Finding efficiencies or effectively cutting costs without impacting services is like taking a bridge into fog so thick you can’t see – you may be avoiding the water underneath you, but you don’t know exactly where you are going.
The cost of delivery government services appears to be increasing year over year. A recent study found that across OECD countries, government production costs as a percentage of GDP rose by over 11% between 2000 and 2009.
But finding ways to battle those rising costs – finding efficiencies effectively and sustainably - is hard work. A study carried out by the ASQ Lean Six Sigma Hospital Study Advisory Committee found a lack of sustained improvements across over 70 projects.
The UK government recently studied its efficiency efforts and found that while they have some evidence in efficiency gains in recent years, achieving them depends on what process you target and how you approach the efficiencies. In addition, efficiency savings are sometimes a long time coming and may not be delivered at all.
Why Can’t You Find Efficiency By Just Cutting Costs?
Can’t you just find efficiencies by cutting costs while maintaining services? Aren’t you then just paying less for the same output?
The UK government found that simply cutting the same amount of budget across all departments has adverse effects on service quality:
“The consequence could be less efficient tax collection, less effective enforcement by Customs and excise and poorer services for citizens as “back office” activities are slimmed down to support the “front line”. “Administration costs” can easily be characterised as “inefficient and wasteful bureaucracy”, yet efficient administration supports the frontline.”
A few years ago, the State of Utah planned to cut 7% of the budget for the Department of Alcohol and Beverage Control. But they found that would lead to the closure of profitable outlets that bring in solid tax revenue for the state. And 10% of all liquor sales in the State went to the school lunch program.
An investigation by the New York Times a few years ago found that “across-the-board” Federal Government tax cuts ended up hurting the private sector economy through collateral damage to the services and companies that supported the departments that were cut.
It doesn’t work to just simply cut departmental budgets: no two organizations are the same. When finding efficiencies or cutting costs (typically not the same thing) its important to understand staffing models, service delivery models, and the drivers for service quality.
Simply cutting a budget or implementing the same approach across all organizational areas can lead to lower staff morale, slower services, lower service quality and ultimately less efficiency.
So where can an organization find efficiencies? Front office? Back office?
3 Main Sources of Efficiency
There are really three main sources of efficiency in your organization:
1. Reduce or Improve your Human Resources
Typically the best way to achieve efficiency is to improve your productivity (improve your outputs with the same or lower costs). Research has fairly repeatedly shown that the best way to do that is to improve the morale, skills and/or wellbeing of your staff.
By investing in your employees, you will incur short-term pain for long-term gain. Well trained and happy employees are more engaged and more engaged staff are more productive. Higher productivity equals lower cost per unit (be it widgets created or paper pushed).
The American Government studied efficiency gains across all of their Federal Agencies, and found that they could achieve around a 5% to 10% efficiency gain by focusing on improving skillsets and core capabilities of staff.
2. Business Process Improvement
One of the more popular approaches to increasing efficiency is through business process improvement. In one well-researched, extensive study, after a review of hundreds of projects across 128 organizations using Lean Six Sigma, the researchers found that effective implementation of Six Sigma led to an average savings of 1.7 percent of revenues over the period of implementation.
Typical ways that you can achieve efficiency, find cost savings, and improve process timelines include:
Standardization of processes
Reduced process steps
Reduced process costs
Reduce process variability
Reduced process waste
After studying how government agencies can achieve cost savings and process efficiency, they found that public sector organizations can achieve between 3% to 5% efficiency gains through streamlining and standardizing processes, policies, and procedures.
But be wary – check out my earlier blog that cites how research has shown that process improvement projects don’t always deliver what they promise.
3. Improved Technology
The third main way to find efficiency is through improving technology that your staff use to provide the service. The main argument is that technology reduces human error, allows you to produce your outputs faster, and can allow you to use fewer staff.
However, should you avoid those pitfalls, if you are a public sector organization you can achieve up to 10% efficiency gains from a successful IT project.
So Now What?
So how do you find those evasive sources of efficiency? What has worked for governments in the past? How have they fought off persistent sources of inefficiency?
These are all topics I will explore in future blogs.
In the time being, if you liked this one leave a comment or let me know.