will describe HRSA actions in  response to GAO recommendations to address (1) weaknesses in  oversight of the 340B Program and (2) the lack of clarity in program  guidance. The statement will also (3) describe ongoing GAO work  regarding the 340B Program and HRSA oversight.

For this statement, we obtained information and documentation from  HRSA officials about any significant program updates, and steps they  have taken to implement our 2011 recommendations. More detailed  information on the objectives, scope, and methodology for our 2011  report can be found in that report. We conducted our work for the 2011  report from September 2010 to September 2011, and updated this work  in February and March 2015, in June and July 2017, and again in March  2018. The work upon which this statement is based was conducted in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

The 340B Program was created following the enactment of the Medicaid  Drug Rebate Program and gives 340B covered entities discounts on  outpatient drugs comparable to those made available to state Medicaid  agencies. HRSA is responsible for administering and overseeing the  340B Program.

Eligibility for the 340B Program, which is defined in the PHSA, has  expanded over time, most recently through the Patient Protection and  Affordable Care Act (PPACA), which extended eligibility to additional  types of hospitals. Entities generally become eligible by receiving  certain federal grants or by being one of six hospital types. Eligible  grantees include clinics that offer primary and preventive care services,  such as Federally Qualified Health Centers, clinics that target specific  conditions or diseases that raise public health concerns or are expensive  to treat, and AIDS Drug Assistance Programs, which serve as a “payer of  last resort” to cover the cost of providing HIV-related medications to  certain low-income individuals. Eligible hospitals include certain children’s  hospitals, free-standing cancer hospitals, rural referral centers, sole  community hospitals, critical access hospitals, and general acute care  hospitals that serve a disproportionate number of low-income patients,  referred to as disproportionate share hospitals (DSH). To become a  covered entity and participate in the program, eligible entities must  register with HRSA and be approved. Entity participation in the 340B  Program has grown over time to include more than 38,000 entity sites,  including more than 21,000 hospital sites and nearly 17,000 federal  grantee sites (see fig. 1).

To be eligible for the 340B Program hospitals must meet certain  requirements intended to ensure that they perform a government function  to provide care to the medically underserved. First, hospitals generally  must meet specified DSH adjustment percentages to qualify.  Additionally, they must be (1) owned or operated by a state or local  government, (2) a public or private nonprofit corporation that is formally  delegated governmental powers by a unit of state or local government, or  (3) a private, nonprofit hospital under contract with a state or local  government to provide health care services to low-income individuals who  are not eligible for Medicaid or Medicare.

All drug manufacturers that supply outpatient drugs are eligible to  participate in the 340B Program and must participate in order to have  their drugs covered by Medicaid. To participate, manufacturers are  required to sign a pharmaceutical pricing agreement with HHS in which  both parties agree to certain terms and conditions.

Program Structure, Operation, and Key Requirements

The 340B price for a drug—often referred to as the 340B ceiling price—is  based on a statutory formula and represents the highest price a  participating drug manufacturer may charge covered entities. Covered  entities must follow certain requirements as a condition of participating in  the 340B Program. For example  covered entities are prohibited from subjecting manufacturers to  “duplicate discounts” in which drugs prescribed to Medicaid  beneficiaries are subject to both the 340B price and a rebate through  the Medicaid Drug Rebate Program.  covered entities are also prohibited from diverting any drug purchased  at the 340B price to an individual who does not meet HRSA’s  definition of a patient. This definition, issued in 1996, outlines three  criteria that generally state that diversion occurs when 340B  discounted drugs are given to individuals who are not receiving health  care services from covered entities or are only receiving non-covered  services, such as inpatient hospital services. (See table 1 for more  information on HRSA’s definition of an eligible patient.) Covered  entities are permitted to use drugs purchased at the 340B price for all  individuals who meet the 340B Program definition of a patient  regardless of whether they are low-income, uninsured, or  underinsured.

A covered entity typically purchases and dispenses 340B drugs through  pharmacies—either through an in-house pharmacy, or through the use of  a contract pharmacy arrangement, in which the covered entity contracts  with an outside pharmacy to dispense drugs on its behalf. The adoption  and use of contract pharmacies in the 340B Program is governed by  HRSA guidance. HRSA’s original guidance permitting the use of contract  pharmacies limited their use to covered entities that did not have in-house  pharmacies and allowed each covered entity to contract with only one  outside pharmacy. However, March 2010 guidance lifted the restriction  on the number of pharmacies with which a covered entity could  contract. Since that time, the number of unique contract pharmacies has  increased significantly, from about 1,300 at the beginning of 2010 to  around 18,700 in 2017 (see fig. 2); and, according to HRSA data, in 2017,  there were more than 46,000 contract pharmacy arrangements. HRSA  guidance requires a written contract between the covered entity and each  contract pharmacy. Covered entities are responsible for overseeing  contract pharmacies to ensure compliance with prohibitions on drug  diversion and duplicate discounts. HRSA guidance indicates that covered  entities are “expected” to conduct annual independent audits of contract  pharmacies, leaving the exact method of ensuring compliance up to the  covered entity.

Drug manufacturers also must follow certain 340B Program requirements.  For example, HRSA’s nondiscrimination guidance prohibits  manufacturers from distributing drugs in ways that discriminate against  covered entities compared to other providers. This includes ensuring that  drugs are made available to covered entities through the same channels  that they are made available to non-340B providers, and not conditioning  the sale of drugs to covered entities on restrictive conditions, which would  have the effect of discouraging participation in the program.

HRSA Has Implemented GAO’s Recommendation to Improve Its Oversight of the 340B Program by Conducting Audits

In our September 2011 report, we found that HRSA’s oversight of the  340B Program was weak because it primarily relied on covered entities  and manufacturers to police themselves and ensure their own compliance  with program requirements. Upon enrollment into the program, HRSA  requires participants to self-certify that they will comply with applicable  340B Program requirements and any accompanying agency guidance,  and expects participants to develop the procedures necessary to ensure  and document compliance, informing HRSA if violations occur. HRSA  officials told us that covered entities and manufacturers could also  monitor each other’s compliance with program requirements, but we  found that, in practice, participants could face limitations to such an  approach.

Beyond relying on participants’ self-policing, we also found that HRSA  engaged in few activities to oversee the 340B Program and ensure its  integrity, which agency officials said was primarily due to funding  constraints. Further, although HRSA had the authority to conduct audits  of program participants to determine whether program violations had  occurred, at the time of our 2011 report, the agency had never conducted  such an audit.

In our 2011 report, we concluded that changes in the settings where the  340B Program was used may have heightened the concerns about the  inadequate oversight we identified. In the years leading up to our report,  the settings where the 340B Program was used had shifted to more  contract pharmacies and hospitals than in the past, and that trend has  continued in recent years. We concluded that increased use of the 340B  Program by contract pharmacies and hospitals may have resulted in a  greater risk of drug diversion to ineligible patients, in part because these  facilities were more likely to serve patients that did not meet the definition  of a patient of the program.

To address these oversight weaknesses, we recommended that the  Secretary of HHS instruct the Administrator of HRSA to conduct selective  audits of covered entities to deter potential diversion. In response to that  recommendation, in fiscal year 2012, HRSA implemented a systematic  approach to conducting annual audits of covered entities that is outlined  on its website. HRSA audits include entities that are randomly selected  based on risk-based criteria (approximately 90 percent of the audits  conducted each year), and entities that are targeted based on information  from stakeholders (10 percent of the audits conducted). HRSA currently  audits a total of 200 entities per year, which accounts for less than 2  percent of covered entities. (See table 2.)

