Strategies to Cut Costs and Improve Performance

8/3/2019 Strategies to Cut Costs and Improve Performance

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Strategies to Cut Costs and

Improve Performance

Charles L. ProwManaging Partner, Public Sector

IBM Global Business Services

Debra Cammer HinesVice President and Partner


Daniel B. PrietoVice President and Practice Lead



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FOREWORD

The ederal government aces an estimated annual structural budgetdefcit o $500 billion 700 billion. Defcits o this magnitude represent

a major threat to the economic health o the nation. A plan to reduceand eliminate this structural defcit is urgently needed.

Observers believe the Presidents National Commission on FiscalResponsibility and Reorm (The Debt Commission), which is chargedwith developing such a plan, may set a target o reducing the defcitby about $7 trillion over a 10-year period. I such a defcit-reductionplan is to be credible, the ederal government must adopt an aggres-sive spending reduction program that includes reorming entitlementprograms, eliminating low-priority programs, and adopting commercialbest practices in government operations.

We estimate that through a combination o spending reorms in thesethree areas, the ederal government can save $11.5 trillion overfve years and up to $23 trillion over ten years. Approximately $1trillion o those savings can be generated by adopting commercialbest practices in government operations. It is our belie that existing

technologies can signifcantly reduce costs and improve service quality.This has been IBMs direct experience in the commercial world andwe see no obvious reason why the ederal government cannot achievesimilar results.

In real terms, government organizations at all levels o government arebeing asked not only to do more with less, but to adjust their missionsto todays demands and expectations. Many commercial best practiceshave been adopted to help commercial organizations save money

while becoming more competitiveessentially, doing more with less.At IBM, were maniacally ocused on adopting such practices.

We propose implementing new approaches to improve perormancewhile reducing cost in a more meaningul wayone that will enhancemission value provided by departments to citizens, state and localgovernments, businesses, etc.

Here is a simple way o expressing some value in terms that we intui-tively understand:

Mission Value = Quality * Service

Cost * Time

Qualitycould describe more accurate reunds/payments, gettingthe right commodity to the right place at the right time, or intercept-ing bad guys beore they create damage.

Service could mean organizations that can regard you as anindividual across transactions over time, that anticipate your ques-tions, and that provide service channels that are convenient andaccessible.

Cost could mean cost per transaction or government, cost percitizen, or reduced operations and maintenance (O&M) costs.

Timecould mean shorter elapsed or active time processingapplications, or a decrease in wait time.

Adjusting any o these components will improve the value provided tocitizens, leaders, and other stakeholders. Using this practical approachwould apply proven practices to major aspects o the way government


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FOREWORD

does business that would remove costs rom the process and improvemission outcomes.

This report provides specifc strategies that the ederal governmentcan undertake to achieve savings in operational unctions. A briedescription o each cost-saving strategy is presented on the ollow-ing pages. Additional inormation on each strategy is provided anddiscussed on the IBM Center or The Business o Government website:www.businessogovernment.org.

Charles L. ProwManaging Partner, Public Sector


[email protected]

Debra Cammer Hines

Vice President and Partner


[email protected]

Daniel B. Prieto

Vice President and Practice Lead


[email protected]


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INTRODUCTION

The Nature of the ChallengeAccording to budget projections produced by the Congressional Budget

Ofce in January 2010, the ederal government will accumulatemore than $7 trillion in new debt between 2010 and 2019. Theseestimates suggest the government is running a structural defcit o be-tween $500700 billion each year. The International Monetary Fundestimates the annual structural defcit in the U.S. may even reach $1trillion by 2015 under current policies. The scale o this fscal chal-lenge is unprecedented.

Such a fscal imbalance poses a severe risk to the country. Over time,the accumulation o debt at this scale will crowd out private investmentand could lead to inationary pressures and currency instability. Underthose macroeconomic conditions, the private economy will struggle togrow and create jobs. For that reason, it is imperative that the ederalgovernment adopt an aggressive plan to reduce and ultimately elimi-nate its structural defcit.

