cutting fat adding muscle
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Deloitte Research – Cutting Fat, Adding Muscle A Deloitte Re search Pu blic Se ctor St udy
Deloitte Research
CUTTING FAT, ADDING MUSCLE:
THE POWER OF INFORMATION TECHNOLOGY IN ADDRESSING BUDGET SHORTFALLS
The first of a two part series on IT value in the public sector
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TABLE OF CONTENTS
Executive Summary .......................................................... 1
Introduction ..................................................................... 3Rightsizing IT: Optimizing Technology Spending ............. 5
Taking the Cost Out: Using Technology to Reduce Costs .............................................................. 17
Maximizing Existing Revenue Sources ............................ 24
Insets
Utility Computing: The Future of Public-Sector IT Services? ............................................ 10
Fortune 500 Company Saves MillionsThanks to New Software .............................................. 12
The Link Between Cost Savings andDigital Channel Adoption ........................................... 19
The Promise of Data Warehousing ............................... 25
Self-Funding Strategies – Doing Something with Nothing ............................................. 26
End Notes .................................................................... 27
About Deloitte Research .............................................. 29
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EXECUTIVE SUMMARY
In the face of large and persistent government budget deficits,
cost reduction and revenue enhancement have climbed to
the top of the agenda for policymakers worldwide from
Trenton, New Jersey, to Tokyo, Japan. There is no silver bullet
for tackling these budget challenges—everything from
entitlement reforms to wholesale changes in revenue
structures should be on the table.
But as governments seek to ratchet down costs and optimize
current revenue sources, one powerful weapon they should
have in their arsenal is information technology. The strategic
use of IT can help drive down the administrative expenses
of internal functions like HR, finance, and training and
reduce program costs in areas such as welfare, health, and
human services. While many policymakers recognize the
value of IT—more than 90 percent of public CIOs in our
national survey said technology is an important tool for
addressing budget crises—lean budgets mean that in many
places few funds are available to invest in cost-cutting and
revenue-producing IT projects. Fortunately there is an answer
to this dilemma: Pay for the upfront costs of IT investments
by ferreting out waste buried within the base of government
IT budgets.
Most government IT budgets grew briskly during the 1990s,
thanks to steadily rising revenues and the need to modernize
antiquated government systems. From a government-wide
perspective, this growth was not always well planned or
managed, leading in some cases to bloated technology
infrastructures, redundant systems and applications,
misaligned resources, and huge IT support organizations.
This is just one of many reasons why IT spending is
increasingly being targeted for cuts by legislators and budget
officials hunting for any and all opportunities to trim
discretionary spending. Fully 87 percent of CIOs say theirIT budgets will be reduced this year.
IT budgets shouldn’t be exempted from budget cuts, but
there’s a right way and a wrong way to cut IT. The wrong
way—but also the most popular way—is across-the-board
cuts. As with a starvation diet, such slash-and-burn cutbacks
are usually undone as soon as tax revenues begin flowing
back into government coffers. Instead, governments should
take a more tactical approach, driving out excess costs and
creating additional value by transforming their IT cost base,
structure, priorities, and infrastructure, an approach we term
“Rightsizing IT.”
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Our Three-Pronged Approach for Using IT to Address
Budget Challenges
IT rightsizing. Optimize current government-wide
IT spending through consolidation, outsourcing, and
application sharing.
Use IT to take costs out. Reduce costs throughout
government through the strategic application of
technology.
Revenue optimization. Maximize existing revenue
sources by reengineering business processes and
employing sophisticated tax discovery and revenue
maximization tools.
A well-designed IT rightsizing approach uses three main
strategies to squeeze out inefficiencies from IT budgets: Consolidation. As te chno logy is consol idat ed ,
redundant IT systems can be eliminated and/or
consolidated, hardware and software purchases can be
rationalized, and the ability to manage the government’s
technology infrastructure can be made less labor-
intensive, resulting in lower costs for personnel,
maintenance, and ongoing operations;
Outsourcing. Allows governments to reduce costs by
using the outsourcer’s economies of scale, thereby
providing access to top-notch global technical expertiseand the ability to negotiate deep price discounts that no
single government agency could replicate;
Sharing. Getting agencies to stop buying redundant IT
systems and sharing what they have with other agencies
is one of the best ways to shave IT spending. Fully 85
percent of CIOs rated sharing a somewhat or very
valuable strategy for reducing IT spending; 29 percent
said they had implemented, or were considering
implementing, this strategy.
Depending on how severe the particular budget challenges
are, all or part of the savings from rightsizing should then be
invested in productivity-enhancing technology initiatives that
can help governments drive costs out of their operations.
Opportunities for using technology to cut operating costsgenerally fall into the following categories:
Lower processing costs Reduced customer service costs through self-service
transactions Better prices on goods and services Improved supply chain management Reduced travel and training expenses Less fraud and abuse
By combining IT productivity improvement projects with
an enterprise-wide transformation initiative of programrestructuring, business process redesign, and rigorous
performance management, governments can realize large cost
reductions.
The third way information technology can help close budget
gaps is by optimizing existing revenue sources through the
deployment of advanced software technologies. Such revenue
optimization strategies generally fall into two major
categories: “Tax Discovery,” which uses data warehousing
and other technologies to identify taxpayers who either aren’t
paying or are paying their taxes only partially; and “Revenue
Maximization,” which uses technology and process changes
to maximize the reimbursements a state, regional, or local
government receives from eligible central government
funding sources. More than 80 percent of CIOs believe that
these are somewhat or very valuable tools for maximizing
revenues.
In the face of very difficult fiscal environments, cost reduction
has become an imperative for governments across the globe.
With more tough spending cuts undoubtedly on the horizon,
policymakers must choose how they will achieve the necessary
reductions: 1) They can employ accounting gimmicks, slash-and-burn cuts and other short-term strategies that do little
to fix long-term structural imbalances; or 2) They can
maximize revenues and achieve ongoing cost reductions by
using information technology to fundamentally reengineer
and restructure government. Those who choose the latter
option will be best positioned to serve their citizens when
the downturn ends.
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As connected with the subject of revenue, we may with
propriety consider that of economy. The money saved from one object may be usefully applied to another,and there will be so much the less to be drawn from the pockets of the people…
—Alexander Hamilton
Today, many government policymakers face a conundrum.
On the one hand, they understand that information
technology has great potential as a tool for cutting costs,
improving government services, and transforming
government. In fact, in our national survey of public-sector
CIOs, more than 90 percent of them said technology is animportant tool for addressing budget crises. It can do so by
helping governments reduce back-office administrative costs,
slash fraud and abuse, streamline business processes, and
increase revenues.
On the other hand, in the wake of tight budgets across all
levels of government—and historic budget shortfalls at the
state level in the US—there is precious little money available
for making the upfront investment required to digitize
services and operations. In fact, in the US, many state
governments are actually cutting their IT spending anywhere
from 5 to 35 percent.
INTRODUCTION
The lack of money to fund productivity-enhancing IT
initiatives not only removes one of the best meanspolicymakers have at their disposal for taking the cost out of
government, but it could also slow—or even derail—the
fledgling effort to build digital government.
Fortunately, there is an answer to this dilemma: Wring savings
out of current government-wide technology spending by
optimizing IT operations and use it to invest in cost-cutting
and revenue-producing information technology projects.
This approach offers the best hope for reducing IT budgets
without cutting into core IT services or impeding the ability
of governments to continue to invest in IT projects that can
help reduce the costs of government programs and business
processes.
What are the best opportunities for using technology to
reduce operational costs? How do you squeeze savings from
current IT budgets? Where are the greatest savings likely to
come from? These are just a few of the important questions
that will be addressed in this study.
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About the Survey The survey data presented throughout this report was
obtained from a national survey of federal, state, and
municipal (from big cities only) enterprise-wide, public-
sector CIOs conducted in March and April of 2003. Morethan 40 public CIOs responded to the survey, which focused
on understanding how IT professionals plan to leverage
technology to address their budget issues and what some of
their immediate strategies might be.
The survey was designed to be high level and brief to
maximize participation. It was administered over the Internet
and respondents were assured of confidentiality for individual
responses. The survey was divided into several focus areas:
IT Spending . How IT budgets will be impacted by tight
budgets, how this might affect their IT strategy for theyear, and what opportunities they see for reducing IT
costs;
Current and Future IT Strategies. Which strategies are
viewed as the most valuable for reducing costs and
increasing revenues, and which of these they were most
likely to pursue.
