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



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



1

Deloitte Research – Cutting Fat, Adding Muscle

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%


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





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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


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.


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%


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


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.


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





14


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.



15


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


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.


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



16



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).



17


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%


Not very valuable0%

Not valuable at all2%



18


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


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%



19


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



20


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?


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



21


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



22


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


TABLE 9. COST SAVINGS FROM E-LEARNING



23


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



24


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%


Somewhatvaluable

49%

Not valuable at all0%



25


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.



26


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.



27


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



24 Jeremy Sharrard, “States’ eProcurement Road Map,” The Forrester Report , Forrester Research, July 2001, p. 4.



28


25 “High Payoff in Electronic Government: Measuring the



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.



29


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].

Recent Deloitte ResearchThought LeadershipIT Value in the Public Sector

Putting IT on the Short List: Key Findings from the Harvard

University, John F. Kennedy School of Government's

“Leadership Workshop for the New Governors,” February

2003.

Put information technology on the short list of critical initiatives that the country’s 24 new governors should be focusing on in their first term? The very notion sounds counter-intuitive, but as this Deloitte Research Brief illustrates, deep budget deficits, new

homeland security demands, and public expectations can't be reconciled without dramatic, yet feasible, reforms in how

government operates and delivers services. As a result, information technology should be a key component of each governor’s management agenda.

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As hard as it is to fathom, state budget problems in fiscal year 2003 will be even worse than they were in 2002. This study seeks to provide budget-cutting strategies that will address current budget shortfalls as well as much needed medium and long-term reforms

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