As a result of the audits already conducted, HRSA has identified  instances of non-compliance with program requirements, including  violations related to drug diversion and the potential for duplicate  discounts. The agency has developed a process to address non- compliance through corrective action plans. The results of each year’s  audits are available on HRSA’s website, and we currently have work  underway reviewing HRSA’s efforts to ensure compliance with 340B  Program requirements at contract pharmacies that includes an  examination of HRSA’s audits of covered entities.

HRSA Implemented One of Three GAO Recommendations to Clarify Program Guidance

In our 2011 report, we found that HRSA’s guidance on three key program  requirements lacked the necessary level of specificity to provide clear  direction, making it difficult for participants to self-police or monitor others’  compliance, and raising concerns that the guidance could be interpreted  in ways that were inconsistent with its intent.

First, we found that HRSA’s nondiscrimination guidance was not  sufficiently specific in detailing practices manufacturers should follow to  ensure that drugs were equitably distributed to covered entities and non- 340B providers when distribution was restricted. Some stakeholders we  interviewed for the 2011 report, such as covered entities, raised concerns  about the way certain manufacturers interpreted and complied with the  guidance in these cases. We recommended that HRSA further clarify its  nondiscrimination guidance for cases in which distribution of drugs is  restricted and require reviews of manufacturers’ plans to restrict  distribution of drugs at 340B prices in such cases. In response, HRSA  issued a program notice in May 2012 that clarified HRSA’s policy for  manufacturers that intend to restrict distribution of a drug and provided  additional detail on the type of information manufacturers should include  in such restricted distribution plans.

In addition, we found a lack of specificity in HRSA’s guidance on two  other issues—the definition of an eligible patient and hospital eligibility for  program participation. Specifically, we found that

HRSA’s guidance on the definition of an eligible patient lacked the  necessary specificity to clearly define the various situations under  which an individual was considered eligible for discounted drugs  through the 340B Program. As a result, covered entities could  interpret the definition either too broadly or too narrowly. At the time of  our report, agency officials told us they recognized the need to  provide additional clarity around the definition of an eligible patient, in  part because of concerns that some covered entities may have  interpreted the definition too broadly to include non-eligible  individuals, such as those seen by providers who were only loosely  affiliated with a covered entity.

HRSA had not issued guidance specifying the criteria under which  hospitals that were not publicly owned or operated could qualify for  the 340B Program. For example, we found HRSA guidance lacking  on one of the ways hospitals could qualify for the program, namely by  executing a contract with a state or local government to provide  services to low-income individuals who are not eligible for Medicaid or  Medicare. Specifically, we found that HRSA did not outline any criteria  that must be included in such contracts, such as the amount of care a  hospital must provide to these low-income individuals, and did not  require the hospitals to submit their contracts for review by HRSA.  As a result, hospitals with contracts that provided a small amount of  care to low-income individuals not eligible for Medicaid or Medicare  could claim 340B discounts, which may not have been what the  agency intended.

Given the lack of specificity in these areas, we recommended that HRSA  (1) finalize new, more specific guidance on the definition of an eligible  patient, and (2) issue guidance to further specify the criteria that hospitals  not publicly owned or operated must meet to be eligible for the 340B  Program. HRSA agreed with these recommendations and had planned to  address them in a comprehensive 340B Program regulation that it  submitted to the Office of Management and Budget for review in April  2014. However, HRSA withdrew this proposed regulation in November  2014 following a May 2014 federal district court ruling that the agency had  not been granted broad rulemaking authority to carry out all the provisions  of the 340B Program. After this ruling, the agency issued a proposed  Omnibus Guidance in August 2015 to interpret statutory requirements for  the 340B Program in areas where it did not have explicit rulemaking  authority, including further specificity on the definition of a patient of a  covered entity and hospital eligibility for 340B Program participation.  However, in January 2017, the agency withdrew the guidance following  the administration’s January 20 memorandum directing agencies to  withdraw or postpone regulations and guidance that had not yet taken  effect. In March 2018, HRSA indicated that it was working with HHS to  determine next steps regarding the proposed Omnibus Guidance, which  included the patient definition, but that it was unable to further clarify  guidance on hospital eligibility without additional authority. HRSA also  noted that the administration’s fiscal year 2019 budget proposal requests  rulemaking authority, which, if enacted, would provide the agency with the  authority to regulate hospital eligibility for the 340B Program.

GAO Has Ongoing Work Related to the 340B Program

GAO has ongoing work related to 340B contract pharmacies and the  characteristics of hospitals participating in the program.  Specifically,  given the increase in the number of contract pharmacies in the 340B  Program and concerns that contract pharmacy arrangements present an  increased risk to the integrity of the program, we were asked to review  contract pharmacy use under the 340B Program. In our forthcoming  report, we plan to describe the extent to which covered entities contract with pharmacies  to distribute 340B drugs, and the characteristics of these pharmacies; describe financial arrangements selected covered entities have with  contract pharmacies and third-party administrators related to the  administration and dispensing of 340B drugs; describe the extent to which selected covered entities provide  discounts on 340B drugs dispensed by contract pharmacies to low- income, uninsured patients; and examine HRSA’s efforts to ensure compliance with 340B Program  requirements at contract pharmacies.

In addition, with the growth in the number of hospitals participating in the  340B Program and Medicaid coverage expansions as a result of PPACA,  we were asked to review how hospitals that participate in the 340B  Program compare to other hospitals. In our forthcoming report, we plan to  address how hospitals that participate in the 340B Program compare to non- 340B hospitals in terms of certain characteristics; and how, if at all, the characteristics of 340B and non-340B hospitals  changed after state Medicaid coverage was expanded under PPACA.

We expect to issue these reports this summer.

Chairman Alexander, Ranking Member Murray, and Members of the  Committee, this concludes my statement. I would be pleased to respond  to any questions you may have.

For further information about this statement, please contact Debra A.  Draper at (202) 512-7114 or draperd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this testimony. Key contributors to this statement were  Michelle Rosenberg, Assistant Director; Amanda Cherrin, Sandra  George, and David Lichtenfeld.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

The "340B" program requires drug manufacturers to sell outpatient drugs to covered entities—certain hospitals and federal grantees (like health centers and clinics)—at a discount to have their drugs covered under Medicaid.

This testimony describes the Health Resources & Services Administration's oversight of the 340B Program. In 2011 we made recommendations to HRSA to address weaknesses we identified in its oversight of the program. HRSA has addressed some of our recommendations but has yet to address our recommendations to clarify guidance on patient and hospital eligibility.


Streamlining Government: OMB and GSA Could Strengthen Their Approach to Implementing a New Shared Services Plan

The federal government can reduce duplicative efforts and free up resources for mission-critical activities by consolidating mission-support services that multiple agencies need—such as payroll or travel—within a smaller number of providers so they can be shared among agencies. However, migrating to a shared services provider has not consistently increased cost savings, efficiencies, or customer satisfaction, according to OMB and others who have observed these migrations.

GAO was asked to review previous shared services initiatives. This report: (1) identifies the progress and challenges associated with federal shared services initiatives for selected HR and financial management activities and (2) assesses OMB and GSA's actions to address those challenges. GAO analyzed planning and performance documents and interviewed officials from selected customer and provider agencies and from agencies involved with shared services policy and guidance. GAO also interviewed subject-matter experts familiar with shared services. GAO reviewed steps OMB and GSA are taking to identify and address challenges from past migrations to improve shared services performance.

