IBM Global Business Services Thought Leadership White Paper

Strategies to Reduce Costs and Improve Public Sector Performance An IBM Point of View for the Federal Government of Canada

November 2011

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Strategies to Reduce Costs and Improve Public Sector Performance

Foreword The Canadian federal government is acting with determination to balance the federal budget in the midst of extraordinary economic circumstances. IBM believes that a strategic deficit reduction plan should include adopting commercial best practices, and transformation in government operations, which could save the federal government more than $4 billion annually and improve the quality of programs and services that Canadians value. This has been IBM’s direct experience in the commercial world and we see several opportunities for the federal government to achieve similar results. The IBM Corporation is proud to be celebrating its 100th anniversary in 2011. Established in 1917, IBM in Canada has played an important role in the corporation’s 100-year history. Today our operations extend from coast-to-coast and we are one of Canada’s largest exporters of technology and investors

in research, skills and innovation. The occasion of our 100th anniversary has provided the opportunity to assess and discuss the lessons that have sustained – or challenged – our company. Transformation and innovation are at the core of IBM’s story, in terms of the markets we choose to compete in and how we organize and manage our competitive strategy. Since 1993, IBM has undergone a significant transformation that has helped us prioritize, consolidate and integrate all operations across the global expanse of our organization. Over this time, we have transformed a complex maze of duplicate and conflicting functions into a series of complementary business supports, thereby achieving more than $4.5 billion in reduced spending and annual savings between $3 billion and $5 billion. These savings have been reinvested in research, innovation and the acquisitions necessary for leadership in an extremely competitive marketplace.

Snapshot of IBM’s Transformation Achievements Since 1993, IBM has undergone a significant transformation driving over $4.5 billion in reduced spending and annual savings between $3 billion-$5 billion. AREA of TRANSFORMATION

FROM

TODAY

# of CIOs

128

1

# of Host Data Centres

155

5

# of Web Hosting Centres

80

5

# of Networks

31

1

# of Applications

16,000

4,500

Finance Expense/Revenue

3%

1%

Finance Operations Expense

$2.1B

$1.2B

HR : Employee Ratio

1:59

1:166

# of HR Operations Centres

150

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Key Elements of IBM’s Transformation Journey • Horizontal integration, simplification, and radical change • Consolidation of HR, Finance, Departmental Procurement, and Supply Chain • Benefits harvested from the elimination of redundancy What Canadian Public Sector Enterprises & IBM Have in Common • Enterprise comprised of many organizations • Different legislation / regulation frameworks • Diverse program areas and business units • Diverse organizational cultures • Historic duplication of corporate services • Units or organizations not wanting to give up their autonomy or “edge”

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IBM proposes implementing new approaches in federal government operations to improve performance while reducing costs in a meaningful way — one that will enhance mission value provided by departments to citizens, state and local governments, and business. This report provides specific strategies that the federal government can undertake to achieve savings in operational functions. A brief description of each cost-saving strategy is presented on the following pages. Additional information on each strategy is provided and discussed on the IBM Center for The Business of Government website: www.businessofgovernment.org.

Adoption of Commercial Best Practices in Government Operations As recent events confirm, cost reduction strategies should reflect the fact that economic volatility will likely continue. While Canada’s fiscal house is considered strong by international standards, action is required to provide the government with the ability to respond to changing circumstances. Canada’s global leadership can be advanced by initiatives that strategically reduce operational costs over the short term and that facilitate transformation towards agility and the ability to adjust to changing circumstances – both domestic and international – over the longer term. Many commercial best practices have been adopted to help organizations save money to invest strategically in opportunities and priorities that will make a difference to customers and shareholders — essentially, doing more with less.

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By aggressively implementing these strategies, sustainable cost savings can be realized while also improving operational performance. Below is a summary of some key initiatives that the Government of Canada should consider as part of its deficit reduction strategy, and the benefits that could result. Initiative

Benefits

Move to Shared Services for Enterprise-Wide Functions

Coordination and consolidation of back office operations across government could generate as much as $1.5 billion to $2 billion in annual savings.

Streamline Procurement and Supply Chain Management

Creative, flexible partnership arrangements can help achieve cost reduction or improved program outcomes.

Move to a Mobile Federal Government Workplace

Reducing real estate and other footprint costs and creating a more agile and flexible workforce could lead to $1.6 billion in annual savings.

