Description
Turnaround Apps For The Public Sector
Turnaround “apps” for the
public sector
Contents
2 The platforms
3 Strategy platform
5 Operations platform
8 Finance platform
10 Leadership platform
11 Conclusion
1
From Westport to Winnetka to Walnut Creek, from cafés to cornfields to oil rigs, all
over America we see people with their heads bent over iPads, iPods, iPhones, BlackBerrys,
Droids and all manner of electronic communication devices, seeking answers to problems,
finding information or enjoying some entertainment. All are seeking the “super app” that
solves their problems or meets their needs.
Government leaders, too, are looking for solutions: they need the turnaround solutions
that will restore fiscal stability, stimulate growth and solve government problems. To this
end, we would like to offer some turnaround “apps” — proven winners in the corporate
world — that can be applied in the public sector with relative ease. The corporate world
already has what the public sector is looking for.
2
Turnaround “apps” for the public sector
The platforms
All of our turnaround “apps” need to run on one of the
four platforms
1
listed below. Together, these platforms
create a strategic framework for executing turnarounds
in the public sector.
• Strategy
• Operations
• Finance
• Leadership
In the world of corporate turnarounds, every restructuring
project is unique, even those within the same industry. And
by their very nature, restructuring activities must be objective
and analytical — in other words, apolitical. However, to be
successful, an appreciation of the political landscape is required.
All of this also holds true for cities, counties, schools and other
government units. Each government unit has a unique set of
circumstances, though its essential business of executing public
policy remains the same. Throw in diverse political situations,
and each public sector restructuring will also be unique.
While acknowledging that every restructuring project is unique
and must be approached with a fresh perspective, restructuring
professionals draw upon past experiences and interpret them
in ways relevant to the current situation. There is also an
accepted ordering of the restructuring steps that should not
be ignored. Leadership must come first, followed by a clear
strategy. Operational improvement and financial stability can
be orchestrated together or separately, as the situation warrants.
Although leadership is the first component, it is discussed last,
after the reader has had the chance to become familiar with
restructuring concepts.
It is important to emphasize that there is neither a shortcut to
success nor a silver bullet solution. Focusing just on operational
improvement will not result in a sustainable solution. Likewise,
the strongest leader cannot be successful without sound
execution of the other three components.
1
James B. Shein, author of Reversing the Slide: A Strategic Guide to Turnarounds and Corporate Renewal, identified the “turnaround tripod” of strategy, operations and finance. Leadership has
been added as another essential component to complete our list of platforms for the public sector.
3
Turnaround “apps” for the public sector
Strategy platform
Every private enterprise has a mission; government, too,
has a mission, which is often defined in local charters and
constitutions. Current leadership interprets the mission,
and public policy embodies the prioritization and execution.
Public policy is the strategy of government but government
units need to adopt corporate-like strategic planning in order
to allocate scarce resources and manage constituents’
expectations most effectively.
Strategy app #1: Determining core services
Defining government’s core services is at the heart of any
municipal restructuring effort. For example, all municipalities
share a common concern for public safety that is reflected in
the strength of their police and fire departments. One or several
school districts often claim a major portion of the local budget
but the quality of the educational program will vary with the
allocation of budget dollars, demographic mix of the students
and the capability of the teachers. Infrastructure in the form of
roads, bridges and buildings, along with related maintenance,
is generally in the exclusive purview of the government unit.
The degree to which other services such as health care, sanitation,
environmental management and business regulation should be
prioritized is usually subject to debate and prevailing political
sentiment.
But must cities provide swimming pools and golf courses?
Is it necessary to operate a day care center for the elderly
or preschool children? Such services are often available in a
community from private for-profit or nongovernmental not-for-
profit organizations. In general, government units need to engage
in a strategic assessment that includes a decision framework for
prioritizing its activities. The first question to be answered is this:
What should be included in the government’s service offering?
The question can be answered after determining if the
service is mandated by either law or public policy. If yes,
the follow-up question is: What level or type of service is
required? A government must protect the safety of the public;
what about providing security for a local music festival? Is
it necessary for the police to be called every time the fire
department is summoned to a private residence? The answer
to the first question might seem simple, but the answer to the
follow-up question presents some challenges. Governments
pride themselves on their contributions to the quality of their
residents’ lives. The more parks, the more summer programs,
the cleaner the streets, some would say, the better. But is it
absolutely necessary to operate community colleges or programs
for veterans? As prioritization becomes less clear, the debate can
turn political over public policy concerning “must-have” versus
“want-to-have” programs.
Strategy app #2: Core competencies and priorities
Having identified the strategic activities of the government
unit, the next question that needs to be answered is: What are
the government’s core competencies? In other words, what
activities does this government unit perform that are unique to
the community, cannot be easily imitated or deliver value that is
best in class? In the private sector, turnaround specialists evaluate
business units based on profitability and return on investments.
The equivalent in the public sector is performance metrics that
evaluate how effectively the program serves its purpose. In the
category of “must-have” programs such as police, fire protection
and schools, the departments’ effectiveness can be evaluated in
terms of crime rates, protection against property damage, student
performance and any number of other logical, empirical metrics.
4
How do these departments compare with those found in other
communities? Is there a private sector alternative that can serve
as a benchmark? There is an order to the analysis and economic
logic in addressing the inefficiencies of the “must-have” programs
that should be part of a government’s core competency before
addressing the “want-to-have” programs.
“Want-to-have” programs can vary from community
to community and should not be assumed to be luxurious
extravagances. It is often in these programs that public sector
providers operate as best in class. For example, consider a city-
sponsored health clinic: What is the annual cost of delivering
the program? How many patients has it seen? How many jobs
does it provide in the community? Has the general health index
increased? Has absenteeism at work or in the schools declined
as a result? What are the opportunity costs of not providing the
program? What are the health care alternatives within the same
and neighboring communities for the citizens who use the clinic?
The evaluation of government’s competency in managing this
and any other program relies on benchmarking its performance
against private sector alternatives and/or comparable programs
in other cities.
Services that are nonessential but enriching for the
community can provide an opportunity for a government
to perform like a business. This is where “profit” can enter
the public sector picture. Government entities should not be
precluded from earning profits on their activities and creating
benefits for their constituencies. For example, if the recreation
department can generate enough revenue to cover its expenses
from user fees, it may be able to offer summer programs to
disadvantaged youth at little or no cost.
