7.BUDGETREALLOCATION.pptStrategic Reviews around the world
Cutting Tools: How to Cut
Risks, consequences, sustainability
Practical Considerations for Budget Managers
The New Reality •Swing into deficit era – all Canadian governments affected •Budgets always under pressure – internal and external
pressures •Resources are always scarce, moving around, evolving •Reallocation is always on the books in financial
management, at both macro and micro levels •Being able to cut spending is an inherent managerial skill
required – knowing when, how and where is the challenge.
Feeling the pinch What are the current challenges you face as a public sector manager?
Survey in UK of public sector managers by the Institute on Leadership and Management, 2010
Clichés Abound lCutting the deficit lLeaner and meaner lDoing more with less lCutting the fat out of the system lSmart government
R ea
llo ca
tio n
Policy Change
Fiscal Change
Control Adjustment
Performance Adjustment
Cost Adjustment
Canada Not Alone •Australia since 2007: focused on horizontal
program areas •UK has been in and out for some time:
Comprehensive Spending Review under coalition government – only actually made 38% of projected savings
•Netherlands has been consistent until recent crisis
Ontario Government’s Program Review, Renewal and Transformation (PRRT) is a budget
reallocation process.
• Treasury Board and its Secretariat set terms of reference:
ü Comprehensiveness – assessment of mandate, departmental objectives, program effectiveness, efficiency and alignment to government priorities
ü Reallocation proposals – options for program reductions or eliminations to reallocate to government priorities and support overall spending control
ü Reinvestment proposals – options to better support government priorities
• Departments review the relevance and performance of their spending, identify lowest performing/priority 5% of programs, seek outside expert advice and report to the Treasury Board
• Privy Council Office identifies review departments every year and assesses, with Treasury Board and the Department of Finance, the departmental proposals
Strategic Review Process – Centrally Driven
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Departmental Strategic Reviews to answer specific questions in key areas: ü Government Priority, Federal Role, Relevance (i.e. continued program need) ü Performance (effectiveness, efficiency, value for money) ü Management Performance
Departmental Strategic Reviews to be conducted using the following key elements ü Analytical Framework: The department’s Program Activity Architecture ü Information Sources: Evaluations, Audits, Management Accountability
Framework assessments, Auditor General Reports, and other reports ü Reporting Requirements: Outlined in the Terms of Reference ü Steering Committee: A departmental steering committee to be established
with ex officio membership from TBS ü External Advice: Expert outside advice to be involved on each Review to
ensure neutrality and credibility
ü Sufficient time for deliberative process
ü Ministerial engagement throughout the Review process
ü Clear and strategic alignment of programs and results (value of a strong Program Activity Architecture)
ü Comprehensive assessment of all programs (100%)-not focussing only on 5%
ü Early involvement of senior management team – policy, communications, and corporate services
ü Multiple lines of evidence – evaluations, audits, benchmarking, international comparisons
ü Overview portion of the Strategic Review should tell a compelling departmental story
ü Arm’s length expert advice as effective challenge to proposals and alternatives
• In 2009, the third year of the Strategic Review Process, 20 federal organizations (including departments, agencies and Crown corporations) undertook strategic reviews of 100 percent of their direct program spending.
• In total, almost $26 billion, or approximately 23 percent, of all government program spending was examined.
• Savings of $287 million were redirected to Budget 2010 priorities • Savings were redirected to fund new initiatives, both within
departments and to broader spending priorities in Budget 2009 • Moving from ¼ of all departments to whole of government • Now, savings will be directed to deficit reduction • Targetting total of $11 billion by 2016
The first reviews generated savings but also demonstrated a need to improve the quality of results information …
12 Overtaken by Deficit Review Process
Reallocation in the Budgeting Context
lEmerging as a greater priority lMore preached than practiced around the world lGreater trend to crisis budgeting which is not
reallocation as used here: Greece, Spain, Italy(??) lBest examples: Netherlands, UK and Canada lTypes and forms in Canada: Program Review and
Expenditure Review, Strategic Reviews lCurrently: Strategic Review in Canada – two
phases lOccurs at macro and micro level
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Reallocation in the Budget Context: Types of Reallocation
lFiscal Stress lRevenue shortfall lFundamental repriorization of government spending lOverspending due to increased use of all services lOverspending due to increased costs across the board
lFiscal Abundance lRevenue windfall lRepriorisation freeing up revenue lUnderspending due to decreased use of all services lUnderspending due to decreased costs
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Reallocation in the Budget Context: Types of Reallocation
lProgramme overspending lOverspending due to increase demand for specific programme lOverspending due to increase cost of specific programme lLowered political priority of other programme lUnderspending due to decreased cost of other programme lUnderspending due to decreased use of other entitlement service
lNew political priority lRise in priority of a specific programme lLowered political priority of other programme lUnderspending due to decreased cost of other programme lUnderspending due to decreased use of other entitlement service
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Reallocation in the Budget Context: Types of Reallocation
lSubstitution of inputs lChange in production technology lChange in input prices lChange in cost efficiency of production
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Managers  must  approach  budget  cutting   with  care,  so  as  not  to  harm  the  
organization's  capacity  to  achieve  its   purposes.  The  toughest  question  they  
face  is  how  to  reduce  the  budget  without   compromising  the  organization's  
mission.  
