Stephen Goldsmith

Written by Stephen Goldsmith and Skip Stitt

Since late 2008, public leaders and their staffs have seen immense pressure to reduce costs. Though the economy appears to be on the mend, most state and local governments face an ongoing fiscal crisis, a struggle to cut costs while protecting essential services. Unfunded healthcare and retirement commitments, along with unmet infrastructure needs, are likely to keep the cost-cutting pressure on for years to come.

Many public officials will tell you that no matter how fast they bail, it still feels like the boat is sinking.

As elected officials contemplate a “new normal” where financial needs and wants will substantially outstrip financial resources for many years, it’s worth asking how public sector chief executives should organize their administrations to address this systemic challenge. The depth of the required cost cutting and the long term over which it will be required suggest that ad hoc processes and budgetary “fire drills” will not work. This article explores the characteristics of successful cost-cutting strategies that public sector executives could consider as they tackle this daunting challenge.

Unequivocal Executive Sponsorship

Cost cutting is tough, unpleasant work. It requires choices that most of us would rather not make. As a result, the most important characteristic for a successful cost cutting effort is unwavering leadership from the most senior elected officials. While an individual department head might be able to reduce costs for a few years in their agency, it is very hard to bend the overall cost curve in state and local government until the top leadership demands it.       

Clear and Publicly Communicated Goals

No successful general ever entered battle by telling his troops to “go engage the enemy and we’ll see where we stand in a few weeks.” For that same reason, public sector cost-cutting efforts need clear, quantifiable goals that are publicly communicated to staff and citizenry. When we began our cost-cutting efforts in the City of Indianapolis in the 1990s, the original goal was to save $1 million a month (later increased to $4 million a month). We believed those amounts were the minimum required to fund the fiscal challenges the City was facing. That “stake in the ground” was essential as it informed the thinking and activity of all city mangers and staff. It was also important that citizens understood the goal as we made the tough choices required to get the city back to financial health.     

Long-Term Vision but Short-Term Activity

Velocity matters. While it is important to have a long-term vision of where you want to get, it is even more important that you immediately begin the work of reducing costs. In addition to the obvious benefit of generating savings more quickly, early activity helps drive creativity, innovation, and additional cost savings. Said another way, cost savings activity builds upon itself; the more cost savings you find and capture, the more cost savings you will see in new and different areas. This is because cost-savings activity, especially when driven by innovation, begins to transform the organizational culture. Many employees feel that they have been on a treadmill of cost cutting for years and wonder if there is any more to cut. Cost-savings activity that is driven by innovation begins to change that perception. If Sally in accounting can reduce costs in her mailroom, maybe we can too!

Stay Committed to the Long-Term Vision

There will be an almost irresistible urge to slow cost-savings efforts as the economy begins to heal and budget forecasts begin to improve. State and local leaders need to resist this temptation and, instead, set the expectation that cost savings and service improvement efforts are continuous in nature. In addition to helping address the long-term economic realities facing state and local government, making a long-term commitment to continuous improvement is something that employees are more likely to embrace.  By institutionalizing an innovation and a cost-cutting mindset, leaders can create a more dynamic culture that is better prepared to embrace future challenges.     

A Single Point of Accountability and Ownership

While executive leadership is essential, governors, mayors, county executives, and legislators are simply too busy to manage day-to-day cost-savings activity.  These programs require intense and sustained focus over very long periods of time. In addition, there is no shortage of ideas on how to cut costs. Whether the ideas come from committed employees, engaged citizens, or the business community, most elected officials have more ideas than they can analyze. As a result, it can be very hard to separate the great ideas from those that won’t work.

We believe the best approach is for the top elected official to appoint and empower a single individual to manage cost-cutting activity. While they may be supported by departmental staff or outside volunteers, someone needs to “own” the task and, ideally, report directly to the chief executive. People often ask how the role of cabinet secretary, department head, or legislator fits into this model and if they should own cost-savings activity in their areas of influence. Those leaders will be critical enablers for cost-savings ideas, but we recommend that someone outside of the impacted agencies be appointed to take the lead role for two reasons. First, those officials, like their elected bosses, have lots on their plate. Their days are filled with a constant stream of crises. In addition, we believe that appointing an external voice can help inform the decision making of elected chief executives as they make the tough choices about what must be cut.                         

