Because successful cost reduction depends on maintaining and reinforcing a strong sense of value, the implementation phase of government cost cutting is when the lack of a lodestar really takes its toll. The story is a familiar one. After the initial fanfare and publication of a grand plan, momentum for cost cutting in a public service soon falters, and early bumps in the road hinder progress. Savings in one area can simply reappear as additional costs elsewhere. Tough choices end up being fudged or avoided altogether. When more severe challenges arise, the entire effort is either abandoned or dramatically watered down. Without a clear sense of value in place, the forces against change can easily trump early momentum over the long run.
Governments that have been able to avoid this trajectory tend to be motivated by an external crisis, such as crippling government debt yields or the threat of intervention by the IMF. Some commentators have spoken of the need to create a “burning platform” in order for government cost cutting to succeed. While this can be a very important motivator, it represents the stick without the carrot. There has to be something more aspirational to aim for in order to achieve transformative change.
We believe that a more helpful alternative is to adopt a broader, “value based” approach that focuses on those areas and actions most likely to deliver results and create a benefit, rather than simply avoid pain. Before embarking on a cost-cutting exercise, governments should first decide how to measure the value gained by the proposed cuts. A clear understanding of the value sought can then guide both where and how the cuts are made. Exactly what that means in practice will depend on a government’s chosen approach to cost cutting.
Pragmatic approaches focus on the cost reductions themselves, so understanding their value requires setting clear financial targets up front, breaking them down into subcomponents, and then closely tracking costs. As government accounting systems are often not up to the job, an important first step can be investing early in robust systems that can track costs at the appropriate level of detail. Cost-cutting reforms carried out in New Zealand in the early 1990s were supported by the introduction of such systems.
Deliberative approaches incorporate qualitative elements to help define the value sought. This makes it particularly important to agree upon and communicate a clear rationale and a vision for the end state. Key stakeholders need to be engaged in the debate. For example, Canada’s Program Review resisted setting up-front targets and instead asked departments to evaluate all spending using six guiding principles. This required strong cooperation and collaboration between ministers and deputy ministers (official heads of departments).
Managerial approaches rely on outcome metrics, so it is vital for these to be agreed upon and measurable and their drivers to be well understood. For example, disease registries in health care enable clinicians and managers to track the outcomes of large groups of patients with the same diagnosis. Comparing the effectiveness of different types of interventions allows them to promote the most successful treatments and stop the least successful.
Adaptive approaches treat value as an “emergent” property of the system, meaning that when a variety of individual agencies operate together within an environment, their collective actions can produce complex and powerful results. The whole becomes greater than—and, in some cases, different from—the sum of the parts. Adaptive approaches emphasize factors such as feedback, transparency, agility, and experimentation. For example, in the U.K., the Ministry of Justice is piloting a new approach to recidivism by agreeing to pay a consortium of charities on the basis of the outcomes they achieve rather than the services they provide. This mechanism is designed to encourage radical innovation and to help the government avoid paying for poor outcomes. In this case, it is particularly important that the government have a clear strategic direction to guide and inform the adaptive approach.
While governments can choose to pursue several of these ideas at once, the secret to success is to retain absolute clarity about the value being sought and to ensure that this is communicated widely and consistently. For that reason, it is often better to prioritize one approach over the others at a particular point in time.
In the current economic climate, assumptions about the role and scope of the state are being questioned in an attempt to rein in public spending. Without a clear sense of value, many well-meaning cost reductions are likely to fail. Adopting a value-based approach to cost reduction can dramatically increase the chances of success and deliver better outcomes for citizens, better value for taxpayers, and more sustainable public finances.