Around the world, many state, regional and municipal governments are in trouble—and help is not on the way.
Closely monitoring and controlling costs is a top priority on any corporate management team’s agenda. The same restraint is not always found in the public sector, however. There, jerry-built budgets, subject to only casual oversight, as well as poor management at the agencies themselves can result in widespread inefficiencies and ultimately fiscal crisis.
Normally, this lack of fiscal discipline can be a troubling yet bearable condition; it will, in any event, be someone else’s problem after another electoral cycle or two. But in today’s crushing recessionary environment, where governments are watching tax revenues evaporate all around them, the situation has become untenable.
In the United States, for example, a report by the Center on Budget and Policy Priorities puts the crisis in stark relief: Forty-eight of 50 US states either currently face or have already dealt with a combined 2010 budget deficit totaling $200 billion—an amount equal to roughly 30 percent of the combined budgets of all 50 states. These deficits necessitate cutbacks in services at hundreds of state and municipal government agencies. And the United States is not alone: Local governments across the globe face historic recession-fueled deficits.
Even with an economic recovery struggling to life, regional governments will continue to face brutal financial difficulties into 2011 and beyond. For instance, 46 US states are expecting fiscal year 2011 gaps equal to 17 percent of their budgets. These shortfalls are likely to grow, and may well exceed a collective $180 billion.
Worldwide, national governments have little capacity to help staunch the red ink flowing at the state, provincial or municipal levels. For example, before Britain’s new coalition government had previewed its budget in June, a European Commission forecast estimated that the UK budget deficit will reach 12 percent of GDP this year—worse than that of Greece, at 9.3 percent, and the highest in the European Union.
Although dire, the situation in the United Kingdom is far from unique. Across Europe countries have seen healthy government budget surpluses metamorphose into gaping deficits that stretch out for years to come. As part of Italy’s attempt to trim its budget deficit from 5.3 percent of GDP in 2009 to the EU’s 3 percent threshold in 2012, the government is hoping to capture €12 billion in annual savings.
Under these circumstances, few white knights in the form of national stimulus funds or bailouts will come to the rescue of distressed governments anytime soon. Meanwhile, citizens grown accustomed to diligent efforts by private-sector companies to cater to their demands have begun to expect the same high levels of service from government agencies—a situation aggravated by growing unemployment and the resulting need for more public assistance.
Out of cash and lacking the political will to close budget gaps quickly, government officials need a new operating model. And they need it now.
Public challenges, private tactics
As the new reality of enforced frugality takes hold, public managers must find innovative ways to cut costs quickly and sustain these savings over time. One highly effective response is a three-step approach agencies can use to cut costs immediately while simultaneously planting the seeds for a longer-term agency transformation.
The goal of the first, critical stage—rapid cost reduction—is to free up cash as quickly as possible to finance the organizational changes required in the longer term. The focus of this article is this initial step, which consists of an intense 90- to 120-day sprint to capture immediate cost cuts. The other two phases concentrate on redesigning agencies’ business operating models in the following two to six months and creating an effective shared services organization over the subsequent one to two years.
This approach is particularly effective because it focuses first on administrative areas, saving agencies from cutting key citizen-facing programs. It achieves quick wins to build internal and external transformation momentum—both of which are critical success factors in an environment that has long proven resistant to change. Recently, public health departments and transportation agencies in North America have successfully used the approach to cut millions in costs from their budgets in a matter of months, with New York City’s Metropolitan Transportation Authority being a prime example (see “Keeping the trains running at New York’s MTA”).
To make the critical first step in this three-phase strategy work, governments need to embrace private-sector tactics. Some governments might be reluctant to do this—having tried in the past to make the necessary changes only to have failed in the face of political opposition, public outcry or a simple lack of know-how. Experience nonetheless demonstrates that public officials can quickly close spending gaps by adapting corporate best practices to the unique challenges government agencies face. This proven methodology can generate from 5 percent to 10 percent in total operating cost reductions and 4 percent to 8 percent in capital budget savings.
To be successful, a program of rapid cost reduction must do five things.
1. Optimize the organization’s span of control
A problem common to both the public and private sectors is having too many highly paid supervisors overseeing too few less expensive frontline employees. Government agencies should rethink their management spans of control, identifying opportunities for supervisor job reductions that can be made quickly and with the smallest possible impact on day-to-day operations.