Efforts to promote greater use of shared services for human resources (HR) and financial management activities resulted in some cost savings and efficiency gains, but challenges impeded more widespread adoption. For example, the Office of Personnel Management estimates that shared services for HR, including payroll resulted in more than $1 billion in government-wide cost-savings and cost avoidance between fiscal years 2002 and 2015. However, challenges include limited oversight, demand uncertainty among providers, and limited choices for customers. To address these challenges, the Office of Management and Budget (OMB) and the General Services Administration (GSA), as the shared services initiative leaders, introduced a new marketplace model in 2018 meant to better meet the needs of customers and service providers by offering more choices for purchasing shared services (see figure). They are also working on plans to create Service Management Offices and Task Order Review Boards to work with agencies to adopt standards for common management activities.

GAO found that OMB and GSA were following some key change management practices such as improving interagency collaboration in their design of the marketplace model. However, implementation weaknesses may limit their success. For example, OMB and GSA do not have a plan to monitor the implementation of NewPay, a 2018 payroll shared services initiative designed to determine how well the new model works. A monitoring plan which includes performance goals and milestones could help OMB and GSA avoid gaps in service or costly delays as agencies transition to the new model for obtaining shared services.

GAO is making four recommendations to OMB including to work with GSA to finalize a plan for monitoring the implementation of NewPay, among other actions. OMB staff did not comment on GAO's recommendations, but noted that OMB may update its shared services policy in the future.

The federal government can reduce duplicative efforts and free up  resources for mission-critical activities by consolidating mission-support  services that multiple agencies need—such as payroll or travel—within a  smaller number of providers so they can be shared among agencies.  Over the past 15 years, the federal government has undertaken efforts  that have saved money and increased efficiency through shared services  solutions. The federal government could potentially save billions more  and reduce overlap and duplication by migrating additional services to  shared services solutions.

The Office of Management and Budget (OMB) and the General Services  Administration (GSA) are responsible for overseeing a strategic,  government-wide framework for improving the effectiveness and  efficiency of shared services. To date, the federal government has made  significant efforts to promote shared services in several areas such as  human resources (HR) and financial management. However, according to  OMB and others who have observed shared services migrations,  migrating these services from individual agencies to a shared services  provider has not consistently resulted in cost savings, greater efficiencies,  or improved customer satisfaction.

You asked us to review previous shared services initiatives for HR and  financial management activities. This report: (1) identifies the progress  and challenges associated with federal shared services initiatives for  selected HR and financial management activities, and (2) assesses OMB  and GSA’s actions to address those challenges.

To address our objectives, we conducted a literature review of GAO’s  work and other relevant publications from the past 15 years on HR and  financial management shared services, such as reports by the  Partnership for Public Service and the Association of Government  Accountants (AGA). We also reviewed our reports that focused on  specific agency migrations. We reviewed planning and performance  documents and interviewed officials from (1) OMB and GSA—the  agencies that currently oversee shared services policy and guidance— and (2) the Office of Personnel Management (OPM) and the Office of  Financial Innovation and Transformation (FIT) within the Department of  the Treasury (Treasury), both of which oversaw past shared services  initiatives and continue to play a key role developing government-wide  HR and financial management shared services policy.

Further, we reviewed guidance, planning, and performance documents  and interviewed agency officials at four agencies engaged in the shared  services process. We selected two federal shared services providers  (FSSPs), federal agencies that provide shared services to other agencies:  the National Finance Center (NFC) housed within the U.S. Department of  Agriculture (USDA) and the Administrative Resource Center (ARC)  housed within Treasury. We also selected two customer agencies: the  Departments of Justice (Justice) and Education (Education) involved in  different phases of shared services migrations. We made our selection  based on a number of factors. To capture a range of experiences and  perspectives, we selected a mix of customer and provider agencies. We  selected one HR and one financial management systems migration to  review, as well as one migration in an earlier phase and one in a later  phase. To capture an in-depth perspective of a migration, we selected  one customer and provider working together on a migration. To capture  perspectives on OMB and GSA’s efforts to address shared services  challenges and improve outcomes, we selected provider and customer  agencies that were meeting regularly with GSA in 2016 or 2017 on their  shared services migration. Our selection of agencies is non-generalizable  and their experiences and outcomes may not reflect all migrations. We  also interviewed subject-matter experts who were involved in public and  private shared services migrations as customers, providers, or  consultants.

To address the second objective, we reviewed OMB and GSA’s efforts to  identify and address challenges and lessons learned from past  migrations, including the new shared services action plan OMB released  in spring 2018. We assessed the extent to which OMB and GSA’s plan  and guidance are designed to facilitate better shared services outcomes  using criteria such as standards for internal control in the federal  government, principles identified in our previous work related to  addressing major management challenges, and the AGA criteria for  effective marketplaces. Additional details on our objectives, scope, and  methodology are in appendix I.

We conducted this performance audit from June 2017 to March 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

According to OMB, the federal government spends more than $25 billion  annually for core mission support services, such as HR and financial  management that are common across agencies. These services are  generally supported by a wide range of activities. For example, the HR  employee life cycle functions represent hiring to retirement and include  activities such as payroll and other compensation and benefits  management. The financial management function includes core financial  activities such as making and receiving payments for goods or services.

As shown in figure 1, for more than two decades, the federal government  has taken actions aimed at increasing agencies’ use of shared services.  Key congressional actions included new laws to create uniform standards  for financial reporting, promote agency use of information technology (IT)  to deliver core mission support services, and establish funding  mechanisms for agencies to modernize IT systems. Presidential  administrations have made it a priority to promote the use of shared  services for HR and financial management activities for many years. For  example, in 2014 and again in 2018, OMB established a cross-agency  priority (CAP) goal of improving the use, quality, and availability of  administrative shared services. Complementing the goal, the Digital  Accountability and Transparency Act of 2014 is intended to standardize  and increase the transparency of agencies’ spending data.

At present, OMB has responsibility and authority to develop and  implement government-wide shared services policy. OMB is working with  GSA to develop shared services strategy, policies, and guidance, with  OPM and Treasury also having important roles (see table 1). Table 1 also  describes the agencies we selected and their roles in the shared services  initiatives.

Federal Efforts to Promote Shared Services Resulted in Some Cost Savings and Efficiency Gains, but Challenges Impeded More Widespread Adoption

Efforts to Promote Shared Services for HR Activities Contributed to Cost Savings and Cost Avoidance

OMB’s efforts to promote HR shared services resulted in cost savings,  cost avoidance, and more consistent service delivery. OMB announced  the HR Line of Business in 2004 simultaneously with the Financial  Management Line of Business. These shared services initiatives shared  similar goals: (1) standardize systems, business processes, and data  elements to promote consistency across the federal government; and (2)  reduce costs by establishing a marketplace or a system of buying and  selling products and services. In this context, the marketplace would allow  agencies to acquire IT systems for core mission support services through  shared services solutions.

OPM and FIT coordinated with their respective Chief Human Capital  Officer and CFO stakeholder communities to develop data elements and  business process standards for common HR and financial management  activities. Setting consistent standards for data and systems can lead to  benefits for shared services customers as well as providers. For example,  the ability to meaningfully aggregate or compare data across the federal  government increases as more agencies adopt common or standardized  data elements or processes. As we have previously reported, the lack of  comparable data across agencies can hinder efforts to analyze  government-wide trends. Specifically, OPM reported in 2015 that the  lack of standardized time and attendance data or required data  components limits access to workforce data and hinders efforts to  analyze government-wide trends. In addition, once providers know the  standards, they can develop a solution applicable to multiple customer  agencies and achieve economies of scale.