Any credible approach to restoring the countrys fscal condition will

likely include both a reduction in spending, including entitlementreorm and elimination or reduction o low-priority programs, andan increase in revenues, most importantly, through the return o arobust economy. The Ofce o Management and Budget (OMB) hasalready directed all department heads to identiy program reductionsor eliminations that can reduce their discretionary budget proposals by5 percent. Secretary o Deense Robert Gates has separately directedcuts o $100 billion over the next fve years. OMB has also directed

agencies to identiy their lowest priority programs. The strategies thatollow reach beyond these directives.

Adoption of Commercial Best Practices in Government

OperationsWhile entitlement reorm and the elimination o low priority programswill be critical components o any defcit reduction strategy, withoutquestion the ederal government can generate signifcant savings by

elevating its operational perormance. In 2009, McKinsey & Companypublished The Case or Government Reorm, which suggested thata 515 percent improvement in the efciency o ederal governmentoperations could generate $450 billion $1.3 trillion in savings overthe next 10 years. In a recent Wall Street Journal opinion piece, NewYork University Proessor Paul Light made a similar assertion, claimingthat $1 trillion in savings over 10 years could be generated primarilythrough aggressive workorce reductions, particularly in the manage-

ment ranks.

While these estimates are directionally useul, they lack the specifcitynecessary to persuade the public that a serious perormance improve-ment eort can yield material savings. Through a private-public partner-ship, we can identiy specifc operational unctions that can be improvedsignifcantly through the adoption o commercial best practices. Byaggressively implementing these strategies, sustainable cost savings can

be realized while, in many cases, improving operational perormanceat the same time. Below is a short summary o the opportunities thatcould constitute a starter list o initiatives o this type.


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COST-SAVING INITIATIVES

Initiative 1: Consolidate Information Technology (IT)

InfrastructureThe governments costs o operating its IT inrastructure are higherthan they need to bein some cases by more than a actor o two.Signifcant savings can be realized i departments and agencies em-ploy proven methods to reduce overall costs o IT ownership.

The ederal government currently spends approximately $78 billionin fscal year 2010 to support its widely-dispersed IT assets. At least2030 percent o that spending could be eliminated by reducing IT

overhead, consolidating data centers, eliminating redundant networks,and standardizing applications.

IBM has dramatically reduced its data center operations and savedup to 40 percent in operating expenses. IBM has cut its IT expensesin hal over the past fve years through consolidation and standardiza-tion. Gartner Group reports that these types o eorts generally delivera 2030 percent reduction in costs. I the ederal government couldachieve similar improvements in perormance, it could save $150

200 billion over the next 10 years.

Initiative 2: Streamline Government Supply ChainsThe ederal government procures approximately $550 billion worth ogoods and services each year. These goods and services are procuredlargely within agencies and departments with independent procure-ment processes. In 2005, OMB announced a strategic sourcinginitiative with the intent o reducing procurement costs by leveragingthe purchasing scale o the government and pooling the purchaseso commodity items. The anticipated benefts have not been realizedprimarily due to ailures to reorm budget and procurement processes.The eort also ocused too intensively on commodity purchasing andnot enough on supplier management.

Over the past decade, IBM internally consolidated 30 dierent supplychains and restructured its supplier network. The company eliminated

$25 billion in costs and improved supplier perormance. Given thecompanys scale and complexity33,000 suppliers, 45,000 businesspartners, and 78,000 products with 3 million possible confgura-tionsIBM can serve as a reasonable point o comparison to size theopportunity or savings available to the ederal government.

We also know that these savings can be achieved in public sectorsettings. The U.S. Postal Service realized $2.5 billion in cost reduc-tions and cost avoidance through transormation o its supply chainprocess. The Department o Deense is applying processes such asLean Six Sigma to extract costs rom their supply chain. In our experi-ence, process improvements alone can improve efciencies by 10 20percent. I the ederal government could achieve similar improvementsin supply chain perormance, it could save more than $500 billionover the next 10 years.


