Cost-cutting

The University of California is trying to cut costs.  The Berkeley campus, for example, hired Bain & Co. for $3m (your tax dollars at work) to find savings. The project is called Achieving Operational Excellence, perhaps because absolutely nothing beyond the home-page blurb seems to  have anything to do with it; the words value, excellence and quality, for example, appear nowhere in pages of FAQs outside the name of the project.  It has so far come up with a bunch of descriptive powerpoints of surpassing banality and naivete (slides 5 and 8 get the Tufte chartjunk award in this set).

I should note that administrative bloat, measured by purely non-teaching, non-researching payroll and positions as a fraction of total budget or headcount, is a serious issue for us, though I certainly don’t see it at the level of my own 14-faculty unit, where the trend is in the opposite direction and our staff count shrinks every year. It’s a little troubling that the steering committee for the Bain exercise has only three members out of fourteen who teach or do research but six current or former, um, administrators;  the Project Leadership & Organizational Design team is four administrators, period.

Among the project’s insights to date are the finding that the office of the Vice-Chancellor for Research, which does no actual research and is entirely people thinking, writing and talking on the phone (nothing wrong with that), spends all its budget on personnel, while the people who run the dorms and have, like, actual buildings to maintain and meals to serve, spends more than a third on supplies and expenses. Holy cow, and all the other blessed ungulates; we sure want to make those ratios the same, right? If not, this slide means what, exactly?

There are a couple of interesting findings. We buy lab supplies at different prices, sometimes a third different (nothing about differing order quantities or rush service, though; remember the $600 hammer nonsense?). There is probably some money to save here, but dollars to donuts we wind up seeking it by centralizing purchasing so people sit around not doing experiments while a clerk waits for a discountable quantity of beaker orders to accumulate, or just spends days looking for the best deal. The 6:1 range in energy consumption of office buildings with similar uses (no warehouses, no labs) is astonishing and important, but do we have to wait for Bain to tell us that this is probably because operating units at Cal don’t pay for gas or electricity, but do have to pay for things like weatherstripping or a new, efficient boiler?

The most interesting slide compares building space occupied by non-academic divisions, in square feet per employee.  The range is from 400 to about 50, and the average is 200. Presumably the low numbers are units like Physical Plant and Parking and Transportation, many of whose staff don’t have or need offices. I foresee a lot of mischief from this item, even if apples are compared to apples, because space is much cheaper than most people realize, and managers  are inefficiently stingy with it, especially public managers worried about ignorant overseers looking over their shoulders and tut-tutting about something that looks like waste if you don’t bother to do any real analysis.

At top-price Berkeley lease rates, that 200 square feet (I hope it’s only assignable, not including corridors and janitors’ closets!) costs about $6000 per year, while the average cost of the worker is about $80,000 with fringes and benefits. Suppose more space could increase productivity 10%, maybe meeting rooms that don’t have to be reserved a week ahead, and offices big enough to hold a couch for a nap ( yes, a nap ) and conversation that isn’t across a desk. How much space would it be worth providing?  Yup, twice as much would be a bargain.  Think Bain will tell us to buy some?

My late colleague Bob Leone, a real live business school professor and a very high candlepower process, taught me that organizations that manage by cutting costs achieve savings and a quality/value reduction, while organizations that push on quality improvement get it and cost savings as well.  There is a good deal of sense to this principle. For example, cost-cutting is  depressing and (as the Bain exercise radiantly illustrates) kind of stupefying, while continuous quality improvement is fun, complicated, and makes people both smarter and happier. You find the cost savings almost automatically by looking carefully at your production process (the core of quality assurance); you don’t see the quality hit by looking at expenditures and financials, especially gross aggregates and comparisons.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

11 thoughts on “Cost-cutting”

  1. I'm a declinist, these days. We have been living in fairyland, everybody's been paid in make-believe money, we've been doing each other's dry cleaning. Ridiculous for first-year associates to start at $160000, for people to buy 5-bedroom, 6-bath houses for families with one or two kids, driving the GMC Suburban 3x/week to the supermarket carrying one person to buy 50 lbs of groceries and bring them home. When I was a kid, barefoot in the snow, five miles, up-hill both directions, etc.

    And, I think Berkeley is swell, does wonderful education. California is spending a great deal of money on Berkeley, and also on providing the chance to take Sociology of Sport at Chico State, which leads directly to – what? – assistant manager of the garden department at a Home Depot? California is paying enormous pensions to police and fire guys who pumped up their high threes with overtime at the end and went out at 52 with a monthly nut higher than their salaries. There must be ways to spend somewhat less doing what Berkeley does, without hurting it, but I am with you, I doubt that the Bain study is a good way to find it. And the Bain study will be nibbling around the edges. I suspect that just not doing a lot of what Chico State does is better than doing it – the kids squander five years and come out with debt and not much improved in ways to think about the world.