As with any strong business, the “must-have” programs should
be analyzed and restructured in a way that maximizes their
efficacy. The “want-to-have” programs often generate political
conflict that can lead to systemic breakdown and inefficiency.
Experts recognize that the trouble with evaluating disparate
“want-to-have” programs is that there are rarely common
criteria around which to measure performance or value. The
metrics for a health care clinic are not comparable to those
used in evaluating the parks and recreation department that
manages parade permits. The number of citizens served may be
the most readily identified metric. This “for the greater good”
approach, however, can easily overrun the needs of underserved
populations. And in the world of performance metrics, the
measure of our humanity may be the ability to afford social
programs that help just a few. The tragedy is when government’s
inefficiency precludes the ability to deliver an important, albeit
uneconomic, humanitarian program.
5
Turnaround “apps” for the public sector
Operations platform
Operational improvement is the next step in restructuring.
It addresses those activities the organization has determined
are core to its purpose and support its strategy. Operational
improvement can encompass many elements. This paper focuses
on only three: scope of service, organizational design and process
design. These three elements are analyzed in terms of the cost
side of the restructuring equation. Note, however, that there
can be operational improvements that will enhance revenue.
At this stage of the restructuring process, the adviser needs
to be well armed with information and analysis. Benchmarking
headcounts, salaries and benefits for employees against
comparable communities in the state, region and nation can
reveal extraordinary opportunities for restructuring government
units. Moreover, efficiency ratios of full-time employees to
units of service provided suggest areas for consolidation and
reduction. There will always be a debate about the true value of
the services of public employees, and their dedication to serving
the community is respected. But when does a six-figure salary
for an animal control officer or lifeguard make sense? Ultimately,
the goal is to reduce costs by eliminating activities or changing
how the work is performed in a manner that maintains or even
enhances the delivery of the services.
Operations app #1: Scope of service
What are the fundamental tasks of the given program or service?
A police force is charged with providing public safety, a broad
vision of service encompassing activities that range from crime
prevention and law enforcement to neighborhood patrols and
community outreach. Over time, it is easy for a department’s
scope of services to be expanded beyond its original scope,
creating an unintended economic burden. For example, the
Department of Homeland Security has recently turned to local
police and county sheriff departments to assist in addressing
illegal immigration. In the Secure Communities program, local
law enforcement shares fingerprints of arrested persons with
U.S. Immigration and Customs Enforcement authorities. If a
match is found, deportation is facilitated. This mandate creates
a new funding requirement for the local police departments
because they must dedicate resources to the newly established
programs. The cost and benefit of such an effort need to be
considered against the mission or scope of the local department
and the needs of the community. Often, it will be possible for
the government unit to stay true to its mission while reducing
the scope of its services and the variety of its activities.
Operations app #2: Organizational design
The organization of employees can have an enormous impact
on the economic efficiency of a government unit. The scope
of service app described above has a direct bearing on the
organizational design of any government unit. Form follows
function. And, as form follows function, expense follows form:
labor expenses are often among the largest, if not the largest,
component of any government budget. Currently, many
cash-strapped governments are providing services beyond
their ability to fund these services on a sustainable basis. Elected
officials and government managers have been and continue to
be forced to reduce services and rightsize their organizations.
An organizational design that was crafted 20 years ago may
no longer match the entity’s scope and mission.
6
The organizational chart of a government unit may reveal
many layers of middle management. In the private sector,
such vertical structures create hierarchies that often lead to
inefficient allocations of work and resources, as well as poor
communication. Selectively removing some middle management
— delayering — flattens the organizational structure and pushes
decision-making downward, improving morale and substantially
reducing expenses. Stronger communication and efficiency from
the top to the bottom of the organization are the ultimate results.
If delayering is done within the strategic framework, the results
will be enhanced service delivery for less cost.
The police department of Raleigh, N.C., has undertaken a
major restructuring effort in recent years to address new crime-
fighting priorities in the community. The organizational design
has been reoriented to focus on gangs, youth crimes, and drug
offenses. The department added a Youth and Family Services
Unit that deploys juvenile officers to proactively work with
families to address gang issues and prevent school dropout.
In the experience of restructuring professionals, almost any
business thrives with a flatter organization structure. Decision-
making is simplified, creating a sense of empowerment and
effectiveness. By decentralizing the decision-making process
in their department, the Raleigh police force is able to provide
officers with the credibility needed to fulfill their mission in the
community. Obviously, such decentralization must be balanced
for all of the tasks at hand while recognizing a hierarchy is still
required for rapid decision-making in emergency situations.
Another common technique used in rightsizing activities
is the “paintbrush” approach: managers determine how much
needs to be cut from the expense line as a percentage of total
costs, and they instruct subordinates to cut 10 percent, 20
percent or 30 percent as they see fit. Often, the decisions as
to which expenses (i.e. headcount) to reduce is done without
adherence to a common strategy and standardized decision
criteria. Because of this, unintended consequences can
compromise the unit’s mission and create an adverse ripple
effect throughout the organization. This approach is easiest
for management but ignores the importance and relevance
of different activities. We do not recommend this type of
approach because the long-term damage can be great.
Operations app #3: Process design
The organizational design of a government unit will dictate
who performs what tasks. Process design considers how
the task is performed. Expense savings may be achieved by
streamlining and consolidating processes. This may include
developing technology solutions to replace labor-intensive
activities, combining similar tasks from across the organization
into a central services function, and outsourcing to third parties.
Improvements that come about from these types of changes
provide the organization with more flexibility to control
costs and improve service delivery over the long term. This is
commonly known as “business process reengineering”. Done
well, the benefits are long term and long lasting. The challenges
are that implementation can be slow and internal compromises
reached during negotiations among the affected parties can lead
to suboptimization of the project.
7
This is particularly relevant in governments with a history of
collective bargaining contracts that evolved to include complex
work rule requirements. These work rules may not be aligned
with the organization’s current needs or capabilities. Antiquated
or redundant job classifications such as “book mender,” “spray
painter,” “spray painter sprayer” and “spray painter helper” may
provide opportunities to simplify the operations. In the current
and prospective economic environment, a balanced approach to
determining service delivery, and the corresponding costs, will
require flexibility by all segments of the labor force, including
those covered by collective bargaining agreements.