Compared to a traditional reduction in force, which is something of a blunt instrument used to achieve specific goals quickly, the span-of-control technique provides a measured, strategic diagnosis of the best manager-to-subordinate ratio and allows agencies to make headcount reductions with limited operational disruption.
This approach typically delivers a 10 percent to 20 percent reduction in the payroll element of a rapid cost-reduction program. At one state agency where rapid cost reduction was put in place, there was one manager for every three employees, while best practice called for a ratio in the 1:6 to 1:10 range. By carefully optimizing the span of control, the agency eliminated a number of management positions, doubling its managerial ratio to 1:6. It simultaneously increased organizational effectiveness by shrinking the bureaucracy and speeding up decision-making processes.
2. Streamline processes
Process streamlining begins with a review and mapping of the current process landscape, highlighting waste, variability, inflexibility and other inefficiencies. Using Lean Six Sigma methodology, process experts and agency personnel work together to reengineer the most inefficient processes, cutting costs by removing waste, increasing speed and reducing complexity. This bottom-up approach complements span-of-control optimization by reducing the time and resources required for both administrative and operating processes—often generating efficiency improvements of anywhere from 10 percent to 20 percent.
One public health department was having difficulties managing its contracts with providers that were delivering programs citywide. Teams prioritized contract management processes based on the potential impact of stream-lining compared to the effort required to capture it; in less than six weeks, they had identified and implemented a number of significant improvements.
As a result, the agency reduced the time required to negotiate and complete contracts for new services from seven months to just one week—cutting the cost of the process and improving access for citizens served by the department.
In the final step of process streamlining, agencies develop an improvement roadmap that includes a list of proposed initiatives, and calculates the impact in terms of speed and cost.
3. Eliminate or defer projects
From facility improvements to software upgrades, managers sometimes allow projects to continue even though they have become less vital or even unnecessary. Instead, agencies should use a systematic approach to prioritize spending and defer or eliminate projects they no longer deem critical.
To do this, they first need to assess the value of projects using legal, regulatory and/or mission-related criteria, and then determine which of the projects can drive demonstrable dollar savings or meet critical strategic objectives. Next, they must allow agencies to appeal some rejected projects, which would then be reevaluated against the criteria. The final step is to investigate any regularly scheduled projects, such as routine vehicle replacement or facilities painting, using industry benchmarks.
The collaborative nature of this process often becomes one of its major benefits. Because the agency’s management team develops the evaluation criteria and holds an appeal meeting to review the projects targeted for elimination, it effectively establishes buy-in throughout the organization for the projects under consideration.
This process can enable public managers to target anywhere from 25 percent to 50 percent of scheduled projects for elimination, providing an immediate cash impact. In one specific case, an agency closed four equipment depots and made other changes to achieve annual savings of about $10 million.
4. Accelerate procurement
Even though governments traditionally award contracts to the lowest bidder, a lack of sophistication in conducting negotiations can needlessly raise costs. Agencies should work proactively with suppliers to renegotiate improved rates or terms.
By focusing on the agency’s external spending, rapid procurement provides a standardized approach, applying competitive pressure and achieving quick results through short, sharp negotiations with top suppliers. The process involves a structured series of fact-based, intense negotiations with suppliers, during which agency managers ask for better terms based on a comprehensive analysis of the spending in question, listen to supplier feedback, clarify concessions and requests, and develop counterproposals.
Finally, they close negotiations and calculate the savings. Rapid procurement can deliver average savings that range from 5 percent to 10 percent of procurement spending related to the activities and programs they have been reviewing. And it’s effective immediately.
5. Audit supplier payments
One estimate has suggested that payment errors cost US public- and private-sector organizations roughly $10 billion each year. A supplier payment audit examines the recovery and loss-prevention capabilities within an agency’s procure-to-pay process, identifying savings by recouping past (and preventing future) duplicate or erroneous payments. Teams systematically assess each project’s spending history to identify and recoup losses from such payments to vendors.
They also put in place automated controls to improve payment accuracy going forward, in the process capturing savings that typically range from 0.1 percent to 0.5 percent of procurement spending. Recently, one bureau used this approach to identify $1.5 million in savings it could recoup over the next six months.
