Delivering on lower-cost, higher-value government

Key challenges: What makes controlling costs such a challenge?

Agency leaders face stubborn obstacles to controlling costs—some long-established challenges, others more recent arrivals, and some on track to only grow in the years to come.

• Aging populations are driving up benefits spending around the world, with Organisation for Economic Co-operation and Development (OECD) nations devoting an average of 21% of GDP to social programs in 2022.¹⁴ These programs offer broad-based benefits and are often politically popular, leaving less money for programs that are more discretionary.¹⁵
• Demand is rising for many government services even as costs continue to climb for providing services such as health care and education.
• Up-front investments for long-term solutions can be hard to come by. Public budgets are often constrained in providing the funding needed to make big improvements, especially when the benefits of the spending may not occur within the term of the current administration.
• Government leaders can be risk-averse when it comes to fundamentally transforming operations or taking drastic measures like closing facilities. This stems from the fear of potential backlash or negative public perception if things don’t go as planned. Consequently, they often revert to familiar and tried-and-tested short-term fixes to cut costs.
• Technical debt entails the high cost of maintaining legacy technology, which makes it even more difficult to invest in modernization.¹⁶ Moreover, this outdated tech infrastructure makes it harder to utilize cutting-edge technologies to streamline tasks.¹⁷
• Procurement processes in government can be inefficient and may waste up to a quarter of the US$13 trillion that global governments spend annually on goods, services, and public works.¹⁸
• Siloed structures within government, with overlapping services and different planning and accountability methods, make it hard to make decisions efficiently and save costs.
• Cost information gaps can mean that leaders don’t have the data to accurately determine the true costs of government operations. This gap hinders their ability to make informed strategic decisions.

Trend in action

Operational efficiency

Goal: Improve employee and process efficiency/productivity often via technology investment, while simultaneously improving the customer experience

Next-gen digital approaches offer the opportunity to alter the economics of public sector operations. AI and other digital technologies can help create tremendous public value, just as companies have used them to generate enormous market value.

Implementing these approaches well is complex. It may require technology investments, or changes in legislation, or significant changes to organizational culture. These technologies, however, can ultimately repay the investment many times over.

AI, productivity, and operational improvements

Productivity is about achieving more with the same inputs. As technology continues to boost productivity in the private sector, public expectations for government to realize similar gains also increases.

A new era of technology tools, in particular AI, gen AI and agentic AI, are ushering in a new generation of cost management in government as well as the private sector. A Microsoft study found that 70% of employees across industries report an increase in productivity from AI and a 29% faster completion rate in tasks such as researching, summarizing information, and enhancing content.¹⁹ The cost of automating tasks is falling rapidly: Early AI adoption often required high investment charges, and the skills needed were scarce. Today, introducing new AI platforms typically demands far less investment of resources. Newly developed digital tools can change the fundamentals of mission economics and work, enabling government agencies to do more with less.

Leaders can use these flexible tools to both enhance existing operations and enable entirely new approaches. Digital twins can help find optimum workflows and aid in policy scenario planning. AI-enabled process and service redesign can help leaders understand the art of the possible around how organizations can be more optimally organized.

Agencies have processes and systems that can be made more efficient with the application of technology. The challenge for leaders is to identify and implement the optimal technology solutions, transform business processes to be more cost-effective, and update talent policies to fully realize employees’ potential in a manner that is outcome-oriented.