Sharing services with neighboring local municipalities
has recently become favored in the redesign of government.
Communities have combined emergency dispatch services,
reduced redundancy in local police and fire services in adjacent
towns, and formed buying cooperatives. Further, cities, counties
and states should consider partnering with the private sector
including nonprofits and charities, in cases where both private
and public sectors provide similar services. This is a particularly
powerful approach to social service offerings such as youth
programs, immigrant services and safety net programs for the
most needy.
It may even mean that outsourcing to a third party provides
a better service for less cost. Outsourcing is an approach that
has come in and out of vogue over many years. It is not a
panacea and often requires strong management to ensure that
the third-party contractor delivers on the promise. In fact, even
redesigning the outsourcing process — the bidding procedures
for such public contracts — can yield savings by increasing
competitiveness for selection.
In private sector restructuring, administrative and internal
tasks are areas ripe for business process reengineering. Often,
conscientious employees perform tasks simply because they
always have. One company kept so many different logs to keep
track of business activities that they had someone whose job it
was to check all 14 logs on a daily basis. When all log-keeping
was stopped for a week, it quickly became apparent that one
or two of the logs were important and the rest were busywork.
Taking the approach of just stopping an activity for a short
period of time will quickly reveal its relevance and importance.
These situations are particularly evident in organizations whose
business has been relatively static over time, including some
government units. Clearly, a county cannot stop plowing the
snow during a blizzard, but it can stop many back-office and
administrative tasks for a brief period to determine if they are
truly necessary.
Operational improvement decisions must be based on
data and analysis, and be applied in a bi-partisan manner. The
effect on individuals, citizens and the government entity itself
can be significant; tough choices can be justified only when
the reasoning is sound and beyond reproach. As noted earlier,
analytical preparation is critical. In both the private sector and
the public sector, most people will reach the same decision if
they are provided with the same facts and analysis; that is, a
single set of data must be available to all stakeholders and l
eaders of the restructuring process must provide all parties
with the same analysis. While this may sound obvious, it is
not the standard by which all restructurings occur.
8
Turnaround “apps” for the public sector
Finance platform
8
It is financial distress that leads most organizations to the
doorstep of the restructuring expert. Today, governmental
organizations are suffering from two types of financial distress
that are common among private sector enterprises: expenses
greater than revenues and excessive future commitments.
A structural imbalance between revenues and expenditures
in the general fund is the government equivalent of unprofitable
operations in the private sector. As elected officials became
euphoric over the increase in revenue in good economic times,
they undertook an expansion of services along with generous
increases in compensation and benefits for employees. Providing
more parks and summer programs for children, building
beautiful performing arts centers, adding police and firefighters,
and refurbishing government offices are all worthy expenditures
when cash is available. So is saving for a rainy day and paying
off debt. The latter received short shrift in many municipalities
in past years, so that when economic disaster hit, there was
no cushion. Even those municipalities that had the foresight
and discipline to save did not expect the impact of the Great
Recession to last as long as it has. Now governments are faced
with a cost base that exceeds their revenue potential at least in
the near and medium terms.
Some states and municipalities have statutory requirements
for a balanced budget, which should prohibit the behavior
outlined above. But the requirements are generally not well
defined, and as a result, certain states and municipalities have
found ways to fund current operating losses with long-term
debt. In short, when there is little motivation to balance
operating revenues and expenses, and capital markets encourage
borrowing, public officials may postpone or avoid making
difficult decisions. The public finance market has provided
the equivalent of the home equity line of credit to many
municipalities such that government units can easily borrow
to cover budget imbalances.
Finance app #1: Long-term financial planning
Distressed businesses often lack long-term financial plans.
The discipline to look three to five years into the future forces
management to incorporate strategic plans and create goals
that serve the interests of their shareholders. Government is
no different. The idea of budgeting for complex government
services from the local level all the way to the state and federal
levels without regard for the long-term is anathema to the
turnaround professional.
The Government Finance Officers Association recently
wrote about building a financially resilient government
through long-term financial planning
2
and referenced Jamais
Cascio, a senior fellow at the Institute for Ethics and Emerging
Technologies, who identifies the following eight essential
characteristics of any resilient system:
• Diversity – Avoid a single point of failure or reliance
on a single solution
• Redundancy – Have more than one path of escape
• Decentralization – Centralized systems look strong
until they fail catastrophically
• Transparency – Share plans and preparations,
and listen when flaws are pointed out
• Collaboration – Work together to become stronger
• Falling gracefully – Failure happens
• Flexibility – Be ready to change when plans fail;
do not count on stability
• Foresight – Think and prepare
This approach is a tool that municipalities can use as they
undertake strategic planning in concert with long-term financial
planning. The following characteristics are particularly resonant
when looking at public sector turnaround activities.
2
http://gfoa.org/downloads/financiallyresilientgovernment_whitepaper.pdf
9
Transparency – A challenge with public finance is the lack of
transparency and readily understandable financial reporting.
Even sophisticated readers of financial information struggle
to make heads or tails out of the reports generated by our
government units. The timeliness of the information is often
lacking —some reports appear many months after the actual
results. Prospective financial information is even more
challenging than the historical. Governments should institute
clear and consistent information based on generally accepted
accounting principles.
Foresight – The very concept of long-term planning
begs government leaders to think beyond the election cycle
and anticipate economic challenges and crises. Developing
contingency plans and establishing real, tangible cash reserves
are important.
Finance app #2: Cash flow planning
Jim Gentry, professor emeritus of finance at the University
of Illinois at Urbana-Champaign, once said that liquidity is
like beer at a fraternity party: when you are out of liquidity,
the party is over.
Understanding liquidity in the context of government
operations is important to ensuring that essential activities
can occur without interruption. Some government units
make an attempt at cash flow forecasting, but limit its use to
evaluating the need for short-term borrowing – revenue and
tax anticipation notes in particular. However, the private sector
uses cash forecasts as a “dashboard” to monitor performance,
even if the business is not distressed, via a tool called the “13-
week rolling cash forecast”. Successful businesses evaluate their
forecasts against actual results to understand whether variances
were based on timing or permanent differences. This discipline
of evaluation creates a continuous feedback loop that enhances
management’s ability to forecast and minimize variance. How
can this be applied in the public sector?