Move to Collaborative IT Resourcing

Open, coordinated and flexible approaches to Application Development and Maintenance resulted in 30 percent cost reduction in IBM.

Accelerate IT Infrastructure Consolidation

Consolidation of data centres, networks and e-mail systems could provide up to 30 percent reduction in the cost of operations.

Apply Advanced Business Analytics to Achieve Operational Efficiencies

Improper payments to individuals could be reduced by $725 million to $1.2 billion annually. Leveraging private sector partnerships in an innovative business model can help share the risk and manage the investment necessary to increase efficiency and reduce operational costs. Considerable work is already complete and leveraging the work already underway would reduce the design efforts required.

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Strategies to Reduce Costs and Improve Public Sector Performance

Initiative #1: Move to Shared Services for Enterprise-Wide Functions Every dollar spent on support activities and overhead within federal government departments and agencies is a dollar that could be spent on programming or returned to the taxpayer.

The State of New Jersey, Somerset County began transitioning its municipal offices and school systems to a shared services model in 1993. Through this initiative, the county saved over $19.6 million in 2006 alone. For the same services targeted as shared service functions in 2005, the savings were $13.6 million.

During the last 20 years, private and public sector organizations across the globe have been reaping the benefits of moving to shared services for “back-office” or administrative functions. The current level of duplication of back office functions across government departments presents an immense potential for savings. In the private sector, back-office costs have been reduced to 1 percent of annual expenditures, compared with 2.5 percent in the government sector.1

Expenditures related to Internal Service expenditures, including Communications, Human Resources, Information Technology, and Financial Management are expected to equal over $9.8 billion in 2011-2012.2 If the savings rates seen in other shared service implementations were applied to the federal government’s internal services spending, $1.5 billion to $2 billion in annual savings could be generated (assuming a conservative 15-20 percent return on investment).

When the US federal government consolidated 26 payroll systems to four, the Environmental Protection Agency reduced payroll costs from $270 to $90 per employee, saving $3.2 million a year; and the Department of Health and Human Services reduced costs from $259 to $90 per employee, saving $11 million a year. In its implementation of global shared services, IBM significantly reduced the cost of doing business, reduced its spending on HR, finance, real estate, procurement, supply chain and IT service delivery and infrastructure by $4.8 billion over an five-year period. In addition, each Shared Service is driving ongoing efficiencies including: • •

•

If the savings rates seen in other shared service implementations were applied to the federal government’s internal services spending, $1.5 billion to $2 billion in annual savings could be generated.

A $900 million reduction in finance expenses A reduction in HR Headcount to Employee ratio from 1:59 to 1:166 A reduction in the number of HR operations centers from 150 to 8

Source, IBM White Paper – Shared Services Driving UK Public Sector Transformation and Revitalisation, 2007

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Source, Parliamentary Budget Office, Report on Main Estimates, 2011

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Initiative #2: Streamline Procurement and Supply Chain Management The Government of Canada spends approximately $18 billion on external purchases each year. Every federal department has systems, processes and people supporting these procurement activities. An enterprise model for procurement presents significant opportunities for cost savings in both the procurement process and in the spend itself. The introduction of more efficient transaction processes can allow a greater number of resources to focus on strategic activities such as managing internal customer relationships, supplier relationship management and joint performance improvements, sourcing decisions to ensure best value, and market intelligence. Implementation of a Shared Services model for procurement can generate operating cost savings driven by process improvement, standardization and simplification as well as economies of scale. In the past decade, IBM internally consolidated 30 different supply chains and restructured its supplier network, eliminating $25 billion in costs and improving supplier performance. Furthermore, the transformation of IBM’s procurement function resulted in a fundamental shift in the role of the procurement team – away from transaction processing and into higher value activities such as market intelligence, strategic sourcing and supplier management. Given the company’s scale and complexity, IBM can serve as a reasonable point of comparison to size the opportunity for savings available to the Canadian federal government.