Support at the top
A number of corporate best practices can help public-sector managers ensure the success of a rapid cost-reduction project. Before embarking, however, agencies should make sure key leaders support the initiative and have the conviction and the political courage necessary to make what will undoubtedly be tough calls. Additionally, organizations should hold leaders accountable for capturing cross-agency savings and remove those unwilling to deliver as promised.
Successful programs are typically centralized, with a dedicated program management office that organizes the initiative, imposes discipline and ensures transparency. These initiatives benefit from timely, crisp, fact-based communications from the top that set the overall tone for the program. They also tie all savings back to the general ledger and specific savings targets.
Rather than enraging constituents with ill-considered, across-the-board budget cuts, state and local agency managers who recognize that fiscal restraint is the order of the day (as well as tomorrow) can proactively re-imagine the role of public service entirely. By adapting and employing ideas sharpened in the hard-nosed environment of the private sector, public officials can make the first, vital move in the three-step process that cuts costs now to finance the long-term transformation their agencies need to survive and provide the best-quality service.
In fact, the fiscal difficulties these governments now face can actually jump-start the change process, instill urgency and compel public agencies to act in new ways, imbuing public-service employees with the need to transform government—and themselves.
For further reading
“Beyond the e-government hype,” Outlook, February 2010
“The bigger picture,” Outlook, June 2009
Keeping the trains running at New York’s MTA
New York’s Metropolitan Transportation Authority, a state agency serving New York City and surrounding counties, is the Western Hemisphere’s largest public transportation provider, with approximately 8.5 million riders every weekday.
The recession-battered state cut back its funding to the agency, resulting in a 2010 budget deficit of nearly $800 million and forcing the agency to act quickly to reduce its cost base. By employing the rapid cost-reduction approach, the MTA quickly identified more than $150 million in potential savings.
An important part of the process, which was adapted to meet the unique challenges of the MTA environment, focused on transforming the agency into a more efficient and effective organization with support from a lean back-office operation. Specifically, the authority made process improvements, renegotiated supplier agreements, reduced management layers, and eliminated or deferred projects that were not mission critical.
The MTA had an immense pipeline of operating projects that ranged from facility improvements and software upgrades to the replacement or refurbishment of worn-out vehicles. The agency looked hard at these and other programs using a project elimination and deferral approach to prioritize its spending more effectively.
Of 280 projects evaluated, 141 were identified for elimination or deferral based on the mission-driven criteria developed by the organization. As a result, the MTA achieved savings of $40 million in 2010. Furthermore, upon completion of the project elimination initiative, the agency intends to perpetuate its savings by using the same criteria to evaluate future projects.
The MTA also engaged in a rapid procurement process to identify savings opportunities. Over the course of just 10 weeks, agency buyers collaborated with suppliers to negotiate more competitive terms and amended contracts to yield immediate savings. Working with 43 vendors and suppliers to renegotiate contracts, the buyers identified savings of nearly $40 million, including $18 million in existing contracts in 2010.
By acting aggressively in the spirit of continuous improvement, the MTA continues to target areas that include controlling overtime and consolidating redundant functions.
About the authors
Michael K. Ostergard is the North American managing director for Accenture Corporate Strategy. With 18 years of strategy consulting and financial management experience, Mr. Ostergard has worked with senior executives on all aspects of value-based management, valuation, cost reduction, corporate restructuring and corporate strategy.
He is based in Atlanta.
Ravi Chanmugam is the management consulting lead for Accenture’s Health & Public Service operating group in North America. He has more than 13 years of strategy and M&A experience working with a wide array of clients, from Global 1,000 companies and major private equity firms to government agencies. Mr. Chanmugam is based in New York.
Arthur J. Vieira is a senior manager in Accenture Strategy. Based in Boston, Mr. Vieira specializes in enterprise transformation, strategy development and execution. His recent work focuses on helping turn around underperforming businesses and developing new growth strategies for clients.
Sarah C. Glass is a consultant in
Accenture Corporate Strategy. Ms. Glass, who is based in Washington, D.C., works in the health and public-service industries. Prior to joining Accenture, Ms. Glass worked in the nonprofit sector for five years.