For most governments, 13 weeks is an insufficient time frame.
Biannual tax payments, large lag periods associated with federal
or state funding, and union contracts with annual lump-sum
payments require a longer forecasting horizon. Ideally, a rolling
12-month forecast is better. Governments need to develop
a heightened sense of importance around working capital
management. In the private sector, businesses have long known
that it is important to balance accounts receivable collections
with accounts payable expenditures. Ideally, businesses want to
collect their receivables as quickly as possible and pay their bills
at the latest date acceptable. Many public sector organizations
existed for years without ever having to worry about having
enough cash in the bank account to pay bills. This scenario
has changed as cities and states have begun to spend more than
they take in, making cash flow forecasting more important.
Neglecting working capital management exacerbates cash flow
problems and diminishes the fun at the party.
10
Turnaround “apps” for the public sector
Leadership platform
10
Successful turnarounds occur only when there is strong
leadership that possesses a few definitive characteristics: courage,
unwavering commitment to achieve the most good for the
most constituencies, decisiveness, credibility, tolerance and
the ability to persuade. These characteristics are those ideally
found in leaders we elect to public office. The difference is that
many public office leaders may have never faced the kind of
fiscal crisis that can rattle even the best corporate executives.
Further, elected officials are not required to have any training
or experience in business or finance, two critical ingredients
for a well-functioning public sector.
Leadership app #1: Turnaround coach
In private sector turnarounds, an “outsider” with no stake in
the outcome of the restructuring other than to create stability
and return the business to profitability is often brought in.
A Chief Restructuring Officer can restore credibility to
management and give confidence to boards of directors and
outside constituencies like banks and shareholders. But an
elected or appointed government unit leader cannot simply
cede authority to an outsider. But he or she may do well to
hire an “auxiliary authority” in the form of a turnaround adviser
who can rise above political considerations and stay focused on
strategy, operations and finance. Professionals who have been
in the trenches in crisis situations can help develop options that
may not have been previously considered. Outside advisers can
also ensure that the fact gathering and data analysis, so important
in reaching agreement on the restructuring activities, is done in a
way that avoids political tinkering.
Leadership app #2: Pain sharing
For restructurings to be successful, all stakeholders must buy
in to the need for the restructuring. They must see themselves as
part of the problem, and part of the solution. Strong leadership
is often needed to help the constituencies see that they play
both roles. Reaching consensus can be difficult and normally
requires each party, sometimes to varying degrees, to agree to
concessions for the sake of the greater good. In the private sector
this normally translates into a company that maximizes profit or
value. In the public sector, this concept is more ephemeral.
Accepting such resolutions and compromises is called
“sharing the pain.” In the private sector, where there is a broad
history of restructurings, this concept is well understood as an
expectation by parties in interest at the onset of a restructuring.
The public sector, by contrast, is not always incented to “share
pain.” Sometimes it is more politically expedient to defer pain or
mask it or ignore it. But if the goal is to effect lasting, permanent
change in a troubled situation — such as a current or future
budget deficit — the strategic approach to prioritizing programs
and services, coupled with the reasoned negotiation, can yield a
successful outcome.
11
Turnaround “apps” for the public sector
Conclusion
The complexities of governing and the economic crises facing
leaders today will require new approaches and challenge even the
best politicians. But the expectation that new problems can be
solved by continuing to repeat the standard operating practices
of the past will only yield frustration and a result that the
turnaround cannot be effected.
The turnaround community’s experience in fixing troubled
businesses for more than three decades has yielded lessons
that have direct application for governments. The platform
fundamentals of strategy, operations, finance and leadership
provide a reasoned and structured framework to tackling
crises as well as instituting necessary long-term changes.
Martha E. M. Kopacz
Managing Principal
Corporate Advisory & Restructuring Services
Grant Thornton LLP
T 212.542.9730
T 617.848.5010
E [email protected]
Michael E. Imber
Principal
Corporate Advisory & Restructuring Services
Grant Thornton LLP
T 212.542.9780
E [email protected]
Christopher R. Jadro
Manager
Corporate Advisory & Restructuring Services
Grant Thornton LLP
T 212.542.9595
E [email protected]
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Arizona
Phoenix 602.474.3400
California
Irvine 949.553.1600
Los Angeles 213.627.1717
Sacramento 916.449.3991
San Diego 858.704.8000
San Francisco 415.986.3900
San Jose 408.275.9000
Woodland Hills 818.936.5100
Colorado
Denver 303.813.4000
Florida
Fort Lauderdale 954.768.9900
Miami 305.341.8040
Orlando 407.481.5100
Tampa 813.229.7201
Georgia
Atlanta 404.330.2000
Illinois
Chicago 312.856.0200
Oakbrook Terrace 630.873.2500
Schaumburg 847.884.0123
Kansas
Wichita 316.265.3231
Maryland
Baltimore 410.685.4000
Massachusetts
Boston 617.723.7900
Michigan
Detroit 248.262.1950
Minnesota
Minneapolis 612.332.0001
Missouri
Kansas City 816.412.2400
St. Louis 314.735.2200
Nevada
Reno 775.786.1520
New Jersey
Edison 732.516.5500
New York
Albany 518.427.5197
Long Island 631.249.6001
Downtown 212.422.1000
Midtown 212.599.0100
North Carolina
Charlotte 704.632.3500
Raleigh 919.881.2700
Ohio
Cincinnati 513.762.5000
Cleveland 216.771.1400
Oklahoma
Oklahoma City 405.218.2800
Tulsa 918.877.0800
Oregon
Portland 503.222.3562
Pennsylvania
Harrisburg 717.265.8600
Philadelphia 215.561.4200
South Carolina
Columbia 803.231.3100
Texas
Austin 512.391.6821
Dallas 214.561.2300
Houston 832.476.3600
San Antonio 210.881.1800
Utah
Salt Lake City 801.415.1000
Virginia
Alexandria 703.837.4400
McLean 703.847.7500
Washington
Seattle 206.623.1121
Washington, D.C.
