Public Sector
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Why It’s So Hard to Cut Costs in Government

May 11, 2012 by Craig Baker, Adrian Brown, and Joe Manget
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In This Article
  • When faced with the need to cut costs, the public sector lacks a common measure of value, equivalent to profit in the private sector, to guide decision making.
  • When embarking on a cost-cutting initiative, governments generally rely on one of four approaches: pragmatic, deliberative, managerial, or adaptive.
  • A better alternative is a "value based" approach to cost cutting that, by focusing on those actions most likely to deliver results, can dramatically increase the odds of success.
 

Governments around the world are facing a range of unprecedented budgetary challenges, and many will be forced to implement drastic cuts. Yet most public-sector cost-reduction programs fall short of their targets, despite detailed plans and a significant amount of political will. Why is cutting costs in government so difficult?

In the private sector, decisions about where to cut costs (and where to invest) are informed by the likely impact on an enterprise’s future profitability. While judgment is part of the equation, building shareholder value is the primary goal.

In contrast, the public sector lacks an overall measure of value equivalent to profit, so administrators cannot rely on a singular focal point—a lodestar—to guide their decisions. When embarking on a cost-cutting exercise, public administrators confront all the same strategic, organizational, and management challenges faced by their commercial counterparts, with the added complication that their actions will not culminate in a commonly agreed-upon measure of success beyond a reduced level of spending.