The Public Sector Squeeze: Doing More with Less. And Probably Less with Less.

Things are getting tense in the U.S. public sector. While the uncertainty and unusually high number of unfilled positions that have so far accompanied the first presidential transition in eight years marks a major source of strain, there are other causes. Sagging revenue, a demographic crunch, intensifying infrastructure-improvement needs, surging cybersecurity risks, 21st Century citizen expectations and a technological reckoning confront public sector organizations at a time when most budgets seem likely to grow significantly leaner.

“Discretionary spending is not going to be increasing,” says Carlos Otal, National Managing Partner of Grant Thornton’s Public Sector practice. “It’s just not possible. We used to talk about doing more with less. Now, we need to figure out how to do less with less. Decisions need to be made regarding priorities—what are you going to do? What aren’t you going to do, and why?” Even after organizations have pruned the number of major investments they will pursue, they still need help doing more with less. No wonder The Boston Consulting Group’s Danny Werfel points to a pervasive need throughout the sector to “manage the tension” of increasing requirements and decreasing budgets.

New technology platforms and tools can help public sector navigate through these difficulties, but only if: 1) their implementation risks are minimized and their returns are optimized; and 2) legacy system environments stretching back to the Reagan (or even the Kennedy) administration do not get in the way.

Fortunately, many decision-makers within public sector organizations at the federal and state level are highly experienced in addressing change and responding quickly to unexpected, game-changing events, ranging from staggering cybersecurity breaches to government shutdowns to 9/11. Veteran public sector consultants can take care of business, too. Before joining BCG three years ago, Werfel was chosen by President Obama and Secretary of the Treasury Jack Lew to serve as acting commissioner of the Internal Revue Service in the wake of that agency’s organizational crisis.

“In the past year, it has been an extremely bumpy ride for a lot of government agencies around the world,” says Matthew Merker, Senior Analyst, Lead for Industry Consulting Research at ALM Intelligence. “This level of uncertainty is new, even for some consulting firms. But these firms are well suited for this type of uncertainty and disruption for the foreseeable future. Many firms have been doing transformational work for decades, so they have developed the tool kits necessary to help clients deal with sudden change. This period of disruption will give firms a great opportunity to get existing clients interested in other services: While we were fixing this, we noticed another improvement opportunity we can help you with…”

Liquid Citizens and Other Disruptors 

Public sector organizations face the same GAFA-driven pressure—heightened customer expectations as a result of the unmatched digital experiences Google, Apple, Facebook and Amazon deliver to billions—bearing down on other industries.

One of the biggest drivers of change within the public sector is what Accenture refers to as “liquid” citizen expectations, explains Kristin Ficery, Managing Director of the firm’s public sector consulting in North America. “Every citizen is increasingly a digital customer for government,” she says while noting that these digital citizens expect public sector agencies to provide service on par with the way commercial enterprises deliver customer service. Eighty-four percent of respondents to Accenture’s 2017 Citizen Survey indicate that they expect the same—or even higher—quality of digital services from government as they do from commercial organizations.

Heightened citizen expectations figure prominently among a knotty mix of trends and issues driving major changes in the sector; these include:

Budgets

The overall budget environment remains challenging, to say the least, at all levels of government (see State Spending Growth Declines, opposite page). In many areas, budgets are constricting at the same time organizational mandates and responsibilities are expanding. These constraints, public sector consulting leaders point out, goose demand for “evidence-based” decision-making, which in turn increases a need for greater cost transparency and better data management and data analysis capabilities.

“There is an increased demand for results-based decision-making and accountability,” notes North Highland Global Public Sector Lead Barbara Ray. “This holds true for both constituents and federal funding agencies. From the constituent perspective, public sector agencies face higher expectations to move toward a self-service government and, at the very least, an enhanced citizen experience.” On the funding side, Ray adds, key federal initiatives place higher levels of accountability on recipients by making funding allocations dependent on service quality and performance outcomes.

Demographics

The aging public sector workforce marks a pervasive challenge; when discussing the issues public sector organizations face, every consultant takes time to describe this multi-faceted problem.

Otal notes that the financial crisis and the unsteady recovery motivated many retirement-eligible employees to hold off on leaving the workforce. This will result in some organizations getting walloped by much larger retirement waves than previously expected. Ray notes that the tenures of state-level employees are significantly shorter than their predecessors, a trend that further complicates knowledge transfer and succession planning capabilities, which already lag behind private sector capabilities).

Ficery and Werfel point to recruiting challenges, particularly regarding the youngest generation of workers. Werfel identifies two recruiting headwinds that must be addressed: pay disparity and the public sector’s reputation. Government agencies seeking to hire talented, young IT professionals and data scientists are competing against the lush compensation packages offered by the GAFA and other high-tech companies.

