7 Best Practices for States in Trouble

When it comes to stretching scarce dollars, states should examine recent trends in business best practices.
by , | November 30, 2010

A record number of new governors, 26, have been elected. Their transition teams are finding what the sitting governors already know: State finances are worse than expected.

The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. Even after deep spending cuts over the past two years, states continue to face large budget gaps. The Center on Budget and Policy Priorities believes that it is reasonable to expect that shortfalls in 2012 state budgets are likely to exceed $140 billion.

Any credible approach to restoring government's fiscal condition will include significant streamlining of operations. When it comes to stretching scarce dollars, states should examine recent trends in business best practices.

Adopting commercial best practices can lead to significant savings in federal, state and local government operating costs. Such practices already have been adopted to help commercial organizations save money while becoming more competitive.

A recent study from the Technology CEO Council estimates that, if adopted by the federal government, a set of seven strategic initiatives could save $1 trillion over the next decade. These seven approaches to trimming operating costs can also improve government performance for citizens.

By aggressively implementing these same seven approaches, states and localities can also cut costs and improve operational performance at the same time. While these strategies won't solve budget problems by themselves, they could sure make a dent:

Initiative 1: Consolidate IT infrastructure. States' costs of operating information technology infrastructure are higher than they need to be -- in some cases by more than a factor of two. Significant savings can be realized if governments employ proven commercial approaches to reduce overall costs of IT ownership.

The federal government, for example, currently spends about $76 billion to support its widely-dispersed IT assets. At least 20 percent to 30 percent of that spending could be eliminated by reducing IT overhead, consolidating data centers, eliminating redundant networks and standardizing applications. Indiana, for example, standardized its personal computers and estimates that this will save over half a million dollars a year.

Private-sector organizations have dramatically reduced their data center operations and saved up to 40 percent in operating expenses. Some have cut their IT expenses in half over the past five years through consolidation and standardization.

Initiative 2: Streamline supply chains. Many government agencies tend to buy their own goods and services. But bulk buying across agencies can save money. In 2005, the federal government launched a "strategic sourcing initiative" with the intent of reducing procurement costs by leveraging the purchasing scale of the federal government and pooling the purchases of commodity items. The anticipated benefits have not yet been realized primarily due to failures to reform budget and procurement processes. The effort also focused too intensively on commodity purchasing and not enough on supplier management.

Over the past decade, private-sector companies have consolidated their multiple supply chains and restructured their supplier networks. These companies eliminated billions of dollars in costs and improved supplier performance.

There are also examples that show these savings can be achieved in public-sector settings. For example, the U.S. Postal Service reaped $2.5 billion in cost savings and cost avoidance through a supply chain transformation effort. The Department of Defense is applying processes such as Lean Six Sigma to extract costs from their supply chain. In our experience, process improvements alone can improve efficiencies by 10 percent to 20 percent.

Initiative 3: Reduce energy use. Federal, state and local governments are under increasing pressure to cut their greenhouse gas emissions and energy/water use. One of the most effective means for reducing energy use is by rationalizing their facilities. For example, private-sector experience in call center consolidation suggests that organizations can reduce IT-related energy costs by 25 percent. In addition, the aggressive adoption of voice, video, document sharing and collaboration tools can reduce travel-related expenses by 10 percent to 20 percent. Another area for energy savings is government buildings and vehicles. The federal government plans to implement new building management technologies to reduce energy consumption for the 3.1 billion square feet of space it currently occupies. Advanced fleet management systems can reduce the size of a state's vehicle fleet and can also reduce energy consumption by 10 percent to 20 percent.

Initiative 4: Move to shared services for mission-support activities. Every dollar spent on support activities and overhead within government agencies is a dollar that could be spent on programs and services or returned to the taxpayer. Why should every agency have its own IT, finance, legal, human resources or procurement operations? Agencies, like the private sector, should move to shared services.

When the federal government consolidated 26 payroll systems to four, the U.S. Environmental Protection Agency reduced its payroll costs from $270 to $90 per employee, saving $3.2 million a year, and the U.S. Department of Health and Human Services reduced its costs from $259 to $90 per employee, saving $11 million a year. Likewise, when the federal government consolidated its travel systems, the Department of Labor founds its costs dropped from $60 to $20 per travel voucher and reduced processing time from about seven days to about three days.

Initiative 5: Apply advanced business analytics to reduce improper payments. States and the federal government already recognize the magnitude of this issue. The federal government, for example, issues nearly $3 trillion annually in payments in one form or another. The Government Accountability Office estimates that $72 billion was lost to improper payments in fiscal year 2008, and the Office of Management and Budget estimates losses approached $98 billion in 2009 ($54 billion in Medicaid and Medicare alone).

Industry regularly conducts recovery audits of large-scale transactions; this could be fraud or mistakes, or an unanticipated shift in demand. New analytical techniques can increase the identification rate to 40 percent, which would double the current anticipated recovery rate targeted by the federal government.

Initiative 6: Reduce field operations footprint and move to electronic self-service. Most state governments have citizen-facing operations that rely on manual, paper-based business processes. By moving as many touch points to electronic platforms as possible and at the same time rationalizing the government's field operations footprint, the government can reduce costs and improve citizens' experiences.

Australia's CentreLink initiative provides online benefit determination and payments to individuals on behalf of 27 different government agencies. The estimated annual savings total $86 million. Similarly, the Service Canada initiative provides 70 services on behalf of 13 federal agencies through online, phone and in-person service delivery channels. The estimated annual savings in the first year totaled $292 million.

Initiative 7: Monetize government assets. Governments have a large inventory of assets that could be producing revenue. "Mining" the balance sheet by examining park concessions agreements and other opportunities may generate significant revenues. This could include selling surplus facilities and selling and leasing back others. The federal government, for example, inventoried its buildings and found 14,000 excess buildings. It is now in the process of selling them off, in hopes of reaping $3 billion in sales.

States also have an array of surplus properties and fee-generating programs that do not recover their costs. Often times fee structures and levels are dictated by issues other than cost recovery. States could identify agencies that can be statutorily dependent on the fee income they generate (for example, no longer subject to the appropriation of general revenues).

Getting It Done

In many respects, identifying savings through best practices is the easy part. The real challenge is turning ideas into action.

Most large organizations struggle to change their ways. State and local governments have traditionally found it rather difficult to make significant changes in operations. The good news is that most (if not all) of these seven cost saving approaches would not require legislative approval.

This is not to say these initiatives will be easy. Indeed, they will require strong leadership and the governor should personally review regular status reports on progress.

Based on industry experience, it is possible to achieve savings while at the same time improving service. We've seen it in industry after industry, and we've seen it in various companies' transformations. For state governments, technology-fueled efficiencies and commercial best practices will be part of any successful streamlining.

For more on this topic, read: Strategies to Cut Costs and Improve Performance, by Charles Prow, Debra Cammer Hines, and Daniel Prieto.

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