Privatize State Government by allowing state agencies, boards and commissions to generate savings to be added to the state’s rainy day fund. Private companies know this as improving processes, increasing productivity and generating profits. But this reform can not be implemented merely by changing a simple government policy statement. The root of the problem is in the way governments are organized and budgeted.

For example a first-class U.S. postage stamp costs 44 cents, up from 2 cents in 1950. Had its price kept pace with inflation, a stamp today would sell for only 18 cents. Instead, stamp prices grew nine times as fast as the general rate of inflation. They outpaced inflation largely because the U.S. Postal Service cannot profit from cost-reducing, quality-enhancing innovation the way that private carriers, such as Federal Express and United Parcel Service, can.

The inability to introduce incentives in government is the driving force for many states to outsource (privatize) government functions. Privatization encourages the search for process improvements leading to profits. Governments prevent improvements to services because there is a law (written or unwritten) against making a profit.

Budgets are set by the legislature and no government entity is going to argue with them if the budget is more than adequate. Most agencies departments and commissions spend all of their budgets because they might over-run their budgets in the future. They certainly do not want the Legislature to cut their budgets. This represents what I call top-down budgeting, “not knowing what the real costs are before funding”, as opposed to bottom-up budgeting “measuring and knowing the real costs before funding”, as used in private industry. This budgeting mindset is deeply embedded in the legislature and in the bureaucratic government organizations.

One of the main reasons that government is so inefficient compared with private companies, besides their bureaucratic structure, is found in the way that funding and budgeting is done. When private companies need to fix a problem they select the Department of the company that “owns” the problem and asks them to come up with the most satisfactory solution. If the problem spans several functions a high level Lean Team is chosen to study the problem and come up with the best solution. That is, to find the best but least costly solution that can be implemented quickly. Once the solution has been identified it is costed-out by industrial engineers or budget personnel, funded by the companies’ management and implemented.

When government encounters a similar problem it is usually first brought to the attention of the legislature by this time the problem is considered to be significant. There becomes an immediate political problem when each political party may or may not consider the problem worthy of consideration. A specific agency may be thought to have responsibility for the problem but they may or may not be asked to come up with a solution. One party may develop a solution to the problem and those against may come up with their own solution. Nearly all government problems are thought to require funding. Therefore there is an immediate effort to determine the funding needed for the solution even before the most satisfactory solution is known. The amount of funding is dependent on the party in power and their perception of the funding required not on the actual funding needed for the most satisfactory solution which may or may not even be known. Once the “solution” is funded it becomes a part of the budget by law. If the problem is thought to be large enough the Legislature may create a whole new agency as the solution. Otherwise the funds are passed to the most likely agency and the matter is thought solved unless the problem arises again at some later date. Note that once the funding becomes law the state’s budgeting personnel have little or no role in determining the level of funding required.

I call this government process Top-Down budgeting where little effort is put into finding the most efficient and effective solution before funding it. This is the opposite of that done in private industry which I call Bottom-Up budgeting finding the most appropriate solution before funding it. The bottom-up solution should be based on a Lean Team study to determine the best method for performing the function. When the best method has been found the set of processes are evaluated using Work Measurement and the development of a staffing base and all other costs are identified. This means that the best method for doing the function and the actual costs in labor and other expenses are known at the time of approval by private companies’ management.

There is hope for state governments the state of Iowa has accepted the practice that Lean studies should be made on problems within government processes. This is a giant step forward because it opens the door for state governments to use the best methods from private industry to find solutions to government problems. Lean has experienced great success in Iowa because it has been used to solve customer turnaround problems cutting months off of public environmental applications. Value Stream Mapping is the primary useful Lean tool used in government. Value stream mapping is a Lean manufacturing technique used to analyze the flow of materials and information required to bring a product or service to a consumer.

However Iowa’s Lean projects have generated little to no savings this is because the reformers are not looking for savings. When you continue to identify savings eventually someone will ask about reducing personnel and the entrenched bureaucracies are not about to let that happen. So what type of solutions do bureaucracies like? They especially like solutions that make them look good with the public because it puts pressure on law makers not to oppose an increase the budget that they want. Any innovation that enhances service to the public like Iowa’s Lean projects and makes the bureaucracy look good is a sure thing to be adopted. This leaves us with bureaucratic government standing directly in the path of generating savings and capitalizing on those savings through reduction in government personnel.