    Where am I trying to go with this? As a public management topic, it is probably worth thinking about best practices for managing decline. If I were a young guy starting out in policy school, that's likely a topic I'd try to get some kind of handle on. The Irish are looking to put a haircut on civil service salaries, with a bigger percentage cut on higher wages. New Jersey governor wants to unwind a lot of the deals his prececessors have made. New York legislature, wow. We have grotesquely stupid policies (ethanol subsidies, mortgage interest is tax deductible) which encourage spending which has low social benefit – how can we get out of them, when they all have their constituencies? Presumably, if we weren't sending a large part of the Treasury to Archer-Daniels-Midland and to tax expenditures which subsidize building granite-counter minimansions in Las Vegas, and a $490000 pension to Bruce Malkenhorst, there would be more money for things I approve of, like Berkeley.

  2. David you of course see the correct side of cutting pensions and AG subsidies.

    I assure you however, I could eliminate 20% of Berkley's staff, and pay the remaining professors 75% of what they are making now without any discernible effect on the the actual "knowledge transfer" into the student body.

    Frankly inside of 10 years, I'd reduce every department to know more than a couple professors, teaching only by recorded video, with support staffs of grad students answering questions.

    No question would ever be answered the same way live twice, and much focus would occur on distilling down the limit number of actual questions, the multitude of ways each question is asked, and the still limited number of ways needed to explain any given idea before 90% f students were able to understand the idea.

    We're going to Napsterize Education – and we're going to do it quick.

    This is not an age of decline – any more than the age of music ended.

  3. One thing that is going to end up killing you (that is, the teaching/research faculty and the students) is that slide about "servers at 200 locations around campus". Governator-dollars to whole-grain donuts there will be a massive push to convert all computing resources to a "shared services" model. Meaning that all the computers will be locked away in a giant 1960s-style Datacenter(tm) (which will eventually be moved to North Dakota or India), those using the computers to do work will have no control over or access to them, and the actual usefulness or work quotient of all computing on campus will plummet.

    Cranky

    But of course, whichever "outsourcer" Bain steers the work resulting from their oh-so-objective analysis to will profit handsomely.

  4. Morgan, leaving aside the curious certainties you assert, who the heck is going to train your army of grad students, and for what reason will they cheaply shoulder almost the entire teaching burden?

  5. I particularly like the line about how servers are "underutilized" because only 52% of their storage is full.

  6. "The Irish are looking to put a haircut on civil service salaries, with a bigger percentage cut on higher wages. "

    Which will save them 100's of millions per year; the financial crisis cost them how many 10's of billions? And this might make it much more tempting for career civil servants to spend more work time thinking about their post-retirement prospects, if you know what I mean………

  7. The original article has a really, really big problem for a samefacts.com post: Prof OHare doesn't have any facts. He's just got innuendo, mixed with a little sarcasm and logical sleight of hand. OK, the Bain presentation slides are pretty much what you'd expect for a 30-minute Power Point status update. They don't have much detail, nor much in the way of recommendations. The lack of detail is because this is the summary presentation, not the report. The lack of recommendations, as they slides themselves say, is because this is the summary of the end of the investigation phrase, not the start of the recommendation part. But Prof. O'Hare doesn't have any facts to add to the mix; he doesn't even refute any of the things Bain says, just points to how he expects Bain to mis-understand them without evidence.

    If he really want to do something useful, he could dig into the situation, do some real work, and some up with facts and recommendations. I really don't expect that from Prof. O'Hare, though, because he's made a career out of criticizing actions after-the-fact. Berkeley professors like to reward each other with pats on the back for doing that, but it doesn't do anything to make the situation any better.

  8. JimmyP – the biggest reason I come to this blog is Mike O'Hare, who was my teacher years ago. Gave a swell class, consistently interesting and positive, and I've always seen him as trying to make things better. He got me my first job after grad school, in Mass state government. So I go into a Mike O'Hare post expecting good things, clearly your mileage differs. I do have some doubts that a recommendation for larger offices and more naps is going to catch fire with the administration, but it never hurts to put it out there…

    Barry, in an earlier Mike O'H post, he said there would be no silver bullet for our energy problems, we needed to develop a lot of silver birdshot instead. Nice line. For finance, including university finance, I think birdshot is the remedy as well – pension haircuts plus cutting lots of tax subsidies plus abandoning the idea that every student should go to a 4-year college plus taxing energy use plus road pricing… as Ev Dirksen never in fact said, a billion here and a billion there and pretty soon you are talking real money.

  9. UCB Chancellor Birgeneau Loss of Trust,Credibility

    The UCB budget gap has grown to $150 million, and still the Chancellor is spending money that isn't there on expensive outside consultants. His reasons range from the need for impartiality to requiring the "innovative thinking, expertise, and new knowledge" the consultants would bring.

    Does this mean that the faculty and management of a world-class research and teaching institution lack the knowledge, impartiality, innovation, and professionalism to come up with solutions? Have they been fudging their research for years? The consultants will glean their recommendations from interviewing faculty and the UCB management that hired them; yet solutions could be found internally if the Chancellor were doing the job HE was hired to do. Consultant fees would be far better spent on meeting the needs of students.

    There can be only one conclusion as to why creative solutions have not been forthcoming from the professionals within UCB: Chancellor Birgeneau has lost credibility and the trust of the faculty as well as of the Academic Senate leadership that represents them. Even if the faculty agrees with the consultants' recommendations – disagreeing might put their jobs in jeopardy – the underlying problem of lost credibility and trust will remain.

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