Transactions, Not Reports

Cost-savings efforts need a transactional focus as contrasted with an analytical focus. Don’t just think about it, do it. Leaders need to avoid studying ideas to death. The filing cabinets and bookcases of public officials (and corporate executives) are filled with studies. There are literally scores of best practices that can be borrowed from other jurisdictions and the private sector, and elected officials need to create a bias for action. 

Focus on Easy, Fast, and (Eventually) Big

The depth of the current fiscal challenges makes it tempting to focus on large cost savings opportunities. These “home runs” are important, but tend to be few and far between and are often much more difficult to implement. In addition to these larger opportunities, it is important to focus on smaller- and medium-sized cost-savings strategies. These smaller opportunities are important for several reasons. They can typically be done more quickly, which starts saving money earlier and builds momentum. In addition, they are more likely to create teachable moments for staff and to get them engaged in the cost-savings process. Not everyone can assist with the new ERP implementation (or even understand it), but everyone can help reduce printing costs by moving to two-sided copies. Finally, when you add up lots of small cost-savings projects, they turn into significant streams of future savings. In Indianapolis, we carefully tracked all of our cost-savings efforts. After six years of work, however, those projects accounted for only about one-half of the difference between our historic budget trend line and the actual, lower budgets. The other half of the cost savings were the result of thousands of city employees being a little more creative about their work and a little more frugal each and every day.             

Articulate the Tradeoffs

As we have said, cutting costs is very tough work. If each decision to cut costs was made in the abstract, there would always be good reasons not to reduce spending. Unfortunately, there are real world trade-offs associated with each decision to continue spending money. If we spend more on public safety, it has an impact on parks and public works. That’s why it is so critical to help staff and citizens understand the trade-offs associated with making (or not making) a cost-cutting decision.

We learned this in Indianapolis when we were looking for ways to improve service and reduce costs at the wastewater treatment operations. When the question posed to the public and the legislative body was “should we have a private partner manage the wastewater treatment plant,” the answer was no. When the question was changed to “should we have a private partner manage the wastewater treatment plant, eliminate a 38% sewer user rate hike, save 44% on operating costs, protect the environment more effectively, reinvest the savings in sewer repairs, and guarantee the wages, benefits, and pensions of the incumbent city staff,” then the answer was a resounding yes. It was only when stakeholders understood the specific tradeoffs associated with the decision that we were able to move forward.

Get Input from Employees Entrepreneurs

One of the best ways to identify great ideas to reduce costs is to talk with incumbent employees and private partners. Many jurisdictions have employee suggestion programs and most jurisdictions hear lots of ideas from private sector partners. We are, however, recommending a much more structured program designed to rapidly accelerate the identification of high-quality cost-savings ideas. In Indianapolis, we created an open-door policy for our labor partners to identify ways to reduce costs, streamline our operations, and improve service. Those goals were recurring themes in labor leadership sessions, front-line employee training, and even labor negotiations. Similarly, we formalized the process of gathering cost-savings ideas from our incumbent vendors. In their annual performance reviews, we asked the vendors to identify areas where we could jointly reduce costs. Of importance to the vendor community, these were not simply focused on their existing contracts, but included new areas where they could provide additional services to meet our cost-savings objectives. Creating a disciplined, ongoing process to identify, triage and then implement ideas from employees and entrepreneurs was critical to hitting our goals.              

Incentives Matter

Providing bonuses to public sector employees based on performance is not without controversy. When used correctly, however, financial incentives for public employees will drive down costs. Whether it is reducing time lost to accidents, eliminating shrinkage in the parts room at the garage, or stopping unnecessary end-of-the-year spending, public employees will focus on reducing costs when they are appropriately incentivized. Financial incentives for city employees were one of the most effective strategies we found to create goal congruence between public employees and the citizens they served.

As city, county, and state executives confront the “new normal” of lower revenue, they will need to develop cost reduction strategies that are built for the long haul. Our experience indicates that the successful strategies will have many of the characteristics described above.

Stephen Goldsmith recently named Deputy Mayor of New York, is the former Mayor of Indianapolis and a Professor of Government at Harvard Kennedy School (on leave). He is the author, with Gigi Georges and Tim Glynn Burke, of the new book The Power of Social Innovation: How Civic Entrepreneurs Ignite Community Networks for Good (Jossey-Bass/Wiley March 2010).

Skip Stitt is former Senior Deputy Mayor and Chief Operating Officer of Indianapolis and the Chief Administrative Officer at ACS, a Xerox Company.