Reasons to Reallocate
Drivers of Cutbacks lCutbacks in budgets, allocations lChanges in service levels lReduced revenue lPrice shifting lPolicy shift reducing entitlements, eligibility, access lNew technologies shifting service centre lUnusual cost shifting, e.g. energy costs
Cutting to Improve lAiming at efficiencies lReducing tax burden lMay need to invest to cut
lExample: amalgamating support services, lNew technology to reduce staff costs.
Determining the Size of the Cuts lOften mandated lSometimes unclear lCuts what also affects the size lCut now or cut later? lThe bottom 5% - common approach but what does it
mean?
• Gradual degradation of service, political surprise, budget padding as defence
Cheese Slicing
• Sounds good, doing more with less, avoids pain, can create system change, cut waste
• Assumes innovations work, may cost money, savings in future not now, takes commitment
Efficiency Gains
• Death of a thousand cuts, individual constituencies aroused
Centralized Priority Setting
Pros and Cons: Risks and Opportunities
Budget Cutting Tools lReduce staff lReduce travel, related services lReduce training lClose offices
Budget Cutting Tools lReduce levels of services lAlternate means of delivery lDownloading costs lIncreasing fees, charges
Across the Board Cuts lOften the easiest lOften mandated and left to manager to plan the execution
strategy (sorry) lGives managers flexibility lCan use slack if any exists lHave to know what you can and cannot cut: discretionary
spending versus entitlements, collective agreements
Critique of Across the Board Cuts lHave "surface" fairness, but they are indiscriminate lDo not account for differences in units' ability to absorb
cuts lIgnore starting level of budget flexibility in a unit.
"Making across-the-board cuts is like going to the bank and asking for five
inches of money.” – Tom Peters
In  an  organization  with  low  trust   levels,  complex  programming  and   relatively  poor  information,  the  best   approach  may  be  across-­the-­board  
cuts.  
But that does not make it good management.
Targeted Cuts lForces priority setting lHave to know where flexibility lies lHave to understand the risks
Targeted Cuts lExample: Strategic Review process of federal government lCan take programmatic approach: cut or change the
whole thing lCan engage staff and management team in priority
exercise but comes down to leadership lRequires in-depth knowledge of the programs, resources
and financial performance of the organizations
Strategic Cost Reductions lTechnology: short term costs for long term savings? lCapital investments lBusiness re-engineering lSharing services
Strategic Sourcing
Government-level Reallocation lTargets departments lSets criteria – high levels lLooks at the allocative efficiency of programs for the
government and the citizen/consume lLooks at the consequences of alternative funding levels. l The first function requires the answering of questions such as:
lis this program motivated by a valid motive for government intervention or should it be left to the market or the private non-profit sector?
Government-level Reallocation l Should this program be organized at the level of national government or
should it be left, for instance, to the municipalities lDoes this program use the appropriate instrument or should it, for
instance, use regulation or a tax instead of a subsidy? l Is this program designed appropriately from the point of view of
allocative efficiency for the government/consumer, for in stance the right subsidy base, regulatory object, criteria of eligibility, etc.?
Government-level Reallocation lThe second function requires the answering of questions
such as: l what would be the consequences for the quality of services, the
level of provision, the private funding contribution and the demand for substitute services, if public funding were reduced by, for instance: 5%, 10% or 20%.
l These two functions are typically not fulfilled by policy evaluation under the supervision of spending departments.
The Cost Reduction Process lWill be organizationally based lHave to know what you have and what you don’t have –
good knowledge of budgets and also of cash management history
lHave to have a grip on costs and how costs vary with volume
lKnowing scope for decision-making: lIs this fully externally mandated? lAre there level targets?
The Cost Reduction Process lAre there area targets, e.g. staff levels? lWho is involved? Need to engage external groups? lExisting budget rules: do managers have budget flexibility that
can be honoured or does that have to change? lTime flexibility to achieve targets – flexibility within the
reduction period – back-end loading lKnown risk tolerance lIs this an extraordinary process or integrated in informal
decision making?
Gearing Up for Process Changes that Reduce Costs
• Making sure you have the financial information about the operation before leaping into anything
• Finding new ways of doing business • Understanding main cost drivers in
current work processes: • Policies, • Processes, • People
• Seeking innovative but cost reliable means of change: example, lean production and health care
None of this is short-term or reactive.
