Analysis: How to cut costs and improve performance

The federal government faces an estimated annual structural deficit of $500 billion to $700 billion. A deficit of this magnitude represents a major threat to the economic health of the nation. The structural deficit is defined as the portion of the total annual deficit that results from a fundamental imbalance in receipts and expenditures, not just one-time occurrences or changes in the economic cycle. Steps to reduce and eliminate this structural deficit are urgently needed.

Congress, the Obama administration, and state and local governments must put government spending on a path of fiscal sustainability for the longer term. Policy makers have focused on three cost-cutting opportunities for doing this:

• Eliminating wasteful programs,
• Taking a longer-term view that focuses on entitlement program policy changes,
• Using proven cost-saving strategies from the public and private sectors to make the daily operation of government much more efficient and deliver improved performance at a lower cost.

Recent discussion of the fiscal crisis has been limited to these three approaches, and discussion centers on draconian, across-the-board spending reduction or equally sweeping tax hikes. Based on the experience of the technology industry, there is a better way. Government has an opportunity to dramatically reduce spending and cut the deficit, while also improving its level of service. By harnessing major technological shifts and adopting proven, commercial best business practices, leaders and managers can not only make government far more productive, but also foster greater innovation in areas ranging from health care to education and energy -- innovation that will generate economic growth and job creation.

Innovative approaches have been used effectively throughout the past several decades to create new technology models. Again and again, new capabilities have simultaneously reduced costs and sparked innovation. While businesses and governments are inherently different in many ways -- responsibilities, objectives and mandates -- both employ millions of professionals to provide goods and services to hundreds of millions of customers and constituents. Not all private-sector solutions are applicable or advisable in a government setting. In both the public and private sectors, the more productive and efficient the operations, the more services can be delivered at the lowest cost. Given the current fiscal outlook for governments at all levels, maximizing government productivity will be essential to maintaining the services citizens want at prices taxpayers can afford.

Traditional Budget-Cutting Exercises Will No Longer Work

We have heard it before -- the need to "do more with less." But the situation is different this time, and much more difficult. Drastically reducing costs is a major undertaking, not a normal budget-cutting exercise. And, importantly, it presents an opportunity to not just cut programs and discretionary costs, but to transform how government does its business.

Across-the-board cuts and undifferentiated freezes that affect all programs and services in the same way can have perverse effects. Such cuts erode the quality of services and affect the morale of public servants. Over time, they erode citizens' confidence in government. Too often, budget-cutting exercises involve a small number of people working in relative secrecy. In contrast, drastic austerity measures require a more open and inclusive approach, one that engages a large set of stakeholders and gives greater emphasis on program evaluations and cost/benefit analyses than occurs in the normal budget process. Rather than looking only at program cuts, leaders and managers should view the need to achieve drastic reductions as an opportunity to reconsider their entire organizational structure as well as program business models.

Traditional Cost-Cutting Exercises Often Prove to be Temporary

Government organizations often cut discretionary costs, such as information technology, travel, and training, which can have an immediate, significant impact. Unfortunately, as soon as the external pressure is gone, these costs creep back into the cost base. More successful organizations invest in central staff who help identify systemic costs associated with organizational and program complexity and supply chain improvements. In doing so, they must be mindful of two important points:

• Establish top-down cost savings targets. Delegating the responsibility for cost-cutting to the frontline organizations often results in cuts to long-term investments, like training, not to low-priority or poorly performing projects. Central staff focused on operational improvements can provide an enterprise-wide view to objectively identify high-priority and high- performance activities, not just set overall cost-reduction targets for the organization.
• Recognize and capitalize on the cost of complexity. Failing to estimate and account for the cost of too many separate operations and support activities can lead organizations to overlook savings from reducing, standardizing, or sharing services, or making supply chain improvements. Central staff are in a better position to identify enterprise-wide and cross-agency opportunities to capitalize on redundancies.

