Outsourcing and Financial Systems Integration in the Federal Government

Article excerpt

and Financial Systems Integration in the Federal Government

Trends for Outsourcing

This case study on the outsourcing of financial services provides lessons learned for other government financial management professionals involved in, or considering, the outsourcing of routine financial transactions. The article describes some of the management analysis that goes into outsourcing and the financial systems challenges of combining commercial data with government data.

Interest in outsourcing within the federal government is increasing. Congress passed the FAIR (Federal Activities Inventory Reporting) Act in 1998, requiring agencies to identify those functions that are "commercial-like," meaning functions not classified as "inherently governmental." In June 2000, agencies complied with the FAIR Act reporting requirements with 53 percent of the federal government's 1.7 million civilian positions-or more than 900,000 positions-declared commercial-like.

The U.S. Agency for International Development (USAID) outsourced the loan servicing and accounting for its credit programs in 1998. That work included sending out bills for fees or principle and interest, posting collections to the right account, accruing receivables, etc. USAID contracted with a private bank to perform the routine transactions for its $23 billion in credit program guarantees and direct loans, amounting to about 2,400 loans and loan guarantees in more than 80 countries.

USAID's experience in outsourcing over the last two years can be passed on to those who are beginning the process, or those who are further along but would like to learn from the experience of others. Although this article focuses on the outsourcing of loan servicing, the lessons learned can be applied to any systems outsourcing and integration, including grant management, payroll, travel, propriety management, inventory, subsidiary accounting and personnel management.

Outsourcing of loan servicing in the federal government began with the Credit Reform Act of 1990. The U.S. Office of Management and Budget (OMB) Circular A-129 Policies for Federal Credit Programs and other Accounts Receivable (1993, as revised), states that agencies are to make the management of credit assets and other accounts receivable as "commercial-- like" as possible. The Chief Financial Officers (CFO) Act, also enacted in 1990, mandated the preparation of audited financial statements for agency credit programs. These credit program audits showed weaknesses in the federal government's ability to account for federal credit assets, and the Credit Reform Act called for the evaluation of outsourcing as an alternative to improve, or commercialize, the financial management of credit programs.

USAID's Outsourcing Efforts

In July 1998, USAID awarded a fee-for-service contract to Riggs Bank of Washington, D.C., to perform the billings and collections (servicing) and loan accounting functions for USAID's loan guarantees and direct loans. After 15 months of preparation, Riggs Bank became the "system of record" for USAID's credit portfolio beginning in October 1999. Riggs Bank leased a commercial loan servicing and accounting system (from M&I Data Systems in Milwaukee, WI) for managing USAi:D's "commercial" data, and created a data warehouse to manage USAID's "government" data. The commercial and government data are combined to give USAID the information it needs to account for and manage its credit portfolio.

Management Analysis

After an agency determines that outsourcing of routine financial transactions will help it meet its financial management goals, three decisions must be made:

* What will the outsourcing contractor do?

* What will the government agency do?

* How will the financial systems of the contractor and government agency be integrated?

One simple guideline is that the outsourcing contractor will perform routine transactions-commercial-like functions-- and the government will perform policy, quality control and contract management functions. …