Some federal leaders and managers have expressed concerns to their consulting partners that troubling perceptions of government work, and workers, are hurting recruiting; the negative portrayals of federal government promoted by many elected officials cannot be helping.

“It becomes difficult to get people to enter the public sector when it has a reputation for being bureaucratic or is held up as something you wouldn’t want to aspire to,” says Werfel. “Whether you believe in small government or you believe in expanding the government, we need great people in government.” His point resonates when revisiting some core government functions, such as keeping our skies safe, ensuring a healthy food supply, conducting border inspections, preventing the spread of infectious diseases and much more.

Technologies

Public sector organizations have wrestled with the need to replace legacy information systems for years. While headway has been made, consultants say, new challenges intensify the need to modernize these core systems. “Many of these legacy systems have been in place since the ’80s if not earlier,” says Otal. “Now, many of the people who coded these systems are retiring.”  Plus, many organizations are updating legacy systems while simultaneously implementing modern technology tools (e.g., cloud computing offerings) and processes (e.g., agile development techniques), which is stretching IT departments thin.

These needs are converging at a time when many public-sector IT functions experience difficulty competing for new talent. There are other complications as well. In recent years, enough IT core modernization projects—and new technology implementations—took longer and cost more than planned to make many public sector CIOs hesitant to pull the trigger on large IT projects, Werfel notes. This has fostered a fair amount of risk aversion when it comes to investing in new technologies.

While citizen expectations, budgets, demographics and technologies mark the most notable disruptions roiling the public sector, that list is not complete. Cybersecurity, infrastructure needs and fraud and waste also represent major drivers of consulting services.

Talent, Tech and Transformation

The pressures zeroing in on public sector organizations prompt them to seek consulting help that neatly fits into people, process and technology buckets. Of course, there is plenty of overlap and interconnectivity among these general categories.

The talent management solutions firms are delivering in response to demographic reckonings, for example, often involve technology and process-improvement elements that bolster knowledge transfer and succession planning while introducing more efficient workflows. The growing demand for evidence-based decision-making, Otal reports, has increased public sector clients’ hunger for better data analytics capabilities and for strategic insights regarding which programs and operations can be consolidated.

Similarly, organizational change and transformation efforts often leverage new—or new-ish—technology, such as cloud-computing, which in turn may require core modernization work along with IT consulting organizational change work that accompany the introduction of agile development methodologies.

The most common forms of consulting requests from public sector clients this year include the following, people, process and technology service areas:

Talent Management: The public sector’s aging workforce challenges are driving demand for all sorts of talent management and workforce planning services, including those related to succession planning, knowledge management/transfer, human resources (HR) technology, leadership development, and recruiting and retention. “As a significant portion of the public sector workforce enters retirement,” Ray notes, “the public sector must attract, retain and motivate the next generation of leaders.” More public sector organizations are taking a closer look at how talent is sourced, on-boarded and developed. “Public sector entities are looking at things like the way people are progressing through the organization, how they’re being readied for future leadership roles, the degree to which recruiting efforts and hiring timeframes are effective,” Werfel says.

Organizational Change and Transformation: Tightening budgets are forcing client organizations to get a more accurate read on costs so that they can then make changes—often major—to operate more efficiently. This represents a ripe and evergreen opportunity for public sector practices and firms because at least some agencies inevitably confront budget reductions at any given point in time. “Many [consulting] firms have extensive experience with streamlining workforces, revamping organizational design, implementing process improvements and other activities clients need to perform when their budgets are significantly reduced,” says Merker. “Now firms can pivot. A firm can say, ‘We’ve been doing a significant amount of streamlining within the Department of Defense during the past eight years—now we can do similar work for you at the EPA or State Department.” Ficery reports that many clients want help transforming back office functions, such as finance, HR and procurement, “into centers of innovation” while notching productivity and service improvements despite tight budgets.

Cybersecurity: As is the case across most industry areas, cybersecurity services remain in high demand in a public sector that has endured its share of high-profile breaches. “That is where the money is, frankly,” Merker says, “because a lot of negative publicity can arise when government organization loses control of vital information due to a cybersecurity lapse.” IBM Global Government Vice President Client Engagement Riz Khaliq agrees while pointing to a need to reframe how cybersecurity is managed. “Many times, cybersecurity is discussed as a bolt-on,” he explains. “I think we’re starting to see a shift whereby public sector organizations are focusing on security at the foundational level when it comes to protecting citizen data.” The cybersecurity stakes are extremely high. “Governments really have one chance to get it right,” Khaliq continues. “If I’m a citizen, and somehow my personal data gets compromised because of the government’s networks, I’m going to be very hesitant to provide any more data to my government.” That reluctance extends to online interactions, which would put the growing number of digital government initiatives and capabilities at risk.