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The transformation agenda facing the federal government requires a new model for partnership and innovation. Unique asset-based solutions need to be factored into a strategic partner selection process to reduce investments, drive productivity, reduce time to benefit and secure a reliable return. While process and system improvements can generate savings, perhaps the most significant opportunity associated with procurement lies in leveraging the capabilities and investments of industry to the advantage of the federal government through the implementation of creative business arrangements, such as a balanced risk reward model with industry, linking the best of the federal team with the best of the private sector team. Procurement models would need to radically change and unique, asset-based solution approaches need to be factored into a strategic partner selection process to reduce investments, drive productivity, reduce time to benefit and secure a reliable return. One of the models that might be explored is demonstrated by IBM’s work for the State of North Carolina. IBM implemented and continues to operate our Fraud and Abuse Management Solution (FAMS) to assist in recovery of improper payments. The solution was implemented at our cost, and we are paid a percentage of recovery amounts identified through the use of sophisticated data analytics tools. The bulk of the recoveries accrue to the client, with IBM receiving 10% of the identified amounts.

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Strategies to Reduce Costs and Improve Public Sector Performance

As an overall direction for procurement, sustainable cost reduction and ongoing strategic cost management comes from creating a more flexible cost structure, where traditional fixed costs become variable, increasing operating leverage and allowing for cash management. In this structure, effective deficit reduction and service improvement involves identifying the resource mix required to address core competencies versus those that can be addressed by outsourcing. This creates an operating model that can respond more quickly to shifts in economic conditions and government priorities.

Procurements linking the best of the federal team with the best of the private sector team can allow vendors to offer their very best solutions and value propositions. Initiative #3: Move to a Mobile Federal Government Workplace A mobile workplace permits employees to work from any location, whether government-owned, home or mobile. The resulting ability to compress the number and size of each workstation drives real estate savings. These real estate savings could then be used to reinvest in other areas that benefit the citizens of Canada.

The public sector has yet to fully exploit those opportunities. Although the Canadian federal government has initiated a smarter workplace initiative, it is still in the early stages of implementation3. Accelerating this workplace renewal could help to achieve cost savings in the near term. However, in order to achieve a more sustainable and flexible cost structure, the real estate operating model must go beyond “bricks and mortar” and leverage the opportunities brought about by mobility and the tools supporting virtual collaboration. To accommodate a mobile workforce, investments must be made in location-independent voice and network services, advanced office-automation tools and, of course, application support for mobile devices such as laptops, tablets and smart phones. Although the projected savings of this approach is dependent upon the number of federal employees who adopt the model, moving to a mobile workforce could generate estimated savings of up to $1.6 billion annually with an ROI between one and two years. Harvesting the benefits, however, requires enterprise level accounting that acknowledges the required investments in both real estate and IM/IT tooling. In addition to savings in real estate, the implementation of a mobile workforce provides other savings. At IBM, for example, savings in travel ($96 million per year) and phone usage ($16.5 million per year) have been achieved.

In the private sector, a dynamic operating model has led to improved utilization and cost efficiency. A greater portion of the workforce is now mobile allowing companies to deploy newer, more cost effective, footprints to reflect offsite work and virtual collaboration.

Workplace 2.0, PWGSC, 2011, 08-26, http://www.tpsgc-pwgsc.gc.ca/mt-wp/index-eng.html

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As the Government of Canada transitions to a Shared Services paradigm, there is an opportunity to implement a flexible real estate model. Workforce mobility provides the Government of Canada with a model that can address growth, while facilitating cost avoidance. A workforce mobility model promotes growth within the existing real estate footprint.

Moving to a mobile workforce could generate estimated savings of up to $1.6 billion annually with an ROI between one and two years. Initiative #4: Move to Collaborative IT Resourcing Like any large enterprise with evolved IM/IT infrastructures, the Government of Canada must focus resources on the development and maintenance of a complex application portfolio. A newer approach to Application Development and Maintenance can be implemented where staff can communicate, collaborate and innovate across multiple teams, time zones and systems, potentially saving the Government of Canada both time and money. The new approach leverages collaboration and social media techniques to effectively extend the working day by leveraging resources located across Canadian and worldwide time zones. This community-based collaboration environment, enabled by technology, allows larger numbers of expert business and technical professionals (both internal and external) to exchange ideas, solve problems, drive innovation and deliver more value – in real time. All are supported by an open-source framework