Washington, D.C. 202.296.7800
Wisconsin
Appleton 920.968.6700
Milwaukee 414.289.8200
Content in this publication is not intended to answer specific questions or suggest suitability
of action in a particular case. For additional information on the issues discussed, consult a
Grant Thornton client service partner
doc_755283418.pdf
Turnaround Apps For The Public Sector
Turnaround “apps” for the
public sector
Contents
2 The platforms
3 Strategy platform
5 Operations platform
8 Finance platform
10 Leadership platform
11 Conclusion
1
From Westport to Winnetka to Walnut Creek, from cafés to cornfields to oil rigs, all
over America we see people with their heads bent over iPads, iPods, iPhones, BlackBerrys,
Droids and all manner of electronic communication devices, seeking answers to problems,
finding information or enjoying some entertainment. All are seeking the “super app” that
solves their problems or meets their needs.
Government leaders, too, are looking for solutions: they need the turnaround solutions
that will restore fiscal stability, stimulate growth and solve government problems. To this
end, we would like to offer some turnaround “apps” — proven winners in the corporate
world — that can be applied in the public sector with relative ease. The corporate world
already has what the public sector is looking for.
2
Turnaround “apps” for the public sector
The platforms
All of our turnaround “apps” need to run on one of the
four platforms
1
listed below. Together, these platforms
create a strategic framework for executing turnarounds
in the public sector.
• Strategy
• Operations
• Finance
• Leadership
In the world of corporate turnarounds, every restructuring
project is unique, even those within the same industry. And
by their very nature, restructuring activities must be objective
and analytical — in other words, apolitical. However, to be
successful, an appreciation of the political landscape is required.
All of this also holds true for cities, counties, schools and other
government units. Each government unit has a unique set of
circumstances, though its essential business of executing public
policy remains the same. Throw in diverse political situations,
and each public sector restructuring will also be unique.
While acknowledging that every restructuring project is unique
and must be approached with a fresh perspective, restructuring
professionals draw upon past experiences and interpret them
in ways relevant to the current situation. There is also an
accepted ordering of the restructuring steps that should not
be ignored. Leadership must come first, followed by a clear
strategy. Operational improvement and financial stability can
be orchestrated together or separately, as the situation warrants.
Although leadership is the first component, it is discussed last,
after the reader has had the chance to become familiar with
restructuring concepts.
It is important to emphasize that there is neither a shortcut to
success nor a silver bullet solution. Focusing just on operational
improvement will not result in a sustainable solution. Likewise,
the strongest leader cannot be successful without sound
execution of the other three components.
1
James B. Shein, author of Reversing the Slide: A Strategic Guide to Turnarounds and Corporate Renewal, identified the “turnaround tripod” of strategy, operations and finance. Leadership has
been added as another essential component to complete our list of platforms for the public sector.
3
Turnaround “apps” for the public sector
Strategy platform
Every private enterprise has a mission; government, too,
has a mission, which is often defined in local charters and
constitutions. Current leadership interprets the mission,
and public policy embodies the prioritization and execution.
Public policy is the strategy of government but government
units need to adopt corporate-like strategic planning in order
to allocate scarce resources and manage constituents’
expectations most effectively.
Strategy app #1: Determining core services
Defining government’s core services is at the heart of any
municipal restructuring effort. For example, all municipalities
share a common concern for public safety that is reflected in
the strength of their police and fire departments. One or several
school districts often claim a major portion of the local budget
but the quality of the educational program will vary with the
allocation of budget dollars, demographic mix of the students
and the capability of the teachers. Infrastructure in the form of
roads, bridges and buildings, along with related maintenance,
is generally in the exclusive purview of the government unit.
The degree to which other services such as health care, sanitation,
environmental management and business regulation should be
prioritized is usually subject to debate and prevailing political
sentiment.
But must cities provide swimming pools and golf courses?
Is it necessary to operate a day care center for the elderly
or preschool children? Such services are often available in a
community from private for-profit or nongovernmental not-for-
profit organizations. In general, government units need to engage
in a strategic assessment that includes a decision framework for
prioritizing its activities. The first question to be answered is this:
What should be included in the government’s service offering?
The question can be answered after determining if the
service is mandated by either law or public policy. If yes,
the follow-up question is: What level or type of service is
required? A government must protect the safety of the public;
what about providing security for a local music festival? Is
it necessary for the police to be called every time the fire
department is summoned to a private residence? The answer
to the first question might seem simple, but the answer to the
follow-up question presents some challenges. Governments
pride themselves on their contributions to the quality of their
residents’ lives. The more parks, the more summer programs,
the cleaner the streets, some would say, the better. But is it
absolutely necessary to operate community colleges or programs
for veterans? As prioritization becomes less clear, the debate can
turn political over public policy concerning “must-have” versus
“want-to-have” programs.
Strategy app #2: Core competencies and priorities
Having identified the strategic activities of the government
unit, the next question that needs to be answered is: What are
the government’s core competencies? In other words, what
activities does this government unit perform that are unique to
the community, cannot be easily imitated or deliver value that is
best in class? In the private sector, turnaround specialists evaluate
business units based on profitability and return on investments.
The equivalent in the public sector is performance metrics that
evaluate how effectively the program serves its purpose. In the
category of “must-have” programs such as police, fire protection
and schools, the departments’ effectiveness can be evaluated in
terms of crime rates, protection against property damage, student
performance and any number of other logical, empirical metrics.
4
How do these departments compare with those found in other
communities? Is there a private sector alternative that can serve
as a benchmark? There is an order to the analysis and economic
logic in addressing the inefficiencies of the “must-have” programs
that should be part of a government’s core competency before
addressing the “want-to-have” programs.
“Want-to-have” programs can vary from community
to community and should not be assumed to be luxurious
extravagances. It is often in these programs that public sector
providers operate as best in class. For example, consider a city-
sponsored health clinic: What is the annual cost of delivering
the program? How many patients has it seen? How many jobs
does it provide in the community? Has the general health index
increased? Has absenteeism at work or in the schools declined
as a result? What are the opportunity costs of not providing the
program? What are the health care alternatives within the same
and neighboring communities for the citizens who use the clinic?
The evaluation of government’s competency in managing this
and any other program relies on benchmarking its performance
against private sector alternatives and/or comparable programs
in other cities.