Information Technology (old and new): Public service clients are requesting consulting assistance across a comprehensive set of IT-related areas, including the modernization of legacy systems, cloud strategy and implementation, and every facet of data analytics. Consulting requests related to machine learning and blockchain projects are also popping up. Many of the technology challenges clients contend with are interrelated, which in turn requires multi-dimensional consulting efforts. Otal describes a project that centers on cloud strategy but involves decisions and/or work related to legacy systems, agile development techniques, talent management elements and data analytics. “So much is involved when you move applications on old technologies to the cloud,” he says.

Count risk-aversion and reluctance among the IT-project elements consultants need to address. Public sector leaders rarely want to be first in line when it comes to testing out new technology, systems or methodology. They also recognize that they can no longer afford to be left behind, given their escalating need for efficiency and higher performance. Werfel says clients are asking for help identifying the right position on the new-technology adoption spectrum to strive for—and for mitigating implementation risks and optimizing returns once they’ve settled on new-technology investments. “Public sector organizations are looking for help at just about every point in the modernization lifecycle,” he adds.

Tension Management’s Staying Power

Werfel’s observation on the all-encompassing nature of IT-related assistance also applies to just about every other aspect of organizational performance in the public sector.

When asked to identify how she expects the public sector to evolve during the next three to five years, Ficery describes trends that touch on most aspects of people, process and technology. She also expects to see greater emphasis on the co-creation of solutions grounded in data, an even stronger focus on citizen experience and user-centricity, the application of behavioral science insights and design thinking methods, more collaborations with citizens on problem-solving and more fluid workforce models “that allow for more project-based and nimble working environments” while supporting more innovative solutions.

Making these types of improvements during a period of declining spending growth suggests that the current tension will sustain—requiring plenty of management help from outside partners.

In our comprehensive look at the public sector two summers ago, IT modernization, cloud technology, digital services and cybersecurity figured prominently among the sector’s top challenges. While those same issues also loom large today, much has changed when it comes to public sector consulting.

“Generally speaking progress is being made, and public sector entities are doing a much better job of identifying strategy and objectives prior to undertaking any large [IT] modernizations,” reports North Highland Global Public Sector Lead Barbara Ray. “This puts departments in better positions to understand ROI and to identify if they are meeting their goals.”

In the past 24 months state and local organizations have notched impressive progress migrating citizen services delivery to the digital domain and to smart-phone apps. Ray points to paying bills, requesting pothole repairs, completing licensing procedures, making mobile payments for parking meters and getting in “virtual line” at the DMV as illustrations of digital services progress.  She also credits public-sector organizations at the federal level for making cybersecurity improvements while emphasizing a crucial point. Fortifying cybersecurity, she asserts, “is a never-ending task and will never be ‘finished’ it terms of protecting U.S. technology and information from both state-sponsored and non-state sponsored threats.

The following areas also represent significant consulting opportunities:

Fraud and Waste: The area of fraud and waste remains a persistent public sector challenge, and a big one (to the tune of billions of dollars). “While a portion of that is true fraud,” says Carlos Otal, national managing partner of Grant Thornton’s Public Sector practice, “much of the problem stems from poor recordkeeping” and other process and people-related shortcomings. Otal reports that public sector clients are interested in deploying predictive analytics and other risk-based approaches to reduce fraud and waste.

Infrastructure: US infrastructure is aging and improvement lags behind other countries. “Bridges, roads, rail and seaports demand modernization and basic repair,” Ray asserts, noting that traditional funding mechanisms may have reached their limits. “The public sector must find a new way to approach these challenges, and perhaps, partner with the private sector where it makes sense.”

Innovation: Discussions about infrastructure improvements often progress to chats about the ways that Internet of Things sensors embedded in bridges, stoplights and other transportation features could transform how the public sector upgrades and manages infrastructure. Although many forms of new technology can deliver dramatic improvements, traditional public sector mindsets also need some transforming, notes Boston Consulting Group Partner Danny Werfel. “Innovation is a topic that a lot of government leaders are thinking through right now,” he says. “They’re trying to figure out how to build innovation into their culture and into the ways in which solutions are deployed.”

More agile solutions represent a common form of innovation. In terms of technology improvements, this might consist of developing a much smaller technology solution to address a challenge much faster than a larger, more expensive technology solution would take to address the same challenge. This type of solution requires a modern IT environment, which is why modernization progress is so welcome.    —E.K.

