In response to economic recession, governments have no choice but to cut costs. Now is the time to build flexibility to quickly adapt to a new position during the downturn. In recent years, change programs have been driven by market shifts, such as a large generation retiring simultaneously, workforce transitions, and the need to standardize processes and rationalize multiple systems. Today, the biggest driver of change is the economic crisis. Governments are trying to manage budget deficits through traditional cost-cutting strategies like layoffs and elimination programs. However, according to the Center on Budget and Policy Priorities, states project that deficits will easily continue through 2011, which may mean that traditional cost reduction methods will not be sufficient. When participants were asked, “How important are cost reduction and change to your organization?”, 83% responded that it was important or that they could not survive without it.
The Need for Strategic Change and Cost Reduction for Governments Facing Economic Recession
The American Recovery and Reinvestment Act of 2009 provided temporary relief, but it will not solve the underlying challenges of providing government services that arise from economic crises in the long term. The dust of the economic recession has started a transformation that requires immediate change from government leaders. Karl Stahemann, Senior Economist at Deloitte Services LP, recently stated that as a direct result of these extraordinary economic conditions, “the size, role, and purpose of government will be different.” The change agenda is: what can leaders do to lay the groundwork that will make us stronger?
The Importance of Cost Reduction and Organizational Change from the Perspective of Deloitte 2009 Program Participants
During the May 2009 Deloitte Dbriefs program (part of Deloitte’s published programs) on cost reduction strategies for budget-constrained governments, we asked a series of questions to over 375 participants. Here, some of the questions and their corresponding answers will be highlighted. For example, when participants were asked, “How important are cost reduction and change to your organization?”, 83% of respondents said that it was important or that they could not survive without it.
Current Cost Reduction to Gain a Position for the Future
Cost reduction starts with the basics and usually goes deeper afterward, often becoming very painful. When an organization is faced with an immediate need to reduce costs and balance the budget, start with the following principles:
- Hiring Freeze Option: Are there vacant positions in departments that provide services at a reasonable level?
- Position Reduction Option: Are there areas where demand/activity decreases during a bad economic situation, or are there redundant areas that the organization can do without?
- Can we ask employees to share the pain of the recession? Can we start the option of wage freezes along with the option of reducing the workweek?
- Renegotiate Contracts Option: Can we ask vendors to share the pain of the recession?
- Timing or Leveraging Assets: Can we use reserves or reduce cash flows/accounts receivable, or delay payment schedules?
These tactics are used in both the private and public sectors. What happens when it becomes clear in a specific organization that these tactics are not enough? What is your proposed option?
Approaches to Cost Reduction
Step 1: Define the Core of the Desired Change By defining the core of this change, the most difficult decisions are made now to position the organization for the future. What is at the core of your organization’s or a specific government unit’s strategy, programs, structure, or your customers? Asking this question can help define the core change that needs to be made. For example, your organization may not want to cut investments but would prefer to use alternative and creative investment approaches in specific programs to make investments. On the other hand, it may be necessary to arrange options to be ready for the future in areas where investment is not currently needed. What are the potential programs of the organization? After the potential programs regarding the core strategy are defined, you can look at the organization to reduce non-core layers of supervision, duties, and programs.
Step 2: Define Your Approach to Targeting Organizational Change and Cost Reduction Now that the core of the change has been defined, what is the evaluation framework for where to target the change programs? Consider evaluating programs based on the four general approaches below:
- A functional approach requires evaluating programs such as profits, education, welfare and health services, public safety, transportation, employee benefits, and strategic resources.
- An organizational approach means evaluating by individual organizations and the relationship between local and state governments.
- A programmatic approach focuses on specific programs within the organization, often including a large number of customers who can affect the organization, such as the unemployment insurance program which may affect employment and economic development along with income.
- A business process approach looks at the entire organization from a business process perspective, meaning it tends to evaluate processes such as human resources, finance, issue management, eligibility, and licensing.
Step 3: Define Your Guiding Principles for Change and Cost Reduction For cost reduction and change programs to become a reality, difficult decisions must be made. Therefore, defining guiding principles at the start is very important to create a framework for consistent decision-making. For example, if you move from several organizations with their own IT, business, and administrative systems to a shared organization, how can you do the same amount of work or more with fewer resources?
Do you want to evolve from traditional paper-based activities to online transactions by opening new, more efficient, and effective avenues? Do you want to transform from an organization-centric view to a citizen-centric focus? How can you better solve citizens’ problems? The answers to such questions will affect the organization’s structure and operational model.
Step 4: Operationally and Centrally Define and Drive Efficiencies and Cost Reductions Pay attention to customer-facing and administrative areas, which may have potential opportunities for change and help the government’s position in the long run.
Attention to Employees – Human Resources in Recession
Human capital is, at the same time, the greatest source of value and the highest cost in most organizations, both public and private. Leaders are constantly looking for ways to increase value and reduce employee costs. Effective management of human capital costs for an organization looks at all human resource costs within the organization, including cost structure, HR programs, and the performance of the HR organization. Human capital cost management is built on the organization’s cost reduction initiatives, but it is not limited to supplier analysis and reduction. The overall delivery of human resources services, the use of technology beyond paper transactions, HR policies, and talent management approaches and programs are other items that have been evaluated.
Organizational cost management projects that focus on human capital are unique because the recommendations can affect a wide range of audiences and bring specific results such as redirecting career paths and changing roles and responsibilities. The leaders of such changes usually feel vulnerable, which can affect the culture, morale, and achievements of the project. Furthermore, organizational cost management projects are by nature transformative and usually move quickly, which increases anxiety. Since these projects have a personal nature, predicting their results is very difficult, as it is very hard to quantify the impact of emotions on the human components of these changes.
In response to the question, “What is your organization’s plan for using current economic conditions for change?”, a majority of 69% of the 375 respondents in a recent Dbriefs webcast said they would reduce prices and use this opportunity for difficult changes.
Methods to Help Sustain Change
In recent months, change has become a dominant topic, and today’s economic conditions emphasize the need for new, fundamental approaches to providing government services. Here are 10 suggestions to consider in your efforts to sustain change:
- Engage leaders to lead – Leadership support must be regular, visible, consistent, and frequent.
- Communicate with your employees – State issues directly and create a strong two-way dialogue.
- Avoid “everyone’s job” and “no one’s job.” – Strive to clarify roles and responsibilities and assign accountability.
- Adapt your performance management system – Put the big sign on what is truly critical.
- Remember that your culture does not define itself – Actively focus on what is truly important and promote desired behaviors.
- Anticipate “we don’t need this” and “we can’t do this.” – The application of change disciplines requires training and support.
- Plan the transformation in advance. – Form your team and make sure they are running the right programs.
- Build your champions – Nurture your stakeholder network globally.
- Become a learning organization – Think beyond the classroom; connect to global organizations through training.
- Remember where you came from – When developing your change management approach, pay attention to your organization’s history of driving change.
This article was translated into Persian by Mr. Hamidreza Moghadami from an article with the following specifications: Steve Dahl and Beth Thiebault, Cost reduction strategies for budget-constrained governments, Deloitte Development LLC, 2009.
