Improve EfficiencyMaking better use of resources is an integral part of financial recovery and becoming more efficient is often of primary interest to elected and appointed officials. This section first describes a “program review,” which is a framework for focusing efficiency-enhancing efforts in the right areas and then addresses a number of efficiency improvement techniques.
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There are many different efficiency-enhancing techniques available, but it can be difficult to know which to apply. A program review is a thorough examination of a service area to determine where efficiency improvement opportunities might lie. A team follows an analytical process to gather data, assess the program against a number of predefined “tests,” and develop options for improving efficiency. A program review can cover a wide range of ground, including examining mandates from other levels of government to see if they are being properly translated into actual service provision; looking for possibilities to partner with other governments to provide a service; streamlining business processes; or lowering the level of service provided. Here is a sample program review tree that illustrates a number of tests to which a program might be subject.
After the program review is complete, the organization should have a much better idea of which efficiency-enhancing techniques have the most promise.
Often activities (and expenses) build up around a mandate: a program begins to perform activities which may not actually be required by law. First catalog all the mandates to which your programs or departments are subject. Then take a close look at the exact wording of the mandate to understand what is required and where flexibility is available. Check on how other jurisdictions are implementing the mandate. A better understanding may make it possible to cut activities that are not actually required or design more cost-effective ways to fulfill the mandate. Consider creating and empowering an oversight group to examine mandates. Do not include people whose jobs are directly connected with the mandate as part of the review group.
Process Improvement and Streamlining
Process improvement is a series of actions taken by the owner of a process to identify, analyze, and improve existing processes to meet new goals and objectives. These actions often follow a specific methodology or strategy, such as “Lean” process improvement. One universal key to success with process redesign is to develop a clear business case that describes the proposed redesign and the expected cashable savings. Diagramming the work to be done and the current process is a great first step to identifying gaps and duplications in existing systems. Flow charts provide a good visual basis for analysis leading to additional interviews and discussion of best practices, employee suggestions, and customer feedback.
One process improvement methodology that holds particular potential for local government is Lean process improvement. GFOA’s Lean whitepaper describes the benefits local governments have realized from Lean, the roles people plan in a Lean initiative, and the steps involved in a Lean process improvement event. GFOA’s consulting website has additional information on Lean, including how to get assistance with Lean for your organization.
Shared services take advantage of economies of scale by aggregating like services across the organization or between organizations. They also promote best practices by organizing services into “shared-service centers” that are focused on the most efficient/effective performance of that service and that are subject to result-based accountability via formal service-level agreements with “customers.” The shared services concept can be applied to inter-jurisdictional cooperation or to similar functions performed within the same government. Shared services can be applied to back-office support services as well as front-line services. Best Resources:
Competition often creates efficiency because those that do not provide what the customer wants for a reasonable price will soon be out of business. “Managed competition” is a technique that requires in-house service units to compete with external service providers. If a fully competitive process is not possible, then internal departments can be required to bid against a target (perhaps using external benchmarks to set). If the internal bids do not meet the target, then there is a stronger case for competition from outside firms. Like outsourcing, managed competition is not a guaranteed long-term cost saving. There must be a competitive private market for the service in question and the government must beware of “loss leader” pricing, where a private firm underbids public employees with the expectation of raising prices later after internal capacity to provide the service has been degraded.
Internal service funds or enterprise funds can also be used to create a market-like atmosphere, especially for support services. Support services can be required to “sell” their services to their customers, perhaps even with competition from private-sector providers.
Using a private firm to provide public services has long held appeal in many quarters under the presumption that private industry has cost advantages over the public sector. Be aware, however, that cost savings from outsourcing are far from guaranteed. A number of studies have shown that outsourcing for cost reduction is generally only successful when a number of criteria are met. Below are crucial tests a given service should meet in order for it to be outsourced in order to save costs.
- Are competitive forces available? Outsourcing will only reduce costs if competition exists to constrain the profit-maximizing predilections of private enterprise.
- Can desired results be measured? Outsourcing is more successful when the government has a clear vision for the results it desires from the contractor and those results can be unambiguously measured.
- Does the agency want just “results”? Many times in the public services, it is not just the results that matter; the process by which a service is provided is also of concern. In cases where the government requires close control over the means by which a service is performed, outsourcing for cost reductions will generally be less successful because process constraints would limit the ability of private-sector firms to use their inherent advantages (e.g., personnel flexibility, creative incentive structures) to deliver cost savings.
- Can the agency contract successfully? Fundamentally, using outsourcing for cost savings is a matter of trading lower production costs (i.e., private firm) for higher coordination costs (i.e., contract management). Thus, successful outsourcing requires that the government be able to minimize coordination costs by creating a contract that provides mechanisms for effective monitoring. Hence, internal capacity to monitor markets and create and manage contracts with outside firms is essential.
- Do the economics make sense? Outsourcers can deliver cost savings based on economies of scale in service provision (i.e., spreading fixed costs over multiple customers) and through employing best practices for processing efficiency owing to their expertise in the service provided. Hence, outsourcing can deliver the greatest potential savings for service areas in which the agency does not have critical mass sufficient for economies of scale and/or has not implemented best practices.
In addition to cost reduction, outsourcing can also be used to improve financial position by improving the organization’s flexibility. Outsourcing can transform the fixed cost of in-house personnel and assets into the variable cost of a pay-as-you-use service provided by a vendor, dramatically improving the agency’s adaptability to future changes in demand and/or revenue.
Technology is often looked to a natural way to increase efficiency. However, investing in the right technology and then getting the expected results can be challenging. Research has shown IT governance to be essential to good investing in IT. “IT governance” is a broad term for a system of collaborative decision-making designed to link the IT strategy with the business strategy. Via IT governance, you can develop a clear system for defining decision-rights over how technologies are used and invested in, what the expected return on investment is, and then define the accountabilities for getting the anticipated return on those investments. In order for the public sector to get the most out of its technology investments, the finance officer and technology leader must work together to connect budget processes with an IT governance structure. This will cultivate leadership behaviors that lead to business-driven, financially savvy technology decision making. See the GFOA publication IT Budgeting and Decision Making: Maximizing Your Government's Technology Investments.
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