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that places a premium on intellectual capital, expertise, trust, efficiency and results. The focus is on increasing productivity and capacity, improving profits through time-based performance, and motivating individual and collective talent. In an effort to further reduce the cost of IT, IBM began to specifically look for a better way to manage Application Development and Maintenance in 2008. As a global IT leader, IBM needed to deliver services smarter, faster, more innovatively, and at lower cost. They wanted to cut operational IT costs to redirect investment to transformation, while maintaining quality within a set budget. Using this new approach to Application Development and Maintenance, IBM experienced a 30 percent operational cost reduction in overall application management expenditures in the first year. The company has been able to shift the focus to transformation of its IT organization through new development and evolving its ability to take advantage of new market realities, while maintaining and modernizing its legacy systems. Furthermore, the time and cost of human resources have been reinvested into further evolution of efficiencies, and new methods, services, and value offerings.

A collaborative environment, enabled by technology, allows larger numbers of expert business and technical professionals (both internal and external) to exchange ideas, solve problems, drive innovation and deliver more value – in real time.

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Strategies to Reduce Costs and Improve Public Sector Performance

Initiative #5: Accelerate IT Infrastructure Consolidation The Government of Canada’s well-advised plan to initially consolidate data centres, networks and e-mail, parallels privatesector best practices that could provide more than 30 percent operations budget reduction, or close to $1 billion annually. Today’s public sector IT infrastructure is a combination of overlapping legacy systems that require on-going maintenance along with newer incremental investments to address emerging priorities. The net result is an IT asset mix with an inflexible cost base, low return on assets, and inability to quickly respond to changes in the operating environment. Infrastructure consolidation requires a persistent focus on the business of IT and needs to be driven by sound, enterprise-wide engineering principles. The optimization resulting from consolidation will drive more significant savings if coupled with strategies to enabling common business processes and corporately shared business-services. This could reduce overall IM/IT spending as well as support a meaningful service innovation agenda. Since starting its transformation, IBM viewed their IT consolidation strategy as a critical enabler of their overall business transformation and as supporting a broad set of goals such as enabling productivity, integration, growth and innovation. The IT Transformation was coupled with strategies to implement corporate Shared Services, such as consolidated HR and Finance; and, strategies to bring the entire corporation to a standardized set of business processes.

The outcomes are impressive. IBM went from 128 CIOs to one, reduced its Data Centre footprint from 155 to five and reduced the number of corporate networks from 31 to one. With this underpinning, Shared Services reduced spending by $4.8 billion over five years, the Supply chain averaged between $3 billion and $5 billion in savings every year for six years, and the company saw $1.4 billion in productivity gains in process transformation and integrated operations. Starting with a focus on infrastructure consolidation, followed by a mission to globally integrate IM/IT processes led to making things smarter at the application level. As a result, the application portfolio was reduced from 16,000 applications to 4,500. Currently, some of IBM’s infrastructure priorities include the further consolidation of Finance systems and controlling Desktop Management expenses. The Government of Canada is advised to consider alternate sourcing strategies such as Strategic Outsourcing and Cloud to leverage industry strengths and move toward an on-demand model where possible.

The Government of Canada’s well-advised plan to consolidate data centres, networks and e-mail systems parallel a private-sector best practice that could provide up to 30 percent reduction in the cost of operations.

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Initiative #6: Apply Advanced Business Analytics to Achieve Operational Efficiencies Major Canadian federal government benefits programs, including Employment Insurance, Canada Pension Plan and Old Age Security, currently deliver more than $80 billion in benefits payments per year. For a typical benefits organization, about 3 to 5 percent of total expenditures are fraudulent and client errors are estimated to make up an additional 6 to 10 percent4. This suggests that 9 to 15 percent of benefits payments are improper. The U.S. government has recognized the magnitude of this issue, signing the Improper Payments Elimination and Recovery Act in July 2010 with a goal of reducing improper payments by at least $20 billion per year. Many government organizations are using analytics technologies and techniques, not only to identify potential fraud and error, but to also help streamline key business processes and provide improved service delivery more efficiently. The U.S. Social Security Administration (SSA) is using a model developed by IBM in the continuing disability benefit review process, saving $1 billion over five years. The SSA model can process disability applications in less than one second, based solely on application data, helping SSA achieve its goal of paying benefits to obviously disabled applicants within 20 days, reducing average claims processing times and improving service quality to disabled individuals.

