Applying Private-Sector M&A Strategies to Public-Sector Cost-Reduction Challenges

Congress has enacted legislation that requires $1.2 trillion in budget cuts before January 2013, but where these cuts are made and how they will be implemented is up for debate. Tune into this episode of Deloitte Insights to learn how Federal agencies – through merging, integrating, consolidating, and divesting – can reduce inefficiencies and redundancies without significantly impacting their core missions. 

Speakers

Robin Lineberger, CEO, Federal Government Services, Deloitte Consulting LLP
John Powers, principal, Deloitte Consulting LLP
JoAnn Boutelle, partner, Deloitte & Touche LLP  

Transcript 

It’s time for Insights, a video news production of Deloitte LLP. Now here’s your host, Sean O’Grady.

Sean O’Grady (Sean): Hello and welcome to Insights.  Congress has enacted legislation that requires $1.2 trillion in budget cuts before January of 2013, but where these cuts are made and how they will be implemented is a matter of discussion.  Now here to talk about the government’s potential to save dollars through merging, integrating and consolidating and investing are Robin Lineberger, the CEO of the Federal Government Services at Deloitte. And next to Robin is John Powers, a leader of our M&A Restructuring practice. And we also have JoAnn Boutelle.  She is the former deputy CFO of the U.S. Department of Defense and now a partner within Deloitte and Touche. 

Folks, thank you very much for joining us today here in New York.  So, the Joint Select Committee on Deficit Reduction, the so-called Super Committee, failed to meet their objectives, meaning that automatic sequestration is going to begin in 2013. Robin, my first question is to you and that is how do you see the U.S. government effectively taking on these cuts? 

Robin Lineberger (Robin): Well, Sean, so the Congress - during the legislative process that set up the Super Committee, and ultimately what’s called sequestration - really programmed (or gave the president an indication of where he should make) those cuts should the Super Committee fail. And, as we know, they didn’t reach an agreement. So now they’ve moved into the stage where they’re going to begin looking at sequestration. 

The basic guidance that Congress provided was to make even cuts across the civilian agencies and the defense agencies of the Federal government, to not raise revenue, and then to not deal or cut mandatory programs or entitlement programs.  So as a result, they’ll be taking that money out of the civilian agencies and DOD, and then what we need to be mindful of is that the DOD has already been through a round under previous-Secretary Gates of significant cost-cutting already. 

Sean: And JoAnn, how do you think that those cuts – is that going to work what Robin was just outlining?

JoAnn Boutelle (JoAnn): Well, the challenge the government has is how to eliminate the inefficiencies and the redundancies in their organizations and their processes without impacting the core missions.  So, in the past, the way the government would have taken these type of cuts would be what we would call a “peanut butter spread,” which they would spread across all of the departments in the Federal government.  The risk with this cut is that it is so large that some may look at impacting mission programs. And, you know, for example, in the Department of Defense, I think most of us would agree that we would not want to see reductions or eliminations of major weapons systems at the risk of defending our country and our lifestyle inadequately.  

So instead, the departments across the Federal government need to look more at their processes, what the people are doing, and focus more on business and administrative functions to achieve these cost reductions. 

Sean: Clearly a conflict between security and cuts. 

JoAnn : Without a doubt. 

Sean: And, John, your take on the sequestration and the failure of the Super Committee? 

John Powers (John): Well, with the peanut butter cuts, there’s an assumption embedded in any kind of peanut butter approach which is that I already allocated my resources perfectly.  But conditions have changed, either because the government does a different budget requirement for any agency or the Department of Defense or because we have a different approach we need to take to delivering the mission, one of the two. 

So if you peanut butter cut, you’re not going to address the changing conditions.  So first and foremost, you need to reprioritize your most valuable activities.  In a commercial setting when we’re doing integration, we start with top-down guidance from the key leaders as to what are our key priorities. And in the Federal government context, that’s what part of the missions are most important.  Once you’ve done that activity from a top-down, you need to have a sense of how am I spending my money, what are the activities, where’s it being distributed, what can I approach as being less value-added than another part of the business. 

You need to go after the cuts – the approach of the cuts – by thinking about what I want to preserve, what’s most important to preservation of the mission, and then take a real hard look at which problem would you like to have.  Do you want to preserve the mission, or do you want to continue with the status quo, which is kind of a standard distribution of costs for what we’re doing today. 

Sean: And we’ve been talking about “peanut butter spread,” but I’m going to move the metaphor from condiments to fruits and vegetables – and that is low-hanging fruit.  So, JoAnn, in your experience from the government, do you see low-hanging fruit? Do you see any areas for cost improvement, those logical spots to go? 

JoAnn: So I think there’s a few areas that they can focus on.  There should be less emphasis on owning assets – so using more cloud computing, divesting of real estate, consolidating different types of functions like data center operations or human resource functions, eliminating business systems and going to more enterprise-wide systems.  They have thousands of systems, so that eliminating them would reduce costs. But, of course, the thing they really need to do is an analysis of their spend and what the people are doing so that they can more effectively target where they should be making these cuts. 

Sean: How about you, Robin?  Do you agree with that?

