RSM Bird Cameron explains how to cut Government cost without cutting the Serice

The impact of the Global Financial Crisis (mark I & II), have left most western governments with substantial budget deficits. Most experts agree (and as time goes on they are being proven right), that this economic downturn is different than its predecessors in that it is deeper and is taking longer to resolve. While the Australian economy has weathered the storm better than most, the budgetary impact of government’s stimulus spending and its other major policy programs has left the Commonwealth with a large debt. Add to this rising uncertainty over future revenues (from the waning mining boom, a high Australian dollar continuing to impact on non-commodity exports, and a depressed retail sector) andincreased demand for services (changing unemployment and recent natural disasters), and it becomes clear that the government and its agencies face a massive challenge in returning the budget to surplus.

While the Government could adopt traditional fiscal measures to increase taxes or cut programs, the fragility of the current economic situation means that these policy measures are unattractive to the central agency economists, to say nothing of their political implications in an election year. The result is that that Government will continue to look to its agencies to provide a further dividend in terms to reduced expenditure.

After several years of increasing and compounding “efficiency dividends”, further across-the-board cuts are likely to lead to reductions in service quality or delays in investment in important, value creating ideas (i.e. reduced discretionary spend), endangering agency outcomes and ultimately having a negative impact on service delivery. It is now also clear, as highlighted by the Treasurer’s admission in December that a Surplus is unlikely this year, that the “efficiency dividend” approach has not delivered the needed savings, and this is before the added pressure of servicing the new debt accrued through this year’s likely deficit.

To succeed agencies must adopt an approach that reduces expenditure through sustainable change – not just the one-off cutting of services or delays in investment – that protects or improves outputs and service levels. Agencies will need to engage in new approaches to operational management aimed at leaving them not only fit for use, but fit for service, in the face of long term reduced budgets.

What’s needed is a new mindset: “a cost conscious service” mindset, that challenges some of the choices made in the past (at times of budgetary ease), revisiting ideas and breaking new ground. Sustainable and flexible service cannot be built on one-off tactics for immediate relief alone; they must be driven by structural improvements and efficiency initiatives that enable sustainable change.

This paper outlines 10 opportunities that government agencies can adopt to sustainably reduce costs while generating new value for citizens for the long term.

1 Consider structural change Many agencies are working with decentralised management processes and functions (how many divisions have their own finance manager for example?) Over time decentralised processes can result in inconsistent procedures and fragmented systems, leading to rework to integrate data and higher operating costs. When agencies take steps to integrate and streamline their structures and processes, or even to work together, they can open up a third budgetary option beyond cutting services. Finding and fixing these inefficiencies represents a prime opportunity to lower operational costs without lowering services.

A good example is the establishment of “bureau services”, common in the areas of HR and Finance, to support additional areas such as Administered Funds management. Many agencies use administered payments (e.g. Grants, Subsidies, Entitlements, Scholarships, etc), to 3rd sector entities achieve their policy objectives. As government policy increases in complexity the use of administered payments has become more commonplace and widespread from one program or from one division to another, with the potential for duplication and avoidable costs has risen too.

Often this is manifest as an agency having multiple Head Contracts or Deeds with the same Service Provider (separately administered at a divisional or “program” level), a dependence on paper-based processes, and administrative policies more appropriate to historical “low volume” days (often in respect to FMA regulation compliance, invoicing, correspondence and acquittal).

In our experience, by establishing bureau services the divisions within an agency (or even across different agencies through sharing a service), can work together to reduce administration costs and duplicated effort for themselves and likewise reduce costs and redtape for service providers. Over time, the bureau services will also improve the choices made (in terms of which providers to fund), and help agencies focus more on the outcomes of their funding choices. Some areas to focus on include:

* Application / Offer Round advertisement and response handling;

* Provider registration and viability/integrity assessment;

* Standard contract terms and conditions to reduce administrative overhead (such as processing annual financial statements and insurance currency);

* Streamlined payments and invoice handling (including the adoption of RCTIs as a standard business process);

* FMA reporting obligations management; and

* Provision of a common funding management IT system .*

Agencies invest in innovative strategies to improve their achievement of outcomes, upgrade services or to reduce costs. Most of these strategies require a new IT solution or capability to be implemented.

Often the solutions developed (and paid for by one agency), could be of value to other agencies. This is often recognized by the commissioning agency and typically results in it seeking to retain the IP (in the “Contract Material”) in the belief that it may be able to make the solution available to other agencies. However, while good in intention, the reality is that most agency buyers of solutions have neither the time nor the experience to successfully market the solutions. The obvious alternative is to form a “buying coalition” with other agencies pre-procurement. While this sounds like an attractive alternate the truth is that it typically leads to delays as agencies seek to align stakeholders, requirements and technology.

However, there exists a third alternative-vesting IP in the contractor. Here the commissioning agency would share its belief that the solution would be attractive to other agencies as part of its procurement process and seek to trade its IP (in the solution) with the Contractor for a “reduced price”. Under such a deal, the Contractor would gain IP in the solution and would be free to market it to other agencies; something they are in all likelihood better equipped to do. Other agencies should benefit from a lower price for the solution (compared to commissioning their own), as it does not need to be provided from scratch.