FIGURE 1. IMPORTANCE OF TECHNOLOGY IN AD DR ES SI NG BU DG ET CH AL LE NGE S
Veryimportant
61%
Neutral5%
Somewhatunimportant
2%
Somewhatimportant
32%
How would you rate the importance of technology in helpingaddress government budget crises?
Not important at all0%
SOURCE: DELOITTE RESEARCH
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In the face of steep revenue shortfalls, IT budgets, having
up to now mostly escaped the budget axe, are coming under
fire from policymakers looking for more places to trim
discretionary spending. Fully 87 percent of CIOs say that
their IT budgets will be reduced this year (see Figure 2).
These cuts are most likely to come in the form of across-the-
board budget reductions.
The use of across-the-board cuts is understandable—it’s the
quickest and easiest way to get savings from IT budgets, and
few legislators or budget officials have the time or inclination
to wade too deeply into the inscrutable world of IT spending.
Nevertheless, it’s the wrong approach for cutting technology
budgets. This kind of slash-and-burn downsizing often
amounts to little more than a short-term budget-balancing
fix. As with a starvation diet, cutbacks are usually undone as
soon as tax revenues begin flowing back into government
coffers. Moreover, across-the-board cuts could do serious
harm to the government’s ability to digitize and modernize
its services and operations.
This is not to say that IT budgets shouldn’t be fair game for
budget cutters. However, rather than using the hammer of an indiscriminate across-the-board cut, extracting savings
from current IT spending requires the careful use of a scalpel.
It requires changes in the organization’s IT cost base,
structure, priorities, and infrastructure, an approach we term
“Rightsizing IT.” By looking at a government’s IT investments
from a consolidated, enterprise perspective, rather than from
the more parochial perspectives of individual agencies,
RIGHTSIZING IT:OPTIMIZING TECHNOLOGY SPENDING
bureaus, and divisions, rightsizing allows technology
investments to be leveraged across the organization. The aim
is to drive out excess costs and create additional value by
managing IT assets like any other class of assets.
Rightsizing has several important advantages over across-the-
board cuts:
Linkage to Strategic Goals. Across-the-board spending
cuts provide little guidance about how or what information technology services should be provided in
the first place. In contrast, rightsizing projects seek toproduce an IT infrastructure more closely aligned with
the organization’s principal goals, business processes, and
IT governance structure;
Sustainable Cost Savings. Rightsizing uses a variety of
techniques to streamline and optimize IT spending in
order to achieve significant and ongoing, long-term cost
reductions in IT spending, as opposed to the one-time
nature of savings inherent in most IT downsizing
initiatives;
Core IT Capabilities Remain Intact. Whereas across-the-board cuts often cause degradations in IT services,
rightsizing tries to avoid this by instead focusing on
managing IT assets more efficiently, allowing agencies
to target cost reductions in operational areas while
continuing to invest in new and strategic areas.
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In the face of the slow-to-negative top line growth they havebeen experiencing in recent years, scores of companies have
embarked on IT rightsizing efforts as one way of taking cost
out of the bottom line. In fact, it’s hard to find a multinational
corporation that isn’t in some way involved in a major effort
to consolidate, simplify, rationalize, and optimize its IT
infrastructure across the organization. While such efforts
aren’t quite as widespread in the public sector, they are on
the rise. In our survey, nearly all public CIOs indicated that
they were looking for ways to increase the efficiency and
productivity of their current IT spend. The application of
the following three rightsizing strategies can help themaccomplish this goal:
Consolidation Outsourcing Sharing
FIGURE 2. IT BUDGETS ON THE CHOPPING BLOCKS
Somewhatreduced IT
budget63%
Somewhatincreased
IT budget5%
No change toIT budget
7%
Significantlyreduced IT
budget24%
How will IT spending in your government be affected this year?
Significantincreased IT budget
0%
SOURCE: DELOITTE RESEARCH
Consolidate to Take Advantageof Economies of ScaleOver time, as individual agencies sought to meet their unique
information technology needs, they became more and moreindependent of any central IT organizations. They designed
and built their own networks, data centers, and application
suites, bought their own servers, software, and security systems,
and hired their own people to manage and maintain their
growing IT empires. From a government-wide perspective this
growth was rarely well-planned or managed. All of this was
encouraged, if not required, by appropriations processes that
tended to fund programs and departments, not cross-agency
IT initiatives.
Take the State of California. Thanks to a decentralized IT
structure and appropriations process, each department tendsto operate as its own “island of automation”—each buying its
own IT systems, each not fully aware of how this affects the
requirements and resources across the rest of state government.
As a result, the state operates numerous data centers, hundreds
of different e-mail systems, and thousands of servers. The
State’s Transportation Department alone has dozens of
contracts just for project management software. “Historically,
we have had within the state a highly decentralized IT
community, with very little focus on economies of scale or
statewide standards,” explains Craig Grivette, Deputy
Secretary for Enterprise and Business Technology for the Stateof California’s Business, Transportation, and Housing Agency.
Such an IT operating model is extremely costly to support—
just one reason why Grivette and State CIO Clark Kelso are
determined to reform it.
TABLE 1. BUILDING BLOCKS FOR IT RIGHTSIZING
Category Sample InitiativesPotential
Cost Reduction Comments
Consolidation • Web servers• Data centers
• Mainframes• Help desks
• IT spending• Portals
• Telecommunications
• Improves economies of scale• Redundant IT systems can be eliminated and headcount
reduced
20–40%
Outsourcing • Data centers• Storage services• Application
maintenance
• Shift to lower-cost provider who performs functionas core competency
• Replace fixed costs with variable costs• Management time and resources freed up
Up to 20%
Sharing • Enterpriseapplications
• Disaster recovery
• Stovepiped spending wastes tax dollars• Eliminate redundant purchases of same or
similar software
10–20%
• Help desks• IT infrastructure
• Data centers
SOURCE: DELOITTE CONSULTING
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But California is by no means alone. The US Department of
Commerce operates more than a dozen data centers and
hundreds of Web servers. The State of Virginia operates
dozens of data centers; the State of Michigan has more than
2400 servers; and before it began consolidating its IT
infrastructure, the State of Florida had 200 different IT
groups, 150 state Web sites, and 23 data centers. In short,
distributed IT infrastructures are the norm, not the exception
in the public sector.
Al l too often, the unfortunate result s of al l this IT
decentralization are bloated technology infrastructures,
redundant systems and applications, misaligned resources,
stovepiped business processes, disorganized computing
environments, incompatible computer systems, and huge IT
support organizations. This not only wastes millions of
taxpayer dollars a year, but leaves government IT systemsmore vulnerable to security breaches.
By improving economies of scale, combining and
rationalizing decentralized IT hardware and software systems
offers one of the best strategies to drive these costs out of the
IT budget. As technology is consolidated, redundant IT
systems can be eliminated and/or consolidated; hardware and
software purchases can be rationalized; and the ability to
manage the government’s technology infrastructure can be
made less labor-intensive, resulting in lower costs for
personnel, maintenance, and ongoing operations.Technology that enables better, more efficient use of shared
technology without risking system outages or data corruption
has recently become available, making consolidation an even
more viable proposition.
Opportunities for consolidating information technology
range from relatively simple undertakings, such as Web
servers, to more complex and controversial ones like
consolidating all IT infrastructure and spending. Other
consolidation opportunities include mainframes, networks,
portals, telecommunications, IT support staff, and vendor
contracts for hardware, software, and services.
One of the most significant consolidation opportunities is
data centers. Owning and maintaining multiple data centers
is hugely expensive because each one must maintain
hardware, software, floor space, heating and cooling,
electricity, and pay overhead.1 In an effort to reduce these
costs, many governments have consolidated their data centers
in recent years. New Jersey has gone from six data centers to
one and South Carolina from 11 to one. One of the biggest
efforts is in Pennsylvania, where the state government expectsto save $140 million over five years from outsourcing and
consolidating 18 data centers into one.
One of the most radical and comprehensive government IT
consolidation projects anywhere is in Virginia, where the state
is consolidating nearly all its 94 IT departments into a single
IT agency. As part of this massive effort, Virginia is
consolidating data centers, Web servers, storage, call centers,
and various other IT assets. Projected cost savings: $100
million over three years.
