Are there true cost savings in consolidation? Ken and Bill debate the merits and demerits of such proposals and actions in this joint post. Add your thoughts and or challenge the Public Great guys in the comments section below.
Ken: Worse, Slower, Cheaper -- The False Promise of Consolidation
In a previous column, "Buried Treasure," I explained that the true cost savings in government are hidden. The costs are in the pipes (our processes and or systems), and the pipes are underground, out of sight. Rather than digging for the buried treasure, we instead turn over a few rocks, hoping money will crawl out. These rocks are usually the same old rocks.
It seems everybody's pet rock this year is consolidation: Wherever there are two or more doing the same function, combine them into one. It seems to make common sense -- shouldn't we have just one HR unit? One IT shop? One print center and one vehicle maintenance garage? It does make sense, if you don't look at the true costs:
The size of the savings is not that big. Administrative functions typically represent about 10 percent of the total budget. Most consolidation efforts forecast savings of about 10 percent. 10 percent of 10 percent is one percent. At best, we save one percent. For example, the consolidation efforts in one of our largest cities are forecasted to save $125 million a year on a $63 billion budget -- that is one-tenth of a percent. All the city has to do to achieve the one-tenth percent savings is to wrestle control over facilities, fleet, personnel and technology from 18 independent, politically connected, powerful departments. Should be a piece of cake.
The pain required to consolidate far exceeds the cost savings. Imagine for a second that you are the big boss -- the leader of a large organization. Under you are 10 departments with 10 strong leaders. You have a bold agenda to dramatically impact the lives of the people in your community, and you need a unified team to pull it off. I come to you with the following proposal: I can save you one percent of your total budget by consolidating like functions. In return, all you have to do is spend the rest of your term fighting with the very people you need to help you implement your agenda. You will have to use all your political capital to pry their hands off their HR, IT, and support resources. You will get to spend all your time in senior staff meetings supporting why we have to do this. In addition, all of your one-on-one time with the department heads will be spent granting exceptions to the consolidation plan. When we are finished, five years later, we will have consolidated most of the departments (except those two really powerful ones), saved a little less than one-tenth of a percent and destroyed any goodwill you have as a leader. Up for it?
Consolidation is about taking. It's like showing up at a preschool and taking a toy out of each kid's hands. What do you get? Crying, screaming fits. Now, if the reward was substantial, then you might do this. But for one percent? Would you trade dissension, division and a wasted agenda for a savings of one percent?
(For those of you who think consolidation is the answer, let me fast forward five years for you: The really powerful divisions will get around the consolidation. They also would have been most of the savings you were anticipating. Inside all of the consolidated departments, new little HR, IT, and fleet shops will start to emerge. It starts small, but eventually the departments recreate what has been taken from them. You end up worse than when you started: Each department still has their own functions and now you have a centralized bureaucracy as well.)
Consolidation hurts productivity. Our most precious resource in government is our capacity to do good. Consolidation reduces this capacity. Think about it. Suppose I tell you that it would be more efficient if you:
• sold your printer and did all your printing at Kinko's. After all, you only use your printer 15 minutes a day -- tops. How wasteful.
• sold your car and used a Zipcar. After all, you only use your car an hour a day anyway. How wasteful.
• sold your cell phone and used a pay phone when you needed to make a call. Unless you are a teenage girl, you only use your phone a few hours per day. How wasteful.
• sold your house and moved into a communal living facility. You only really use 1,000 square feet and having your own kitchen and bathrooms that sit idle is a tremendous waste.
If you did all those things you could save some money. You would be more "efficient." So why don't you? Because you'd have a heck of a time getting anything done. Sometimes we sacrifice efficiency for productivity. And productivity is precisely what we need to get out of this current crisis. It's the "doing more" part of "doing more with less."
But that is only half the story. Now imagine not just that you have to use Kinko's, Zipcar, pay phones and a commune, but that all of these are run by monopolies that don't care about you or your needs. So Kinko's would tell you, "I don't care that you need this in an hour, we serve lots of people so get in line." The commune tells you, "I don't care that you are having another child. We only have so much space to allocate, so get in line." Consolidations create monopolies. We hate monopolies. Monopolies treat customers like hostages. This is the real reason agencies resist consolidation. They know that to get anything done, they will have to go through a monopoly. Imagine if your success was dependent on the cable company, an airline, the postal service and the local school board. Good luck.
What the consolidation merchants are selling is a double whammy: We will hold you accountable for results. To achieve those results, you will have no control over the technology, equipment, personnel or finances -- but you are accountable. Powerless accountability is a recipe for disaster.
As we outlined in a previous column, the primary issue that government is facing right now is capacity. The demand for government is up, and the resources are down. The only way we can meet this challenge is to find a way to move a lot more water through our already full, kinked-up, twisted pipes. We do this by systematically removing the kinks, straightening the pipes. When the pipes are straight, the water moves faster. The faster it moves, the more we can handle. Consolidation doesn't straighten the pipes -- it kinks them further, moving less water a lot slower. The inevitable conclusion? Pressure, leaks and messes. In this fiscal climate, our emphasis needs to be on the productivity of our systems. In short, the emphasis must be on speed.
Are all consolidations bad? Of course not. The $64,000 question(s) -- because that's all you are likely to save -- to ask for each consolidation recommendation are: Will it allow us to move more water faster or will it slow us down? Will it bring us together, or will it tear us apart? The answers are usually quite obvious.
Bill: Anti-Consolidation, But...
So here is an issue where Ken and I should disagree. He spent years avoiding consolidations and pulling his departments free of their death grip. I spent years consolidating technology divisions into what was arguably one of the most successful IT consolidations in the public sector. He's anti-consolidation and I'm ... well, anti-consolidation -- except I clarify my opposition with a big BUT.
Consolidations create monopolies and monopolies don't care about customers. Yes, BUT, if you can build a customer-based consolidation, you can get the savings and meet customer goals. The problem with so many consolidations are that too few of us take the time to think of the customer. Generally, if you have spent your energy fighting with your customer to get control, you don't spend any additional energy to find out how you can use that control to meet their needs, and if you don't focus on the customers -- consolidation sucks.
The political battles are tough, and the savings are ultimately small. Yes, BUT, in a world where "every penny" is more than a symbolic gesture, if the savings outweigh the fight, it's a fight worth having. We saved nearly a quarter billion dollars over four years with more than half of that returned to the state coffers.
Consolidations hurt productivity. Yes, BUT, not in all areas. Let's look at our friends at Southwest Airlines. One reason they are able to make money is because they invested in one type of plane. This decision allows them to hire and train one set of mechanics, and those mechanics can, in turn, work on any Southwest plane at any airport. When employees, like in the Missouri IT consolidation, can work seamlessly between areas, savings occur. That works great for behind the curtain things like e-mail and print servers, but not in areas like application development. Too many consolidations force everyone into the same bucket and when service suffers, consolidation really stinks.
With all that, I am still a fan of consolidation efforts -- IF you can keep it customer focused and not destroy the daily productivity. BUT, there seems to be a trend in consolidation that I think is even worse than anything Ken mentioned -- the chargeback model.
Chargebacks are a way for leaders to take complete control and avoid the budget system by charging divisions to use what was once theirs. While super easy to establish and very appealing to the consolidated managers, it amplifies the issues for customers and pours financial salt into the wounds. If you choose to consolidate, your savings and leadership should stand on its own and you should be able to budget without going back to the divisions for more cash. If your consolidation effort can't stand on its own ... maybe you shouldn't consolidate at all.