Better than Cutting

Slashing budgets across the board protects the worst spending. There are plenty of far more effective ways to go.
by | July 27, 2011

July is the month of new fiscal years. But there's nothing new about relentless demands to cut the budget. With more coming.

Instead of just cutting, we should ask: How can we create the most value with less money? Even better, are there ways to leverage "less money" to actually move our organizations forward? Thank goodness fewer of us are still implementing "fair" across-the-board cuts. They make a hash of priorities and in effect protect the worst spending. What they produce across the board is mediocrity, not fairness.

There are better ways. Here are seven, based mostly on my experience in Iowa state government along with some lessons from recent work with Baltimore.

Take the money off the top. When there's significantly less money for a major program or department ripe for redesign, decide how much you can spend. Rather than look for ways to "cut" from the prior spending level, start by accepting that there's a finite, lower amount. The difference has been "taken off the top." Then take a bit more to fund the redesign. Challenge and empower those involved to redesign to achieve the same or better results with fewer dollars. The key difference here is to ensure that they have the expertise and other resources needed to succeed. Iowa's child-welfare redesign began in this way, with $10 million taken off the top and over $700,000 plowed back in. Results for kids improved.

Gain-sharing: Empower and provide incentives to the folks on the front line to find the best ways to spend less. At the beginning of the fiscal year, the eight employees of the Iowa Department of Transportation's sign shop were told that they could collectively keep 25 percent of what they saved during the year, up to a maximum of $5,000 per employee. The gain-sharing money would only be awarded after the fiscal year closed, to assure that the savings were real. At year's end, each of the eight employees took home a check for $5,000 and the DOT benefited from over $120,000 in additional savings.

Prioritize to "just say no" to the lowest-priority and lowest-value activities. This is hard to do, as we painfully know, but structural deficits and tea-party demands improve our odds. Use budgeting for outcomes, which creates a framework to succeed. Baltimore did just that. The city eliminated several programs that could not demonstrate strong value and merged others. Making these kinds of tough calls also enables you to put more money into activities that deliver the greatest value, which Baltimore also did.

Compare unit costs across work units with the same activities. We looked at the lane-mile costs for paint-striping on Iowa highways across six regional work crews. Their costs varied significantly. When we asked why, the paint crews, who had never communicated much with each other before, discovered that some crews were more efficient than others because of better route planning and driving the striping rigs 3 mph faster while still achieving the quality needed, among other reasons. They also realized that several crews had excess capacity with which they could take on local-government paint-striping jobs and gain additional revenue. All of the crews then adopted these best practices, which resulted in an overall reduction in spending.

Use reverse auctions: Iowa's contractor for institutional paper products had asked us for a price increase of 8 percent at the end of the contract. We responded with our first reverse auction. The low bid was almost 19 percent below the prior contract's cost.

"Lean" your processes. Governments have made huge leaps in the last decade using the latest version of "quality" process-improvement tools. The suite of lean six sigma tools, including kaizen events, consistently lowers costs and improves results. Particularly in areas of process-heavy regulation, we saw cycle times and error rates fall while freeing up resources for other unmet needs.

Work the revenue side. Increase revenue in ways that pass today's political smell test by empowering work units to be more entrepreneurial. The collections unit of the Iowa Department of Revenue had for several years been trying to buy more sophisticated software and more closely integrate--including co-locating--with its private-sector partner. The legislature kept saying no. So the collections team made legislators an offer they couldn't refuse: Let us buy the software and integrate/co-locate, and we'll promise you $42 million more in revenue already owed over the next three years. In fact, they exceeded $50 million. Similarly entrepreneurial, the Alcoholic Beverages Division adopted more businesslike practices and brought in tens of millions more dollars, and not just by selling more liquor.

However you deal with less money, send the right message. The Iowa Department of Natural Resources had generated savings of $700,000 through a series of successful kaizen process-improvement events. In response, the Department of Agriculture pitched the legislature on cutting the DNR's budget by that amount and giving it to Agriculture, which had steadfastly resisted every reform we had been promoting. What message would have been received--and behavior changed--if we had not been able to stop this nonsense?

If anything, activities should have been transferred from Agriculture to the DNR, which had demonstrated a commitment to deliver better results per dollar for citizens and taxpayers. That's our bottom line: results per dollar. How you spend--or cut--should improve your bottom line, in July or any other month.

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