Cost Reduction | The Contracting Education Academy

October 5, 2011 By AMK

OMB issues guidance boosting interagency purchasing

Encouraging agencies to reduce waste by leveraging their “own buying power,” the federal chief procurement officer on Thursday issued guidance designed to reduce duplication in acquisitions by increasing interagency contracting and information sharing.

Dan Gordon, administrator of the Office of Federal Procurement Policy, in a letter to chief acquisition officers and senior procurement executives, wrote that too often, “agencies establish new overlapping and duplicative contracts for supplies or services because the agencies have not adequately considered the suitability of existing interagency contract vehicles: governmentwide acquisition contracts, multiagency contracts and blanket purchase agreements.”

Failure to exploit such opportunities for new efficiencies, he said, “results in higher prices and unnecessary administrative costs.”

Beginning in January 2012, the guidance directs, agency managers should not enter into a new contract without first performing a cost-benefit analysis to “balance the value of creating a new contract against the benefit of using an existing one, and whether the expected return from investment in the proposed contract is worth the taxpayer resources,” Gordon wrote on the White House blog.

The guidance is intended to deal with goods and services such as office supplies and wireless services. “This kind of due diligence and comparison shopping is something that many families across the country do,” the letter stated.

“The guidance will also increase information sharing among agencies,” it added, noting that for years many agencies have focused solely on doing all their own contracting. “We have seen firsthand that interagency contracting — done intelligently, and in a way that reduces duplication — can help us leverage the federal government’s buying power to get better prices.”

Such savings, Gordon said, also would help persuade the Government Accountability Office to remove interagency contracting from its high-risk list.

He praised the General Services Administration’s move in spring 2010 to sign a series of blanket purchase agreements for office supplies. GSA’s award of 15 contracts, 13 of them to small businesses, has produced savings up to 20 percent on office supplies, which will add up to more than $200 million in the next few years, Gordon said.

The new guidance is part of the Obama administration’s Campaign to Cut Waste led by Vice President Joe Biden, who met with Cabinet members on the effort this month.

The approach drew praise from Sean Moulton, director of federal information policy for the nonprofit OMB Watch. “It makes a lot of sense, this idea of coordinating purchases of common elements, getting more consistent — and probably lower — prices and not wasting time,” he said. A similar approach used by the Texas state comptroller of public accounts, he added, has saved millions of dollars.

Scott Amey, general counsel of the nonprofit Project on Government Oversight, said, “There might be slight improvements and savings associated with today’s announcement. Buying in bulk and eliminating duplication will help, but we need to make sure we ask two critical questions, what are we buying and how are we buying it?”

— by Charles S. Clark – Government Executive – September 30, 2011 – http://www.govexec.com/story_page.cfm?articleid=48938&dcn=e_gvet.

June 8, 2011 By AMK

How to cut costs and improve performance

The federal government faces an estimated annual structural deficit of $500 billion to $700 billion. A deficit of this magnitude represents a major threat to the economic health of the nation. The structural deficit is defined as the portion of the total annual deficit that results from a fundamental imbalance in receipts and expenditures, not just one-time occurrences or changes in the economic cycle. Steps to reduce and eliminate this structural deficit are urgently needed.

Congress, the Obama administration, and state and local governments must put government spending on a path of fiscal sustainability for the longer term. Policy makers have focused on three cost-cutting opportunities for doing this:

Eliminating wasteful programs,
Taking a longer-term view that focuses on entitlement program policy changes,
Using proven cost-saving strategies from the public and private sectors to make the daily operation of government much more efficient and deliver improved performance at a lower cost.

Recent discussion of the fiscal crisis has been limited to these three approaches, and discussion centers on draconian, across-the-board spending reduction or equally sweeping tax hikes. Based on the experience of the technology industry, there is a better way. Government has an opportunity to dramatically reduce spending and cut the deficit, while also improving its level of service. By harnessing major technological shifts and adopting proven, commercial best business practices, leaders and managers can not only make government far more productive, but also foster greater innovation in areas ranging from health care to education and energy — innovation that will generate economic growth and job creation.

