1. “Cut to the Bone” Budget Cutting and Reallocation

2. Structure of this Session

3. The New Reality
Swing into deficit era – all Canadian governments affected
Level of fiscal deficit not related to need to constantly review allocated budgets
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.
The bottom line is that no budget is set in concrete. Further, you will always want to create flexibility to manage even if you are not cutting. Finally, you have to be in a position to affect budget exercises whenthey come along.

4. Feeling the pinch
What are the current challenges you face as a public sector manager?
Managers already struggling with budgets, resources and workload.
74% of managers believe their team operate efficiently, with minimal scope for cost savings.
Suggests there may not be the capacity for uniform cuts without harming services.
Survey in UK of public sector managers by the Institute on Leadership and Management, 2010

5. Clichés Abound

6. Variable and External Policy and Politics
Constant and Internal Management

7. Strategic Reviews: Federal Government of Canada

8. 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.

9. Strategic Review Process – Centrally Driven
All direct program spending reviewed - 25% each year
Treasury Board and its Secretariat set terms of reference:
Comprehensiveness – assessment of mandate, departmental objectives, program effectiveness, efficiency and alignment to government priorities
Reallocation proposals – options for program reductions or eliminations to reallocate to government priorities and support overall spending control
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 9

10. Strategic Reviews – Scope and Key Elements
Departmental Strategic Reviews to answer specific questions in key areas:
Government Priority, Federal Role, Relevance (i.e. continued program need)
Performance (effectiveness, efficiency, value for money)
Management Performance
Departmental Strategic Reviews to be conducted using the following key elements
Analytical Framework: The department’s Program Activity Architecture
Information Sources: Evaluations, Audits, Management Accountability Framework assessments, Auditor General Reports, and other reports
Reporting Requirements: Outlined in the Terms of Reference
Steering Committee: A departmental steering committee to be established with ex officio membership from TBS
External Advice: Expert outside advice to be involved on each Review to ensure neutrality and credibility

11. Strategic Reviews –Conditions for Success
Sufficient time for deliberative process
Ministerial engagement throughout the Review process
Clear and strategic alignment of programs and results (value of a strong Program Activity Architecture)
Comprehensive assessment of all programs (100%)-not focussing only on 5%
Early involvement of senior management team – policy, communications, and corporate services
Multiple lines of evidence – evaluations, audits, benchmarking, international comparisons
Overview portion of the Strategic Review should tell a compelling departmental story
Arm’s length expert advice as effective challenge to proposals and alternatives
Our lessons learned post mortem tried to examine “conditions for success”.
Key lessons learned and CSF included:
Sufficient time is needed for a deliberative process
Serious ministerial engagement is key to ensure proposals put forth can be considered as part of Budget planning, and defended in the eye of the public. Ministers need to be engaged early ( demonstrate ownership, presentation matters)
A clear and strategic alignment of programs and results facilitates the Review process and makes the results more meaningful. A strong Program Activity Architecture was key.

12. Overtaken by Deficit Review Process
The first reviews generated savings but also demonstrated a need to improve the quality of results information …
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
Targeted total of $11 billion by 2016 – a Tory legacy
Liberal spending targeted and not across the board so reallocation remains a necessity
Overtaken by Deficit Review Process 12

13. Reallocation in the Budgeting Context

14. Reallocation in the Budget Context: Types of Reallocation

15. Reallocation in the Budget Context: Types of Reallocation

16. Reallocation in the Budget Context: Types of Reallocation

17. 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.

18. Reasons to Reallocate

19. Drivers of Cutbacks

20. Cutting to Improve

21. Determining the Size of the Cuts

23. Pros and Cons: Risks and Opportunities
We can expect to use combinations of all three strategies.

24. Budget Cutting Tools
You really have a number of approaches when thinking of costs:
A • ?functional approach involves evaluating programs, such as benefits, education, health and human services, public safety, transportation, employee benefits, and strategic sourcing
An • ?organizational approach means evaluating by individual departments and connections between State and Local Governments
• ?programmatic approach focuses on specific programs within the organization, often those with large client populations that may cut across agencies, such as the Unemployment Insurance Program which may cut across Employment and Economic Development along with Revenue
A • ?business process approach looks at the entire enterprise from a business process perspective, calling for the evaluation of processes such as Human Resource, Finance, Case Management, Eligibility, and Licensing

25. Budget Cutting Tools
You really have a number of approaches when thinking of costs:
A • ?functional approach involves evaluating programs, such as benefits, education, health and human services, public safety, transportation, employee benefits, and strategic sourcing
An • ?organizational approach means evaluating by individual departments and connections between State and Local Governments
• ?programmatic approach focuses on specific programs within the organization, often those with large client populations that may cut across agencies, such as the Unemployment Insurance Program which may cut across Employment and Economic Development along with Revenue
A • ?business process approach looks at the entire enterprise from a business process perspective, calling for the evaluation of processes such as Human Resource, Finance, Case Management, Eligibility, and Licensing

26. Across the Board Cuts

27. Critique of Across the Board Cuts
"Making across-the-board cuts is like going to the bank and asking for five inches of money.” – Tom Peters

28. But that does not make it good management.
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.

29. Targeted Cuts

30. Targeted Cuts

31. Strategic Cost Reductions

32. Some Big Ticket Items

33. Government-level Reallocation

34. Government-level Reallocation

35. Government-level Reallocation

36. The Cost Reduction Process

37. The Cost Reduction Process

38. 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.

39. 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

40. Scoping and Understanding Consequences of Cuts

41. Scoping and Understanding Consequences of Cuts
Need for a challenge function within the process.

42. 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?
A high-level version of the analytical framework originating from Deloitte Consulting, LLC ( Reorganization Services group, New York, NY).

43. 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?
A high-level version of the analytical framework originating from Deloitte Consulting, LLC ( Reorganization Services group, New York, NY).

44. 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
From a report of the Parliamentary Budget Officer: Budget and Expenditure Reporting to Parliament: Strengthening Transparency and Oversight in an Era of Fiscal Consolidation (April 2012).

45. 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

46. 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?

47. Some Practical Considerations for Budget Managers

48. Reducing Staff Costs

50. Communicating Cuts

51. Keep in mind the following points in developing communications…..

52. 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?

53. 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.

54. 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.

55. 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.

56. 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.
Move as quickly as you can, be focused and do not keep people in suspense too long: great way to shut down any productivity.