Cost Reductions (staffing, hardware, licenses, facility space)
Increased utilization of IT assets
Lower storage requirements
Lower hardware and software prices thanks to increased
economies of scale Better system recovery and availability
TABLE 2. POTENTIAL BENEFITS OF CONSOLIDATION
Jurisdiction Area of Consolidation Cost Savings
State of Virginia Various $100M (over 3 years)
District of Columbia Data Centers $3.6M (over 3 years)
Dept. of Educat ion Mainframe computing $44M (over 4 years) Student Loan Division
State of Florida IT purchasing $11M
TABLE 3. CONSOLIDATION COST SAVINGS
SOURCE: DELOITTE RESEARCH
SOURCE: DELOITTE RESEARCH
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Of course, not all IT infrastructure is appropriate for
consolidation. Just as there are real costs to operating an overly
decentralized IT environment, there are also costs to having
one that is too centralized. Sorting out which components
of the IT infrastructure it makes sense to consolidate and
which it doesn’t depends on a variety of factors, not the least
of which are local conditions, the entity’s current enterprise
IT architecture and the particular governmental structure.
Outsource to Take Advantage of Someone Else’s Scale AdvantageHistorically, IT outsourcing in the public sector focused
mostly on specific programs whose daily maintenance andoperations were often highly complex and entailed significant
upfront development costs, such as Medicaid or child support
processing. In these cases, many governments chose to
contract with private firms with deep expertise in the area
and the ability to capitalize the upfront development
investment, rather than operate the functions themselves.
Recommended for Consolidation
Core Infrastructure
– E-mail, messaging, internal search engines, calendaring,
and scheduling.
Data Centers and server farms
Servers with redundant functionality and similar workloads
– Web servers, file servers, print servers, e-mail servers, and
database applications.
Intensive Systems Management functions
– Backup, clustering, resource allocation, batch work, and
high-volume printing
Hardware that will reduce communication charges
Mature software applications with stable functionality and
usage patterns
Databases
– Those that hold external information on customers and
suppliers
TABLE 4. CONSOLIDATION RULES OF THUMB
SOURCE: DELOITTE RESEARCH
New applications with unproven business value
Systems where the cost of consolidating may be too high
compared to the benefits achieved
Systems with network restrictions for high volume dedicated
users
Applications undergoing frequent change
– Due to organizational growth in one or more business
units, the applications are changing often.
Not Recommended for Consolidation
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By purchasing IT like utility services, governments can
capture the benefits of information technology without the
enormous capital investment required to constantly refresh
their technology. This was one of the main reasons why the
Navy and Marine Corps turned to the private sector to build
and operate their Intranet in the largest government
outsourcing project in the world. “The act of building an
Intranet would require a lot of capital spending—money that
we didn’t have,” explains Rear Admiral Charles Munns, the
director of the $8 billion Navy/Marine Corps Intranet
(NMCI) program.
SOURCE: DELOITTE RESEARCH
In recent years, however, more and more governments have
begun to follow the private sector trend towards more large-
scale outsourcing of government IT operations. San Diego
County has outsourced its entire IT operation; nearly half
the states have outsourced their Web site development or
operations; Chicago public schools have contracted with a
private company to monitor their network, and dozens of
states have outsourced applications maintenance.2 Gartner
estimates that the state and local government IT outsourcing
market in the US will double over the next few years, reaching
$6 billion in 2005, up from $3 billion today.
FIGURE 3. MOST COMMONLY IMPLEMENTED
RIGHTSIZING STRATEGIES
Web server consolidation
20%
Outsourcing18% Data center consolidation
23%
Statewideconsolidationof IT spending
10%
What rightsizing strategies have you implemented,or are you considering implementing?
Sharing ofenterprise
applications29%
SOURCE: DELOITTE RESEARCH
One reason for the growth in outsourcing, similar to therationale for consolidation, is achieving greater economies
of scale. The difference is that rather than achieving
economies of scale by consolidating internal IT assets,
outsourcing allows governments to use the outsourcer’s
economies of scale. A large information technology company,
for example, is likely to have the kind of scale that gives
them access to top-notch worldwide technical expertise and
the ability to negotiate deep price discounts that no single
government agency could replicate.
Jurisdiction IT assets outsourced Cost Savings
City of Indianapol is Entire infrastructure $26M (7 years)
City of Minneapol is Entire infrastructure $20M (7 years)
State of Pennsylvania Data Centers $140M (over 5 years)
Navy/Marine Corps Intranet 2% per seat
TABLE 5. IT OUTSOURCING COST SAVINGS
Moreover, due to the growing size and complexity of IT
functions, many governments are finding that designing,
building, and managing enterprise applications and
infrastructures has become so taxing that they simply cannot
do it themselves. “There was a sense that this was not ourcore mission,” explains Munns. “Our core mission was to
put sailors and ships overseas, not to provide IT support.”
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One of the biggest sources of waste in many governments’
IT spend is their dreadfully low utilization rate of their IT
assets. Computers, servers, storage systems, networks, and
software licenses are among the computing resources that
are chronically underused. A new concept sweeping through
the world of information technology has the potential to
put an end to much of this waste by dramatically increasing
IT utilization rates.
The concept of “utility computing” is fairly simple: instead
of buying hardware and software, you pay a company to
provide you with computing power when you need it. You
pay for only those IT resources you use and nothing more.Companies earn revenues based on how much computing
power the customer uses, or in the case of a software company,
how much the customer uses the application. Utility
computing would allow governments to buy IT services in
the same way they buy electricity, water, and other utilities—
on a pay-per-use basis. “When I come to the office and switch
on the light, I want the lights to go on,” Karl Kaiser, CIO of
the City of Minneapolis recently told Governing magazine.
“I don’t need to own the power company.”3
What makes utility computing possible is the growing ability to “network” IT assets. This enables organizations to share
computing and software resources in order to realize much
higher utilization of software, storage, servers, and data center
capacity. If a certain application needs more processing
power, the utility computing framework could search around
and, for example, find processing power on two other servers
currently not being fully utilized. Cost savings would come
from no longer paying for IT assets that aren’t being fully
utilized and from sharing the costs of maintaining many IT
assets across multiple organizations.
UTILITY COMPUTING: THE FUTURE OF PUBLIC-SECTOR IT SERVICES?
Utility computing can be done in the context of a larger IT
outsourcing relationship—thereby giving governments
greater flexibility to accommodate changing needs than is
typically possible in traditional fixed-price outsourcing
contracts. Alternately, the computing capacity can simply
be rented on a subscription, pay-per-use basis.
Today, utility computing is still in its infancy—even in the
private sector. But this is quickly changing. Gartner forecasts
that utility computing could represent nearly one-third of
the IT management services market by 2005.4 If, as seems
likely, utility computing also catches on in the public sector,
it will result in major changes in government IT operations.Spending on IT equipment will fall, but will be offset by
increased spending on services; network server platforms,
data centers, and applications will be further consolidated;
and ultimately, the public-sector IT workforce will shrink or
be allocated to the development of more innovative IT
applications.
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Share Systems and Applications Across the EnterpriseLacking any overall coordination on IT spending,
government agencies often buy and implement their ownexpensive hardware and software applications, leaving many
governments with several different ERP, payroll, and financial
systems. The US federal government, for example, has 18
different payroll systems and 26 different financial systems
at the Department of Defense alone. In a single division of
the Department of Health and Human Services, there are
5 financial systems, 13 grant management systems,
6 acquisition systems, 6 personnel systems, and 13 separate
e-mail systems.5
In addition to being a huge waste of taxpayer money, such
duplication can result in agencies that are unable tocommunicate with one another, and with their customers
having to visit multiple organizations to get access to services
and information that should be integrated. It’s not
uncommon for an entrepreneur to have to visit over a dozen
State agencies and departments just to apply for and establish
a small business license because the technology and the
associated business processes are trapped within each agency
and lack any form of integration.
It should come as no surprise then, that CIOs see sharing
systems and applications as one of the best opportunities forreducing IT spending. Fully 85 percent of CIOs surveyed
rated it a somewhat or very valuable strategy for reducing IT
spending and 29 percent said they had or were considering
implementing this strategy. Many governments have already
begun moving in this direction by replacing multiple
licensing agreements with enterprise software licenses.
One innovative approach to sharing software applications is
Washington State’s Dig ital Government Applications
Academy. Employees from different agencies work together
at the academy to build applications that are subsequently
shared across state government.
Money can also be saved by sharing IT hardware and software
across governments. There is no reason why a city and state,
or adjoining cities, couldn’t share in the costs of a disaster
recovery computing center, or why states couldn’t share the
costs of building a complex software application that’s needed
to comply with a new federal requirement.
In the short-term, the greatest savings from sharing will come
from putting a stop to agencies’ penchant for building their
own siloed systems (except in cases where that system will
become the enterprise-wide standard and thus can be shared
across the government). At the US federal level, Mark
Forman, the Associate Administrator at the US Office of
Management and Budget (OMB), has embarked on a
campaign to stop federal agencies from buying redundant
IT systems, and get them to share what they have with other
agencies. He calls this strategy “simplify and unify.” “When
I talk about unify,” Forman says, “ I’m really focused at getting
us to team across government, across the agencies. And that
means we’ve got to integrate operations and infrastructure.