Innovative approaches have been used effectively throughout the past several decades to create new technology models. Again and again, new capabilities have simultaneously reduced costs and sparked innovation. While businesses and governments are inherently different in many ways — responsibilities, objectives and mandates — both employ millions of professionals to provide goods and services to hundreds of millions of customers and constituents. Not all private-sector solutions are applicable or advisable in a government setting. In both the public and private sectors, the more productive and efficient the operations, the more services can be delivered at the lowest cost. Given the current fiscal outlook for governments at all levels, maximizing government productivity will be essential to maintaining the services citizens want at prices taxpayers can afford.

Traditional Budget-Cutting Exercises Will No Longer Work

We have heard it before — the need to “do more with less.” But the situation is different this time, and much more difficult. Drastically reducing costs is a major undertaking, not a normal budget-cutting exercise. And, importantly, it presents an opportunity to not just cut programs and discretionary costs, but to transform how government does its business.

Across-the-board cuts and undifferentiated freezes that affect all programs and services in the same way can have perverse effects. Such cuts erode the quality of services and affect the morale of public servants. Over time, they erode citizens’ confidence in government. Too often, budget-cutting exercises involve a small number of people working in relative secrecy. In contrast, drastic austerity measures require a more open and inclusive approach, one that engages a large set of stakeholders and gives greater emphasis on program evaluations and cost/benefit analyses than occurs in the normal budget process. Rather than looking only at program cuts, leaders and managers should view the need to achieve drastic reductions as an opportunity to reconsider their entire organizational structure as well as program business models.

Traditional Cost-Cutting Exercises Often Prove to be Temporary

Government organizations often cut discretionary costs, such as information technology, travel, and training, which can have an immediate, significant impact. Unfortunately, as soon as the external pressure is gone, these costs creep back into the cost base. More successful organizations invest in central staff who help identify systemic costs associated with organizational and program complexity and supply chain improvements. In doing so, they must be mindful of two important points:

Establish top-down cost savings targets. Delegating the responsibility for cost-cutting to the frontline organizations often results in cuts to long-term investments, like training, not to low-priority or poorly performing projects. Central staff focused on operational improvements can provide an enterprise-wide view to objectively identify high-priority and high- performance activities, not just set overall cost-reduction targets for the organization.
Recognize and capitalize on the cost of complexity. Failing to estimate and account for the cost of too many separate operations and support activities can lead organizations to overlook savings from reducing, standardizing, or sharing services, or making supply chain improvements. Central staff are in a better position to identify enterprise-wide and cross-agency opportunities to capitalize on redundancies.

New Approaches are Needed to Truly Transform the Way Government Does Business

Faced with the need to make severe budget cuts, government organizations may react in one of two ways:

One group of leaders and managers will use the necessity for cuts as a catalyst for change. They will seize the opportunity to streamline business processes, shed unnecessary functions and optimize IT systems.
Another group will adopt a bunker mentality and sideline management reform, cutting projects and jettisoning management improvements, believing that management reforms represent a luxury they can no longer afford.

A big risk in the current cost-cutting debate is that not enough attention will be focused on the opportunity to improve operational performance by being smarter about the way government does business. The IBM Center for the Business of Government’s Strategies to Cut Costs and Improve Performance describes seven specific initiatives where technology-enabled productivity solutions can make a material difference in the performance of government programs, based on the experience of real cost savings and efficiencies achieved by public and private sector organizations. These seven strategies constitute a starter list of initiatives of this type.

By aggressively implementing these strategies, sustainable cost savings can be realized while, in many cases, improving operational performance.

Seven Strategies to Cut Costs and Improve Performance

Consolidate information technology infrastructures

Streamline government supply chains

Reduce energy use

Move to shared services for mission-support activities

Apply advanced business analytics to reduce improper payments

Reduce field operations footprint and move to electronic self-service

Monetize the government’s assets

Source: Charles L. Prow, Debra Cammer Hines, and Daniel B. Prieto, Strategies to Cut Costs and Improve Performance. IBM Center for the Business of Government. 2010.

Getting It Done

The problems of mounting debt and deficits can’t be solved overnight, but must be addressed now. An initial step in achieving dramatic cost savings — the “how” it will be done — is deciding “who” will do it. In the private sector, this would be the job of the chief financial officer. However, in many government organizations, the CFO or the budget officer, as one former CFO expresses it, is very good at getting money from Congress to fund various programs and making sure that money is spent — but is not experienced with considering how effectively or efficiently that money is spent.