I contend that the 19th century bureaucratic government organization has long out lived its usefulness and should be replaced by a 21st century streamlined organization adapted from the best of private industry and government. I recommend that this reform be begun by initiating a high level Lean team within each agency to make the process flow study to determine the best organizational flow within the agency. When this is completed each Function within the agency is organized into a functional Lean team. Each functional Lean team will do a process flow analysis on the processes done by the function to determine the best method for doing the function. Lean Teams encourage innovation by empowering both management and employees to find the best processes for doing high level cross functions and the processes within functions. This method requires little investment by the state simply redirecting training efforts for this Lean implementation.

Notice the agency is now budgeted by functions and not departments within the agency. A function is defined as the name given to a set of processes for providing the public with specific item or service and its budget is determined by the number of times that the function will be performed during the budgeted period.

The Process Flow Charts done by the Lean teams provide a record of the costs associated with each Function. If a Function or one of its processes were to be removed all of its budget will also be removed. When the new and best method has been documented in the Process Flow Chart it is presented to the top management. This is an important step which signifies top management’s support and recognition of the Team’s accomplishments. Upon approval of the new method the Process Flow Chart is given over to the budget analyst to cost out the savings of the new method and to identify the proper staffing for the function. The budget analyst then documents the new method and its costs in a spread sheet which will provide input to the next budget. See my Article 137. Role of Lean Facilitator and Budget Analyst.

Budgets developed by the bottom-up method differ from the normal bureaucratic budget. What you have now is the real budget for doing the agencies Functions not that phony bloated budget that they present each year. True, you must add in the cost of managing but now for the first time you know what that cost is. This is a bottom-up budget with actual costs for doing the work known. All other costs are for management and fluff (which can be significant). In my experience in industry most unmeasured office areas are over staffed by 10% or more. Once you know what the real costs are for doing the work and top management is working closely with the Teams. The next steps in the government reform process can begin.

First the functional Team leaders become the Functional Management of the agencies functions. Second many of the mid management levels between the Functional management and top management become redundant. Top management now assumes the role of a Steering Management Team. The top level Lean team and possibly some but not all of mid management may become part of the Steering Management Team. Steering Management has the role of guiding and steering the organization while Functional Management deals with the day to day operation of the agency’s functions. Steering Management is responsible for telling Functional Management “what to do” but not “how to do it”. This is a loose-tight organization with Steering firmly in control of the budget leaving Functional Management free to determine how best to do the job. Those in industry will recognize this as straight from the book “In Search of Excellence- Lessons from America’s Best-Run Companies” by Thomas J. Peters and Robert H. Waterman Jr., Harper and Row, New York, 1982.

What’s different? The multilevel career path of the former bureaucracy is now reduced to one step from the Functional management Teams to the Steering Management Team. Gone are the hundreds of hours of endless manipulation of employee evaluations. Gone also is the endless bickering and negotiation over the agency’s budget. Performance budgeting is no longer needed once the agency has been properly staffed because the functional teams monitor their own progress and if they start to fall behind they can take their own corrective action.

Given the amount of budget stress that states are presently under you might think that states would be willing to give up their bureaucratic organizations and downsize their agencies. Even with 42 states under economic stress except in only a few direr cases they still prefer to cut services and raise taxes than downsize. Any recommendation either Lean or any other method that gets its efficiency from reduced personnel has little chance of being implemented. This is why I advocate extensive government reforms.

The major portion of this reform has already been successfully implemented. I proposed the Steering and Functional management organization to the McDonnell Douglas Missile Systems Co. in 1983 with the approval of Sandy McDonnell CEO of the McDonnell Douglass Corp. It was very successful and was used for more than ten years until the Company was sold to Boeing in the late 1990’s. It was built on the Quality of Work Life (QWL, similar to TQM teams) Teams that were in place in 1983. Since then I have developed my unique method for Work Measurement to arrive at a Staffing Base and a solid budget.

I am currently looking for a state agency where I can pilot this reform in state government. But I fear that the only way that this can be done is for the legislature to act because most bureaucratic agencies are unlikely to volunteer its organization for the pilot.