We’re buying the same infrastructure many times over, and
that’s going to change.”6 Forman estimates that this initiative
has saved the federal government more than $3 billion todate by unifying existing initiatives and blocking purchases
of redundant technology.
FIGURE 4. PERCEIVED VALUE OF VARIOUS IT
RIGHTSIZING STRATEGIES
Rank the value of the following opportunities for reducing IT spending
SOURCE: DELOITTE RESEARCH
Data center consolidation
54%
29%
5%5%
7%
Web server consolidation
30%
52%
10%
5%
2%
Sharing ofenterprise
applications
56%
29%
15%
Statewideconsolidation of
IT spending
31%
23%
21%
10%
15%
Outsourcing
18%
35%
35%
10%
2%
Very val uabl e Somewhatvaluable
Neutral Not veryvaluable
Not valuableat all
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Competing globally today means running a tight ship. This
telecom manufacturer looked to IT consolidation to reduce
fixed costs and improve operational effectiveness. But before
it could begin consolidating its IT infrastructure, the
company needed to have a comprehensive accounting of all
aspects of IT ownership, including inventory, utilization, and
life cycle risk.
Conducting such an inventory can be an incredibly resource-
intensive exercise that seldom produces reliable data, while
it consumes a great deal of manpower and money. So instead
of the typical manual process, this global corporation turned
to a next-generation software application to perform theaccounting.
The Strategic Asset Management (SAM) application
identified, categorized, and analyzed all of the company’s IT
hardware, software, and services running on the network.
This provided the firm with complete visibility of its IT assets,
as well as an idea of how every piece of hardware and software
was being utilized. Unlike manual inventory processes, the
data gathering process was nonintrusive and repeatable. That
means utilization can be analyzed not just on a particular
day but also over a 30-day period or longer. The ability totrack utilization in near real time can help organizations
maximize their IT assets on a continual basis.
Deloitte Research – Cutting Fat, Adding Muscle
FORTUNE 50 COMPANY SAVES MILLIONS THANKS TO NEW SOFTWARE
The scan turned up all kinds of surprising intelligence. For
example, 65 percent of the company’s networks were
underutilized. That means substantial savings could be
realized through network consolidation. The application also
discovered numerous hardware and software resources on
the network that everyone thought had been turned off.
Unfortunately, they hadn’t been. This miscalculation resulted
in unnecessary, ongoing maintenance costs.
Most rewarding: The purchasing department was able to
cancel a router order after the scan found numerous routers
fronting empty networks. The cost savings on this alone was
$750,000. All in all, the company identified $33 million insavings from consolidation initiatives implemented as a result
of the information derived from the asset scan. And the
application’s ability to repeat this inventory process on a
regular basis should keep the company’s IT operation running
more efficiently in the future.
12
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Identifying quick wins
Data center consolidation and large-scale IT outsourcing
often require significant upfront investments, extensivechange management efforts and can take many months or
even years to complete. Achieving some quick wins is
therefore critical to delivering results and cutting costs right
away, not two years from now. Quick wins allow governments
to begin showing tangible results in 30, 60, and 90-day
increments, instead of the traditional multi-year government
development cycles. The cost savings can then be used to
fund larger, more complex consolidation and outsourcing
projects.
FIGURE 5. MAPPING IT ASSETS AND SORTING OUT RIGHTSIZING OPTIONS
SOURCE: ADAPTED FROM VARIOUS SOURCES, INCLUDING DELOITTE RESEARCH AND CRAIG GRIVETTE, DEPUTY SECRETARY FOR ENTERPRISE AND BUSINESS TECHNOLOGY FOR THEBUSINESS, TRANSPORTATION, AND HOUSING AGENCY OF THE STATE OF CALIFORNIA
Examples:Technology procurements,
Internet, Intranet, messaging,hardware maintenance, Webhosting, office productivity, widearea networks, desktop support,DNS security services, help desks,
training, router management
Examples:CAD, customer
relationshipmanagement,
geographicinformation systems
Example:Custom
applications
70%
20%
10%
Specialized services
Services required by only one entity within government.These are often custom, “home grown” solutions or very specialized market technology.
Shared services
Services required by groups of entities withingovernment. These may have “user groups”associated with them.
Common services
Services required to some extentby all or nearly all governmententities. These could be referredto as enterprise or statewideservices, commodity services,standard functions, or the “ITutility.”
Consolidate Share Outsource
Potential quick win opportunities for consolidation projects
would in clud e ap pl ica ti ons that don’t have hu ge
interdependencies or critical software requirements (e.g.,e-mail server consolidation), because they will be easier to
relocate or combine. Typically, network optimization projects
and server and storage consolidations can also bring quick
win savings to agencies. Consolidations that involve
numerous relationships between departments or agencies
(e.g., data center consolidation) may, in some cases, need to
be delayed until more experience is gained through initial
consolidation projects. For shared services, consolidating
electronic forms for self-service data collection and job search
and employment can both be implemented relatively quickly.
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Align your IT Governance Structure
IT governance, the organized capacity to guide the
formulation and implementation of initiatives and oversee
IT operations, includes strategy formulation, resource
allocation, planning, controlling and compliance. An effective
IT governance structure binds information technology
strategies and spending to the vision, goals and businessobjectives of the entire governmental entity.
FIGURE 6. PRIORITIZING RIGHTSIZING PROJECTS
SOURCE: DELOITTE RESEARCH
With every alternative, look for quick hitsthat can help self fund larger efforts
Breadth of Optimization Solution
Applicationconsolidation
Business processharmonization
Organizationalharmonization
Business processoutsourcing
Note: diagram does not intend to represent sequence of initiatives
Project Complexity
Cost Savings
ITOutsourcingData center
consolidation
Storageconsolidation
Reporting
Strengthening weak IT governance structures is essential to
optimizing IT spending because a weak structure won’t
provide CIOs enough leverage to push through the necessary
reforms.8 Fully realizing the benefits of consolidation, for
example, requires that the CIO or some central technology
or budget authority has sufficient power and authority to set
and enforce certain policies and standards for the agencies.
SOURCE: DELOITTE RESEARCH
Leadership
• Setting the overall directionfor IT within the corporation
• Maintaining its cultural values,corporate image,and voice
• Representing the corporation’skey IT stakeholders
FIGURE 7. IT GOVERNANCE COMPONENTS
Planning
• Developing corporate ITstrategy
• Building corporate ITorganization
• Setting corporate IT goals
• Aligning IT performance targets
Monitoring & Control
• Qualitative benchmarking
• Service level management
• Penalty system management
• Service improvementidentification and control
Coordination & Compliance
• Ensuring compliance with ITstandards and obligations
• Coordinating IT activitiesbetween organizational units or IT supplier
• IT deployment management
Capital Allocation
• Resource allocation
• Determining capital available
• Determining IT investmentcriteria
• Reviewing bids for capital
Policy
• Setting the fundamental IToperating philosophies
• Establishing corporate ITstandards, rules, andguidelines
IT GOVERNANCE
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SOURCE: DELOITTE RESEARCH
Strategic IT planning
(especially for cross-agency initiatives like e-Government)
Funding
Architecture and standards
Infrastructure operations (e.g., data centers)
Security
Program oversight
Human resources strategic planning
(recognizing needs and priorities of individual agencies)
Quality assurance
Risk management
Vendor management
IT procurement
TABLE 6. SORTING OUT IT RESPONSIBILITIES
Enterprise Level Responsibilities Agency-Level Responsibilities
Feasibility, impact, and business case assessment
Process reengineering/redesign
Application development and maintenance
Resource and skills management (micro)
Project management
System implementation
Striking a balance between the need to adopt an enterprise
approach to IT management on the one hand, and allowing
individual government agencies some freedom and flexibility
to use technology to meet their own particular business needs,
is tricky. Experience has demonstrated that there are benefits
to both centralized and decentralized IT organization and
management structures. There isn’t a hard line between these
approaches. The key is to divvy up responsibilities between
the center and the agencies in a way that balances each of
their respective strengths and weaknesses. This is often termed
the federated IT governance model.
The question governments need to ask is which applications
and processes are enterprise-wide in nature and thus can be
centralized, and which are more agency-unique. Typically,
business case development, project management, process
reengineering, and application maintenance can all be kept
at the agency level, while standards, security, and procurement
can typically all be done more efficiently and effectively at
the central level (see Table 6).
