McKinsey: A public sector rethink could save $3.5 trillion worldwide

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Governments around the world stand to save $3.5 trillion annually within the next five years if they improve the efficiency and effectiveness of their spending, according to a new study from the McKinsey Center for Government.

This figure -- "equivalent to the entire global fiscal gap" between receipts and expenditures -- could be saved if governments around the world adopted the best practices from the private sector as well as from other governments, the authors said.

They pointed to four primary areas where governments can adopt a more strategic approach and fortify next-generation skills to change their current, inefficient path: finance, commercial capabilities, talent management as well as digital technology and data analytics.

The authors found that as private-sector customer service improves and becomes faster and more user focused, the customer service satisfaction gap between government and private companies grows larger.

"Increasingly, citizens -- as consumers of public-sector goods -- are expecting governments to offer the same level of service," the report stated. "To close the gap, they must urgently find ways to deliver more, and better, for less."

Tera Allas, a co-author of the report, told FCW that while governments "cannot just mimic private sector businesses" due to the complexity of government, "some of those same techniques that businesses deliver to drive profit margins are the same techniques you can use in government to drive better health outcomes or better education outcomes or better transport outcomes."

One of the main obstacles that governments generally still face, Allas said, is the implementation of outcome-based management practices. The report stated that the increased use of data analytics, greater reliance on IT, smarter procurement and use of commercial services can help government meet its objectives efficiently and cost effectively.

The lack of widespread data analytics prevents governments from identifying areas for improvement and measuring outcomes, the report stated. 

Another problem, Allas said, is that government innovation initiatives focus more on the "front end of the services" rather than digitizing services themselves and focusing on objectives.

"We see a lot of government investment in a website, but actually beyond that, there's not an awful lot that citizens can actually do on the website, and they may still have to stand in a line or send in something via mail," she said. Government is constrained, in part, due to "intense media scrutiny" and a lack of competition that leads to a risk-averse attitude, she added.

"One of the shocking statistics that we found on procurement is that, in many cases, governments spent as much on the actual transaction … as they spent on the stuff they buy," Allas said, adding that a greater digital reliance can slash this cost.

However, the authors did note areas where the United States is a global leader. Opening data for private-sector use is one area where the United States deserves praise, Allas said, because it "creates competition" and reduces costs.

Tom Dohrman, senior partner at McKinsey and leader of North America public and social sector practice, added that the analytic capabilities of the Centers for Medicaid and Medicare Services and the IRS in detecting fraud are "some of the leading examples globally."

About the Author

Chase Gunter is a former FCW staff writer.


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