OPM oversaw one of the first efforts to create a shared services  marketplace in 2001, which focused on payroll. That effort resulted in cost  savings, cost avoidance, and greater consistency in the interpretation and  application of payroll rules. In the early 2000s, many agencies’ payroll  systems were nearing the end of their estimated life cycles. As managing  partner of the HR Line of Business, OPM worked with OMB to identify  payroll providers. They selected 4 of the then 22 federal payroll providers  to serve as FSSPs for the 116 executive branch agencies. We  previously reported that, according to OPM officials who had overseen  the payroll consolidation effort, OMB authorized only the chosen federal  payroll providers—not other agencies—to spend money on modernizing  payroll systems, thereby encouraging the shift to the selected FSSPs.

OPM designated six more public- and private-sector shared services  centers to provide additional HR functions to agencies in between 2005- 2008. These functions include core HR services such as personnel  action processing and benefits and compensation management, as well  as noncore services such as HR strategy and performance management.  According to OPM, more than 99 percent of agencies migrated to a  payroll provider and more than 88 percent of agencies migrated to an HR  shared services center. This resulted in an estimated savings and cost  avoidance of more than $1 billion between fiscal years 2002 and 2015.  The consolidation of payroll providers from 22 to 4 providers also  contributed to greater consistency in the way the federal government  interprets and applies payroll rules.

Outcome Information on Financial Management Shared Services Efforts Is Limited

The federal government made progress toward establishing standards for  selected financial management activities and designating providers to  engage in a marketplace. However, information on outcomes is limited  because data were not tracked amidst changes in the Financial  Management Line of Business leadership and strategy. In 2004, OMB  designated GSA’s Financial Systems Integration Office (FSIO) as  managing partner of the Financial Management Line of Business. OMB  also designated four FSSPs to provide financial management services to  other agencies. They were: the Department of the Treasury’s  Administrative Resource Center (ARC), the Department of the Interior’s  Interior Business Center (IBC), the Department of Transportation’s  Enterprise Service Center (ESC), and GSA’s Federal Integrated Solutions  Center.

Under the original Financial Management Line of Business, which was  launched in 2004, federal agencies were required to either serve as a  shared services provider or leverage a shared services provider when  modernizing a financial system. In 2010, OMB changed this strategy.  Agencies would no longer be required to adopt shared services for  financial systems. In announcing this change in strategy, OMB noted  concerns related to the costs and risks—such as projects that did not  meet agency needs upon completion—that medium and large agencies  had encountered as they pursued shared services for financial  management activities. OMB also noted that agency managers were  more likely to pursue shared services for less complex operations such as  common website hosting, rather than more complex operations, such as  financial transactions. Further, OMB announced a change in leadership.  FSIO ceased operations and OMB later designated the Department of the  Treasury’s Office of Financial Innovation and Transformation (FIT) as the  new managing partner of the Financial Management Line of Business.

FIT took steps to establish a marketplace for customers seeking shared  financial management services and to develop standards for financial  management activities. As part of this effort, FIT created a process to  analyze the existing financial management FSSPs to identify capability  gaps. FIT invited the existing FSSPs and other agencies that wanted to  receive FSSP designation to apply. In 2014, FIT selected ARC, IBC,  ESC, and USDA Financial Management Services (which is separate from  NFC) to provide financial management services to other federal  agencies. FIT also worked with the CFO community to develop more  than 40 business use cases for financial management activities. Business  use cases document how a common activity, such as disbursing  payments, is executed, including a sequential description of each step in  the process. According to a FIT official, these business use cases foster a  common understanding of how to execute specific financial management  functions among customers and providers, which can make it easier for  customers to transition to shared services.

Further, FIT identified four initiatives to expand shared services for  financial transactions. FIT’s four shared services initiatives included  expanding shared services for accounts payable and accounts  receivable, debt collection, and payment processing. FIT officials  estimated these projects could contribute to cost savings of around $620  million over 5 years, but they did not track cost savings. FIT officials also  did not track the percentage of non-CFO Act agencies that migrated  financial systems to a shared services provider. FSSP customer lists  show that non-CFO Act agencies and commissions more frequently rely  on external providers for core financial shared services than do medium  and large agencies.

FIT officials stated that OMB transferred many of FIT’s responsibilities,  including collecting performance information, to GSA in 2016. In 2018,  GSA officials published customer satisfaction data from 2017 and 2018  for administrative functions, including financial management services  through the Customer Satisfaction Survey. GSA also plans to track the  percentage of selected financial transactions—such as certain types of  payments—completed by a shared services provider starting in 2020.  However, tracking of cost data continues to be an issue, which we  address later in this report.

Governance and Marketplace Challenges Have Impeded Greater Progress toward Cost Savings and Other Performance Goals

Wider adoption of HR and financial management shared services has  been impeded by challenges in two areas. First, shared services efforts  have faced persistent governance challenges, such as limited interagency  collaboration, difficulty reconciling benefits and trade-offs, and limited  oversight and technical support for shared services migrations. Second,  the efforts have also experienced marketplace challenges, which involve  difficulty obtaining funding to invest in shared services, demand  uncertainty among providers, and limited choices for customers. These  issues hampered efforts to establish effective and efficient shared  services marketplaces. As a result, these marketplaces have not been  able to consistently support sufficient competition limiting the potential  cost sharing efficiencies and improved performance that could be realized  with greater usage. OMB and GSA have taken steps to address these  challenges, which we assess later in this report.

Limited interagency collaboration. The Lines of Business governance  structure limited collaboration across different mission support areas. This  made it more difficult for those with expertise in acquisitions, IT, HR, and  financial management policy to work together on shared services  solutions. For example, although a shared payroll solution should ideally  consider how to appropriately implement payroll rules, an area in which  the Chief Human Capital Officers community has subject-matter  expertise, it also needs the expertise of others. Specifically, the solution  should also be able to integrate with an agency’s financial reporting  systems, an area in which the CFOs and Chief Information Officers have  expertise. Additionally, the solution should ideally leverage the  government’s purchasing power, an area in which the Chief Acquisition  Officers have expertise. The Lines of Business Managing Partners took  steps intended to address this issue. For example, the HR Line of  Business chartered the Multi-Agency Executive Strategy Committee to  facilitate interagency collaboration by bringing together representatives  from human capital offices across CFO Act agencies. Later in this  report, we describe additional steps OMB and GSA took to promote  greater collaboration across the individual Lines of Business.

Difficulty reconciling benefits and trade-offs. We found that agencies  have had difficulty reconciling the trade-offs associated with adopting a  standardized service. OMB has issued multiple memorandums over the  years directing agency officials to consider shared services solutions  when researching options for replacing legacy HR or financial  management systems. Despite OMB’s direction, the benefits for  customers to migrate to a standardized solution were not always clear.  According to ARC officials, prospective customers were invested in their  legacy processes, or did not factor long-term cost savings or cost  avoidance into their decision-making process, therefore limiting the full  realization of standardized shared services.

These difficulties are illustrated in a recent experience at Education.  Education officials debated whether to migrate the department’s financial  management system to a shared services provider, and spent substantial  time and money determining whether it was feasible. Education has several systems which are closely integrated and dependent on one  another, including financial and grants management. In considering trade- offs, officials were concerned about the costs they would incur and the  impact to their grantees if they de-coupled these systems to migrate to a  standardized financial system. According to Education officials, they  spent about a year meeting with officials from OMB, FIT, and ARC to  determine the feasibility of migrating their core accounting system to  ARC.