AI and beyond

• In the United Kingdom, Swindon Borough Council developed a gen AI application that translates complex government documents into easy-to-read formats, making them easier for individuals with learning disabilities to understand. The tool can effectively translate documents into 75 different languages, reducing translation costs from £120 per page to less than 10 pence.²⁰
• Over a six-month period, the Digital Transformation Agency of Australia made Microsoft 365 Copilot available to more than 7,600 employees across more than 60 government agencies to assess gen AI’s impact on employee productivity. The tool saved each employee an average of one hour a day on administrative tasks.²¹
• In 2023, Brazil’s National Treasury introduced PagTesouro-GRU, a digital tool for automating tax payments for entities without their own systems. Handling 27,000 requests daily, the platform has reduced government fee processing time significantly.²²
• With a large chunk of government spending in most countries going to health care, many leaders are looking to new technologies to boost the productivity—and lower the costs—of health services. International Data Corporation estimates that gen AI will free up 10% of clinicians’ time, leading to nearly US$100 billion in annual health care savings in the Asia Pacific region, excluding Japan.²³

Automation

• In 2015, health care provider North Tees and Hartlepool NHS Foundation Trust launched a transformation aimed at digitizing paper-based systems, giving clinicians an enhanced decision-support tool, and revolutionizing emergency and inpatient wards by creating an electronic prescribing and medications administration module. With the system finally fully operational, administrators have reported dramatic reductions in medication errors and, equally important, freeing nursing staff by nearly 20,000 hours annually to spend time on direct patient care instead.²⁴
• The state of Ohio implemented a suite of bots to streamline administrative tasks for case workers handling Medicaid, SNAP, and TANF services. The Department of Rehabilitation and Correction bot saves case workers hundreds of hours monthly by directly incorporating new incarceration data into the Ohio benefit system, automatically updating case information, redetermining eligibility, and sending reports to county workers for cases that need follow-up. Each month, the bot reviews 4,000 new incarceration alerts, processing 60% of them within 24 hours. Alerts that require additional context are automatically passed to human caseworkers—ensuring a critical human‑in‑the‑loop safeguard in place for complex eligibility decisions.²⁵

Technology infrastructure

• With redundancy a persistent hurdle to controlling costs, many government leaders see real opportunity in transforming agencies’ technology infrastructure. Indonesia is in the middle of an effort to consolidate some 27,000 government applications into a single “super app” that citizens can use as a portal to access administrative agencies and government services, as well as for civil servants to access employment-related functions.²⁶
• Single-use, custom-built applications often add to inefficiencies, increasing operational and maintenance costs, especially as redundancies accumulate. The US Navy is consolidating some 200 HR applications in an initiative called MyNavy HR, expected to save countless hours and dollars.²⁷
• A solid data and technology infrastructure can streamline processes and reduce operational costs. In 2010, the Indian government launched India Stack, a cross-agency suite of digital financial frameworks and products, to boost financial inclusion and make it easier for citizens to secure bank accounts. This initiative, lowering banks’ cost of onboarding new customers from US$23 to only 10 cents, has led to more than 500 million Indians opening new accounts.²⁸

Reducing fraud, waste, and abuse

Any successful attempt to eliminate waste, fraud, and abuse is the equivalent of found money—money that can be saved or used to deliver real value. Consistent with traditional cost management tools such as quality management and reengineering, this means taking a more holistic approach. It also requires leaders to recognize, as cost-of-quality studies have shown, that an ounce of prevention can be worth many pounds of cure.²⁹

The GAO estimates annual losses to the US federal government from fraud between 2018 and 2022 to have been between US$233 billion and US$521 billion.³⁰ In the United Kingdom, officials estimate that fraud costs 0.5% to 5% of all government spending.³¹ Armed with new tools, agencies are tackling this venerable problem by employing a variety of strategies.

One effective approach has been fast and agile collaborations that involve sharing data and intelligence to keep pace with evolving criminal strategies. Members of the Joint Chiefs of Global Tax Enforcement, a transnational joint operational group formed in 2018, develop strategies for gathering information and intelligence, communicate regularly, and conduct joint investigations.³²

Advanced analytics and AI offer the ability to work with large sets of transactions to more effectively identify complex fraud patterns, limit false positives, increase operational efficiency, and avoid fraudulent losses. The UK Public Sector Fraud Authority, created in 2022, saved £311 million in fraudulent activity in its first year using this approach, collaborating with more than 1,000 public bodies to compare records and identify discrepancies, using advanced tools to identify potentially fraudulent activity.³³ Similarly, the US Department of the Treasury successfully prevented and recovered more than US$4 billion in fraud and improper payments in fiscal year 2024, a significant increase over previous years, by leveraging data-driven strategies. AI-based applications flagged high-risk transactions; machine learning helped to detect Treasury check fraud.³⁴

Strengthening fraud monitoring for grant programs can also significantly reduce costs to programs. By combining technology, collaboration, and comprehensive oversight, organizations can significantly reduce fraud risks and associated costs, ensuring that grant funds achieve their intended purposes.