 

Sidebar1: State Spending Slows

State spending in the U.S. grew in 2016, but at a significantly lower rate (4 percent) than state spending increased in 2015 (6.9 percent), according to the National Association of State Budget Officers’ (NASBOs’) current State Expenditure Report. This declining growth rate likely reflects that fact that the two largest sources of state revenue—the collection of personal income and sales taxes—also posted lower year-over-year growth in 2016, according to NASBO. The 2016 drop in state expenditure growth is more noteworthy when considering that the state expenditure growth rate increased steadily since 2012—when the growth bottomed out at its lowest point in at least two decades. Plus, NASBO projects that states will increase spending by only 1 percent in the current fiscal year.          —E.K.

 

Sidebar 2: Global Opportunities Abound

The U.S. and EU have traditionally represented the most attractive public-sector consulting markets. While this state of affairs seems likely to continue, new consulting opportunities are emerging in other regions, and the types of services in demand within the EU are shifting.

IBM Global Government Vice President Client Engagement Riz Khaliq zooms through a diverse list of public sector engagement outside of the U.S. that his firm has recently conducted, including trash collection improvements in Madrid and traffic-congestion reductions in Singapore.

Given the finite number of roads that the island nation can build, Singapore is wisely optimizing its transportation infrastructure, enlisting IBM’s cognitive computing and consulting expertise to predict where traffic congestion will arise—in plenty of time to redirect traffic before gridlock sets in.

The EU, and the UK in particular, have a growing need for consulting help due to two recent forms of disruptions, both major: Brexit and increased incidents of terrorism. “Brexit will be a major driver of organizational change for UK public sector organizations because so many government functions were integrated with the European Union,” explains Matthew Merker, senior analyst, lead for Industry Consulting Research at ALM Intelligence.

“There is a need to disentangle those links, which will exist for years. EU member clients will have similar, if perhaps less intense, needs for organizational changes following Brexit. Upcoming elections in other EU member countries could bring about other unexpected changes.”   —E.K.

 

Sidebar 3: Sector Modernizes Technology, But More Challenges Loom

In our comprehensive look at the public sector two summers ago, IT modernization, cloud technology, digital services and cybersecurity figured prominently among the sector’s top challenges. While those same issues also loom large today, much has changed when it comes to public sector consulting.

“Generally speaking progress is being made, and public sector entities are doing a much better job of identifying strategy and objectives prior to undertaking any large [IT] modernizations,” reports North Highland Global Public Sector Lead Barbara Ray. “This puts departments in better positions to understand ROI and to identify if they are meeting their goals.”

In the past 24 months state and local organizations have notched impressive progress migrating citizen services delivery to the digital domain and to smart-phone apps. Ray points to paying bills, requesting pothole repairs, completing licensing procedures, making mobile payments for parking meters and getting in “virtual line” at the DMV as illustrations of digital services progress.  She also credits public-sector organizations at the federal level for making cybersecurity improvements while emphasizing a crucial point. Fortifying cybersecurity, she asserts, “is a never-ending task and will never be ‘finished’ it terms of protecting U.S. technology and information from both state-sponsored and non-state sponsored threats.

The following areas also represent significant consulting opportunities:

Fraud and Waste: The area of fraud and waste remains a persistent public sector challenge, and a big one (to the tune of billions of dollars). “While a portion of that is true fraud,” says Carlos Otal, national managing partner of Grant Thornton’s Public Sector practice, “much of the problem stems from poor recordkeeping” and other process and people-related shortcomings. Otal reports that public sector clients are interested in deploying predictive analytics and other risk-based approaches to reduce fraud and waste.

Infrastructure: US infrastructure is aging and improvement lags behind other countries. “Bridges, roads, rail and seaports demand modernization and basic repair,” Ray asserts, noting that traditional funding mechanisms may have reached their limits. “The public sector must find a new way to approach these challenges, and perhaps, partner with the private sector where it makes sense.”

Innovation: Discussions about infrastructure improvements often progress to chats about the ways that Internet of Things sensors embedded in bridges, stoplights and other transportation features could transform how the public sector upgrades and manages infrastructure. Although many forms of new technology can deliver dramatic improvements, traditional public sector mindsets also need some transforming, notes Boston Consulting Group Partner Danny Werfel. “Innovation is a topic that a lot of government leaders are thinking through right now,” he says. “They’re trying to figure out how to build innovation into their culture and into the ways in which solutions are deployed.”

More agile solutions represent a common form of innovation. In terms of technology improvements, this might consist of developing a much smaller technology solution to address a challenge much faster than a larger, more expensive technology solution would take to address the same challenge. This type of solution requires a modern IT environment, which is why modernization progress is so welcome.    —E.K.

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