Each year local governments struggle to address budget deficits by generating new revenue and spending cuts to close budget gaps. Elected officials typically think short term and rely on one shot measures rather than permanent changes to cost structures. Local governments need to operate smarter and cheaper. According to a recent study by IBM titled Smarter, Faster, Cheaper – An Operations Efficiency Benchmarking Study of 100 American Cities, “In many cases, the thoughtful application of innovations in business process, organizational design, and technology can in fact reduce costs and improve services simultaneously.”
By comparing the performance of similar organizations through benchmarking, opportunities for improving performance can be identified. IBM used publicly available data to benchmark the 100 largest cities in the United States to assess and compare how efficiently they operate.
The IBM study revealed some interesting results:
- The level of resources that cities dedicate to delivering basic municipal services varies enormously. Per capita spending in certain service areas can differ by a factor of ten.
- The variation in spending does not correlate with population, per capita income, geographic size, labor unions, or differences in workloads. The difference in spending is based on management and policy decisions. Cities spend what they spend because they choose to spend it.
Once a city decides which services it should deliver, management has broad discretion on how they will deliver those services as far as how much to spend, the labor to be used, the organizational structure and technology to be utilized.
According to the study the existence of management discretion is good news and bad news for those responsible for managing a city. The good news is that the level of efficiency of your government is within your control and there is no shortage of examples from other cities where responsible city governments have made different strategic and operational choices.
The bad news is that the usual excuses often offered for failing to run government more efficiently such as labor unions, operational environment and poverty are not obstacles to delivering services efficiently. The more important factor appears to be management.
Cities with a city manager form of government are nearly 10% more efficient than cities with strong mayor forms of government. Approximately 70% of municipal government expenses are labor related. Cities vary considerably as to how many employees are utilized to deliver services. On average cities employ 652 employees per 100,000 residents. However, the average number of employees per 100,000 for the top performing cities is 519, while the average for bottom performers is 983.
Based on an analysis of the spending included in this study, if any given city moved up one quintile in the ranking, they would effectively eliminate on average 15% of their operating costs. In other words, cities do not necessarily need to aspire to move to “best practice” status in the rankings in order to achieve substantial savings. A more modest level of improvement can actually yield large expenditure reductions.
Clearly, the value that can be created through relatively modest improvements in efficiency is substantial. Most organizations have “centers of excellence” that perform at a very high level while at the same time operations that struggle to perform in an efficient manner. Benchmarking can help management determine which of their operating entities fall in the former category and which fall in the latter.
What do you think about the results of the IBM study? Can benchmarking be a useful tool for improving the performance of government?