A strong digital public infrastructure (DPI) can help prevent leakages in government service delivery. India’s DPI program is a suite of standards and platforms—such as digital identity, digital payments, and data exchange systems—that helps agencies deliver essential services to citizens at scale. DPI has enabled Indian agencies to remove duplicate beneficiaries and properly direct aid to farmers as well as elderly, underprivileged, and other citizens. The country’s journey to develop DPI began with the digital Aadhaar identity system, with the government linking Aadhaar to beneficiaries’ bank accounts for direct deposits. As of July 2024, DPI has saved the government more than US$41 billion by preventing leakages in benefits transfers.³⁵

Structural transformation

Goal: Pursue substantive structural and operational changes that reduce government’s cost base

Consolidation

For obvious reasons, government agencies are far less likely to engage in mergers and acquisitions than for-profit entities. But consolidations or restructurings of public sector institutions do occur, and leaders are increasingly considering such moves. The underlying drivers may vary, but the goal is to cut costs and enhance effectiveness by streamlining and integrating services.

Consolidation of academic institutions. In recent years, declining enrollments and financial pressures have forced many small colleges to close or merge. Since 2016, nearly 60 public educational institutions in the US have either initiated consolidation efforts or announced their intentions to do so.³⁶

For instance, in 2020, with the COVID-19 pandemic exacerbating existing problems, the state of Vermont began the process of closing three of the four Vermont State College campuses—part of a system facing a US$25 million combined structural deficit—and reopening them as Vermont State University. Through this consolidation effort, aided by federal funds, leaders cut 150 redundant academic programs, ramped up hybrid learning, reorganized infrastructure, and shrank the overall campus footprint.³⁷ By the second year of consolidated operation in fall 2024, year-over-year enrollment had grown 14%.³⁸

In 2023, Connecticut merged its dozen separate community colleges into the Connecticut State Community College, becoming the state’s largest institution of higher education, spread across multiple campuses. Through administrative restructuring and other cost reductions, leaders aim to save more than US$40 million annually.³⁹

Data center consolidation. Government leaders elsewhere are looking to improve efficiency by consolidating data centers and other IT infrastructure across agencies. As part of the US Office of Management and Budget’s (OMB) ongoing Data Center Optimization Initiative, the Department of Defense shut down 46 data centers while identifying additional cost savings of US$178.5 million in 2020 alone.⁴⁰ The US Department of Health and Human Services also saved costs through data center closures—49 of them between 2016 and 2022—outsourcing and migrating to cloud. Since 2016, the department calculates at least US$340 million saved through cost savings and avoidance.⁴¹ All in all, the OMB initiative helped federal agencies save a total of US$5.7 billion between fiscal years 2011 and 2021.⁴²

Shared services

Shared services occurs when agencies source their mission support needs from a handful of other government agencies approved as service providers in particular areas, such as financial management, human capital, and acquisition. The goal is not simply to migrate services to a single large government provider; it is to find the best option for each service, wherever that option resides. In 2024, the United Kingdom launched an initiative under which three major UK government departments—HM Revenue and Customs, the Department for Transport, and the Ministry for Housing, Communities and Local Government—will create a shared digital platform for HR, finance, and procurement services. This shift is expected to lower costs and offer more streamlined services.⁴³

Privatization and public-private partnerships

Privatization can help governments turn dormant physical capital into financial capital—and benefit governments financially by putting the assets on the tax rolls. Governments with underperforming assets such as parking lots, water facilities, and golf courses can use those assets to raise revenue through privatization.

