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Achieving Real
Transformation

Getting A Leash on Leviathan, Part 2

by Robert Tauber

ast month we looked at how Nevada’s current budget crisis can actually become our greatest opportunity to transform Nevada’s state’s government for excellence in the 21st century. Specifically, we looked at how the federal sector, and particularly the Department of Defense (DoD), is aggressively implementing strategies for change. Herein will be put forth an agenda for our governor and legislators to meet the challenge.

Recall that in order for real change to occur within government, three elements must converge nearly simultaneously. These are: 1) an energetic competitive sourcing and privatization (CS&P) agenda by the state’s chief executive, 2) legislative mandates for CS&P and government reform, and 3) a driving fiscal imperative in terms of budgets and accountability. Let us now look at each of these elements.

The Executive

A Nevada Commission on Competitive Sourcing and Privatization should be established. The commission would be under the direct reporting authority of Governor Guinn and be given the charter to establish CS&P policy, to nominate as candidates for CS&P those state government functions that are deemed commercial activities and to adjudicate those competitions. A powerful way to ensure that the commission enjoys the full authority of the state executive power, its establishment and charter should be codified during the Legislature’s next biennial session.

Before the next session, however, Governor Guinn should issue to all department directors a policy directive that says four things.

First, consistent with NRS 232.005—whereby a department director "shall conduct such investigations and studies as he deems necessary to determine the most efficient and economical use of the personnel of his department"—directors shall look within their departments and identify those activities that are not inherently governmental. They will then—by the end of the current calendar year—submit them to the governor as candidates for competitive sourcing and privatization.

Second, inherently governmental activities shall be defined as those done by the State of Nevada that either obligate the state financially or exercise the state’s power. All other activities will be deemed not inherently governmental and thus candidates for commercial competition.

Third, each department director shall appoint an Officer of Primary Responsibility (OPR) to manage competitions within his or her department.

Finally, commercial availability of the reported activities shall be assessed, and within a reasonable period of time, those candidates deemed viable commercial activities shall undergo competition, winners to be determined based upon best value to the government. Government activities will be retained within the public sector if the state government’s Most Efficient Organization (MEO) bid proves to be the best value to the state in a fair and reasonable competition. In this contest, technical approach, past performance and all costs to perform the activities will assessed, validated and compared with private-sector bids. If a private-sector bid proves to be the best value, the state activities thus evaluated will be transitioned to the private-sector winner and state employees will have first right of refusal to fill positions with the winning service contractor.

It is important to be clear on the distinction between outsourcing and privatization, both of which are commercialization outcomes. In the federal sector, the key distinction is that outsourcing yields commercial service contracts that are managed, and the real property is still owned by the government. Under privatization, the government turns over or sells to the commercial service provider all properties and assets associated with the service. The state’s CS&P strategy should dictate which venue will be more cost effective.

One option is termed in the federal sector a direct conversion of activities. In this scenario, no competitive sourcing is done: The government activity is simply converted directly to the best value (or lowest cost if the service acquisition strategy so decides) commercial bidder. Governor Guinn’s effort to privatize Nevada’s state prison health care system would fall under the direct conversion concept. Under the federal government’s implementation of OMB Circular A-76, only candidate organizations with staffs totaling 10 or fewer civilian employees may directly convert. Privatization is a separate acquisition strategy altogether, specifically excluded as an option when A-76 competitive sourcing studies are done. As a rule experts involved in CS&P at the state and local levels recommend that wherever possible, activities should be competed rather than direct converted. Virginia’s Commonwealth Competition Council is an example. Established by Virginia’s Government Competition Act in 1995, the council says, "Competition is the engine that creates the savings and efficiencies associated with privatization."

Absent competition, even private-sector bids may not achieve the very best value outcomes. Consistent with free-market principles, managed competition inspires excellence and innovation and maximizes best-value customer satisfaction.