The guidance in the AGIMO source IT contract template is clear and allows agency to select a model where “the Contractor owns the Intellectual Property Rights in the Contract Material and provides a licence to the Customer to use the Contract Material”. In RSM Bird Cameron’s opinion taking up this model could provide the best opportunity to reduce costs for the Commonwealth where the solution was novel and was associated with a process common to many agencies. For example the implementation of online recruiting solutions.

3Access renewable energy rebates through lease variations

Today most state and territories offer feed-in rebate schemes for solar and wind power. Many of these schemes are open to both commercial and residential buildings. However, with the Commonwealth’s direction towards leasing over the past decade, we have the bizarre situation where the Commonwealth has not benefited from the very policy it has inspired through setting the national renewable energy target.

But what if there was a way for Commonwealth agencies to access feed-in tariff rebates? RSM Bird Cameron believes that agencies, by working with their landlords, can access part of the value of these rebates and create a “win win” situation for both themselves and their landlords. Put simply, agencies could seek to direct part of their funds towards the installation of renewable energy generation equipment (by their landlords), who could then re-reimburse the agency through lower rent. This would provide a new source of value for the landlord and reduce the agency’s operating costs while reducing its carbon footprint.

In the past decade changes in technology, work culture and worker’s compensation insurance arrangements has enabled businesses to dramatically reduce the amount of office space they use, and the amount of associated resources they consume. With current budget pressures, now is a great time for agencies to revisit its facilities expenditure as a strategy to reduce costs through delaying new capacity coming on-line, consolidation, and reduction.

In RSM Bird Cameron’s experience taking a hard look at your facilities spend, especially if you have not done so for five years or more, can lead to dramatic savings in the order of 15% to 20%. This can be further increased by adopting a model of greater mobility (where appropriate) through the broader deployment of lap-tops, tablets and smart phones, and the adoption of practices such as working from home (or working remotely). Agencies can dramatically reduce office space while improving staff morale, to say nothing of the costs avoided by reduced attrition. For example, “mobilised” organisations no longer provide middle managers (or even some executives) with dedicated private offices; reducing the cost of fit-out while maximizing floor space and promoting a culture of industrial equity. Some of the reclaimed space is used to provide additional meeting facilities, “quiet spaces”, “Call rooms” or better staff facilities.

Reducing travel related costs is an obvious opportunity for agencies to help stay within their reduced budgets, and most government executives will be familiar with implementing “travel reductions” and even “travel bans” (typically in the last quarter), as agencies and divisions try to remain “on budget”. Unfortunately stopping or slowing travel, without other action, will only ever offer short-term relief. However, there are ways that agencies can enjoy the benefits of reduced travel costs for the long term. RSM Bird Cameron’s experience suggests that three strategies are likely to return good value:

Investing in sustainable travel replacement solutions to reduce the cost of travel for internal business operations. The current generation of video conferencing technologies, coupled with the data and connectivity capacity of the NBN is driving the costs of these solutions down and their quality up. With appropriate use these solutions can dramatically reduce agency travel costs. At the lower end of the video spectrum, point-to-point desktop based solutions can allow teams to engage in effective video based discussions and thereby avoid or defer travel. For project teams, the deployment of intranet based collaboration solutions such as instant messaging, team rooms, and project workspaces (e.g. Microsoft Sharepoint), can dramatically reduce the need for travel and the amount of time spent on the phone.

Outsourced travel management

Outsourcing travel management means that agencies can benefit from the consolidated buying power to reduce the cost of airfares, hotels or rental cars.

Re-negotiate your travel arrangements In the current period of global economic pain travel industry providers (airlines, hotels, and rental car agencies), are seeking to secure long term arrangements with institutional customers. This means that the time is right to re-negotiate your travel arrangements with the aim of reducing rates and fares, in return for providing longer term certainty the amount of travel for formal meetings.

At times of low head-count growth, now is the time to take a fresh look at your recruitment function.

Many agencies operate recruitment functions designed around the “fire house” model, where the recruitment team leaps into action once a business area advises them of a vacancy that needs to be filled. Once the fire bell rings (i.e. a “request to recruit” is received), the team slides down the fire pole and starts writing advertisements to appear in the local and national newspapers, posted in the gazette, or added to the agency’s website. Weeks later, all the applications are reviewed and interviews are scheduled, references are carefully checked, and finally letters of offer go out only to discover that the most highly rated candidates are no longer available. In the mean-time agencies have lost progress or put important initiatives at risk due to an absence of staff.

Fortunately agencies can do much to address this situation and improve the performance and cost associated with recruitment. Some ideas include:

* Recruit for the forecast (not to the vacancy) Most agencies have a wealth of data that can be used to accurately forecast their retention and separation rates. By using this data with divisional resource plans, recruitment units should be able to pro-actively source a pipeline of candidates in advance of any specific vacancy opening up; reducing the effort to recruit and minimizing the time to fill a vacancy.