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Initiative 3: Reduce Energy UseIn October 2009, the president issued Executive Order 13514,

mandating ederal agencies cut greenhouse gas emissions and energy/water use. One o the most eective means or reducing energy useis through acilities rationalization. IBMs experience in call cen-ter consolidation suggests that organizations can reduce IT-relatedenergy costs by 25 percent. The aggressive adoption o voice, video,document sharing, and collaboration tools can reduce travel-relatedexpenses by 1020 percent. The implementation o new buildingmanagement technologies can reduce energy consumption or the

3.1 billion square eet o space currently occupied by ederal agencies.Advanced eet management systems can reduce the size o the eetand reduce energy consumption by 1020 percent. The combinationo these initiatives could generate $20 billion in savings over 10 years.

Initiative 4: Move to Shared Services for Mission-Support

ActivitiesEvery dollar spent on support activities and overhead within ederalagencies is a dollar that could be spent on programming or returned tothe taxpayer. Why should every agency have its own IT, fnance, legal,human resources or procurement operations? When the ederal gov-ernment consolidated 26 payroll systems to our, the EnvironmentalProtection Agency reduced payroll costs rom $270 to $90 per em-ployee, saving $3.2 million a year; and the Department o Health andHuman Services reduced costs rom $259 to $90 per employee, sav-ing $11 million a year. Likewise, when the government consolidated

travel systems, the Department o Labor reduced its costs rom $60 to$20 per travel voucher and reduced processing time rom about 7 toabout 3 days.

Four government cases studies rom the British government suggestthat 2030 percent savings are achievable by moving to a sharedservices platorm. I that savings rate were applied to the ederalgovernments support services spending, $50 billion in savings could

be generated over 10 years.

Initiative 5: Apply Advanced Business Analytics to

Reduce Improper PaymentsThe administration already recognizes the magnitude o this issue. Uponsigning Executive Order 13520 on reducing improper payments inNovember 2009, the president stated that my administration is ex-panding the use o Payment Recapture Audits, which have proven to

be eective mechanisms or detecting and recapturing payment errors. One approach that has worked eectively is using proessional andspecialized auditors on a contingency basis, with their compensationtied to the identifcation o misspent unds. The president ollowedthis with an April 2010 memorandum to agencies directing them toreduce improper payments by $20 billion a year. His authority to actwas reinorced when he signed the Improper Payments Eliminationand Recovery Act in July 2010.

The ederal government annually issues nearly $3 trillion in paymentsin one orm or another (e.g., grants, ood stamps, Medicare payments,tax reunds). The Government Accountability Ofce estimates that $72billion was lost to improper payments in fscal year 2008. OMB esti-mates losses approached $98 billion in 2009 ($54 billion in Medicaidand Medicare alone).


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OMB issued guidance this spring to departments asking that theydevelop plans to reduce these improper payments by $20 billion.

Industry regularly conducts recovery audits o large-scale transactions;these could be due to raud or mistakes, or an unanticipated shit indemand. New analytical techniques can increase the identifcationrate to 40 percent, which would double the current anticipated sav-ings rate and generate an incremental $200 billion over 10 years.

Initiative 6: Reduce Field Operations Footprint and Move

to Electronic Self-ServiceMost departments have citizen-acing operations that rely on manual,paper-based business processes. By moving as many touch points toelectronic platorms as possible, and at the same time rationalizingthe governments feld operations ootprint, the government can reducecosts and improve the citizens experience.

Australias CentreLink initiative provides online beneft determinationand payments to individuals on behal o 27 dierent government

agencies. The estimated annual savings total $86 million. Similarly,the Service Canada initiative provides 70 services on behal o 13 ederalagencies through online, phone, and in-person service delivery channels.The estimated annual savings in the frst year totalled $292 million.