They also reported spending more than $750,000 on a feasibility study.  The study noted that the cost of an internal migration would be less  expensive than migrating to ARC. Ultimately, in 2016, Education  officials decided that instead of migrating they would modernize their  legacy system internally. GSA and OMB supported Education’s decision  to modernize in house and agreed that Education did not need to move to  a shared services provider at that time. However, GSA officials working  with Education on their financial management modernization efforts noted  that Education’s decision to pursue a customized solution that paired  financial systems and grants contributed to the higher quoted cost of  migrating to ARC. GSA officials also recommended that Education  consider the costs and benefits of making changes to its financial  management systems that would eventually facilitate the transition to a  shared services solution. Education officials said they remain committed  to reviewing this effort again in the future.

Limited oversight and technical support. Customer and provider  agencies experienced issues with project management, which contributed  to delayed and costly migrations. For example, we previously reported  that two recent financial management migrations—involving the  Department of Housing and Urban Development (HUD) migrating to ARC  and the Department of Homeland Security (DHS) migrating to IBC, the  federal shared services provider within the Department of the Interior— were late, over budget, and only addressed a portion of the original  project scope. In 2016, we reported that HUD migrated 4 of 14 planned  financial management capabilities to shared service solutions, but ended  efforts to migrate the remaining 10 planned capabilities to ARC, in part because of weaknesses in implementing key management practices.  For example, HUD’s senior leaders did not recognize and fully address  challenges as they arose, including those identified with scope, schedule,  and program costs. As a result, HUD was unable to follow through with its  plans to replace a number of its legacy financial management systems  and continues to maintain those systems while seeking other new  initiatives to address aspects of the remaining capabilities. HUD spent  about $58 million over three years before deciding to end the migration  and modernization effort in April 2016. ARC officials reported that as of  November 2018, it continues to provide financial management services  for the capabilities that HUD migrated.

Similarly, in 2017, we reported that to address long-standing deficiencies  in DHS’s financial management systems, DHS started to migrate three  components to a modernized financial management system solution  provided by the IBC. However, we found that significant challenges  such as project management and communication problems, among  others, disrupted the project, raising concerns about the extent to which  objectives would be achieved as planned. In May 2016, DHS and IBC  determined that the planned implementation dates were not viable. We  reported that plans for DHS’s path forward on this project were delayed  for 2 years.

In both cases, we found that the customer agencies did not consistently  follow leading project management practices, such as properly identifying  potential risks and developing mitigation plans. We made four  recommendations to HUD and two recommendations to DHS intended to  address weaknesses in their department’s financial management systems  modernization efforts. However, as of November 2018, they had not yet  implemented them.

OPM took steps to address this issue for the HR Line of Business. OPM  officials told us that in 2007 they developed an online guide to assist  customer agencies to prepare for and manage a migration of their human  resources operations to a shared services center. According to OPM, the  guidance contains information regarding different delivery models, the  migration process, and roles and responsibilities. Further, OMB and  GSA recognized that customers and providers would benefit from  additional technical support and oversight. In May 2016 guidance, OMB  tasked GSA with assisting agencies during implementation by publishing  guidance incorporating best practices and lessons learned in project  management. OMB also tasked GSA with monitoring implementations  to ensure that agencies are following a disciplined process and properly  assessing project risk in partnership with OMB. Later in this report, we  describe steps GSA has taken to provide guidance and technical  assistance to agencies.

Funding challenges, demand uncertainty, and limited choices.  Funding challenges, demand uncertainty among providers, and limited  choices for customers are challenges that have limited the effectiveness  of shared services marketplaces for HR and financial management  services. We have previously reported that agencies consider obtaining  the funding required for consolidation and migration efforts to be a  challenge. This can affect their ability to realize cost savings and cost  avoidance. GSA officials said funding challenges can be a barrier to  entry into the marketplace for potential customers. In part because of  funding challenges, agencies continue to rely on legacy IT systems for  core mission support services. Many of these systems are increasingly at  risk of failure because of aging technology and reliance on applications  that are no longer supported by vendors. As a result, agencies are limited  in their ability to deploy updates or make adjustments to ensure the  systems support mission needs. In our 2017 High-Risk report, we found  that agencies needed to establish action plans to modernize or replace  obsolete IT investments across the federal government.

Some FSSPs have also struggled to keep up with the capital investments  necessary to modernize. We previously reported that OPM officials  involved with the payroll consolidation effort said that funding had not  materialized for systems modernization for the four payroll service  providers, though it was expected at the outset of the initiative. The  officials said this lack of funding was a major problem that put the long- term viability of the effort at risk. According to NFC officials, the HR  FSSPs continue to find it difficult to keep up with the capital investments  necessary to modernize. GSA officials said that federal investment in HR  and financial management systems modernization lags behind the private  sector.

According to agency officials and subject-matter experts, federal and  commercial shared services providers faced uncertainty related to  customer demand, which made it difficult for them to plan and more fully  participate in the shared services marketplace. For example, ARC  officials said that in determining whether to invest in system improvement,  they need to evaluate the impact on current customers as well as the  benefits to potential customers. They also pointed out that the costs  associated with systems improvements would be borne by the current  customer base if potential new customers failed to materialize.

On the customer side, both agency officials and subject-matter experts  told us that potential customers often found it difficult to identify providers  capable of meeting their needs. Some customers wanted a la carte  services and others had needs which surpassed the capacity of available  providers. For example, Education’s HR officials said it was difficult to find  a provider to meet their needs for specific HR services. A lack of up-to- date information about providers’ services and costs complicated their  search process. Education officials said they reached out to several  FSSPs, but either they did not provide the specific services Education  wanted, they were not taking on new customers, or the cost was not  feasible for Education. We previously found that as more agencies  consider transitioning to shared services providers, making pricing and  performance information publically available can help agencies determine  the most efficient method for obtaining services.

Subject-matter experts said that large agencies also had challenges  finding an FSSP capable of meeting their needs. For example, one  subject-matter expert who works at a large agency with more than  350,000 employees described the challenges his agency faced identifying  a provider capable of providing financial management services. He said  one potential FSSP was concerned that adding a large customer would  negatively impact its ability to serve other customers. In light of the  difficulty in finding a provider with sufficient capacity, the agency decided  to modernize its financial system internally.

In light of these challenges, agency adoption of shared services has been  slow and uneven. In 2015, the Association of Government Accountants  (AGA) surveyed government managers and staff, and found that difficult  migration experiences raised doubts among officials at other agencies  contemplating shared services. AGA found that respondents considering  migrating to a shared services provider were hearing enough concerns  that they were not eager to undergo a substantial migration.  Consequently, agencies continue to conduct common business activities  in an inconsistent manner and maintain unique systems. Therefore, they  may be missing opportunities to achieve cost savings offered by greater  use of shared services. For example, according to OPM, there are at  least 108 different systems that send time and attendance data to FSSPs.  There are also an estimated 86 learning management systems across the  government. We have consistently reported that duplicative and  incompatible agency business systems and data prevent agencies from  sharing data, or force them to depend on expensive, custom-developed  systems or programs to do so.

OMB and GSA Have Taken Actions to Address Governance and Marketplace Challenges, but Could Strengthen Their Implementation Approach

OMB and GSA Have Taken Actions to Address Persistent Challenges

Over the past several years, OMB and GSA have taken actions— including creating a new governance structure and redesigning the  marketplace—to address the challenges that impeded more widespread  adoption of shared services. To bolster interagency collaboration, OMB  issued guidance in 2016, which designated a Shared Services Policy  Officer within OMB with responsibility and authority to develop and  implement government-wide shared services policy. OMB also tasked the  new Unified Shared Services Management (USSM) office within GSA to  bring together key stakeholders, including the managing partners of the  different lines of business, and representatives from customer and  provider agencies.

