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(originally published by Booz & Company)


How the U.S. Government Can Cut Overhead

By using in-house agencies to provide services to other departments that need them, the federal government is saving tens of billions of dollars and learning what some in the private sector already know.

The many benefits of overhead optimization do not apply only to the private sector. Major strides are also being made by public-sector institutions to implement these concepts. A case in point is the United States government, which has been focused on reducing its general and administrative (G&A) costs for nearly 15 years, beginning with the “Reinventing Government” program headed by then Vice President Al Gore in the mid-1990s. These efforts were reinvigorated in 2001 with the Bush administration’s E-Government initiatives and again in 2004 with the announcement of the Line of Business (LoB) task forces charged with identifying and consolidating similar services being performed across multiple agencies.

The federal government’s take on overhead cost reduction differs somewhat from that of the commercial sector, but the broad concepts still apply. Shared services is a good example. Although the federal agencies may call it by a different name, they are implementing its basic tenets all the same. In this case, the cross-agency G&A services being consolidated and streamlined are called “LoBs.” Nine have been identified to date: Financial Management, Human Resources Management, Grants Management, Case Management, Federal Health Architecture, Information Systems Security, Geospatial, IT Infrastructure Optimization, and Budget Formulation and Execution. Others are in the process of being identified and will join this roster in the years to come.

The immediate objective of the LoB initiative is to enhance cost savings and performance through standardized and streamlined business processes that evolve through competition. Ultimately, the goal is to identify opportunities to reduce the cost of government and improve services to citizens through business performance improvements. The route to achieving these goals is analogous to that of any commercial shared-services undertaking.

The shared-services providers, in the case of the U.S. government, are most commonly in-house federal agencies deemed to be “Centers of Excellence” in particular LoB service areas. So, for example, the Treasury Department (specifically the Bureau of the Public Debt) is a Center of Excellence for certain Financial Management services. The Department of Health and Human Services is a designated CoE in Human Resources Management.

Agencies identified as Centers of Excellence act as fee-for-service providers to other agencies. Together, the customer agency and the service provider agency draw up a service-level agreement — commonly referred to as an interagency agreement or memorandum of understanding — specifying the services to be delivered, the requirements and parameters, the unit cost and total cost, the cost assessment methodology, and the time frame for service delivery. The federal government has not typically utilized traditional charge-back mechanisms, instead relying on demand management mechanisms to develop budgets and allocate funds to appropriate service providers. However, executives and managers across the government are seeking more effective and accurate methodologies for managing service relationships and costs.

Once the ink is dry on this agreement stipulating a new business-to-business relationship between the provider agency (or private entity, in some cases) and the subscriber agency, the real work of implementing the memorandum of understanding and monitoring its progress begins. Successful implementations start at the top and remain a senior priority. Key performance indicators are identified, tracked, and communicated, and external and internal benchmarks and best practices are monitored routinely. This notion of measuring and monitoring the actual cost of doing business for specific services is relatively new to federal agencies, but it is essential in determining whether the organization is best served by in-sourcing or outsourcing.

As with any other shared-services initiative, the expected results are threefold:

  • Economies of scale, skill, and experience
  • Streamlined systems planning, implementation, and operations
  • Product and service innovation.

What differs between the private- and public-sector approach to shared services is not so much the objectives, process, or expected results, but rather the context.

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  1. Vinay Couto, Frank Galioto, Dave Mader, and Jens Schädler, eds., Optimizing Overhead: From Cost Center to Competitive Advantage (s+b Books, 2007): The book from which this article is excerpted. Click here.
  2. National Partnership for Reinventing America Web site: Provides extensive details, reports, and conclusions from Vice President Al Gore’s program to “create a government that works better, costs less, and gets results Americans care about.” Click here.
  3. Web site: Covers all of the initiatives of President George Bush’s effort to improve the efficiency of government, a more private sector–oriented approach than under the Clinton administration. Click here.
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