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Depending on the government’s particular fiscal situation,
some of the savings from IT rightsizing may have to go back
to the general fund. However, in most jurisdictions, some of
the savings from rightsizing can be invested in productivity-
enhancing technology initiatives. That, in turn, can help
governments drive costs out of their business operations.
Many companies have realized large cost savings from Web-
enabling business processes such as purchasing, HR, and
supply chain management. Such savings have been slower to
come to the public sector for a variety of reasons—
governments, for example, got a much later start inimplementing Web-based technology—but with many
governments facing their third consecutive year of budget
shortfalls, interest in using IT as a cost-cutting tool has never
been greater. In our CIO survey, 95 percent of respondents
called technology a valuable tool for cutting operating costs
(see Figure 8).
There is now also more willingness than in the past to take
the steps necessary to actually capture the savings from IT
investments. This involves everything from developing more
rigorous business cases and Return on Investment (ROI)
models on the front end, to following through with painful
workforce reductions on the back end.
TAKING THE COST OUT:USING TECHNOLOGY TO REDUCE COSTS
FIGURE 8. INFORMATION TECHNOLOGY AS A TOOL
FOR COST CUTTING
Neutral2%
Very valuable49%
Rate the value of technology as a tool to cut operating costsin your government
Somewhatvaluable
46%
SOURCE: DELOITTE RESEARCH
Not very valuable0%
Not valuable at all2%
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Opportunities for using technology to cut operating costs
generally fall into the following categories:
Lower Processing Costs
Reduced customer service costs through self-service
transactions
Better prices on goods and services
Improved supply chain management
Reduced travel and training expenses
Less fraud and abuse
Lower Processing CostsIf government is known for anything, it’s the huge quantity
of paperwork it spills forth—a perennial burden for
businesses and individuals alike. Almost any interaction with
government seems to involve filling out forms—sometimes
stacks upon stacks of them.
Government’s love affair with paper is immensely costly and
time-consuming to both the private and public sector.9 The
US Office of Management and Budget estimates that the
federal government alone imposes at least $160 billion of
paperwork costs on the private sector each year.10
From license renewals to parking ticket payments to business
compliance reporting, nearly all government transactions
with citizens and businesses can be done more cheaply over
the Net. E-government allows the public sector to automate
many routine interactions with citizens and businesses,
eliminating paperwork and reducing processing costs, such
as sorting, stuffing, mailing, and printing. For example, the
cost of processing an e-payment for the US federal
government is only 2 cents, compared to 43 cents for issuing
a check.11 State and local department of motor vehicle offices
routinely report substantial savings from moving their citizen
transactions online. Arizona’s DMV, for example, saves 76percent from online vehicle registration renewal. The State
of Virginia also reports significant cost savings from Web-
enablement. “It’s less cost for us to process the transactions,”
says Tully Wellborn, director of Web services for the Virginia
DMV. “If they were to come in, it would cost $5, and through
the Internet it costs $2.50 to do the transaction, so it’s a 50
percent savings for us.”12
In Michigan, child care providers must bill the government
on a biweekly basis to be reimbursed for services. Between
postage, printing, and processing, this simple process costs
$750,000 annually. A new Internet billing pilot project allows
child care providers to log on and submit billing information
over the Internet. This eliminates the costs of preparing the
forms, mailing, data entry, and error correction, saving the
state about $845,350 over three years.
SOURCES: NASCIO 2002 DIGITAL GOVERNMENT AWARDS APPLICATIONS AND THEINTERGOVERNMENTAL ADVISORY BOARD FEDERATION OF INFORMATION PROCESSINGCOUNCILS.
TABLE 7. SAVINGS FROM REDUCED PROCESSING COSTS
E-Government Application Annual Cost Savings
Washington State CombinedApplication Program (WASHCAP) $6.37M
Michigan Child Care Internet Billing Project $.28M
Ohio Bureau of Workers’ Compensation
Dolphin Project $4M
Wisconsin Worker’s Compensation Insurers’Web Reports $1.5M
California CAL-Buy Online $9.7M
FIGURE 9. WAYS TECHNOLOGY CAN SAVE
GOVERNMENTS MONEY
SOURCE: DELOITTE RESEARCH
Reducedworkforce
costs
18%
How have savings been realized due to the use of technology in your government?
Reducedprocessing
costs
32%
Reducedpaper costs
17%
Better priceson goods
and services
15%
Reducedtravel and
training costs
10%
Reducedfraud and
abuse
8%
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Reduced Customer Service CostsThrough Self-Service TransactionsProviding assistance with farm programs; signing people up
for benefits; processing eligibility requests; answering questions about zoning ordinances or thousands of other
subjects; these are just a few of the things that millions of
government employees located in thousands of field offices
and call centers spend most of their day doing. The salaries,
benefits, and overhead supporting this extensive network of
government field offices costs taxpayers tens of billions of
dollars a year.
Leading private companies are experiencing significant cost
savings from shifting millions of such customer calls to self-
service Web transactions. Oracle saves $550 million annually
by letting customers serve themselves, estimating that eachcustomer care call handled by an employee costs $350,
compared to about $20 for those done on its Web site.13
Similarly, by moving 35 million customer service calls to a
Web-based self-service environment, IBM saved $750 million
in 2000. Every service call handled through ibm.com instead
of a customer representative saves between 70 and 90
percent.14
Letting customers serve themselves through self-service Web-
based transactions would allow governments to reduce
customer service costs and provide around-the-clock serviceto customers. Several years ago, the Texas Workforce
Commission shifted its Unemployment Insurance
application process from about two-dozen local offices to
call centers. Later, the service was offered online. By allowing
individuals to apply for unemployment benefits over the
telephone or the Web, the state was able to reduce wait times,
offer more specialized services, and save millions of dollars
by closing eleven local offices.15 In Hennepin County,
Minnesota, the county government was able to cut the staff
of one department in half after building a Web site that
enabled residents to see and pay their property taxes online.16
THE LINK BETWEEN COSTSAVINGS AND DIGITAL
CHANNEL ADOPTION
Between printing, postage, sorting, scanning, data entry and error correction, processing millions of tax returns
is an expensive endeavor. In Texas, if you laid the paper
the state processes each year in tax returns end to end, it
would stretch from Laredo to New York City—and Texas
doesn’t even have a personal income tax! Though it lacks
a personal income tax, Texas does have a whole bunch
of specialized taxes on business, each one just a little
different from the other. The cost of processing all these
different tax returns in Texas is huge: approximately $30
million a year. A consulting report commissioned by
the Texas Comptroller’s office found that between $10and $20 million of these costs could eventually disappear
with Internet tax filing. Whole activities can be
eliminated with Web filing, including opening the
returns, data entry, error correction, and postage. The
report estimates that eventually, the agency could cut
the number of employees needed to process taxes in half.
But there’s one big catch: most of the big savings don’t
kick in until a significant percentage of taxpayers file
their taxes online. Why? Because until that happens,
the Comptroller’s office needs to run parallel paper andelectronic processes, meaning they can’t do all the things
necessary to realize the large cost savings, such as making
significant reductions in the number of employees and
selling off some of the expensive equipment used to sort
and image paper forms. A study of online services by
the State of Texas found that the state could save up to
$1.9 million on 11 applications if they achieved a 30
percent take-up rate, but fully $6.3 million if the
adoption rate was 100 percent.17
The link between adoption and cost savings holds true
for most e-government applications. In fact, if adoption
of an online service is very low, the additional costs of
adding and maintaining the Web channel, together with
the existing costs of supporting physical and phone
service channels, could mean that Web-enabling a service
would actually increase a government’s service costs.18
Governments will not realize large cost savings from most
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e-government applications until they focus more time
and resources on increasing what in some jurisdictions
are very low take-up rates. In the United Kingdom, for
example, only 13 percent of the population used e-
government services in 2002, despite large investmentsin online government by the Blair administration.19
Internal functions such as finance, training, payroll, and
human resources (HR) management represent the best
near-term opportunity for governments to achieve large
hard cost savings from self-service Web transactions.
Why? Because unlike most citizen and business services,
government can require employees to use the electronic
channel, allowing it to “turn off” other service channels.
(Because the Web isn’t available to all citizens, in most
cases governments can’t turn off its other service channelsin the near-term for GtoC and GtoB services.) The State
of Florida estimates it will save $24 million a year by
Web-enabling and outsourcing HR, payroll, and benefit
administration functions that serve 135,000 employees
across 30 agencies. Much of the savings will come from
significantly reducing the human intervention needed
for most routine HR tasks. This will be accomplished
by requiring state employees to use a self-service digital
channel for most of their HR needs.
