I was pleasantly surprised during my time at the Governing Leadership conference in Maryland held last week.
First was the energy and diligence expended by the elected and appointed officials in attendance to continue to work through the challenges they face. It was a refreshing change from the articles frequently found in the media about less than stellar government performance.
Secondly, I was impressed by the prevalence of Lean methodology in place within different areas of government. As I told the attendees during my panel discussion on performance budgeting; the good news is that organizations in the private sector have been through this transformation and survived. Examples of how to use Lean are readily available, it continues to get easier to implement Lean as the number of successes grow and are publicized.
What struck me during the day was the complexity of planning and operations. While there are several examples, the one that hit home for me was the impact many small decisions have on a government’s finances. For example, a simple choice between who works an overtime shift and who doesn’t can have a decades long financial implication that far outweighs any wage difference or even premium pay difference. But this cost implication is hidden from the decision makers and is often never connected.
It becomes easy to see how governments can get a poor reputation for managing its finances over the years because of what in hindsight look like obviously poor financial decisions.
When labor makes up to 90% of a municipal government’s labor budget (their stat not mine). It would seem like there would be more visibility and control over the decision-making process. The challenge for governments is that an hour worked today is impacted by benefit rules that take into account many years previously worked and then generates many years of commitment ahead. The supervisor making the daily decision has no visibility to this and therefore cannot take it into account.
If we could provide the information that shows the real cost of an hour of labor, supervisors would be enabled to make better decisions and I would bet that government would see immediate benefits from improved use of tax dollars without having to resort to tax increases or layoffs.
Consider these easily measurable areas of influence on the cost of an incremental hour :
- First is the cost of the wage paid. This is the easiest to measure and is often what is used in labor reporting and decision-making.
- Will this have an impact on benefit costs? (If the employee is classified as part-time, will they now be eligible for benefits under the Affordable Care Act? Do they generate any additional vacation, comp time or paid sick/personal time?)
- Are they now eligible for overtime? It could be 1.5 or higher based on negotiated contracts
- Will this hour impact their pension? Depending on pension rules, this incremental hour of work could increase their pension. Depending on the contract, it’s not just the last couple of years of a person’s wages that are used, but, for example, the highest average pay during a continuous 60 month span, whenever that occurs in a person’s career. This incremental hour of time could have an impact on government cost that lasts for 20 or more years!
- Is this work occurring due to a State or Federal grant? Has the amount from the grant already been used up? If so the department is now responsible for paying the overage must now find those funds from another area of the budget.
Every day the result of these calculations change for each individual, they can even change from one hour to the next!
It’s no wonder that supervisors can unwittingly rack up expensive labor bills at the end of the week when they are doing their best to apply resources to the work at hand. Even worse the may never realize what they have done because some of these costs never show up in their daily or monthly cost reports.
What’s the answer? This same problem is faced by supply chain managers all over the world. The cost of a good is impacted by many different factors during its life from raw material to delivered good. Rather than looking at the cost to manufacture the good (Raw Material + Production Labor + overhead) which often produces an incorrect cost, manufacturers look at the large drivers of cost across the entire supply chain and calculate a “Cost to Serve”. The cost to serve is a very useful calculation when making decisions (e.g. We could get cheaper labor in Vietnam but the lead time, shipping and warehousing costs go up too much.)
This same principle can be applied to an hour of labor. With benefit costs and regulatory compliance becoming a significant part of total wages, it’s time to provide the total labor cost to supervisors so that they can make better decisions about how they use labor or who is assigned the next shift.
The best part of this opportunity is that unlike manufacturing Cost to Serve where data collection costs are high but calculation requirements are low, the total cost of the next hour of government labor is already available, it’s a matter of aggregating that cost into a one simple dollar figure on a daily basis so that a supervisor understands the impact their decisions are having on their organization.
If your organization is having trouble containing its labor costs then it’s time to understand what the next hour of labor is really costing your organization. You have the data, you have the rules, it simply a matter of sharing them with the people who are deciding how much to spend in the next hour.
Is it worth the effort? Considering the 2103 PEW Trusts report found that 39 of 40 of the cities it analyzed do not have fully funded pensions and the amounts are measured in 10’s of millions and even billions, I would say this is an area worth looking into.