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Cost restructuring can help agencies meet budget challenges

Apr. 28, 2013 - 01:05PM   |  
By JIM BEGGS   |   Comments

In the aftermath of sequestration, it’s clear that significant budget cuts are inevitable for agencies and programs throughout government. Already, procurements of complex equipment have been reduced or cut; support contracts have been negotiated more aggressively — and, in many cases, cut back or canceled.

These actions have risks. By failing to strategically assess budget challenges, an agency may increase mission risk and miss opportunities for effective and sustained cost reduction.

We need a new way of thinking about cost reduction, a way that agencies can save money while maintaining, and often improving, mission performance.

Using an approach called cost restructuring, the Navy was able to reduce $3.5 billion in costs and cut production schedules by 30 percent on its Virginia-class submarine program. Project leaders set aggressive cost objectives and engaged key stakeholders — senior government leaders, functional area leaders and contractors — to agree on and support cost savings targets. Stakeholders include owners of data, information and critical processes, and decision influencers/makers on investments and initiatives.

Engagement with a project’s stakeholders, a step often left out of cost-cutting initiatives, is critical — without it, significant change cannot succeed. Critical data may not be shared, and needed perspectives will not be leveraged into effective solutions.

Typical cost reduction efforts are not well-suited for prioritizing where to drive out inefficiency and redundancy. While efforts guided by approaches like value engineering or Lean Six Sigma have achieved cost savings, they are often not applied to their greatest potential because standard government cost accounting can’t provide a clear view for prioritization.

Labor, for example, is a standard cost element that is a major cost driver for most organizations. This cost line item, however, can’t help focus where and how to reallocate labor more efficiently. Labor cost typically cuts across several functions and programs, and is driven by functions that support mission and delivery requirements. Understanding must be driven to this level to strategically address cost. This is why across-the-board furloughs are a risky way to meet cost objectives.

A cost baseline that provides this detailed understanding and that is conducted by an impartial third party reveals how costs drive missions and delivery, and provides priorities for how complex organizations and processes should be restructured. The result is a simpler, more transparent and mission-aligned organization.

Elements of the cost restructuring approach have been applied to the Navy, Department of Homeland Security, and in the commercial automotive industry. The results for all these efforts have been similar — significant costs can be driven out without undermining efficiency or mission performance. It can be applied across an entire program or enterprise, or it can be applied to a single functional area.

Regardless of scope, it can only work with leaders ready and able to drive change. Leaders implementing cost restructuring must recognize that a positive contribution is needed from multiple players — most specifically, core government leaders. The ability to carry out trade-off analysis and prioritize areas for restructuring or investment requires that multiple stakeholders align to a common goal under a common structure.

It can be difficult to establish the trust needed among an array of stakeholders to willingly share cost understanding and support the necessary change that will drive savings.

That’s why an impartial third party — like a management consultant or industry analyst — is required to achieve real progress. They can keep all sides focused on the overarching improvement goals.

Such a third party must be credible with knowledge of both the mission and functional requirements that are being carried out today, and must have no ties to how future budgets are allocated or how the program or enterprise is changed. This “honest broker” must have credible independence and a perspective on both commercial and government interests.

The costs to operate systems, run programs and carry out day-to-day requirements are not sustainable and will simply no longer be supported. We need leaders who will find a better way.

A cost restructuring approach will enable the dramatic change that today’s environment demands, and that the health of federal agencies and programs are depending upon.

Jim Beggs is a principal at Booz Allen Hamilton and leads the consulting firm’s cost restructuring capability offering for both commercial organization and federal agency needs.

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