Managing through tight budgets; lessons from all levels of government

Dan Chenok’s column is part of Federal News Radio’s special report, Now or Never: Ideas to Save the Failing Budget Process, in which eight budget experts offer their take on what can be done to fix the broken system.

Commentary by Dan Chenok
Executive Director
IBM Center for The Business of Government

Fiscal constraints will challenge government for the foreseeable future. While this might appear daunting, budget pressures can create an innovative environment and powerful incentives to rethink traditional approaches to mission support and service delivery. In this context, identifying innovative ways to reduce costs, while maintaining and improving performance, will be a critical catalyst.

Dan Chenok, executive director, IBM Center for the Business of Government
As the IBM Center for The Business of Government has addressed in numerous reports and analyses, pursuing efficiency as a way to drive change in government can identify opportunities for savings across agency budgets and help leaders capture long-term savings through the constant search for faster and better ways to deliver services.

In 2010, the IBM Center published a widely circulated report, Strategies to Cut Costs and Improve Performance. Since its release, the fiscal challenges facing government executives have become even more pressing. Constraints imposed by sequestration, continuing resolutions and debt ceilings have made “doing more with less” and “operating smarter with less” an ongoing reality.


Emerging opportunities to save costs

There are emerging opportunities to save costs through improvements in how agencies manage technology, process and data:

  • Technology. When used appropriately, technology can streamline operations and allow employees to shift from transactional processes to strategic insight and customer service. For example, cloud computing allows agencies to move away from spending money recreating applications.
  • Process. There are great examples of the power of streamlining processes such as claims and payment processing, supply chain management and emergency/disaster response, increasing mission effectiveness at a lower price. For example, applying shared services to a broader range of government activities can allow agencies to reduce duplicative back-office operations across multiple bureaus. This allows for enterprise-wide management of finance, HR, acquisition and other mission support functions. Shared services can also benefit front-office activities where agencies share common missions, such as education, environmental protection or health care.
  • Data. Information can also be used strategically to analyze service patterns to identify wasteful processes that can be streamlined to reduce time and costs (e.g., grant application processes). Increasingly, agencies are using analytics to predict and pre­vent problems that drain time and resources, such as identifying improper pay­ments in advance rather than stopping them after the fact. Applying analytics to administrative data sets can also help to determine the cost-effectiveness of alternative interventions.

In addition, a previous IBM Center report, Fast Government: Accelerating Service Quality While Reducing Cost and Time, describes how government executives can make government more efficient by focusing on innovation, disruptive technologies and predictive analytics.

Lessons from the states

Federal leaders can learn much from state experiences. On Feb. 24, the IBM Center released Managing Budgets During Fiscal Stress: Lessons for Local Government Officials by Jeremy M. Goldberg, University of San Francisco, and Max Neiman, University of California at Berkeley. This report describes how California’s budgetary experiences over the past several years can provide lessons learned and roadmaps for other federal, state and local governments, who face fiscal constraints.

Like many local governments across the nation, cities and counties in California have been impacted heavily by the economy in recent years. The report makes recommendations for local govern­ments across the nation. These include:

  • Identify and address structural deficits in a finely grained manner, leaving no major budget category unexamined.
  • Foster citizen engagement to encourage widespread dissemination of fiscal information in order to enhance the legitimacy of public policy choices. Interestingly, this recommendation complements findings that innovation can be a key lever to thrive in a cost-constrained environment, by encouraging employees and citizens to identify new ways of doing business that do not require a base level of spending that has built up for years without much question as to whether it is still needed.
  • Improve the state and local relationship to reduce episodic, convulsive impacts on local public finance.

Measuring and capturing cost savings

At any level of government, it is important that government executives establish baselines to measure savings. The first step in understanding how much can be saved involves understanding the full baseline costs, which is different in government and often more complex than in the private sector. Most government programs run off a cost baseline that includes a subset of appropriations for the larger department, salary and expense accounts that are not associated with the program, and sometimes working capital or franchise funds. Piecing these sources together to understand current costs is not trivial.

Once the baseline is understood, a second challenge involves developing financial models and methods that can capture savings off the baseline accurately. The federal government has experimented occasionally with “share in savings” contracting as a way to operationalize this measurement; this is a framework that incentivizes companies to achieve the measured savings over time, from which contract payments are made.

Even if clear savings opportunities emerge and there is financial transparency for the opportunity, barriers exist that impede savings capture and reinvestment. Federal budget law requires that agencies have sufficient funds on hand to cover the costs of a contract upfront (including termination costs); this requirement makes the use of a gain-sharing approach less attractive. In addition, federal agencies must generally spend all of their money in a given fiscal year, while savings often take months or years to materialize. Overcoming such barriers will likely require the use of prototypes and pilots to demonstrate the art of the possible, building support for pilots and understanding how success can scale more broadly.

Government can apply these techniques in a variety of settings — through pilots on projects funded by annual appropriations, or greater use of flexible spending accounts such as working capital funds or franchise funds, which often allow dollars to be carried across years and spent more flexibly. Agencies can also collaborate with industry to draw out ideas for savings, perhaps using challenges and prizes as a way to promote innovation. Contracts can be written to create incentives for industry partners to dedicate a portion of their activities to innovative, rapid experimentation, finding better ways to achieve results while lowering costs.

Given the budget realities of today, it is critical to identify opportunities for efficiency, measure and capture savings, and reward those who deliver cost savings. Doing this can also help identify further opportunities to save money, ways to record those savings and a continuous drive for cost-effective improvements that benefit all citizens.

Dan Chenok, is the executive director, IBM Center for the Business of Government. A career government executive, Chenok was previously the branch chief for information policy and technology at the Office of Management and Budget. In 2008, he served as the government lead for the Technology, Innovation, and Government Reform group and as a member of the OMB Agency Review Team on President Barack Obama’s transition team.