The chief executive officer/chief operating officer model that is prevalent in the private sector does not work as well in government. Cabinet secretaries have huge jobs. With many direct reports just in the Office of the Secretary, they need their deputy to serve as an alter-ego in many capacities, not just as a chief operating officer. While some deputy secretaries have been very attentive to management, others have not.

The best approach is for top officials to appoint and empower a single individual to manage cost-cutting activity. While they may be supported by departmental staff or outside volunteers, someone needs to own the task and, ideally, report directly to the agency head. The secretary or deputy secretary should recruit a highly respected and experienced former CFO from the private sector to serve as the department’s “uber-manager” with the explicit mission to achieve dramatic cost saving.

People often ask how the role of Cabinet secretary, department head, or legislator fits into this model and whether these officials should own cost-savings activity in their areas of influence. These leaders will be critical enablers for cost-savings ideas, but we recommend that someone outside the impacted agencies be appointed to take the lead role for two reasons. First, those officials, like their elected bosses, have a great deal on their plate. Their days are filled with a constant stream of crises. Second, we believe that appointing an external voice can help inform the decision-making of agency heads as they make the tough choices about what must be cut.

The Role of Leaders and Managers

Cost-cutting is tough, unpleasant work. It requires choices that most of us would rather not make. Therefore, unwavering leadership is the most important characteristic for senior officials to display in a successful cost-cutting effort. While an individual department head might be able to reduce costs for a few years in an agency, it is very hard to bend the overall cost curve unless top leadership demands it.

How this process will play out over the next few years remains to be seen. In many respects, identifying sources of savings (whether policy changes or operational improvements) is the easy part. The challenge will be to turn ideas into action. Most important, we know that the proposed operational and process improvements do not just cut costs; they also foster collaboration, idea sharing, and a culture of innovation.

This will be where government leaders and managers come in. They will be the ones who do the heavy lifting to implement major program adjustments and cutbacks, as well as harness major technological shifts and not just cut costs, but also adopt innovative practices to make government far more productive.

This article was reprinted from GovExec.com on June 3, 2011 at http://www.govexec.com/story_page_pf.cfm?articleid=47935&printerfriendlyvers=1 and is adapted from “Seven Management Imperatives,” a report by the IBM Center for the Business of Government on broad societal trends that are changing the way federal agencies and their leaders must operate. The report’s authors are Mark A. Abramson, Gadi Ben-Yehuda, Jonathan D. Breul, Daniel J. Chenok, John M. Kamensky, Michael J. Keegan and Frank B. Strickland Jr.

April 28, 2011 By AMK

Congress looking at forced reductions to address budget and debt ceiling issues

It’s the budgeting equivalent of the old adage about killing two birds with one stone. Congress returns from Easter recess next week facing two urgent fiscal questions: what to do about raising the federal government’s borrowing threshold and how to pass a budget for the next fiscal year that honors the fiscal austerity of the current political moment?

Increasingly, the odds favor addressing both issues with a single legislative agreement.

The Treasury Department has said the federal government will hit its $14.3 trillion debt limit around May 16, though bookeeping leeway could allow lawmakers to defer action until July. Republicans in both the House and Senate, backed by a few Democrats, have said they will oppose increasing the debt limit without a significant commitment to future spending cuts.

Just a few weeks after reaching a last-minute deal to fund the government through the end of this fiscal year ending on September 30, the Republican-controlled House and Democratic-controlled Senate must also address the bigger challenge of reaching a deal on a budget resolution setting spending targets for fiscal 2012, which starts on October 1. The budget resolution offered by House Budget Committee Chairman Paul Ryan, R-Wis., has no chance of Senate passage and Senate Budget Chairman Kent Conrad, D-N.D., has not yet offered a budget resolution, but his plan would face long odds in the House as well as in the Senate if it could not generate some GOP support.

Congressional aides in both chambers said that the hope is to address the debt limit and the fiscal 2012 budget by approving a bill that would require Congress to meet ratio-based deficit-reduction targets over perhaps the next decade.

Under the plan, failure by congressional committees to hit the targets would trigger automatic reductions.

Democrats said such a proposal can be voted on in one package with a debt-limit increase, and could provide the significant commitment to deficit reduction that picks up enough GOP votes to allow the debt-ceiling increase. The bill could also serve as a vehicle to set fiscal 2012 spending levels.