Better Prices on Goods and ServicesBursting file cabinets; piles of paper burying desks; the hunt
for lost purchase orders; endless complaints about late or
missing supplies; these are just a few characteristics of
government’s notoriously inefficient paper-basedprocurement systems. According to a State of Texas study,
governments spend 5.5 percent of procurement budgets
simply on processing costs.21
FIGURE 10. BEST OPPORTUNITIES FOR USING
TECHNOLOGY TO REDUCE COSTS
What areas are the best opportunities for usingtechnology to reduce cost?
SOURCE: DELOITTE RESEARCH
Government tobusiness applications
30%
Government tocitizen applications37%
Government togovernmentapplications
33%
E-procurement, which encompasses electronic catalogs, Web-
based bid notifications, purchase cards for smaller purchases,
reverse auctions, and end-to-end paperless transaction
capabilities, holds tremendous promise for speeding up
transactions, increasing competition, slashing costs forpostage, printing, and copying, freeing up staff time, cutting
administrative costs, and driving down costs by enabling
more leveraged, consolidated purchasing. According to
Jupite r Media Metrix , by 2005 onl ine purchasing by
government will reach $286.1 billion, compared with $5.5
billion in 1999, representing 17 percent of all federal, state,
and local authority procurement.22 If online purchasing can
shave even a percent or two off these costs, it would equate
to billions in savings. In Italy, the government estimates
that it saves an average of 30 percent on the prices of goods
and services purchased online on its e-procurement site.23
Ultimately, much of the savings from self-service transactions will come from lower workforce costs. Florida’s HR
outsourcing and technology enhancement initiative, for
example, will allow it to reduce the number of employees
delivering HR services by more than 1,000 FTEs. As more
citizens take care of their government needs on the Web,
governments will need fewer clerks to process requests, fewer
human resource professionals to fill out personnel forms,
and fewer data processors to transfer information from paper
to computers. In Nebraska, the state used technology to cut
its seasonal tax-processing work force in half. At the federal
level, the IRS is planning to reduce its processing work forceby 366 full-time positions in fiscal 2004 because the growth
in electronic filing has resulted in less work for the 15,000
IRS employees who process tax returns.20
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The first and easiest step in migrating from paper to electronic
procurement is to move bid notifications and supplier
registration online. This alone can slash printing and mailing
costs by 75 percent. “We’ve seen tremendous benefits,” says
one state procurement official. “Now, none of our agencies
are mailing out anything. We estimate that we’ve saved
$180,000 on mailing costs alone.”24
The next step is to move all small purchases to an electronic
framework. People tend to associate government purchasing
waste with $500 hammers. But the cost of the hammers is
only one component of the waste; it can cost hundreds of
dollars just to process the orders for those $500 hammers.
That’s because in paper-based purchasing systems, anytime
anyone in government orders anything, it sets off a
nightmarish process of requisitions, approvals, purchase
orders, invoices, and checks—each of which has to besubmitted, requested, issued, drafted, signed, and
countersigned by a battery of officials. The result:
Administrative costs average $150 per purchase order in the
public sector, meaning that the cost of processing the purchase
often exceeds the cost of the item itself. By moving certain
purchases to an electronic framework, the State of Maryland’s
eMaryland Marketplace reduced the average cost of purchase
orders for these purchases by $100.25
Online catalogs and purchase cards—with the proper
safeguards in place—can also take many costs out of thepurchasing process. “The payment issue is quite large,” says
William Cullen, Maryland’s chief of purchasing. “There
could be enormous savings in purchase-card payments
alone.”26 The government of South Wales in Australia was
able to lower the number of checks written by almost half
and reduce bank charges and overall financing costs by 9
percent by introducing purchase cards.27
For larger dollar purchases, automating purchases and
approvals by creating a single, integrated online system can
shorten procurement cycle times from days or weeks to
minutes, and shave the costs of processing by 50 percent.
Once this is put in place, governments can coordinate volume
discounts using the now aggregated information, and slash
commodity costs anywhere from 5 to 15 percent.28 Florida,
for example, generated over $11 million in IT cost savings
from bulk purchasing and renegotiating contracts.29
One way to save money through aggregated purchasing is
through the use of online “reverse auctions,” in which sellers
compete to offer the lowest prices on commodities or
services.30 By improving the flow of information between
buyers and sellers, reverse auctions can make markets more
efficient, increase competition among suppliers, and reduce
the costs of doing business with buyers. The State of
Pennsylvania, for example, has saved more than $13 million
in commodity costs since 1999 through the use of reverse
auctions.31 Manny DeVera, a senior executive at the Federal
Technology Service who has overseen more than 60
electronic reverse auctions by federal agencies, says he has
seen cost savings on everything from computers to aircraft
parts. “Every auction we’ve done has shown cost savings,”
says DeVera.32
Soon, artificial intelligence will be used in online auctionsand marketplaces, producing further savings. Computers will
conduct an endless series of analyses comparing the bidding
history of various suppliers with that of buyers, and then
accept or reject bids based on the analysis.
TABLE 8. SAVING MONEY BY WEB-ENABLEMENT
SOURCE: WILLIAM D. EGGERS, “SHOW ME THE MONEY: COST-CUTTING STRATEGIES FORCASH-STRAPPED GOVERNMENTS,” AMERICAN LEGISLATIVE EXCHANGE COUNCIL AND THEMANHATTAN INSTITUTE FOR POLICY RESEARCH, NOVEMBER 2002.
Organization Process Web-Enabled Estimated Savings
Cisco Systems: Supply chain management $412.5M
Cisco Systems: Financial reporting $86M
DoD Financial & Accounting Service: Reverse auctions $2.1MDuPont: E-procurement $200M
Honeywell: Travel booking $4M
IBM: Training $395M
IBM: Customer service $750M
IBM: E-procurement $270M
Oracle: Customer service $550M
Shell Oil: Knowledge management $200M
State of Pennsylvania: Reverse auctions $13M
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Improved Supply ChainManagementThe typical governmental approach to supply chain
management consists of buying years’ worth of supplies andpacking them into giant warehouses. On tours of state
facilities, the office of the Texas State Comptroller found
warehouses packed with mothballed, prehistoric computers,
old furniture, and excessive quantities of various items,
including a 17-year supply of Polaroid film, a 21-year supply
of screw-cap vials, and a 31-year supply of enema
administration sets.33
Led by pioneers like Dell Computer Corporation, most
private companies have long since abandoned this archaic
approach to supply chain management. They’ve used Web-
based technologies to integrate and automate their sourcing,purchase orders, and logistics. This allows companies
to practice just-in-time, build-to-order supply chain
management, in which they only hold a few days worth of
inventory at a time.
Public agencies are still in the early phases of using technology
to better integrate their supply chains, but some are already
seeing benefits. By moving away from the practice of
stockpiling months’ and years’ worth of supplies toward an
electronic platform, the federal General Services
Administration has been able to close six federal warehouses,saving $176 million over 10 years.
The best near-term opportunities to reduce costs from better
supply chain management lie with agencies that procure large
quantities of supplies and equipment, such as defense,
transportation, health and human services, and general
services agencies.
Reduced Travel and Training CostsIn today’s knowledge society, training is no longer just a
necessary expense—it’s a critical investment in the
organization’s future. E-learning, together with electronic
collaboration technologies such as teleconferencing, e-rooms,and Webinars, can help governments slash travel and training
costs. For large organizations, such savings can be huge. IBM
estimates that moving 40 percent of all training to Web-
based programs and CD-ROMS saves the company $395
million a year.34 Much of the savings come from reduced
travel expenses, which typically amount to 50 percent of
training budgets, and lower off-site, instructor, and training
administration costs.
• Travel cost
• Instructor fees
• Printing, distribution, and storage costs
• Avoidance of costly mistakes in the live environment
• Training available to new hires at no additional cost
• Less employee turnover
SOURCE: DELOITTE RESEARCH
TABLE 9. COST SAVINGS FROM E-LEARNING
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Less Fraud and AbuseGovernments waste billions of taxpayer dollars a year on
overpayments, errors, false claims, and outright fraud. In
2000, the Inspector General for the US Department of
Health and Human Services found that the Health CareFinancing Administration (HCFA) paid $20.6 million for
Medicare equipment or services provided to beneficiaries after
they died. Meanwhile, in the late 1990s, the Veterans Affairs
Department made improper benefit payments to convicts
serving prison sentences. Approximately 13,700 incarcerated
veterans were overpaid about $100 million.