GSA also introduced the Federal Integrated Business Framework to build  on ongoing efforts by OPM and FIT to develop standards for HR and  financial management data elements and business processes, among  other things. As part of this effort, cross-agency working groups  identified 11 end-to-end processes for mission support services. Similar  to the business use cases FIT developed, these business processes  document how a common administrative activity is executed, including a  sequential description of each step in the process. According to GSA  officials, these business processes serve as the basis for a common  understanding of what services agencies need, and what shared services  providers should offer. These working groups also bring together those  with expertise in acquisitions, IT, HR, and financial management policies.

GSA also developed guidance for selecting and migrating to a shared  services provider. The new guidance identified opportunities for GSA to  review agency migration materials. GSA developed the Modernization  and Migration Management Playbook (M3 Playbook), a compilation of  leading project management practices and lessons learned from past  systems migrations, and met with agencies contemplating or undertaking  migrations. The M3 Playbook divides a typical shared services migration  into six phases. For each phase, the M3 Playbook identifies key steps  agencies should take before they move on, such as completing a risk  mitigation strategy and defining performance and success metrics. At the  end of each phase, the M3 Playbook recommends a “tollgate” review to  ensure both customer and provider completed the necessary steps and  are ready to move to the next phase. GSA is to provide recommendations  to OMB on the migrations based on observations of project status and  risk from tollgate reviews.

Agency officials involved with HR and financial management migrations  we spoke with said they found both the Playbook and GSA’s reviews  helpful. For example, Justice officials said they started to use the  Playbook once it was available midway through their HR system  migration to NFC. Prior to each tollgate review, Justice officials said they  submitted the required deliverables so that GSA had time to review the  documents prior to the meetings. Justice officials said that GSA staff  reviewing their materials offered concrete suggestions such as  developing and documenting success metrics, strengthening their  business case, and developing a risk assessment document. According  to Justice officials, these suggestions improved the migration process.  Education officials also reported they appreciated the project  management expertise provided by GSA staff.

OMB and GSA Introduced a New Shared Services Marketplace Model, but Could Strengthen Their Implementation Approach

In fiscal year 2018, OMB and GSA introduced a new marketplace model  for shared services that seeks to better meet the needs of customers and  providers by offering more choices for purchasing shared services. We  examined their approach for the new model and found they were  following some key change management practices, but there are  weaknesses with the implementation. Specifically, we found OMB and  GSA do not have a plan to monitor the implementation of an initiative  designed to determine how well the new marketplace model works as  intended. Nor have they identified and documented some key roles and  responsibilities. The action plan also does not explain how OMB and GSA  will provide information to customers about provider services, pricing, and  performance. Lastly, OMB and GSA have not implemented a process for  collecting and tracking cost-savings data.

OMB and GSA described their plan for the new marketplace in an action  plan, released in March 2018, along with the President’s Management  Agenda. The management agenda issued a new cross-agency priority  (CAP) goal to improve the effectiveness of shared services. According to  the management agenda, the shared services goal will support CAP  goals related to IT modernization, data accountability and transparency,  and the workforce of the future. OMB and GSA are the shared services  goal leaders and staff said they are coordinating with other CAP goal  leaders to achieve their objectives.

To oversee the marketplace and provide greater accountability for  migrations, OMB and GSA are implementing a new two–tier governance  structure (see figure 2).

To ensure that agencies are adhering to the standards developed by the  Business Standards Council and to provide greater oversight and  accountability for shared services migrations, OMB and GSA are working  on plans to create Task Order Review Boards (Review Boards) for  different types of services, such as payroll or accounting. According to  OMB and GSA’s action plan, the Review Boards will administer standards  and will review all task orders for shared services purchases for  compliance with the standards. The Review Boards will need to approve  any requested customizations. According to GSA officials, the contracts  for the various vendors providing shared technology and transaction  processing services will be purchased through and managed by Service  Management Offices (SMO). The SMO will be responsible for managing  the integration of new commercial suppliers into the marketplace and  responding to user concerns. The SMO will also be held accountable for  provider performance. OMB staff noted that the details of the Review  Boards depend on the shared services solutions that are identified.

Figure 3 describes the different options customers will have for  purchasing shared services in the new marketplace. The figure also  shows how a Review Board and SMO are intended to interact with  customers and providers.

To determine whether the marketplace model functions as intended, OMB  and GSA introduced an initiative, NewPay. In September 2018, GSA  awarded a 10-year, $2.5 billion NewPay agreement to two commercial  teams to provide payroll, and work schedule and leave management  services using Software-as-a-Service. Software-as-a-Service—a cloud- based computing model—delivers one or more applications and all the  resources—operating system, programming tools, and underlying  infrastructure to run them—for use on demand. According to OMB and GSA staff, Software-as-a Service should help address some of the  challenges with demand uncertainty because providers can more easily  increase and decrease capacity depending on changes in demand than  FSSPs have been able to do with their current technology.

Our prior work on organizational transformations shows that incorporating  change management practices—such as setting implementation goals  and a timeline to show progress—improves the likelihood of successful  reforms. Adopting key change management practices can also help  managers recognize and address agency cultural factors that can inhibit  reform efforts. As OMB and GSA prepared to implement the new  marketplace model, they incorporated some key change management  practices. For example, they defined their vision for a shared services  marketplace and some of the key activities needed to achieve that future  state. GSA also issued a draft statement of objectives for NewPay in  December 2017. The statement includes a comprehensive list of tasks  related to project management and assigns responsibility for those tasks  to the prospective customers, providers, or the government agency that  will fulfill the SMO role.

Although OMB and GSA have incorporated some key change  management practices, we found some weaknesses in OMB and GSA’s  implementation of the marketplace.

Monitoring. OMB and GSA do not have a finalized plan to monitor the  implementation of NewPay. We have previously identified key questions  for agencies that are planning and implementing transformations. In that  work, we found that agencies need to monitor and evaluate their efforts to  identify areas for improvement. We have also reported that effective  monitoring plans should include performance goals and milestones,  transparent reporting tools to help manage stakeholder expectations, and  a process for capturing lessons learned to improve the management of  subsequent phases.

OMB and GSA staff said they are working on a plan to help them  implement NewPay. However, it is not yet complete and they did not  provide us with a draft to review. They said their plans continue to evolve  and they anticipate having an implementation plan by spring 2019. The  lack of a finalized plan with the elements listed above hinders OMB and  GSA’s ability to provide sufficient oversight for this transition. Having such  a plan would provide various benefits to the NewPay implementation  effort. First, a monitoring plan that includes performance goals and  milestones would help OMB and GSA track how many and how well  customer agencies are transitioning from one provider to another.  Similarly, setting performance goals related to continued delivery of  services during the transition could help OMB and GSA more quickly  identify gaps and make adjustments as needed. Specifically, OMB and  GSA could more effectively monitor how the new approach for purchasing  payroll, and work schedule and leave management systems integrates  with current HR systems.

Additionally, transparent reporting tools, such as web-based reporting on  key milestones, could help OMB and GSA demonstrate that they are  aware of challenges and are addressing them as they arise. Greater  reporting transparency could also help build momentum, show progress,  and help justify continuing investments in reforming shared services  efforts. Finally, a process for capturing lessons learned based on NewPay  could help OMB and GSA improve the process for subsequent initiatives  and further minimize disruptions to agency delivery of services during  these future transitions.