Services that are nonessential but enriching for the
community can provide an opportunity for a government
to perform like a business. This is where “profit” can enter
the public sector picture. Government entities should not be
precluded from earning profits on their activities and creating
benefits for their constituencies. For example, if the recreation
department can generate enough revenue to cover its expenses
from user fees, it may be able to offer summer programs to
disadvantaged youth at little or no cost.
As with any strong business, the “must-have” programs should
be analyzed and restructured in a way that maximizes their
efficacy. The “want-to-have” programs often generate political
conflict that can lead to systemic breakdown and inefficiency.
Experts recognize that the trouble with evaluating disparate
“want-to-have” programs is that there are rarely common
criteria around which to measure performance or value. The
metrics for a health care clinic are not comparable to those
used in evaluating the parks and recreation department that
manages parade permits. The number of citizens served may be
the most readily identified metric. This “for the greater good”
approach, however, can easily overrun the needs of underserved
populations. And in the world of performance metrics, the
measure of our humanity may be the ability to afford social
programs that help just a few. The tragedy is when government’s
inefficiency precludes the ability to deliver an important, albeit
uneconomic, humanitarian program.
5
Turnaround “apps” for the public sector
Operations platform
Operational improvement is the next step in restructuring.
It addresses those activities the organization has determined
are core to its purpose and support its strategy. Operational
improvement can encompass many elements. This paper focuses
on only three: scope of service, organizational design and process
design. These three elements are analyzed in terms of the cost
side of the restructuring equation. Note, however, that there
can be operational improvements that will enhance revenue.
At this stage of the restructuring process, the adviser needs
to be well armed with information and analysis. Benchmarking
headcounts, salaries and benefits for employees against
comparable communities in the state, region and nation can
reveal extraordinary opportunities for restructuring government
units. Moreover, efficiency ratios of full-time employees to
units of service provided suggest areas for consolidation and
reduction. There will always be a debate about the true value of
the services of public employees, and their dedication to serving
the community is respected. But when does a six-figure salary
for an animal control officer or lifeguard make sense? Ultimately,
the goal is to reduce costs by eliminating activities or changing
how the work is performed in a manner that maintains or even
enhances the delivery of the services.
Operations app #1: Scope of service
What are the fundamental tasks of the given program or service?
A police force is charged with providing public safety, a broad
vision of service encompassing activities that range from crime
prevention and law enforcement to neighborhood patrols and
community outreach. Over time, it is easy for a department’s
scope of services to be expanded beyond its original scope,
creating an unintended economic burden. For example, the
Department of Homeland Security has recently turned to local
police and county sheriff departments to assist in addressing
illegal immigration. In the Secure Communities program, local
law enforcement shares fingerprints of arrested persons with
U.S. Immigration and Customs Enforcement authorities. If a
match is found, deportation is facilitated. This mandate creates
a new funding requirement for the local police departments
because they must dedicate resources to the newly established
programs. The cost and benefit of such an effort need to be
considered against the mission or scope of the local department
and the needs of the community. Often, it will be possible for
the government unit to stay true to its mission while reducing
the scope of its services and the variety of its activities.
Operations app #2: Organizational design
The organization of employees can have an enormous impact
on the economic efficiency of a government unit. The scope
of service app described above has a direct bearing on the
organizational design of any government unit. Form follows
function. And, as form follows function, expense follows form:
labor expenses are often among the largest, if not the largest,
component of any government budget. Currently, many
cash-strapped governments are providing services beyond
their ability to fund these services on a sustainable basis. Elected
officials and government managers have been and continue to
be forced to reduce services and rightsize their organizations.
An organizational design that was crafted 20 years ago may
no longer match the entity’s scope and mission.
6
The organizational chart of a government unit may reveal
many layers of middle management. In the private sector,
such vertical structures create hierarchies that often lead to
inefficient allocations of work and resources, as well as poor
communication. Selectively removing some middle management
— delayering — flattens the organizational structure and pushes
decision-making downward, improving morale and substantially
reducing expenses. Stronger communication and efficiency from
the top to the bottom of the organization are the ultimate results.
If delayering is done within the strategic framework, the results
will be enhanced service delivery for less cost.
The police department of Raleigh, N.C., has undertaken a
major restructuring effort in recent years to address new crime-
fighting priorities in the community. The organizational design
has been reoriented to focus on gangs, youth crimes, and drug
offenses. The department added a Youth and Family Services
Unit that deploys juvenile officers to proactively work with
families to address gang issues and prevent school dropout.
In the experience of restructuring professionals, almost any
business thrives with a flatter organization structure. Decision-
making is simplified, creating a sense of empowerment and
effectiveness. By decentralizing the decision-making process
in their department, the Raleigh police force is able to provide
officers with the credibility needed to fulfill their mission in the
community. Obviously, such decentralization must be balanced
for all of the tasks at hand while recognizing a hierarchy is still
required for rapid decision-making in emergency situations.
Another common technique used in rightsizing activities
is the “paintbrush” approach: managers determine how much
needs to be cut from the expense line as a percentage of total
costs, and they instruct subordinates to cut 10 percent, 20
percent or 30 percent as they see fit. Often, the decisions as
to which expenses (i.e. headcount) to reduce is done without
adherence to a common strategy and standardized decision
criteria. Because of this, unintended consequences can
compromise the unit’s mission and create an adverse ripple
effect throughout the organization. This approach is easiest
for management but ignores the importance and relevance
of different activities. We do not recommend this type of
approach because the long-term damage can be great.
Operations app #3: Process design
The organizational design of a government unit will dictate
who performs what tasks. Process design considers how
the task is performed. Expense savings may be achieved by
streamlining and consolidating processes. This may include
developing technology solutions to replace labor-intensive
activities, combining similar tasks from across the organization
into a central services function, and outsourcing to third parties.
Improvements that come about from these types of changes
provide the organization with more flexibility to control
costs and improve service delivery over the long term. This is
commonly known as “business process reengineering”. Done
well, the benefits are long term and long lasting. The challenges
are that implementation can be slow and internal compromises
reached during negotiations among the affected parties can lead
to suboptimization of the project.