Technology is making it easier for governments to detect
and reduce such fraud. Neural networks, data mining, and
biometrics have proven highly effective in rooting out the
tens of billions of dollars of taxpayer money that’s wasted onfraud, abuse, and erroneous payments. “Data brokers” and
online eligibility systems, for example, can help reduce fraud
by instantly verifying the income and assets of TANF and
Medicaid applicants.35
Another way of reducing overpayments is through a concept
called “audit recovery.” By applying an array of proprietary
software packages and fast computers, a recovery auditing
firm can sort through thousands, even millions, of day-to-
day payment transactions in order to identify mistakes—
that is, overpayments or under-deductions from commodity
and other suppliers, such as Medicaid and Medicare
providers. As these mistakes are discovered, the amounts
involved are usually deducted from future invoices of the
supplier or provider.
Private sector experience shows that about .1 percent of
payment amounts are recovered through audit recovery. But
if the entity being audited is a reasonably sized Fortune 500
company, the company may be making $20 billion of
purchases from suppliers. Through recovery auditing, the
company is thus retrieving $20 million annually, and this$20 million goes straight to the bottom line as increased
profits. For government, experience has shown an error rate
of .4 percent for direct purchases, and an astronomically
higher error rate for entitlements and other spending.36
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Another way that policymakers can use information
technology to help close budget gaps is by using sophisticated
technology tools to optimize existing revenue sources. More
than 80 percent of CIOs believe technology is a very or
somewhat valuable tool for maximizing revenues. Revenue
optimization strategies generally fall into two major
categories: “Tax Discovery,” which uses data warehousing
and other technologies to identify taxpayers who are either
not paying, or only partially paying, their taxes; and “Revenue
Maximization,” which uses technology and process changes
to maximize the reimbursements a state, regional, or localgovernment receives from eligible central government
funding sources.
Revenue discovery and revenue maximization are not new
concepts. Both were aggressively deployed during the early
1990s—the last time many governments faced large budget
shortfalls. At the time, policymakers looked mostly within
revenue generating agencies for ways of improving existing
administration and collection systems. Agency-specific
technology upgrades and process improvements were then
typically employed. While these solutions were somewhat
successful in increasing revenue, they were generally narrow
in scope and incremental in nature.
Recently, governments have begun taking a more holistic
approach to revenue optimization. There is a growing
awareness that large-scale revenue benefits will only come
when entities “touching” the revenue source—both within
and outside of government—work together to share
MAXIMIZING EXISTINGREVENUE SOURCES
information and identify additional revenues. Florida’s
SUNTAX, an integrated revenue administrative system,
maintains information and files on taxpayers in one
integrated database that uses a single identification number
for each taxpayer. All information for each taxpayer is linked
and accessible, allowing the department to identify the total
amount of liabilities or credits for any taxpayer, across all tax
areas. In its first two years in operation, SUNTAX generated
more than $70 million in new revenues from the
telecommunications industry alone by identifying
noncompliance.
FIGURE 11. VALUE OF TECHNOLOGY AS A TOOL TO MAXIMIZE REVENUES
Not very valuable2%
Very valuable34%
Rate the value of technology as a tool to maximize revenues
Neutral15%
SOURCE: DELOITTE RESEARCH
Somewhatvaluable
49%
Not valuable at all0%
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Tax Discovery Revenue, or “tax,” discovery is the process of identifying,
validating, and collecting unpaid or partially paid taxes. The
main goals of tax discovery are the following:
Increased voluntary compliance through taxpayer
education Improved enforcement of the tax laws Greater efficiency in tax administration and collection Increased tax base
The initial phase of tax discovery involves both discovering
instances of less-than-complete compliance by known
taxpayers and uncovering accounts currently unknown to
the revenue department. These findings are then validated
and taxpayer accounts are established and/or systematically
processed for payment. The State of California Franchise Tax Board (FTB) is using this approach to improve its tax
collection system and provide enhanced customer service
offerings on the Internet. The board’s data warehousing
system generates business intelligence from more than 220
million pieces of individual tax information, such as W2 and
1099 forms, in order to identify non filers and provide them
with detailed information on how to become tax compliant.
The discovery process begins by identifying the key data
elements used to evaluate taxpayer compliance. Data sources
are then determined and sharing arrangements established(in instances where key data elements lay outside the existing
tax database). The key data elements are then extracted and
analyzed to identify less-than-compliant taxpayers. At the
same time, accounts previously unknown to the existing
taxpayer database are identified through separate matching
routines. The resulting information is used by the revenue
agency to collect taxes owed. As part of its integrated tax
system initiative, the Wisconsin Department of Revenue
implemented a tax and revenue data warehouse solution to
support its field, office, discovery, and nexus audit units. The
solution contained four years of sales and use and corporatetax system data, and enabled the state to collect an additional
$20 million in the first two years alone. Using a similar
approach, the Texas Comptroller’s office was able to generate
an additional $67 million in revenues between 1998 and
2001.
THE PROMISE OF DATA WAREHOUSING
The Compliance Division of the Commonwealth of
Massachusetts’ Department of Revenue (DOR) haslong performed data matches to detect individual
income tax non filers as part of its ongoing compliance
programs. However, these processes were often non-
reusable and “single threaded,” meaning that a non-
compliant taxpayer was discovered from a single stream
of data, rather than being triggered by multiple sources.
This was costly and under-performing. In 2001-02,
in an effort to transform its current match process and
increase the Department’s compliance efforts, DOR
piloted a solution that brought together source income
data on wage earners, income and dividend earners,and income from sole proprietor businesses. By
combining all of this data, the system created “profiles”
of individuals who should have filed an individual
income tax return. The non filers were then notified
with proposed tax assessments based on the profiles.
What made this change possible in Massachusetts is
something called data warehousing. A data warehouse
offers a consolidated view of data (often from a variety
of sources), optimized for reporting and analysis.
Basically it’s an aggregated, sometimes summarized
copy of transaction and non transaction data
specifically structured for dynamic queries and
analytics. By focusing on the integration of data, rather
than on the integration of systems, data warehousing
has helped break down some of the traditional barriers
to communication and cooperation between agencies,
while allowing them to maintain their autonomy. In
addition, the relatively short development and
implementation cycle associated with data
warehousing, compared with full -scale systems
integration enables more rapid revenue recovery—an
important consideration, given the current budget
climate.
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Revenue MaximizationFor years, state, local and regional governments have looked
for ways to maximize or increase reimbursement received
and/or recovered from “uncapped” central funding sources.
In the United States, the primary targets of these efforts have
been Title IV-A (previously AFDC—now TANF), Title XIX
(Medicaid) programs, and Foster Care and Adoption
Assistance Title IV-E programs (which have since been
capped). There has also been an increased emphasis on
recovering funds from third-party sources for Title XIX
services, including third-party liability recoveries and targeted
case management.
Among the various roadblocks to maximiz ing federal
reimbursements—smaller governments, for example, are
limited by a lack of economies of scale and a constrained
ability to make the necessary technology investments—has
been access to data. The problem is that the information
needed to determine whether someone is eligible for federal
funding resides in multiple locations and typically isn’t shared.Take a child in school who requires speech therapy and whose
mother is receiving TANF. The school, not knowing that
the child’s mother is on TANF, might pay for the speech
therapy even though the federal government would pay for
it if it were billed.
Data warehousing has enabled state, local, and regional
governments to increase central government reimbursements
by integrating service information from multiple sources like
these. The data is used to create “client” profiles which, in
turn, help government administrators identify and access
appropriate services and funding streams. This approach to
increasing “uncapped” central government funding sources has
been successfully utilized by state and local governments across
the US. New revenue generated from such initiatives will soon
level off, however, as more and more governments exhaust their
opportunities for maximizing central government
reimbursements and as changes in federal eligibility make it
harder for state, regional, and local governments to seek
additional reimbursement.
Conclusion As more and more governments worldwide focus their
attention on cost reduction and revenue maximization,
information technology is one of the most important tools at
their disposal for ratcheting down costs and optimizing current
revenue sources. The strategic use of IT can help governments
drive down the administrative costs of internal functions like
HR, finance, and training as well as program costs in areas
such as welfare, Medicaid, and human services.
Much of the initial investment needed for realizing such savings
can be paid for by ferreting out excess costs buried within theIT budgets of many governments. That such waste exists
wouldn’t come as a surprise to most government CIOs;
previously however, political obstacles have prevented most of
them from doing much about it. No longer. Thanks to the
severe budget pressures faced by many governments—and the
corresponding urgency to squeeze out every last dollar of
potential cost savings—such obstacles can now be more easily
overcome, providing policymakers with a unique opportunity
to put an end to the stovepiped operations that characterize so
many government IT operations today.