7-Steps of Effective Costing •Costing purpose: how will information be used? •Cost Object: what is being targeted – activity, service,
output, outcome? •Cost base: relevant costs, all in. •Cost Classification: direct and indirect. •Cost assignment methodologies: reasonable. •Calculate, validate and confirm •Get Sign-off: everyone has to agree on baseline.
From Treasury Board of Canada Guide on Costing http://www.tbs-sct.gc.ca/pol/doc-eng.aspx?section=text&id=12251
Scoping and Understanding Consequences of Cuts lRisk of actions: political, clients, interest groups, staff lPotential to lead to organizational goal shifting,
restructuring, etc lCan be a great opportunity to change, adjust, fix lPolicy and procedural changes
Scoping and Understanding Consequences of Cuts lImpact on organizational plans lChanges in authorities and delegations lImpact of variable cuts within an organization
Need for a challenge function within the process.
Risk Framework •Strategy Risk: Does the overall strategic approach
appear to be sound? Is it consistent with best practices in the private and public sectors?
•Human Resource Risk: Does the proponent of the savings initiative possess the capabilities to successfully implement the initiative? How does the proponent’s human resource capability compare with that found in comparable projects or initiatives in the public and private sector?
Risk Framework •Process Risk: Does the proposal require the re-
engineering of existing business processes? What is the magnitude of the proposed changes and how easily can they be implemented? What is the effect on stakeholders?
• Infrastructure Risk: Is the existing infrastructure (e.g. information technology, capital assets, and governance and underlying legislation) adequate to execute the proposal, or is new infrastructure required (or new legislation/governance model). Are there risks inherent in the use/purchase of new infrastructure?
Risk Framework
•Reversal Risk arises when decisions to reduce or eliminate certain programs are reversed.
•Execution Risk is commonly associated with the implementation of an operational efficiency measure. The implementation of an efficiency measure often requires new skills, business processes, and infrastructure
Challenges in Reallocation at Both Macro and Micro Level • Significant organizational investment
• Executive and management time • Commitment to process and tough decision-making • Financial and business intelligence has to be sound Triaging large volumes of
complex information • Asking tough questions • Maintaining perspective –Strategic Review as an opportunity to renew
organization, not simply a budget reduction exercise
Issues and Questions •Strategic reviews are vertical: need horizontal reviews as
well, e.g. review of central HR functions •Cut whole programs or bits and pieces •Cost of efficiencies – transitional •To what extent do you invest to save?
Some Practical Considerations for Budget Managers
Reducing Staff Costs lSlow down hires, keep positions vacant lOutright lay-off lThe use of attrition lShifting to non-permanent staff, contracting lAltering work arrangements
Transitional Costs
Transfer Reallocation
Communicating Cuts lCuts will inevitably raise issues of legitimacy and trust lRumours of cuts can potentially do more harm than their
reality – morale, concern for clients, friends
Keep in mind the following points in developing communications…..
l Assume that everyone is looking for the answer to one question—will I lose my job?
lKeep the messages clear. lBe careful what you promise. l Don't expect to make everyone happy – but don’t appear
to happy making cuts either. lDo not say, this will not hurt. Be clear on consequences.
Practical Considerations for Budget Managers • Have your own process of identifying possible reductions and
efficiencies. Be ready. Get there first. • Ask yourself and your organization some tough questions, such as:
• Is the activity designed to operate as efficiently as possible? • Have necessary materials being purchased at the lowest price
while maintaining quality? • Are we locked into contractual arrangements beyond our control?
Practical Considerations for Budget Managers
• Can the process be mechanized or computerized to minimize staff costs?
• Can this be delivered through a third party more cheaply? • Can processes be standardized within and across units to
reduce costs? • Can you amalgamate units? • Can IT be better sourced? Careful here.
Practical Considerations for Budget Managers
• Can you look at fleet reductions or better management? • Can you increase revenue?
• Know your costs and how they interact: does reducing training costs affect performance in a measurable way?
• Compare and contrast. Find cost comparitors. Find places where other solutions have been tried and worked.
• Beware the bounce.
Practical Considerations for Budget Managers
• Know your history – what has already been done. Is all the low handing fruit be plucked?
• Link reductions to program results • Do due diligence on risks: be clear, avoid chick little
responses. • Link reductions to resource issues beyond your control but in
your area of need – look at IT, HR, other functional areas. • Look for internal partners to reduce costs – share, double up,
eliminate overlaps.
Practical Considerations for Budget Managers • Be aware of your redundancies – people, obligations, systems,
programs • Ensure your program is understood – be ready with your story • Focus on sustainability not just response. • Make sure you know what you will need to get in return for the cuts:
• Greater flexibilities in other areas, • Future draft trades, • Transitional assistance and money, • Additional support for problem cost areas.