“You Can’t Shrink Your Way Into Prosperity”
From a recent article in the Wall Street Journal:
[A]ccording to some analysts and students of corporate behavior, [...] companies that take a limited and more-targeted approach to layoffs tend to do better in economic recoveries than those that slash employment sharply and across the board.
“You can’t shrink your way into prosperity,” says Wayne Mascio, a business professor at the University of Colorado, Denver.
Although the article focused on downsizing in private companies, I think that the conclusion applies nicely to the public sector, as well. This is particularly relevant to state agencies in Missouri as they cope with their budget problems. Instead of scaling back their operations proportionately, governmental agencies in Missouri should take a targeted approach, by identifying programs that are underperforming and subsequently eliminating or outsourcing them. This would increase the likelihood that the programs would recover and perform better in the future.
When determining which programs, or segments thereof, to cut, a firm or a government agency should also consider non-financial and indirect costs. This is because unintended negative consequences could adversely affect a firm or an agency’s bottom line, as well as its ability to perform core functions. In order to increase its overall growth and prosperity, a firm or agency should focus on the activities for which it has a comparative advantage, and then trade amicably with others that possess a comparative advantage in other activities.
The firm or government agency in question should also consider its opportunity cost for providing a program under review. Outsourcing non-core functions enables concentration on core functions, which can improve efficiency and quality. This way, firms and agencies alike could maximize their up-time and productivity.
The opposite side of the argument is that in government, political factors play in every decision, and in an attempt to target the cuts you find that every program or department has a powerful protector who can save it. In some ways you are seeing that in Illinois right now, as the budget troubles, which dwarf Missouri’s problems, are being dealt with via brinksmanship. Don’t get me wrong, taking a comprehensive review, the way Missouri is going right now is terrific and the best way to make these choices. But if an across-the-board cut (as one Illinois candidate for governor has proposed) is the only way to get past the political paralysis, that is far better than doing nothing.
Comment by David Stokes — May 12, 2010 @ 10:41 a.m.
When determining which programs, or segments thereof, to cut, a firm or a government agency should also consider non-financial and indirect costs.
You mean, like, which cuts would tend to activate effective gadflys/embarrassing photo ops, or cut campaign contributions? For businesses, those matter to only varying degrees. For gov, well, it is a different story. Ruling rationally would be preferred rather than having to say, ‘well, I can’t cut this because the office is in my voter stronghold and I want to keep the people there happy.’
Comment by Papillon — May 12, 2010 @ 10:48 a.m.
You suggest things like outsourcing non-core functions to cut costs. The problem with this type of thinking, that while it gets employees off the books, it doesn’t really cut any costs. Our state employees are not high paid by any standard—shuffling expenses does nothing to help the bottom line.
Comment by suzyjax — May 12, 2010 @ 11:40 a.m.
@David:
I agree that an across-the-board cut is preferable to nothing. However, for the reasons described in the article, I think that strategically cutting and restructuring an organization is even more preferable.
@Papillon:
I agree that special interests and political pressure exist in the public sector, so government agencies may have additional things to consider when they approach downsizing. Additionally, I think that business relationships are something to consider, but only to a limited extent. Takes the downsizing personally strikes me as a juvenile way to react to a calculated business decision.
As a different non-financial consideration, I think that it is important to consider how these decisions to downsize affect in-house employees. It’s probable that they may not all survive in the consequences of the business decision, of course. I experienced this two years ago, when my former employer was purchased by a larger company, then went though a significant amount of restructuring, and then laid off 35% of its staff, including myself, because they were made redundant. I think that this decision negatively affected the company’s bottom line because they shed highly skilled employees. Additionally, the decision to shed sections of the business often negatively affects those employees that remain with the company or government agency. They may experience survivor guilt, which includes worrying about their own security and work performance.
@SuzyJax:
Outsourcing isn’t always more expensive than conducting operations in-house. In the context of a business, depending on the volume of production, it could cost more to buy the raw materials and labor and assemble a product in-house than to outsource it. Organizations frequently decide to partner with other individuals and organizations if they don’t have the skill set in house. They find value in this because they can accomplish more, while keeping a smaller payroll, and it’s less expensive than hiring new people. In the context of a government agency, it could be similarly cheaper for taxpayers to outsource the service to another individual or firm.
Comment by Christine Harbin — May 12, 2010 @ 1:02 p.m.
@SuzyJax
Salaries may not be very high in the government, but the getting the pensions/health care expenses off the books is quite beneficial for the long term financial health of Missouri. Government gets to fix its costs rather than having unknown liabilities.
Comment by Papillon — May 12, 2010 @ 1:18 p.m.