Legislative Mandates

In the next session of the Legislature, a Nevada Government Competition Act (NGCA) should be passed to do two things.

The act should establish the Nevada Commission on Competitive Sourcing and Privatization. There are two ways to staff this commission. First is to make the commission composed solely of business and industry leaders appointed by the executive. While this approach worked well for a city, Indianapolis (to be discussed later), the diverse interests of Nevada and the state’s economic and demographic span make this approach unlikely. More in line with our needs is an approach modeled after the State of Virginia’s Commonwealth Competition Council, which is made up of representatives from business, industry, the state legislature and the executive branch. The governor and leaders of the Legislature’s two houses would make appointments to the commission.

The Nevada act should also levy the requirement upon all departments within the executive branch to review and report annually to the governor, and at least biennially to the Legislature, those activities that are not inherently governmental (as specifically defined above). This is analogous to the Federal Activities Inventory Reform Act of 1998. The Nevada act should further require that within a reasonable period of time those activities shall be competed based upon a best-value determination.

It is important to understand the need for enactment of this law beyond the obvious. Given the realities of this sweeping initiative—such as the fact that CS&P and other government reform agendas in general are subject to the whims of the various occupants of the governor’s mansion—we must insure a legal legacy will remain after the current administration. Future governors and administrators will have to uphold and faithfully execute this law as part of their oath of office.

The Driving Fiscal Imperative

A lthough the actions being taken by Governor Guinn and his budget staff are bold and indeed necessary to balance the budget, they are necessarily reactive and not strategic. What Nevada badly needs is a systematic discipline on budgetary demands—a discipline accomplished through a deliberate contraction of budget authorization, which in turn forces the desired transformation of the state’s bureaucracy. In so many words, the governor should put the departments of the executive branch on notice that:

  • Effective immediately, there will be a 5 percent reduction in current-year unobligated fund allocations for all state operating budgets except those deemed vital to health and safety. In addition, there will be an additional 5 percent across-the-board allocation reduction in FY 2000 and another 5 percent reduction for FY 2001. The governor should work with his budget director to use this series of 5 percent allocation savings as set-asides to fund modernization of state operations. As these modernizations are implemented, set-asides will be repaid to the treasury with the savings accrued from the their implementation.
  • Within 120 days, all department heads shall provide a draft strategic plan to the governor detailing their approach to re-tooling department business processes to meet existing and projected workloads under the reduced funding. Departmental costs shall be expressed in fully allocated terms, i.e., all costs both direct and indirect. In other words, process costs shall be reported using activity-based costing (ABC) methodologies and process re-engineering concepts justified in terms of process cost reductions. A final implementation plan shall be submitted by the start of the next calendar year and where applicable, these plans should converge with CS&P initiatives. Once approved, plans shall be fully implemented within 18 months. Moreover, ABC methodologies shall be used by all departments to monitor agency cost performance, and ABC methodologies will support strategic management decisions.
  • The governor’s 2001 biennial budget submission to the Legislature shall incorporate an across-the-board cut in budget requests for the state’s FY 2002 and FY 2003 budgets equaling an aggregate reduction of 15 percent below the recently approved budget for the upcoming biennium in constant-year dollars (not adjusted for inflation).

These cuts will be painful and may be viewed as draconian. But they are necessary to strategically discipline the bureaucracy and force its transformation. I am reminded of the story of a four-star Air Force general who was administering the beginning of the DoD budget drawdown just after Congress had made its first major cut of the old Cold War budget. Meeting with his most senior staff officers, the commander was hearing their complaints that the cuts he was imposing upon his command elements were intolerable.
"Let me be clear about this," he firmly said. Stretching his hand out onto the conference table, the general rested his hand upon his fingertips. "This is a hand today," he said.

Then the commander withdrew his pinky and ring finger and firmly replaced the remaining three fingers upon the table. "This is a hand tomorrow!" he said.