Without a monitoring plan with performance goals and milestones,  transparent reporting tools, and a process for capturing lessons learned, it  will be more difficult for OMB and GSA to provide oversight of the  transition and its effects on providers and customers, including whether  there are interruptions to delivery of services. A monitoring plan could help OMB and GSA avoid gaps in service or costly delays as agencies  transition to the new model for obtaining payroll and work management  services.

Roles and responsibilities. OMB and GSA have also not identified or  documented some key roles and responsibilities related to the  implementation of NewPay. Identifying a NewPay SMO is a crucial first  step, since the SMO is supposed to play a key role driving standards and  holding customers and providers accountable for performance. However,  OMB and GSA have not announced which agency will serve as the SMO.  Further, they have not identified which agencies or officials will serve on  the NewPay Review Board. They also have not documented the authority  or the resources the SMO and Review Board will have to enforce agency  adoption of standards.

OMB and GSA have also not yet documented which agency will be  responsible for interpreting payroll rules and regulations. This has been  an ongoing issue for the payroll FSSPs. According to GSA and NFC  officials, the payroll FSSPs have been interpreting business rules  differently, and thus have implemented new regulations inconsistently.  According to NFC officials, the payroll FSSPs requested the  establishment of a governing body to help standardize the process for  implementing new regulations. OPM officials told us in September 2018  that they intend to start providing guidance to support payroll  standardization to the extent allowed by law and regulation in the future.  However, as of October 2018, OMB and GSA had not documented this  decision.

According to federal standards on internal control, management should  establish an organizational structure, assign responsibility, and delegate  authority to achieve an entity’s objectives. When the organizational  structure describes overall responsibilities, and when those  responsibilities are assigned to discrete units, then organizations can  operate more efficiently and effectively. Moreover, in our previous body  of work on enhancing interagency collaboration, we identified key  practices that can help agencies mitigate challenges when they attempt to  work collaboratively. For example, clarifying roles and responsibilities  can enhance interagency collaboration.

OMB staff and GSA officials said they are still identifying which agencies  or entities will fill key roles and assume key responsibilities. They  anticipate that some of this information will be finalized by spring 2019.  Identifying and documenting roles and responsibilities would help ensure  that key stakeholders are involved in planning and implementation  activities. Until OMB and GSA clearly identify, communicate, and  document key roles and responsibilities, they run the risk of not achieving  their objectives. They also risk repeating past problems, such as the  inconsistent implementation and interpretation of standards and  migrations that encounter costly delays because agencies do not follow  available guidance.

Information on services, pricing, and performance. Although the  action plan aims to help additional providers enter the marketplace, it  does not explain how OMB and GSA will provide information to  customers about provider services, pricing, and performance. According  to the Association of Government Accountants, effective marketplaces  require market transparency with information on services, pricing, and  performance. Also, according to federal standards on internal control,  managers should externally communicate the necessary quality  information to achieve an entity’s objectives.

As we have previously reported, reliable information on the costs of  federal programs and activities is crucial for effective management of  government operations. OMB staff and GSA officials said that data  collection efforts are on hold as they continue to try to determine what  performance metrics they will use and share with potential customers.  Without up-to-date information on providers—such as the services they  offer, their level of performance, and their costs—it will be time  consuming and difficult for potential customers to compare providers. This  lack of information could slow the rate of shared services adoption.

Cost-savings data. In the CAP goal action plan for shared services,  OMB and GSA established a cost savings goal of an estimated $2 billion  over 10 years based on reforms to the shared services governance  structure and marketplace. However, their action plan does not include  steps they intend to take to collect and track cost-savings data. Such data  would allow them to assess their progress toward their goal. In their  action plan, OMB and GSA included performance measures for goals  such as customer satisfaction. They also have output measures related to  HR and financial management activities. However, they did not include a  measure to gauge their progress in achieving cost savings. In our  previous work on key questions for agencies that are planning and  implementing transformations, we found that agencies need to have  processes in place to collect the needed data and evidence to effectively  measure goals of reform efforts.

OMB and GSA said they are still finalizing their implementation plan.  Including a process to collect and track cost savings data in the final plan  would position them to assess how well their reform efforts are  contributing to their cost savings goal. Cost savings data would also  support oversight efforts, as OMB and GSA could better communicate to  Congress and other relevant stakeholders the extent to which their  reforms are contributing to cost savings goals. Earlier in this report, we  described how difficult it was to determine the progress of the financial  management line of business because the managing partners of that  effort did not track data on cost savings. Until OMB and GSA finalize a  plan for collecting the needed data and evidence to effectively measure  cost-savings goals, they risk experiencing a similar challenge.

OMB and GSA’s action plan to support the shared services CAP goal  does not directly address funding challenges. However, new legislation  intended to promote IT modernization efforts may address these  challenges. In 2017, Congress enacted the Modernizing Government  Technology (MGT) Act as part of the 2018 National Defense  Authorization Act. The MGT Act allows agencies to create working  capital funds for modernizing IT systems. Working capital funds are  primarily used for business-like activities, such as purchasing  consolidated or shared services within and between federal agencies.  The MGT Act allows CFO Act agencies to transition legacy systems to  cloud computing platforms or other innovative platforms and technologies,  among other things. We have previously reported that working capital  funds provide agencies with an opportunity to operate more efficiently by  consolidating services and creating incentives for customers and  managers to exercise cost control and economic restraint.

The MGT Act also established the Technology Modernization Fund and  Technology Modernization Board. Agencies can apply to the board for  loans for IT modernization projects, including replacing legacy systems  with shared services. In February 2018, OMB issued guidance on the  initial process agencies should follow to submit proposals to the board.  As of February 2019, OMB announced plans to award close to $90 million  to various agencies for modernization projects. Two of these awards  were for shared services: one award was to GSA for more than $20  million to help fund NewPay and one award was to USDA for $5 million to  migrate 10 IT applications to a shared services cloud platform model.

When properly implemented, a shared services model for HR and  financial management activities has the potential to help the federal  government cut costs and modernize aging IT systems. Over the past 15  years there have been some notable shared services successes: for  example, consolidating payroll services resulted in more than $1 billion in  cost savings and cost avoidance over 10 years, according to OPM  estimates. However, there have also been persistent governance and  marketplace challenges that have impeded more widespread adoption of  shared services.

OMB and GSA have been involved in shared services reform efforts for  decades. Their plan for a new shared services governance structure and  marketplace has the potential to address some of the challenges that  have previously hindered more widespread adoption of shared services.  For example, their proposed marketplace model has the potential to make  the marketplace more effective by reducing demand uncertainty among  shared services providers and providing more choices for customers.  However, several weaknesses in their implementation of NewPay could  limit the initiative’s success. OMB and GSA do not have a plan to monitor  NewPay’s implementation. They also have not documented key decision- making roles and responsibilities related to the implementation of  NewPay. Until they develop a monitoring plan which includes  performance goals and milestones, transparent reporting tools, and a  process for capturing lessons learned, and documenting key roles, they  risk implementation challenges that could cause gaps in service or costly  delays.

OMB and GSA also do not have a process to provide information to  customers about provider services, pricing, and performance. Developing  such a process would help minimize the challenges of transitioning to  shared services on key stakeholders. Finally, OMB and GSA do not have  a process for collecting and tracking cost-savings data. Until OMB and  GSA finalize their plan for collecting the related data and evidence to  measure their cost savings goal of an estimated $2 billion over 10 years,  they will not be able to determine and report progress made.

We are making four recommendations to OMB to work with GSA, which is  the co-goal leader for the shared services CAP goal.