Such a plan would not include entitlement reform, though a general statement signaling intent to address entitlements is possible.

While such a measure would serve a similar function in both chambers, aides said they expect the House and Senate to take different approaches, which would complicating efforts. Democratic staffers said they hope Senate passage of what will be seen as a bipartisan plan would put pressure on House GOP leaders to move the same measure.

The details of what many are referring to as a “fail-safe” or triggered mechanism on spending reductions would be crucial, and are far from determined. But various groups of lawmakers and policy organizations are pushing plans that follow the general outline of forcing future cuts that could be linked to the debt-ceiling vote. Sens. Bob Corker, R-Tenn., and Claire McCaskill, D-Mo., have offered a proposal to set binding caps to reduce spending to about 21 percent of the nation’s gross domestic product, though the plan has little Democratic support.

A group of former policymakers, including former Senate Budget Committee Chairman Pete Domenici, R-N.M., outlined a package last week to force Congress to identify deficit-reduction targets that stabilize the debt over 10 years. President Obama signaled general support for a plan that caps spending.

The most closely watched fail-safe proposal, however, may come from the bipartisan “Gang of Six” senators. The group, comprised of Conrad and Sens. Mark Warner, D-Va., Dick Durbin, D-Ill., Saxby Chambliss, R-Ga., Mike Crapo, R-Idaho, and Tom Coburn, R-Okla., hopes to release a sweeping plan to cut the deficit as soon as next week. Their proposal, based on a plan offered last year by the heads of Obama’s bipartisan fiscal commission, would seek to cut spending by $3 trillion and increase tax revenue by $1 billion over a decade.

Two Senate sources briefed on Gang of Six talks said they expect the senators to propose multiple “pieces,” that could receive votes at separate points this year.

The sources said that in addition to a long-term deficit-cutting plan, the senators are preparing to recommend a relatively simple process under which Congress commits to meet deficit-reduction targets, to both mandatory and discretionary spending over perhaps a decade. The plan would also set targets for revenue increases. It would impose “draconian” cuts if the targets are not met, one senior aide said. That proposal could then be linked to the debt-ceiling vote.

A key to the proposal would be the exclusion of specific cuts. That will allow Congress to defer fights it cannot complete in the next month or two while committing to future reductions.

It remains to be seen how strict the plan would be – Congress has previously created exemptions to limit the effect of similar approaches, like Paygo. But the plan would at least serve the political and legislative means for passage of the debt-limit increase.

Conrad has said he is holding off on offering a budget resolution to see if the gang reaches a deal soon. If it does, a senior Democratic aide said Conrad could then include a fiscal 2012 budget plan in the fail-safe mechanism that would be voted on in conjunction with the debt limit.

The aides said they expected the gang to unveil their both long- and short-term deficit-cutting plans as soon as the middle of next week.

Spokesmen for Coburn, Durbin, Warner, Conrad, and Chambliss said the senators have not reached an agreement, noting that no proposal is agreed on until a complete deal is reached by gang members. The aides said the group may not offer a plan next week. All declined to comment on the specifics of the potential proposal.

In public appearances in recent days, gang members have made it clear that their long-term deficit-cutting plan would include a trade in which Democrats agree to a long-term effort to trim spending on Social Security benefits while GOP members back efforts to increase tax revenue by ending tax deductions or loopholes. The package will not include any increases in tax rates, according to senators and multiple aides.

The Social Security component would aim to reduce spending on benefits over 75 years. Advocates of some Social Security reform, like Warner, hope to sell the plan by arguing that it will affect only Americans currently younger than 32 or 33 years old. But aides said the specifics of changes in benefits, and the age of those affected, are one of several remaining issues.

The gang is also widely expected to propose ways to cut spending on Medicare and Medicaid, likely including some means-testing to control Medicare costs. But the group has kept a tight lid on specifics.

– by Dan Friedman – National Journal at http://www.govexec.com/story_page_pf.cfm?articleid=47670&printerfriendlyvers=1 – April 26, 2011

April 22, 2011 By AMK

Relying on continuing resolutions wasted billions, says Pentagon acquisition chief

The absence of a permanent budget for the first six months of the fiscal year likely cost the Defense Department billions in inefficiencies, according to the Pentagon’s top purchasing official.