New Approaches are Needed to Truly Transform the Way Government Does Business

Faced with the need to make severe budget cuts, government organizations may react in one of two ways:

• One group of leaders and managers will use the necessity for cuts as a catalyst for change. They will seize the opportunity to streamline business processes, shed unnecessary functions and optimize IT systems.
• Another group will adopt a bunker mentality and sideline management reform, cutting projects and jettisoning management improvements, believing that management reforms represent a luxury they can no longer afford.

A big risk in the current cost-cutting debate is that not enough attention will be focused on the opportunity to improve operational performance by being smarter about the way government does business. The IBM Center for the Business of Government's Strategies to Cut Costs and Improve Performance describes seven specific initiatives where technology-enabled productivity solutions can make a material difference in the performance of government programs, based on the experience of real cost savings and efficiencies achieved by public and private sector organizations. These seven strategies constitute a starter list of initiatives of this type.

By aggressively implementing these strategies, sustainable cost savings can be realized while, in many cases, improving operational performance.

• Seven Strategies to Cut Costs and Improve Performance

• Consolidate information technology infrastructures
• Streamline government supply chains
• Reduce energy use
• Move to shared services for mission-support activities
• Apply advanced business analytics to reduce improper payments
• Reduce field operations footprint and move to electronic self-service
• Monetize the government's assets

Source: Charles L. Prow, Debra Cammer Hines, and Daniel B. Prieto, Strategies to Cut Costs and Improve Performance. IBM Center for the Business of Government. 2010.

Getting It Done

The problems of mounting debt and deficits can't be solved overnight, but must be addressed now. An initial step in achieving dramatic cost savings -- the "how" it will be done -- is deciding "who" will do it. In the private sector, this would be the job of the chief financial officer. However, in many government organizations, the CFO or the budget officer, as one former CFO expresses it, is very good at getting money from Congress to fund various programs and making sure that money is spent -- but is not experienced with considering how effectively or efficiently that money is spent.

The chief executive officer/chief operating officer model that is prevalent in the private sector does not work as well in government. Cabinet secretaries have huge jobs. With many direct reports just in the Office of the Secretary, they need their deputy to serve as an alter-ego in many capacities, not just as a chief operating officer. While some deputy secretaries have been very attentive to management, others have not.

The best approach is for top officials to appoint and empower a single individual to manage cost-cutting activity. While they may be supported by departmental staff or outside volunteers, someone needs to own the task and, ideally, report directly to the agency head. The secretary or deputy secretary should recruit a highly respected and experienced former CFO from the private sector to serve as the department's "uber-manager" with the explicit mission to achieve dramatic cost saving.

People often ask how the role of Cabinet secretary, department head, or legislator fits into this model and whether these officials should own cost-savings activity in their areas of influence. These leaders will be critical enablers for cost-savings ideas, but we recommend that someone outside the impacted agencies be appointed to take the lead role for two reasons. First, those officials, like their elected bosses, have a great deal on their plate. Their days are filled with a constant stream of crises. Second, we believe that appointing an external voice can help inform the decision-making of agency heads as they make the tough choices about what must be cut.

The Role of Leaders and Managers

Cost-cutting is tough, unpleasant work. It requires choices that most of us would rather not make. Therefore, unwavering leadership is the most important characteristic for senior officials to display in a successful cost-cutting effort. While an individual department head might be able to reduce costs for a few years in an agency, it is very hard to bend the overall cost curve unless top leadership demands it.

How this process will play out over the next few years remains to be seen. In many respects, identifying sources of savings (whether policy changes or operational improvements) is the easy part. The challenge will be to turn ideas into action. Most important, we know that the proposed operational and process improvements do not just cut costs; they also foster collaboration, idea sharing, and a culture of innovation.

This will be where government leaders and managers come in. They will be the ones who do the heavy lifting to implement major program adjustments and cutbacks, as well as harness major technological shifts and not just cut costs, but also adopt innovative practices to make government far more productive.

This article is adapted from Seven Management Imperatives, a report by the IBM Center for the Business of Government on broad societal trends that are changing the way federal agencies and their leaders must operate. The report's authors are Mark A. Abramson, Gadi Ben-Yehuda, Jonathan D. Breul, Daniel J. Chenok, John M. Kamensky, Michael J. Keegan and Frank B. Strickland Jr.