Shared Services and Cost Reduction in the Public Sector Context

Cost reduction is the main motive for introducing shared services in the public sector. However, while governments are increasingly consolidating their back-office functions into Shared Service Centers (SSC), there is a surprising lack of evidence to prove that SSCs lead to economies of scale and cost reduction. As some authors claim that cost reduction is a myth, there is an evident need for in-depth empirical research from different public sector contexts to verify whether and in which conditions can the establishment of a SSC reduce public administration costs. In the first part of this paper I review the existing literature on shared services in the public sector. Focussing on the cost reduction motive I aim to study whether and how the adoption of a SSC model can help to reduce costs in the public sector context. In the second part of this paper I present the results of two case-studies from Estonia. The cases can be seen as ideal cases to study cost reduction as their context is similar to the private sector context. The case-studies show that if the public sector context enables radical top-down reform, instant dismissal of back-office staff, rapid adoption of a common software and reorganization of business processes and organization structures, the back-office staff reduction is achievable. However, the overall costs and benefits of shared services in the public sector are difficult or impossible to measure and when the cost reduction motive is not achieved, other motives are emphasized as the main motives of the SSC. In the discussion section I discuss the implications of these findings.