Getting to this point, however, won’t be easy. It will require
bold thinking and actions—in many cases, nothing less than a
complete rethinking of how IT is provided. This will involve
some short-term pain, but the potential payoffs—cost savings
of anywhere from 5 to 35 percent, a more streamlined, less
balkanized IT infrastructure, and the renewed ability to invest
in transformative IT projects—should be more than worth it.
SELF-FUNDING STRATEGIES –DOING SOMETHING
WITH NOTHING
To offset the costs associated with data warehousing,
governments have increasingly entered into benefits-
funded partnerships with the private sector. Private
firms provide the initial project investment and are
paid from the incremental funds generated by the
resulting improvements. Consulting fees are generally
capped to ensure that the public remains the primary
beneficiary of the additional revenue. In addition to
cost savings, governments have sought this type of
partnership arrangement in order to share risks and take
advantage of the private sector’s expertise in this area.
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End Notes1 John Kost, “Government Insights: Possible IT Budget
Cuts,” Research Note , Gartner, January 6, 2003.
2
Ellen Perlman, “Teaming Up for IT,” Governing.com (fromGoverning’s December 2002 issue) http://governing.com/
12it.htm.
3 Ibid.
4 Christine Adams, Michael Haines, Laura McLellan, and
Michael Palma, “Utility Computing to Change VAR
Opportunities by 2006,” Research Brief, Gartner
Dataquest, October 29, 2002, p.2.
5 Christopher Connell, “Moving Mountains: An Interview
with US Secretary of Health and Human Services Tommy
G. Thompson,” Catalyst magazine, American Management
Services, Autumn 2001.
6 Gail Repsher Emery, “Mark Forman gets his dream job,”
Washington Technology , www.washingtontechnology.com,
January 7, 2002.
7 “High Payoff in Electronic Government: Measuring the
Return on E-Government Investments,” A Report for the
Intergovernmental Advisory Board, Federation of
Government Information Processing Councils in
cooperation with the Office of Intergovernmental
Solutions, US General Services Administration, March 31,
2003, p.19. www.gsa.gov/intergov.
8 G. Kreizman and M. McDonald, “The Right Governance
Structure for Government IT,” Research Note, Gartner,
April 24, 2003, p.1.
9 In fact, for agencies that process millions of paper forms a
year, the direct and indirect costs of passing paper around
can constitute a not insignificant chunk of their budgets.
Web-enablement makes most of these costs disappear—
providing that is, that the customers themselves also migrateto electronic interactions (and that is a big caveat!).
10In an effort to reduce these costs, Congress has passed two
laws, the Government Paperwork Reduction Act (GPEA)
of 1997 and the E-File Act of 2000, requiring all US federal
agencies to put their most important forms and processes
online, as well as allowing electronic filing.
11 Ravi Nath, “The Next Generation E-Business,” from
HIGPA, http://www.higpa.org/events/past/MTHP/
nath.pdf. August 22, 2002.
12Ellen McCarthy, “Government Sites Draw Web Traffic,”
The Washington Post , January 9, 2002, p.E5.13G. Christian Hill, “Dog Eats Dog Food. And Damn if It
Ain’t Tasty,” eCompany Now (now Business 2.0), November
2000 (cover story).
14Ira Sager, “Big Blue Gets Wired,” Business Week E.Biz, April
3, 2000, p.EB 99.
15Texas Comptroller Carole Keeton Rylander, “Improve the
Medicaid Eligibility Process,” from e-Texas: smaller,
smarter, faster government, Texas Comptroller of Public
Accounts, December 2000, p.183.16Ellen Perlman, “Local Governments: Time is Ripe for IT
Investments,” Governing.com , April 11, 2003.
17“Cost-Benefit Study of Online Services,” TexasOnline
Authority, Department of Information Resources, January
2003, (http://www.dir.state.tx.us/TIC/dir_info/
dirpubs.htm).
18See, for example, John Kost, “Understanding True Costs
of Self-Service in Government,” Research Note, Gartner,
April 12, 2003.
19“High Payoff in Electronic Government: Measuring the
Return on E-Government Investments,” US General
Services Administration, op. cit, p.27.
20Bridgette Blair, “E-Filing Efficiencies Allow IRS to Shift
Positions to Compliance,” Federal Times , April 28, 2003,
p.4.
21Drew Robb, “Plugging in to Electronic Procurement,”
Government Technology, September 2000, p. 80.
22Preston Dodd, “State of the Union Online,” from
Jupi te r Communicat ions , ht tp :/ /www.fedweb.org /
FedWeb2001Presentations/13.
23“High Payoff in Electronic Government: Measuring the
Return on E-Government Investments,” US General
Services Administration, op. cit, p.12.
24 Jeremy Sharrard, “States’ eProcurement Road Map,” The Forrester Report , Forrester Research, July 2001, p. 4.
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25 “High Payoff in Electronic Government: Measuring the
Return on E-Government Investments,” US General
Services Administration, op. cit, p.37.
26Carol Anderson, “The eBuyer Era,” Governing , eGoverning
Special Section, September 2000, p.68.27Peter Wise, “License to Save Money,” The Financial Times
(London), June 6, 2001, p.16.
28Sharrard, “States’ eProcurement Road Map,” op. cit, p.7.
29The state went from 17 agencies purchasing nine different
imaging systems to eight being requested but only one
purchased.
30 As opposed to “forward auctions,” in which buyers bid
against each other for an item until the highest bidder is
left standing.
31Gary Ankabrandt, Pennsylvania Department of General
Services, interview with the author, July 2001.
32 Will iam Matthews, “Savings drive reverse auctions,”
FCW.com , February 16, 2001.
33Carole Keeton Rylander, “Report of the e-Texas
Commission: education, excellence, efficiency,
effectiveness,” Texas Comptroller of Public Accounts,
December 2000, p.140.
34Don Steinberg, “A Smarter Way to Stay Smart,”
SmartBusinessMag.com , May 2002, p.48.
35 William D. Eggers, “Show Me the Money: Cost-Cutting
Strategies for Cash-Strapped Governments,” American
Legislative Exchange Council and the Manhattan Institute
for Policy Research, November 2002.
36Recovery auditing is even more attractive because of the
ease of implementation. Payment to the recovery auditing
firm is made based on a negotiated contingent fee. The
recovery firm takes all the risk and makes all the up-front
human and technology investment.
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About the Author WILLIAM D. EGGERS
Tel: 202 772 8394
e-mail: [email protected]
William D. Eggers is the Global Director for Deloitte
Research-Public Sector. His research focuses on government
reform, e-government, public-private partnerships, cost
reduction, and information technology. He is also a Senior
Fellow at the New York-based Manhattan Institute for Policy
Research and former appointee to the Office of Management
and Budget’s Performance Measurement Advisory Council
(PMAC). He is the co-author of Revolution at the Roots: Making our Government Smaller, Better, and Closer to Home (The Free Press, 1995). His upcoming book on how
technology is transforming government will be published in2004.
AcknowledgmentsTwo of my Deloitte Consulting colleagues played an
important role in the preparation of this study. Mark Lennon
(Sacramento, CA) administered the survey and contributed
key insights into the section on rightsizing IT. Peter Wohl
(Sacramento, CA) contributed extensively to the section on
optimizing existing revenue sources. Other helpful comments
and insights from Deloitte colleagues came from StuartPastman (Philadephia, PA), Richard Clark (Santa Ana, CA),
Mitchell Dombrowski (Philadephia, PA), Greg Pellegrino
(Boston, MA), Bob Campbell (Austin, TX), Todd Wood
(Washington, DC), Mark Price (Sacramento, CA), and Ann
Baxter (San Francisco, CA).
About Deloitte ResearchDeloitte Research identifies, analyzes, and explains the major
issues driving today’s business dynamics and shaping
tomorrow’s global marketplace. From provocative points of
view about strategy and organizational change to straight talk about economics, regulation, and technology, Deloitte
Research delivers innovative, practical insights companies can
use to improve their bottom line performance. Operating
through a network of dedicated research professionals, senior
consulting practitioners, and academic and technology
partners, Deloitte Research exhibits deep industry knowledge,
functional expertise, and a commitment to thought leadership.
In boardrooms and business journals, Deloitte Research is
known for bringing new perspective to real-world concerns.
For more information about Deloitte Research, please contactthe Global Director, Ann Baxter, at +415 268 1026 or via
e-mail: [email protected].
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