In the U.S., there are more than 10,000 ederal government orms in173 dierent agencies that could be automated to allow citizens andbusinesses to conduct their business with government online. Reducingthe citizen-related feld operations o the ederal government and auto-

mating the governments orm processing could generate $30 billion insavings over 10 years.

Initiative 7: Monetize the Governments AssetsThe ederal government has a large inventory o assets that could beproducing revenue. Mining the balance sheet by examining conces-sions agreements and other opportunities may generate signifcantrevenues. This could include selling surplus acilities, and selling andleasing back others. For example, OMB has ound 14,000 excessbuildings and 55,000 underutilized buildings in the ederal inventory.The ederal government has other assetssuch as rights-o-way orenergy transmissionthat could be auctioned o.

The ederal government also has an array o ee-generating programsthat do not recover their costs. Otentimes, ee structures and levelsare dictated by issues other than cost recovery. We suggest the ederal

government identiy agencies that can be statutorily dependent on theee income they generate (i.e., no longer subject to the appropriationo general revenues). For example, a number o countries have corpo-ratized their air trafc control operations. By mining the balance sheetaggressively and corporatizing certain ederal operations, the ederalgovernment could save $150 billion over 10 years.

When taken together, these initiatives could generate billions in savingsin coming years. These savings would be in addition to the approxi-mately $240 billion in savings we estimate the Department o Deensecould generate over the next 10 years as a consequence o the opera-tional improvement eort recently launched by Secretary Gates.


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IMPLEMENTATION

How to Get StartedThe White House should establish specifc savings targets or each

priority cost reduction initiative. We suggest that the OMB Directorappoint a steering team comprised o the OMB Deputy Director orManagement and a subset o departmental secretaries. A centralsupport team would operate out o OMB (or under the direction o thePresidents Management Council) and would unction as a programmanagement ofce charged with coordinating the eort.

Each participating department would establish its own initiative teams

in each o the seven areas. These teams would be responsible ordelivering the target results in their respective departments. These teamswould also work together across departments to identiy government-wide savings opportunities. Each cross-cutting initiative team wouldwork under direction o a deputy secretary.

SteeringTeamOMB/Deputy Secretaries

CentralSupportTeam

OMB Dep. Dir. For Management (chair) Full-Time Transormation Leader (who

would serve as PMO lead)

Support sta on assignment (romagencies and OMB)

ITInrastructure

Team

FieldOperations

Team

SharedServices

Team

EnergyReduction

Team

ImproperPaymentsReduction

Team

SupplyChainTeam

AssetMonetization

Team

InitiativeTeams


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IMPLEMENTATION

The Time is Now and It Can be DoneThe imbalance in the ederal budget must be addressed. While

reasonable people may disagree concerning the speed with whichthat imbalance is eliminated, all agree that there is an urgent need toadopt a credible plan or doing so. The business and economic riskassociated with inaction is no longer tolerable.

It is possible to achieve the level o savings we have outlined here.These savings can be realized while at the same time improving ser-vice. Weve seen it in industry ater industry, and weve seen it in our

own companies transormations. The ederal government must adopta long-term spending strategy that is structurally sustainable, and acombination o innovative, technology-ueled efciency, and commercialbest practices should be at the center o such a strategy.


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AbouttheIBMCenterforTheBusinessofGovernment

The IBM Center or The Business o Government connects public man-

agement research with practice. Since 1998, we have helped public

sector executives improve the eectiveness o government with practical

ideas and original thinking. We sponsor independent research by top

minds in academe and the nonproft sector, and we create opportunities

or dialogue on a broad range o public management topics.

Foradditionalinformation,contact:

JonathanD.Breul

Executive Director

IBM Center or The Business o Government

600 14th Street, N.W.

Second FloorWashington, D.C. 20005

(202) 551-9342

e-mail: [email protected]

website: www.businessogovernment.org


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Documents

Strategies to Cut Costs and Improve Performance