Cost Recovery Strategies in the “New Normal” Laying the foundation for renewed fiscal sustainability DOWNLOAD

Federal agencies are seeking new ways to serve their mission and their constituents despite reduced funding and growing uncertainty over the coming fiscal years. Cost pressures will be the “new normal” for the foreseeable future. How is your organization dealing with it?

Janet Hale, a former government executive with more than 25 years of experience in public policy and corporate management, shares insights on how agencies can take preemptive steps now to recover costs and lower their cost-basis in a sustained way.

How might the severity of budgetary constraints today—versus ones in years past—impact federal agencies?

If we do not make any adjustments, studies indicate US debt will exceed 100 percent of US GDP and interest on debt will pass one trillion dollars by 2025.¹ Systemic structural changes will be needed and cost pressures will be the “new normal” for the foreseeable future. Some agencies feel more pain now than others. Over the next several years, the pressure on deficit reduction will continue and intensify. Agencies will need multi-year cost reduction strategies.

What practical steps are agencies taking as they seek to cut costs over coming fiscal years that do not compromise essential service levels?

Agencies are taking steps to balance mission needs with the available funding in the face of great uncertainty. Agencies have begun actively reassessing their organization’s business processes and priorities, while evaluating key cost areas. One federal organization recently consolidated shared services for human capital, finance, and IT operations to save $25M annually in costs, and place the agency on track to save more than $240M in 5 years.

What are some of the different ways that agencies are cutting costs?

Cost drivers vary by agency, but include personnel costs, real estate, technology, energy, and tax. Twenty-three Federal agencies recaptured more than $100M to review fuel purchases which identified tax overpayments for recapture. Another Federal organization saved $1B in acquisition costs through intellectual property and IT asset valuation during outsourcing contract negotiations. Savings could be returned to the mission or support deficit reduction, but most agencies will need to do more to drive sustained cost reduction.

Are there other areas that agencies could take advantage of for sustained cost reductions? What else might agencies consider for long-term structural change?

Analyzing internal controls and payment data allows organizations to prevent, detect and reduce improper payments. Efficient use of real estate through telework and alternative workplace strategies can help agencies cut costs significantly. Consolidating and restructuring agency programs and organizations around their mission can identify savings in business processes, supply chain, and operations. Agencies can begin their cost-takeout effort with a rapid survey of potential saving opportunities and target areas that could deliver the largest impact without gutting mission.priorities, and return more savings to the mission.

Why is it so hard to actually realize these savings and make them stick?

There is a tendency to want to “work it out in execution,” which can cause some anticipated savings to evaporate and inadvertently lead to less-than-strategic reductions. Real savings accompany measures that lower both total cost of ownership and lower an agency’s cost basis going forward. By focusing on top-line reductions, rather than internal budgetary reallocation, agencies can capture real savings when evaluating cost-cutting options.

What precedents or examples of strategic cost recovery are available for federal managers to look toward as they try to modify their own programs and agencies?

When the private sector faced a similar downturn in recent years, close attention to non-critical functions, capital efficiency, and strategic growth initiatives helped those companies to adapt in an uncertain environment. Some companies outperformed their peers by taking a series of early, strategic actions. By taking pre-emptive steps now, Federal agencies can seize the opportunity to lay a multi-year foundation for renewed fiscal sustainability and return dollars to frontline mission needs.

What kind of information do agency leaders need to be more strategic and effective in this cost-reduction environment?

Advanced business analytics and interactive visualization tools—like geospatial dashboards and predictive models—can help agencies get more value out of existing data and see different cost outcomes by simulating conditions, constraints, and timeframes. These scenarios help agencies uncover new insights into their business, assess trade-offs based on relationships between different decisions and results, and strategically allocate limited resources to maintain—and improve—their mission needs.

How might agency leaders and program managers adapt to this new cost-conscious environment?

Achieving sustained cost reduction demands methodical analysis of key cost reduction areas and can compel some organizations to restructure how they do business. Leadership and strong governance can harness the efforts of and knowledge across the agency to achieve major department-wide goals. Agencies with well-established boards and steering committees, for example, will be better positioned to make decisions based on shared cross-agency priorities, and return more savings to the mission.

Source:
¹ CBO’s “Alternative Fiscal Scenario” constructed from the August 2010 Budget and Economic Outlook, additionally assuming that troops in Iraq and Afghanistan are reduced to 30,000 by 2013.