In a speech on Wednesday at the conservative-leaning Heritage Foundation, Ashton B. Carter, undersecretary of defense for acquisition, technology and logistics, argued that the seven continuing resolutions passed by Congress from October 2010 through the second week of April were highly ineffective and resulted in a waste of taxpayer resources.

“It is uneconomical to proceed in this herky-jerky fashion,” Carter said. “It cost billions for us to operate in this way. It’s like a hidden tax.”

He said the lack of a permanent, fixed budget upset some carefully calibrated buying plans and caused the department to shelve other programs that had yet to commence.

Congress finally passed a fiscal 2011 budget for the last six months of the fiscal year last week.

Carter’s address focused on his initiative to milk greater savings and more efficiencies out of the roughly $400 billion the department spends to procure goods and services. The acquisition chief said the era of ever-increasing Defense budgets was gone and that the department needed to do “more without more.”

The leaner acquisition environment, he said, will feel very different to those in the Defense community who have “grown accustomed to a circumstance where they can always reach for more money.”

While much of Carter’s focus was on the $200 billion devoted to the services of acquisition, he also suggested that the department may not be done cancelling or scaling back several expensive major weapons programs.

Carter’s office has already abandoned several weapons programs, totaling $300 billion, which were either over-budget or inefficient, or which involved a product of which the department had simply acquired enough. They include the presidential helicopter, the Expeditionary Fighting Vehicle and aspects of the Future Combat System.

And while the Pentagon has plucked most of the low-hanging fruit, “there undoubtedly will be more cancellations of that kind,” he said.

The alternative to not addressing these problems, Carter said, is more broken programs, ineffective products provided to the warfighter and eroded taxpayer confidence in the department’s ability to wisely spend money.

Repeating themes from many previous speeches on this subject, Carter outlined his 23-point plan to drive more efficiencies and savings out of an essentially flat Defense acquisition budget. The plan includes introducing more competition, reducing bureaucracy and unnecessary paperwork, improving the tradecraft of service acquisition, building up the procurement workforce and incentivizing better productivity from industry.

Carter added that the department plans to roll out a new Superior Supply Incentive Program in the coming months that will reward the best performers in the Defense industry with advantages in source selection, performance payments and nonmaterial recognition. The program is modeled after a plan originally scheduled to be introduced by the Navy but which Carter is expanding departmentwide.

“We are trying to reduce cost and not profit,” Carter said. “We use profit as an incentive to reduce cost.”

Relying on continuing resolutions wasted billions, says Pentagon acquisition chief

– by Robert Brodsky – GovExec.com – Apr. 20, 2011

February 14, 2011 By AMK

SBA chief signals 2012 budget will eliminate some programs

President Obama’s fiscal 2012 budget, scheduled to be released on Monday, will streamline, and in some cases, eliminate entirely, several small business programs, according to Small Business Administrator Karen Mills.

Last month, Sens. Mary Landrieu, D-La., chairwoman of the Small Business and Entrepreneurship Committee, and Olympia Snowe, R-Maine, the panel’s ranking member, sent a letter to Mills and SBA Inspector General Peg Gustafson seeking recommendations for programs that could be “eliminated, or substantially reduced without undermining the SBA’s ability to serve the needs of small business owners.”

On Friday, Mills responded in a one-page letter in which she declined to provide details of any program cuts before the fiscal 2012 budget is submitted to Congress.

But, in a sign of what might be on the horizon, Mills hinted that the agency, which already has experienced years of flat or declining spending, could face even leaner times.

“With respect to delineating specific programs that we believe are redundant or duplicative, on Feb. 14 the president will release his fiscal 2012 budget proposal, which will identify SBA programs that can be further streamlined, or in some instances eliminated altogether,” Mills wrote.

It is not clear which programs are on the chopping block. In the letter, Mills said she, or SBA senior program officials, would be available to discuss the cuts after the budget has been released.

“Over the past two years, the agency has made considerable progress in this area,” Mills wrote. “Plans are in place to continue to use technology and other cost-saving approaches to continue to streamline activities and make the best use of the taxpayers’ dollars.”

The IG’s office said it has not yet completed its response to the letter.

The Senate committee is planning to hold a hearing this month on proposed SBA program cuts.

– by Robert Brodsky – GovExec.com – February 9, 2011

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