* Specialised recruitment staff Many agencies operate a recruitment model where the next available recruitment team member is given the next recruitment request to manage, regardless of the type of resource needed. However, organisations with high performing recruitment teams have staff dedicated to recruiting for specific functions. This goes beyond simple specialisation such as SES, non-SES and Graduate, to include specialisations such as Technologist recruitment, Customer Service Officer recruitment, Finance Officer recruitment, etc. Adopting a deeper specialisation structure means that Recruitment teams can work with business areas and more effectively source resources (by being active in the labour market and by targeting advertising dollars to areas of best affect). Specialised recruiters also have better visibility of Order-of-Merit and Alumnus lists and should be able to use these assets for better effect.

* Adopt a range of recruitment methods Not every position requires a panel to be established and formal interviews to be conducted. Many candidates new to the public sector these practices can be very off-putting. By adopting less bureaucratic processes (where appropriate), agencies can speed-up the process, reduce costs and improve its choice of candidate.

The Australian Government sends hundreds of millions of letters each year, including millions of cheques and associated paperwork. Many agencies likewise receive and process large volumes of correspondence. The end result is substantial costs associated with the operation of mail-rooms, processing, distribution and handling of physical paper, scanning and/or physical archiving. No process is perfect, leading to lost paperwork and cheques, resulting in further costs and dissatisfied customers.

Surely there is a better way? While it is true that paper remains an important communication tool, in RSM Bird Cameron’s experience there are a number of ways agencies can reduce costs while improving customer services;

* Administered Payment Invoicing Many agencies make grant or other administered payments. Often these arrangements require the recipient to invoice the agency during the course of the agreement, leading to paper handling costs associated with the receipt of the invoice (inbound) and in sending remittance advice (outbound). However, if the agency is determining the amount to be paid, then it is probable that a “Recipient Created Tax Invoice” (RCTI), is appropriate. Under the RCTI process the agency can determine when a payment is due and produce the Tax Invoice, which it the sends to the recipient. Adopting RCTIs where appropriate eliminates the Inbound invoice; halving the paper handling costs for each transaction.

* Electronic Payment, Remittance & RCTIs Many agencies allow their customers to easily “opt in” to payment by cheque (leading to an outbound paper handling process), or similarly to receiving payment remittance advice by mail. Indeed some agencies use these older modes of payment and communication as the default; unless an alternative is selected. Given the psychology of “filling in a form” agencies can dramatically reduce their costs by simply removing cheque and physical mail as options on their forms. Payees would then be defaulted into providing email addresses for correspondence and BSB/Account details for payment arrangements, potentially with the ability to request the alternative by writing to the agency.

* Electronic correspondence as the Norm Many agencies revert to the use of paper and physical mail based outbound communications channels as their normal business practice, and this despite having in many cases collected (at great aggregate cost), email addresses and telephone numbers. Adopting the use of email and SMS technology as the default channel for outbound communication is an easy step any agency can make to reduce costs.

* Move to electronic signatures Many agencies still require clients, customers or service providers to physically sign many documents, despite the Commonwealth passing the Electronic Transactions Act that allows a person to satisfy a legal requirement for a manual signature by using an electronic communication.” Adopting a policy of accepting electronic communication, consistent with the Act, provides a great opportunity for agencies to reduce costs.

8 Consider Business Process Outsourcing

The public service started down the road of outsourcing business processes in response to the budget pressures of the 1990s. For example, most agencies have outsourced Property Management to their Landlords, and procured physical security services from 3rd party providers. But the Service has been slow to adopt business process outsourcing for more traditional functions (such as expense processing and HR), despite massive take-up by the corporate sector. As a result most agencies still maintain their traditional suite of corporate services in-house; with some shared service arrangements now emerging.

In the meantime the world has seen a substantial maturing of Business Process Outsourcing (BPO) services; especially in the area of corporate back-office. Given the current budgetary pressures on agencies, now is an opportune time to re-consider BPO. Key business processes to consider outsourcing include:

* Physical security

* Property Management

* Procure to pay

* Payroll processing

* Expense processing

* Record to Report

* Fleet Management

* Human Resources & Recruitment

9 Data analytics to shape better deals

The application of new information technologies such as data analytics means that agencies are able to develop new business models and approaches that reduce their costs while improving outcomes. Leading organisations are making extensive use of analytics, coupled with integrated systems, to drive better deals (for example, with the 3rd sector providers), this results in reduced compliance management costs, more information regarding the efficacy of policy and funding programs, and the ability to more quickly change policy and administrative levers to optimize outcomes.

A time of budget hardship for Government means that many of the providers of services (IT services in particular), are feeling the pressure too; making now a great time for agencies to consider strategic IT sourcing arrangements that will “lock in” greater value for the long term. Agencies should be seeking to use innovative sourcing strategies to negotiating favourable procurement agreements; especially where agencies have substantial programs to deliver.

One strategy to consider is to establish panel arrangements that lock in a small number of providers (say 2 or 3), for each category of service (i.e. Big Programs, Medium IT Solutions, APIs and Interfaces), in return for a commitment to a competitive rate card for a period of time. This strategy means that agencies can also reduce their procurement costs by avoiding unnecessary tender responses.

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