7
This is particularly relevant in governments with a history of
collective bargaining contracts that evolved to include complex
work rule requirements. These work rules may not be aligned
with the organization’s current needs or capabilities. Antiquated
or redundant job classifications such as “book mender,” “spray
painter,” “spray painter sprayer” and “spray painter helper” may
provide opportunities to simplify the operations. In the current
and prospective economic environment, a balanced approach to
determining service delivery, and the corresponding costs, will
require flexibility by all segments of the labor force, including
those covered by collective bargaining agreements.
Sharing services with neighboring local municipalities
has recently become favored in the redesign of government.
Communities have combined emergency dispatch services,
reduced redundancy in local police and fire services in adjacent
towns, and formed buying cooperatives. Further, cities, counties
and states should consider partnering with the private sector
including nonprofits and charities, in cases where both private
and public sectors provide similar services. This is a particularly
powerful approach to social service offerings such as youth
programs, immigrant services and safety net programs for the
most needy.
It may even mean that outsourcing to a third party provides
a better service for less cost. Outsourcing is an approach that
has come in and out of vogue over many years. It is not a
panacea and often requires strong management to ensure that
the third-party contractor delivers on the promise. In fact, even
redesigning the outsourcing process — the bidding procedures
for such public contracts — can yield savings by increasing
competitiveness for selection.
In private sector restructuring, administrative and internal
tasks are areas ripe for business process reengineering. Often,
conscientious employees perform tasks simply because they
always have. One company kept so many different logs to keep
track of business activities that they had someone whose job it
was to check all 14 logs on a daily basis. When all log-keeping
was stopped for a week, it quickly became apparent that one
or two of the logs were important and the rest were busywork.
Taking the approach of just stopping an activity for a short
period of time will quickly reveal its relevance and importance.
These situations are particularly evident in organizations whose
business has been relatively static over time, including some
government units. Clearly, a county cannot stop plowing the
snow during a blizzard, but it can stop many back-office and
administrative tasks for a brief period to determine if they are
truly necessary.
Operational improvement decisions must be based on
data and analysis, and be applied in a bi-partisan manner. The
effect on individuals, citizens and the government entity itself
can be significant; tough choices can be justified only when
the reasoning is sound and beyond reproach. As noted earlier,
analytical preparation is critical. In both the private sector and
the public sector, most people will reach the same decision if
they are provided with the same facts and analysis; that is, a
single set of data must be available to all stakeholders and l
eaders of the restructuring process must provide all parties
with the same analysis. While this may sound obvious, it is
not the standard by which all restructurings occur.
8
Turnaround “apps” for the public sector
Finance platform
8
It is financial distress that leads most organizations to the
doorstep of the restructuring expert. Today, governmental
organizations are suffering from two types of financial distress
that are common among private sector enterprises: expenses
greater than revenues and excessive future commitments.
A structural imbalance between revenues and expenditures
in the general fund is the government equivalent of unprofitable
operations in the private sector. As elected officials became
euphoric over the increase in revenue in good economic times,
they undertook an expansion of services along with generous
increases in compensation and benefits for employees. Providing
more parks and summer programs for children, building
beautiful performing arts centers, adding police and firefighters,
and refurbishing government offices are all worthy expenditures
when cash is available. So is saving for a rainy day and paying
off debt. The latter received short shrift in many municipalities
in past years, so that when economic disaster hit, there was
no cushion. Even those municipalities that had the foresight
and discipline to save did not expect the impact of the Great
Recession to last as long as it has. Now governments are faced
with a cost base that exceeds their revenue potential at least in
the near and medium terms.
Some states and municipalities have statutory requirements
for a balanced budget, which should prohibit the behavior
outlined above. But the requirements are generally not well
defined, and as a result, certain states and municipalities have
found ways to fund current operating losses with long-term
debt. In short, when there is little motivation to balance
operating revenues and expenses, and capital markets encourage
borrowing, public officials may postpone or avoid making
difficult decisions. The public finance market has provided
the equivalent of the home equity line of credit to many
municipalities such that government units can easily borrow
to cover budget imbalances.
Finance app #1: Long-term financial planning
Distressed businesses often lack long-term financial plans.
The discipline to look three to five years into the future forces
management to incorporate strategic plans and create goals
that serve the interests of their shareholders. Government is
no different. The idea of budgeting for complex government
services from the local level all the way to the state and federal
levels without regard for the long-term is anathema to the
turnaround professional.
The Government Finance Officers Association recently
wrote about building a financially resilient government
through long-term financial planning
2
and referenced Jamais
Cascio, a senior fellow at the Institute for Ethics and Emerging
Technologies, who identifies the following eight essential
characteristics of any resilient system:
• Diversity – Avoid a single point of failure or reliance
on a single solution
• Redundancy – Have more than one path of escape
• Decentralization – Centralized systems look strong
until they fail catastrophically
• Transparency – Share plans and preparations,
and listen when flaws are pointed out
• Collaboration – Work together to become stronger
• Falling gracefully – Failure happens
• Flexibility – Be ready to change when plans fail;
do not count on stability
• Foresight – Think and prepare
This approach is a tool that municipalities can use as they
undertake strategic planning in concert with long-term financial
planning. The following characteristics are particularly resonant
when looking at public sector turnaround activities.
2
http://gfoa.org/downloads/financiallyresilientgovernment_whitepaper.pdf
9
Transparency – A challenge with public finance is the lack of
transparency and readily understandable financial reporting.
Even sophisticated readers of financial information struggle
to make heads or tails out of the reports generated by our
government units. The timeliness of the information is often
lacking —some reports appear many months after the actual
results. Prospective financial information is even more
challenging than the historical. Governments should institute
clear and consistent information based on generally accepted
accounting principles.
Foresight – The very concept of long-term planning
begs government leaders to think beyond the election cycle
and anticipate economic challenges and crises. Developing
contingency plans and establishing real, tangible cash reserves
are important.
Finance app #2: Cash flow planning
Jim Gentry, professor emeritus of finance at the University
of Illinois at Urbana-Champaign, once said that liquidity is
like beer at a fraternity party: when you are out of liquidity,
the party is over.
Understanding liquidity in the context of government
operations is important to ensuring that essential activities
can occur without interruption. Some government units
make an attempt at cash flow forecasting, but limit its use to
evaluating the need for short-term borrowing – revenue and
tax anticipation notes in particular. However, the private sector
uses cash forecasts as a “dashboard” to monitor performance,
even if the business is not distressed, via a tool called the “13-
week rolling cash forecast”. Successful businesses evaluate their
forecasts against actual results to understand whether variances
were based on timing or permanent differences. This discipline
of evaluation creates a continuous feedback loop that enhances
management’s ability to forecast and minimize variance. How
can this be applied in the public sector?