Some may counter that those cuts were needed because the Cold War is over and therefore they are achievable, whereas Nevada’s growing population demands expanded funding for services and support activities; thus, there is no basis for similarity.

I offer that although the Cold War is over, the size of the national defense mission has not been reduced but expanded. The theme of the day within the DoD is "more with less," and take it out of hide. Bosnia, Haiti, Somalia, Russian aid, NATO enlargements and the dismantling of Russian nukes all came largely out of the DoD’s hide with the expectation that the department meet its expanding mission and modernization requirements with the funds remaining. This means trying to meet the mission requirements for Iraq, North Korea, training, modernization and spares procurements, as well as Bosnia, Kosovo and all of the other feel-good initiatives that are currently the hallmark of U.S. foreign policy, and trying to meet these requirements with perilously decreased manpower and an inadequate budget in terms of real dollars (adjusted for inflation).

As is recently evident, the DoD is being forced to implement this principle of the fiscal imperative to the extreme. In my opinion, after all efficiencies are exacted, the DoD has a $300 billion mission and around $260 billion to fund it—which could spell disaster if this situation is not rectified sooner rather than later. Nevertheless, we in Nevada can note that it is the driving fiscal imperative these cuts have created that forced transformation for better or worse throughout the department. Re-engineering, CS&P, and the Defense Reform Initiative are all key elements of the DoD’s strategic plan. What’s more, they are being implemented, something rarely witnessed within the Beltway bureaucracy "paper mills."

Prognosis for Nevada

But with all this said, what’s the chance that such an agenda will work for Nevada? No one can guarantee success in life, but we can look at trends from the experiences of others. And where policies along these lines have been implemented, success can be noted: Specifically, in the case of the city of Indianapolis.

Stephen Goldsmith was elected to his first term as mayor of Indianapolis in 1991. At that time, budget growth ran at a rate of 6 percent compounded annually since the mid-1980s, and the projected annual budget deficit at the start of Goldsmith’s first term was a record $20 million. The mayor then implemented a sweeping initiative to transform the city government’s business processes. Specifically, the SELTIC (Service, Efficiency, and Lower Taxes for Indianapolis Commission) was formed and made up of Indianapolis’ best executives and entrepreneurs, recruited as volunteers on a probono basis. The purpose of this commission was to undertake specific reviews of CS&P opportunities throughout the local government.

To the maximum extent possible, city employees were given the opportunity to compete to retain their jobs when it was deemed that their functions were commercial activities that were ripe for competition. And because city employees were given the opportunity to compete for their jobs, a vigorous and constructive competition environment resulted, whereby union and city line management worked together to become the best value bid for the government. ABC was used to capture all costs for local government bid proposals. And once implemented, ABC methodologies showed that the main activity costs usually didn’t arise from manpower but instead wasteful processes that city agencies were following. The result of that insight was significant re-engineering of those processes to meet the demands of the competitive environment. To date the net effect of these efforts has been that around 40 percent of in-house bids are winning while generating savings of more than 25 percent over the status quo. And overall savings to Indianapolis as a result of all CS&P award decisions, are now projected in excess of $100 million.

Momentum

The first article of this series began with the statement that the Chinese symbol for crisis combines the character for danger and the character for opportunity. Politically, danger always confronts anyone attempting to reform government bureaucracies: The state leviathan, roused from its torpor, immediately goes to a war footing, breathing fire and, of course, casting aspersions on the reformer’s good faith.

Yet the field of war is also the field of opportunity—a realm where disaster is evaded and success secured. The great military commanders move consciously into conflicts armed with well-thought-out strategies, tactical alternatives and the will—indeed, the appetite—to seize the momentum of the battlefield.

The current episode of Nevada’s enduring budgetary crisis may be the greatest opportunity available to the state for decades to implement serious and positive state government reform. Our new governor has pledged this as his goal; we appreciate his appetite for the fight. NJ

Robert C. Tauber (rtauber@aol.com) is a government reform expert and consultant. He lives in Las Vegas.


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