In 2022, India privatized its state-run airline, selling Air India—which cost the government US$2.4 million a day to operate—to the Tata Group for US$2.3 billion.⁴⁴ Since privatization, Tata has focused on restructuring, upgrading IT infrastructure, and releasing digital apps; the privatized airline has placed the largest aircraft order in Indian history,⁴⁵ and in November 2024, Tata completed a merger of Air India with Vistara, bringing Singapore Airlines into a consolidated partnership.⁴⁶

Government agencies can also consider forming alliances and strategic partnerships with private sector entities to enhance service delivery and capture value as part of the overall mission. Such alliances can attract new investments and introduce innovative private sector practices. These alternative delivery models offer significant opportunities for cost savings.⁴⁷

Real estate portfolio rationalization

Today, government organizations are taking a hard look at the assets that make up their current footprints. Both direct facilities costs and associated costs, such as local management, represent significant expenditures.

Current physical configurations reflect past decisions, demographics, and needs. More importantly, they reflect historical trade-offs among service delivery, costs, and physical proximity. For many agencies, technology has fundamentally changed these trade-offs. Leaders may find significant savings through a process that begins by asking, What work should be done and where? What infrastructure is needed to get that work done? and Do we need all these facilities? Technologies, real estate markets, labor pools, and costs may have changed enough to make it worth reevaluating the current configuration.

In Ottawa, the federal public works department, Public Services and Procurement Canada, holds the second-largest portion of government floor space after the Department of National Defense,⁴⁸ with 6.2 million square meters of office space.⁴⁹ With hybrid work increasingly prevalent, the department is looking to halve its real estate footprint, generating income from sales and savings on rent and maintenance.⁵⁰

In the United States, the General Services Administration (GSA) sees a similar opportunity to reduce the federal government real estate portfolio by 30%, saving up to US$60 billion over a decade. This effort is in addition to the GSA’s ongoing initiatives since 2013, which have already reduced federally owned office space by 12 million square feet and leased space by 18 million square feet.⁵¹ Additionally, the Department of Defense has saved US$12 billion annually from five previous rounds of base closures and consolidation through the Base Realignment and Closure (BRAC) process.⁵²

Demand management

Goal: Reduce the demand for certain programs

Government spending on social welfare globally has risen over the last century, with wealthier countries now allocating between 15% to 30% of GDP to retirement benefits, health care, education, housing, and other basic services (figure 2). The spending numbers rarely fall. Over time, the expectation of these benefits makes it challenging for lawmakers to reduce costs in this area. 

Some governments are looking to better manage public demand for this suite of health and social services, in particular through policies that promote employment and reduce demand for health-related services through whole health, preventive health care, and early intervention.

Promoting employment

For working-age constituents, some government agencies are rethinking social welfare, shifting programs from merely delivering financial assistance to also promoting employment, with the receipt of benefits being contingent on individuals seeking work and developing their skills.

Active labor market programs—which help individuals find work, improve their skills, and succeed in jobs—can help reduce the demand on social welfare programs.

Ontario’s poverty reduction strategy aims to help transition individuals from social assistance to employment through a comprehensive suite of supports. The province offers job placement assistance, skill training programs, and additional supports such as housing stability, crucial for enabling individuals to secure and maintain employment. In 2023 alone, more than 28,000 Ontario households successfully transitioned from social assistance to employment.⁵³

Similarly, the UK government designed its all-in-one Universal Credit program to facilitate employment by gradually reducing benefits as income increases rather than abruptly withdrawing support. This approach has proved particularly beneficial for lower-income individuals, encouraging them to take on jobs or work more hours without the fear of losing all their benefits at once. Participants are required to regularly meet with a work coach and take proactive steps to boost earnings.⁵⁴