In Canada, applying new analytical techniques could help identify up to 40 percent of improper payments. This could mean identifying $2.9 billion to $4.8 billion in potential reductions on a base of $7.2 billion to $12 billion in estimated improper payments. If 25 percent of the potential reductions are successfully prevented or recovered this could mean $725 million to $1.2 billion in savings per year that could be applied to the federal deficit. Similar analytic techniques can be applied to the audit and control of government employee expenses, and to optimizing the collection of taxes owed. The investment required to implement is typically less than 1 percent of the additional annual improper payments identified, and governments that adopt advanced analytics for improper payments typically see a positive return-on-investment in less than 12 months. A proof of concept project using samples of real data can provide a more accurate picture of the benefits that can be realized, and would help to solidify a plan for the implementation of the required process and technology changes. This approach reduces the overall risk of the project, and can provide the basis for an outcome-based charging arrangement.

In Canada, applying new analytical techniques could help identify up to 40 percent of improper payments. This could mean identifying $2.9 billion to $4.8 billion in potential reductions on a base of $7.2 billion to $12 billion in estimated improper payments.

Income security Programs in Canada, C.A. MacDonald & Associates, part of the Fraser Institute Waste in Government competition, 1995

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Strategies to Reduce Costs and Improve Public Sector Performance

Looking Forward It is possible to achieve the savings outlined here while also improving service. IBM has experienced this with our own transformation journey as well as customer implementations in very large and complex organizations – both public and private. These strategies have helped very large and complex organizations reduce costs in the very short term and create a sustainable basis for services innovation and quality over the longer term. The case for action has never been more urgent or timely. Currently, the federal government is positioned to approach transformation from a position of domestic strength and continuity in leadership. Internationally, Canada also approaches this effort from a position of economic strength, relative to the United States, Europe and other competitor nations. The opportunity is to advance and provide a beacon for global leadership.

A selected review of recent studies on implementing cost cutting strategies emphasize the importance of clearly defined goals, leadership from the top, adoption of best practices and change management5. In all cases, the Canadian federal government appears to be on the right track. The government’s cost reduction goals and objectives are clear and backed by the Prime Minister and Cabinet. Institutional capacity in the form of Shared Services Canada (SSC) is now in place to coordinate key elements of the cost reduction agenda. The Strategic and Operating Review is engaging senior leadership in a critical exercise of change management.

Implementing the Transformation Agenda Coordinating change across the federal government enterprise requires an institutional authority that is mandated and accountable to implement and achieve change. Drawing from the lessons learned from IBM’s transformation journey and our experience with other large, complex organizations, defining characteristics would include: • a clearly defined mandate, accountability structures and performance measures through agreed-upon scope and roadmaps; • a governance structure that engages stakeholders across the enterprise and provides the incentives to share the risks and rewards of transformation; • the right management, skills and resources to drive and lead transformation; and • an openness to partnerships and new methods for accessing and leveraging knowledge to get the job done.

John Kamensky, “Smart Streamlining”, IBM Centre for the Business of Government (see: http://www.businessofgovernment.org/blog/business-government/smart-streamlining), accessed on Nov. 7, 2011.

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This is a positive start. Ongoing success will be contingent upon finding new and alternative ways to define strategy, manage operations and deliver programs and services. We think there are four critical areas of focus required to sustain the effort: 1. Focus on making steady progress with the implementation of SSC, ensuring that the early projects are successful and providing value to stakeholders. 2. Establish a roadmap for the radical consolidation of functions that are currently duplicated across departments such as Procurement, HR, Finance, Grants and Contributions, as well as Case Management. 3. Consolidate more infrastructure services such as Desktop, and centrally implement the tools necessary to support a mobile workforce. 4. Implement the procurement mechanisms required to give SSC sourcing alternatives including outsourcing and the ability to shift traditionally fixed costs to variable ones. Policy and strategy in this space needs to be guided by the goal of achieving cost reduction and service improvement outcomes and accessing the right innovation, knowledge and capabilities to achieve those objectives. Industry best practices are required to facilitate the right partnerships and manage business relationships with external services providers.

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The federal government has an opportunity to adopt a long-term spending strategy that is structurally sustainable and enables investment in our country’s future. Through a combination of innovative and commercial best practices, the Government of Canada could improve its agility to better drive Canada’s future growth and prosperity.

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