For most governments, 13 weeks is an insufficient time frame.
Biannual tax payments, large lag periods associated with federal
or state funding, and union contracts with annual lump-sum
payments require a longer forecasting horizon. Ideally, a rolling
12-month forecast is better. Governments need to develop
a heightened sense of importance around working capital
management. In the private sector, businesses have long known
that it is important to balance accounts receivable collections
with accounts payable expenditures. Ideally, businesses want to
collect their receivables as quickly as possible and pay their bills
at the latest date acceptable. Many public sector organizations
existed for years without ever having to worry about having
enough cash in the bank account to pay bills. This scenario
has changed as cities and states have begun to spend more than
they take in, making cash flow forecasting more important.
Neglecting working capital management exacerbates cash flow
problems and diminishes the fun at the party.
10
Turnaround “apps” for the public sector
Leadership platform
10
Successful turnarounds occur only when there is strong
leadership that possesses a few definitive characteristics: courage,
unwavering commitment to achieve the most good for the
most constituencies, decisiveness, credibility, tolerance and
the ability to persuade. These characteristics are those ideally
found in leaders we elect to public office. The difference is that
many public office leaders may have never faced the kind of
fiscal crisis that can rattle even the best corporate executives.
Further, elected officials are not required to have any training
or experience in business or finance, two critical ingredients
for a well-functioning public sector.
Leadership app #1: Turnaround coach
In private sector turnarounds, an “outsider” with no stake in
the outcome of the restructuring other than to create stability
and return the business to profitability is often brought in.
A Chief Restructuring Officer can restore credibility to
management and give confidence to boards of directors and
outside constituencies like banks and shareholders. But an
elected or appointed government unit leader cannot simply
cede authority to an outsider. But he or she may do well to
hire an “auxiliary authority” in the form of a turnaround adviser
who can rise above political considerations and stay focused on
strategy, operations and finance. Professionals who have been
in the trenches in crisis situations can help develop options that
may not have been previously considered. Outside advisers can
also ensure that the fact gathering and data analysis, so important
in reaching agreement on the restructuring activities, is done in a
way that avoids political tinkering.
Leadership app #2: Pain sharing
For restructurings to be successful, all stakeholders must buy
in to the need for the restructuring. They must see themselves as
part of the problem, and part of the solution. Strong leadership
is often needed to help the constituencies see that they play
both roles. Reaching consensus can be difficult and normally
requires each party, sometimes to varying degrees, to agree to
concessions for the sake of the greater good. In the private sector
this normally translates into a company that maximizes profit or
value. In the public sector, this concept is more ephemeral.
Accepting such resolutions and compromises is called
“sharing the pain.” In the private sector, where there is a broad
history of restructurings, this concept is well understood as an
expectation by parties in interest at the onset of a restructuring.
The public sector, by contrast, is not always incented to “share
pain.” Sometimes it is more politically expedient to defer pain or
mask it or ignore it. But if the goal is to effect lasting, permanent
change in a troubled situation — such as a current or future
budget deficit — the strategic approach to prioritizing programs
and services, coupled with the reasoned negotiation, can yield a
successful outcome.
11
Turnaround “apps” for the public sector
Conclusion
The complexities of governing and the economic crises facing
leaders today will require new approaches and challenge even the
best politicians. But the expectation that new problems can be
solved by continuing to repeat the standard operating practices
of the past will only yield frustration and a result that the
turnaround cannot be effected.
The turnaround community’s experience in fixing troubled
businesses for more than three decades has yielded lessons
that have direct application for governments. The platform
fundamentals of strategy, operations, finance and leadership
provide a reasoned and structured framework to tackling
crises as well as instituting necessary long-term changes.
Martha E. M. Kopacz
Managing Principal
Corporate Advisory & Restructuring Services
Grant Thornton LLP
T 212.542.9730
T 617.848.5010
E [email protected]
Michael E. Imber
Principal
Corporate Advisory & Restructuring Services
Grant Thornton LLP
T 212.542.9780
E [email protected]
Christopher R. Jadro
Manager
Corporate Advisory & Restructuring Services
Grant Thornton LLP
T 212.542.9595
E [email protected]
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Arizona
Phoenix 602.474.3400
California
Irvine 949.553.1600
Los Angeles 213.627.1717
Sacramento 916.449.3991
San Diego 858.704.8000
San Francisco 415.986.3900
San Jose 408.275.9000
Woodland Hills 818.936.5100
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Tampa 813.229.7201
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Atlanta 404.330.2000
Illinois
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Oakbrook Terrace 630.873.2500
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Kansas
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Maryland
Baltimore 410.685.4000
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Boston 617.723.7900
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Detroit 248.262.1950
Minnesota
Minneapolis 612.332.0001
Missouri
Kansas City 816.412.2400
St. Louis 314.735.2200
Nevada
Reno 775.786.1520
New Jersey
Edison 732.516.5500
New York
Albany 518.427.5197
Long Island 631.249.6001
Downtown 212.422.1000
Midtown 212.599.0100
North Carolina
Charlotte 704.632.3500
Raleigh 919.881.2700
Ohio
Cincinnati 513.762.5000
Cleveland 216.771.1400
Oklahoma
Oklahoma City 405.218.2800
Tulsa 918.877.0800
Oregon
Portland 503.222.3562
Pennsylvania
Harrisburg 717.265.8600
Philadelphia 215.561.4200
South Carolina
Columbia 803.231.3100
Texas
Austin 512.391.6821
Dallas 214.561.2300
Houston 832.476.3600
San Antonio 210.881.1800
Utah
Salt Lake City 801.415.1000
Virginia
Alexandria 703.837.4400
McLean 703.847.7500
Washington
Seattle 206.623.1121
Washington, D.C.
Washington, D.C. 202.296.7800
Wisconsin
Appleton 920.968.6700
Milwaukee 414.289.8200
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of action in a particular case. For additional information on the issues discussed, consult a
Grant Thornton client service partner
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