Denmark’s labor policies combine labor market flexibility with active assistance for individuals. In its “flexicurity” model, the government assumes responsibility for retraining and reintegrating laid-off workers into the workforce as quickly as possible. In exchange for benefits, unemployed individuals are required to participate in active labor market programs. These programs cost approximately 2% of GDP per year, making Denmark the OECD country that invests the most in active labor market policies, by a wide margin.⁵⁵ Since 2014, the number of social benefit recipients has decreased as more Danes have moved into employment.⁵⁶

Reducing costs by improving health outcomes

Struggling with rising health care costs, governments are increasingly adopting a whole-health approach that emphasizes wellness rather than just treating illness.⁵⁷ Programs typically include preventive and early care services such as cancer screenings and pregnancy care along with wellness promotion activities such as anti-smoking campaigns.

To improve populations’ living conditions and invest in lifelong health development, health care organizations and government agencies are increasingly addressing the drivers of health and factors such as lifestyle, nutrition, socioeconomic status, education, and environmental conditions that disproportionately affect health outcomes.⁵⁸ These measures aim to improve overall health and reduce emergency room visits, ultimately lowering government spending.⁵⁹

The state of North Carolina has adopted a payment model rewarding providers that improve population health outcomes at a lower cost of care. Incentivizing stronger patient primary care helped improve management of chronic conditions and reduce the number of hospitalizations and emergency room visits. In its first three years, the program saved the state more than US$155 million and generated more than US$75 million in revenue for participating in health care practices through shared savings allocations and quality bonuses. The public-private partnership operates in more than 540 sites; about 85% of those sites are focused on federally designated primary health care provider shortage areas.⁶⁰

The state of Maryland, following the lead of Germany and several other countries,⁶¹ has tried a different approach by transitioning to an all-payer hospital global budget that allocates a fixed annual payment to each hospital, unlinked to the volume of services delivered. This paradigm shift has incentivized hospitals to actively work to reduce preventable hospital usage, and indeed, Maryland reduced hospital admissions by 16.2% and has narrowed disparities in several quality measures. Over its first three years, the model reduced the state’s Medicare spending by US$689 million.⁶²

The Nurse-Family Partnership is a community health program that helps specialized nurses connect with first-time mothers very early in their pregnancy, maintaining a partnership until the child’s second birthday. During the early months of a child’s life, support can reduce emergency room visits for accidents, food poisoning, and incidences of child abuse and neglect.⁶³

Public health campaigns are another way to improve health outcomes while reducing long-term costs. In its first three years, the US Food & Drug Administration’s tobacco prevention campaign “The Real Cost” dissuaded an estimated 587,000 youth ages 11 to 19 from starting to smoke. Through a paid-media strategy and targeted messaging, the campaign effectively altered teenagers’ perceptions of tobacco use, leading to a 30% reduction in smoking initiation among youths between 2014 and 2016. The campaign achieved significant projected cost savings from reduction in future disability, medical care, lost wages, and lower productivity: fully US$53 billion, more than US$180,000 for each of the youths who would likely have become a smoker.⁶⁴

Tools and strategies for delivering on lower-cost, higher-value government

There is tremendous pressure today to increase efficiency and transform the cost structure of government. Doing so requires a thoughtful, integrated approach combining traditional cost management tools (mergers, fraud, and waste reduction) with new age solutions like digital and AI that can enable deep and enduring operational efficiencies (figure 3).

Operational efficiency: The proven tools of business process redesign take on new life when combined with AI tools and robust digital platforms. This is especially true in government where so much activity is centered on benefits processing, providing information, and financial transactions.

Structural transformation: Governments have a bevy of structural approaches they can use to reduce costs without negatively affecting services, ranging from consolidation to IT rationalization to different models of public-private partnerships.

Demand management: Significant savings are possible by using demand management tools to shift demand to lower-cost channels of access (digital rather than an in-person visit, for example) or by encouraging or by reducing the demand for some benefits by increasing labor force participation or improving health outcomes.