Robin: I do agree with JoAnn’s assessment, in particular when you look inside, you know, a major agency, whether it be Defense or one of the major civilian agencies.  But I think there are other opportunities beyond looking inside a single agency. The government in the past has called that “shared services” – the ability or capability to look at like functions across agencies, share resources/assets, and consolidate those into what might be called centers of excellence – shared services – so that those organizations can provide those functions across multiple agencies – again, dealing with the administrative, the back-office side, in trying to alleviate the cuts, ameliorate the cuts, from the mission functions. 

Sean: And, John, your thoughts? 

John: When you’re looking at opportunities in this kind of a context, what Robin talked about is similar agencies looking at sharing resources.  In the commercial space, the symptoms of opportunity are usually, we call it same-same-same and different-different-different, which means when you see the same people doing the same activities for the same customers, and/or in different places using a different infrastructure and different processes, what you have there is some combination of excess – unnecessary – complexity, fragmentation and redundancy.  

So if you look for those symptoms within any of the agencies, what you’re going to find is they’ll be found away from the mission, or far away from the mission, such that you should look first to those types of places.  Now, you’ll see things like call centers.  Often, you’ll find many call centers to address similar types of customers for similar types of problems.  Those can be virtual, and they should be virtual.  We’ll often find unused or unleveraged capacity in a network or in a data center, and oftentimes you’ll find real estate which is in the same place for similar types of operations but fragmented across an entire city or geography.  Those are the kinds of symptoms you look for when you want to take cuts away from the mission.

Sean: So you just mentioned the word investment, and as I was sitting here listening to the three of you, I was thinking about how there will logically have to be some kind of investment by some of these departments to locate these low-hanging fruits – to go and get them and potentially do an integration or a divestiture.  So my question to you is, how is a department going to justify making an investment in this political environment that is closely watching every dollar that’s being spent? 

JoAnn: Well, you know, everyone in the Federal government is being asked for the next few years to spend less.  The question is to spend less on what. And they – the Federal government – does not typically have the people with the skill sets to determine the what.  These are the skills that they need to do business case analysis. 

So, as an example, the Department of Defense was recently asked by Senator Jim Webb of Virginia to provide their business case analysis for the decision to shut down the Joint Forces Command in Norfolk, Virginia.  The department did not have a strong business case to support that decision. So it’s likely that across the Federal government, what you’ll see is the need to bring in contractors with the skill sets to help the government develop thought-out business cases. 

Sean: How about you, John?  Do you agree with that sentiment?

John: I think the point JoAnn’s making could best be described as bringing along someone who’s been through it before, an advisor or advisors who have experience in this particular situation.  So, what we’re talking about right now for the Federal government, I’ve seen in the commercial space quite a lot.  They’re basically career events, like life events for us as people. A life event for you and I is getting married or buying a house.  We do that once or twice in our lives.

In a career, you’re going to go through this kind of transformation or radical change once or twice.  This is a once or twice in a career event.  But you’ll find advisors are out there that have been through this type of life event many times.  In fact, they’ll be entire practices like we have at Deloitte that focus on just being good at the life event.  And that kind of advisor can help you see around the corner.  They can provide value beyond the fees that they charge based on helping you avoid pitfalls – like making sure that the business case that’s presented has got the right facts and is in the right level of detail.

Those kinds of advisors are going to pay for themselves 10 times over and typically do.  Advisors with the right kind of experience and confidence would be and should be happy to go – as we would say at Deloitte – at risk.  We call it value-based billing, but essentially put their fees at risk with your results and any advisor who is confident and capable will want to do that kind of arrangement because they’ll want to link up your results with their results or in essence, the relationship together and extricably link the two firms toward one unified goal.  And that will drive towards a better outcome in general. 

Sean: So, seeking out someone who’s been down the path before. Robin? Final thoughts over to you. 

Robin: Yes, Sean.  I think if you take a look at the two points that each of my colleagues are making, one about the development of the business case – understanding what the potential savings are so that they can be prioritized – and bringing in a partner that understands how to move through the process. So that it’s key that not only have the business case, but engage in a way that you can actually achieve or realize the savings that you want.  

And if you bring the third piece of this, which is the budget’s not all going to be cut the first year.  This is time-phased in.  So they have money today, so making those investments in those areas – as you said, the low-hanging fruit – in order to capitalize and actually attain those savings will continue to give them the bandwidth or a wedge to continue to invest in the consolidations or the divestitures in a way that they can fit within the future budget regime. 

Sean: So be sure to start smart.  Now, folks, thank you very much for joining us today. 

Group: Thank you. 

Sean: You’re welcome.  All right, we’ve been talking about the potential for U.S. Government agency mergers, integrations and divestitures with Robin Lineberger, the CEO of the Federal Government’s Services at Deloitte; John Powers, a principal at Deloitte Consulting; and JoAnn Boutelle, a former Deputy CFO of the U.S. Department of Defense, now a partner in Deloitte and Touche.

If you would like to learn more about Robin, John, JoAnn or any of the topics discussed on today’s broadcast, you can find that information on our website at www.deloitte.com/insightsus. For all the good folks here at Insights, I am Sean O’Grady. We will see you next time.

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