OMB’s Shared Services Policy Officer should work with GSA to finalize a  plan for monitoring the implementation of NewPay. The plan should  include:  implementation goals, a timeline, and milestones for agencies to  transition from one provider to another;  transparent reporting mechanisms on key milestones; and a process for capturing and communicating lessons learned.  (Recommendation 1)

OMB’s Shared Services Policy Officer should work with GSA to document  key roles and responsibilities, including which agency will be the NewPay  SMO, who will be assigned to the NewPay Task Order Review Board,  how the SMO, the Review Board, and other key stakeholders will work  together, and which agency will be responsible for interpreting payroll  rules and regulations. (Recommendation 2)

OMB’s Shared Services Policy Officer should work with GSA to update  provider information on services offered, pricing, and performance and  share that information with prospective customers. (Recommendation 3)

OMB’s Shared Services Policy Officer should work with GSA to  implement a process for collecting and tracking cost-savings data that  would allow them to assess progress toward the shared services cost- savings goal of an estimated $2 billion over 10 years. (Recommendation  4)

We provided a draft of this report to the Director of OMB, the  Administrator of GSA, the Acting Director of OPM, the Secretary of the  Treasury, the Deputy Assistant Inspector General for Audit of the USDA,  the Secretary of Education, and the Assistant Attorney General for  Administration of Justice for review and comment. OMB staff did not  agree or disagree with our recommendations. In comments provided by  email, OMB staff stated OMB has been re-evaluating its shared services  policies and may provide an updated policy in the future. OMB, GSA,  Treasury, OPM, USDA, and the Department of Education provided  technical comments on this report which were incorporated as  appropriate. The Department of Justice did not have comments.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Director of the Office of Management and  Budget, the Administrator of General Services Administration, the Acting  Director of the U.S. Office of Personnel Management, the Secretary of the  Treasury, the Deputy Assistant Inspector General for Audit of the U.S.  Department of Agriculture, the Secretary of the Department of Education,  and the Assistant Attorney General for Administration of the Department  of Justice, and other interested parties. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff has any questions about this report, please contact  Tranchau (Kris) T. Nguyen at (202) 512-2660 or Nguyentt@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of our report. Key contributors to  this report are listed in appendix II.

Appendix I: Objectives, Scope, and Methodology

This report: (1) identifies the progress and challenges associated with  federal shared services initiatives for selected human resources (HR) and  financial management activities, and (2) assesses the Office of  Management and Budget’s (OMB) and the General Service  Administration’s (GSA) actions to address those challenges.

To address both of our objectives, we conducted a literature review of  GAO work and other relevant publications on HR and financial  management shared services. In addition to GAO reports, we selected  reports by think tanks and professional associations from the past 15  years, such as reports by the Partnership for Public Service and the  Association of Government Accountants (AGA). We reviewed reports  that described past HR and financial management federal shared  services initiatives or specific shared services migrations involving HR or  financial management services. These reports assessed the outcomes,  challenges, or summarized lessons learned associated with those  initiatives or migrations.

We reviewed planning and performance documents and we interviewed  officials from (1) OMB and GSA, the agencies that oversee shared  services policy and guidance, and (2) the Office of Personnel  Management (OPM) and the Office of Financial Innovation and  Transformation (FIT) within the Department of the Treasury (Treasury),  agencies that oversaw past shared services initiatives and continue to  play a key role developing government-wide policy for HR and financial  management shared services. Key documents we reviewed included:  OMB memorandums announcing federal shared services initiatives; the  Modernization and Migration Management (M3) Playbook, guidance that  GSA developed and provides to agencies considering or implementing  shared services migrations; strategic or operational plans for earlier  shared services initiatives, such as the Human Resources and Financial  Management Lines of Business; and strategic or operational plans for  ongoing shared services initiatives such as the Federal Integrated  Business Framework, a model GSA developed with the lines of business  managing partners for moving agencies toward common, cloud-based  solutions for management functions.

To illustrate examples of outcomes and challenges, we selected two  federal shared services providers (FSSPs), federal agencies that provide  shared services to other agencies: the National Finance Center (NFC)  within the U.S. Department of Agriculture (USDA) and the Administrative  Resource Center (ARC) within Treasury. We also selected two customer  agencies: the Departments of Justice (Justice) and Education  (Education), which are experiencing different phases of shared services  migrations.

We made our selection based on a number of factors. To capture a range  of experience and perspectives, we selected a mix of customer and  provider agencies. We selected one HR and one financial management  systems migration to review, as well as one migration in an earlier phase  and one in a later phase. To capture an in-depth perspective of a  migration, we selected one customer and provider working together on a  migration. To capture perspectives on OMB and GSA’s efforts to address  shared services challenges and improve outcomes, we selected provider  and customer agencies that were meeting regularly with GSA in 2016 or  2017 on their shared services migration. Our selection of agencies is non- generalizable and their experiences and outcomes may not be reflective  of all migrations.

We reviewed guidance, planning, and performance documents at the four  selected agencies. Specifically, we reviewed planning documents that  describe shared services migration purpose and goals, the composition  and responsibilities of the project management team, and estimated costs  and savings; documented results of market research and analyses of  alternatives; risk management strategies; service level agreements and  performance metrics; communication plans for stakeholders; and reports  that capture lessons learned.

For each of the illustrative example agencies, we interviewed agency  officials involved with shared services migrations. At Justice, we  interviewed the project management team overseeing the HR migration to  the NFC. At Education, we interviewed the officials who reviewed the  Department’s HR and financial management shared services options. At  the two FSSPs, we interviewed officials knowledgeable about the  outcomes and challenges associated with past and ongoing federal  shared services initiatives.

We also interviewed subject-matter experts who were involved in public  and private shared services migrations as customers, providers, or  consultants. We met with members of the Shared Services Leadership  Coalition, an interest group promoting shared services solutions involving  commercial vendors. The members who participated in the group  interview discussed shared services benefits, challenges, and lessons  learned. We also met with members of the nonprofit Partnership for  Public Service Shared Services Roundtable. The roundtable members  who participated in the group interview are federal employees involved  with shared services operations. They represented a mix of small and  large agencies.

To further address the second objective, we reviewed OMB and GSA’s  efforts to identify and address challenges and lessons learned from past  migrations, including the new shared services action plan OMB released  in March 2018. We assessed the extent to which OMB and GSA’s plan  and guidance are designed to facilitate better shared services outcomes  using criteria such as standards for internal control in the federal  government, principles identified in our previous work related to  addressing major management challenges, and the Association of  Government Accountants criteria for effective marketplaces. During our  interviews with customer and provider agency officials and subject-matter  experts, we asked for their perspectives on these efforts and the likely  effect they will have on ongoing and future shared services migrations.

We conducted this performance audit from June 2017 to March 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: GAO Contact and Staff Acknowledgments

Key contributors to this report include Sonya Phillips (Assistant Director),  Jessica Nierenberg (Analyst-in-Charge), Rose Almoguera, and Monique  Nasrallah. Faisal Amin, Ann Czapiewski, Timothy J. DiNapoli, Jared  Dmello, Robert Gebhart, Amanda Gill, Dave Hinchman, Gina Hoover,  Valerie Hopkins, John Hussey, Heather Krause, Michael LaForge, Laura  Pacheco, Paula M. Rascona, and Kevin Walsh also contributed to this  report.

A federal agency needs services like payroll and travel to support its work, but it can save money by sharing those services with other agencies. For example, agencies sharing payroll services across government saved more than $1 billion over 10 years, according to a federal estimate.

The Office of Management and Budget and the General Services Administration are promoting human resources and financial management shared services, among others, and trying to address the reasons why agencies don't participate more. We suggested ways to improve their approach to increasing participation.