CEOs Recommend the U.S. Government Transform Its Supply Chain

Stephen DeAngelis

November 04, 2010

In a report entitled One Trillion Reasons, executives from prominent technology companies provided a series of recommendations to the U.S. Government on how it can save a trillion dollars over the next decade and still improve the services its provides [“The Technology CEO Council Identifies $1 Trillion in Federal Government Savings, According to New Report,” Technology CEO Council press release, 6 October 2010]. The Technology CEO Council (TCC) is currently chaired by IBM CEO Samuel Palmisano. Other members of the council include: Michael Dell, Chairman and CEO of Dell; Steven R. Appleton, Chairman and CEO, Micron Technology, Inc.; Greg Brown, President and Co-CEO, Motorola, Inc.; Paul Otellini, President and CEO, Intel Corporation; Michael Splinter, President and CEO, Applied Materials, Inc.; and Joseph Tucci, Chairman, President and CEO, EMC Corporation. The report was “submitted to [the] National Commission on Fiscal Responsibility and Reform that is considering proposals to reduce the federal deficit.” The TCC press release continues:

“By harnessing proven applications of technology to reduce waste, decrease duplication and attack fraud and abuse, the TCC urges the U.S. to foster greater innovation in areas ranging from health care, to education and energy. ‘Our report contains straightforward, proven ways to pare back $1 trillion from the deficit while increasing productivity and enabling sustainable competitiveness,’ said Michael Dell, Chairman and CEO of Dell. ‘We’re serious about helping to provide solutions for the mounting debt crisis, and we’re optimistic that changes today will help lay the foundation for future job growth and innovation for our country.’ Based on real-world expertise, technology and organizational changes that are already working successfully in the private sector, the actionable steps outlined by the TCC can be implemented across government immediately to reduce a nearly $700 billion annual structural budget deficit, improve government operations and the U.S. economy.”

A brief summary of TCC’s recommendations are provided below. It should come as no surprise that a group of tech CEOs would begin its recommendations with one involving data centers. Most, if not all, of the CEOs believe that cloud computing represents the future of IT. The release states:

Green Data Centers – The federal government spends approximately $76 billion annually to support and manage its vast and widely dispersed information technology (IT) assets. Up to 30 percent of that spending could be saved by further reducing IT overhead, combining data centers, eliminating redundant networks and standardizing applications.”

Although consolidation of data centers and elimination of redundant networks are good recommendations, standardizing applications is generally a lot harder than it sounds. I suspect that the government would have to spend money in the short term (perhaps a lot of it) in order to achieve the long-term savings envisioned by TCC members. The next recommendation is also IT related and deals with eliminating fraud.

Stop Fraud with Analytics – An estimated $200 billion could be saved by applying advanced analytics technology to reduce fraud and errors in federal grants, food stamps, Medicare reimbursements, tax refunds and other programs. Analytics can transform these kinds of programs, making them more adaptive, responsive and even predictive based on the changing needs of citizens.”

The elimination of fraud would bring cheers from taxpayers who are tired of having their hard-earned taxes siphoned off by corrupt individuals both inside and outside of government. Reducing Medicare fraud alone could save billions of dollars a year. Since the government doesn’t track Medicare fraud, the exact extent of the problem is unknown; but, I’ve seen estimates of around 20 percent of all Medicare claims being fraudulent. If true, eliminating that fraud alone could save an estimated $75 billion a year which would dramatically increase the amount of savings that could be achieved over the next decade. To get a better understanding of the extent of Medicare fraud, read the story “Real Patients, Real Doctors, Fake Everything Else,” by Michael Wilson and William K. Rashbaum, New York Times, 13 October 2010]. The next recommendation is to go digital.

Go Digital – Transitioning antiquated, paper-based processes to digital records management for federal forms would generate $50 billion in cost savings over 10 years.”

The advent of the internet, cloud computing, etc. makes managing of large data bases both feasible and cost effective. I’m sure that privacy issues will be raised if the government decides to accept this recommendation. Digital information is much more easily stolen or shared than paper-based files. Nevertheless, it is probably time for the government to move fully into the information age. One theme found throughout the report’s recommendations is consolidation. The next recommendation deals with physical rather than virtual consolidation.

Consolidate Assets – The U.S. Office of Management & Budget (OMB) has identified 14,000 excess, and 55,000 under-utilized, buildings in the federal inventory. Mining the balance sheet aggressively and corporatizing certain federal operations, the federal government could save $150 billion over 10 years by selling surplus facilities and auctioning off others.”

My only question with this recommendation concerns timing. Is selling excess and/or under-utilized buildings during a real estate slump the best course of action? I suspect a lot more analysis and forecasting needs to be done to answer that question. As a taxpayer, I want to make sure that the government profits from rather than loses money selling buildings taxpayer money has financed. The final recommendation, and the one I wanted to focus on in this post, deals with supply chains. The report recommends:

Decrease Duplication – A $500 billion savings opportunity exists by consolidating the government’s myriad supply chains. This would also render the government’s procurement process far more transparent, helping to strengthen public trust.”

Sounds simple doesn’t it. We all know, however, that achieving the kind of consolidation the report recommends would be difficult. The Department of Defense has tried for years to reform and consolidate supply chains maintained by individual military services and it has been only partially successful. In an article concerning the TCC report, Jia Lynn Yang stated, “The report says that the federal government has tried this before, including in 2005. The problem with that effort, they say, is that the government limited its focus to commodity purchases and not reforming how it picks suppliers across the board.” [“To save $1 trillion, Uncle Sam should take cues from CEOs, group says,” Washington Post, 12 October 2010] She continues:

“As a corporate example, [TCC members] said that Motorola integrated its supply chains in 2004, and the company said it has saved about $1.2 billion every year. [Jeffrey Zients, chief performance officer for the Office of Management and Budget], said the government is consolidating its purchase of office supplies, which will save 20 percent or $200 million over four years.”

Yang points out that the TCC is not the only group that has made recommendations to lawmakers. “A report last year by McKinsey & Company showed that an improvement of 5 to 15 percent in the government’s operations could save $1.3 trillion.” She concludes:

“Michael Nelson, a visiting professor at Georgetown, said reports from the tech council can be influential. ‘The main thing is who’s saying it,’ Nelson said. … Nelson, who read the group’s reports when he worked in the Clinton administration, said the group helped shape thinking in Washington on a number of issues, including e-commerce, export laws around personal computers and electronic health records.”

I suspect that corporate supply experts would be happy to join an effort to help the government find savings in federal supply chains — especially if their CEO supported such an effort. Government supply chain reform could help establish standards for RFID tags and other supply chain issues that would also benefit the commercial sector. Jessica B. Mulholland asks, “If these suggestions would save so much money on the federal level, could states and localities also see huge savings?” [“Could Technology Save Government $1 Trillion?Government Technology, 21 October 2010] She asked three experts for their opinions on that subject. Although the question asked specifically about state and local government savings, the experts had a difficult time not discussing the federal government. The first expert was Darrell West, director of government studies and founding director of the Center for Technology Innovation at the Brookings Institution. Mulholland reports:

“West … said he’s uncertain about the $1 trillion figure, but there are substantial cost savings the public sector could realize in the technology area. ‘Right now, the public sector is way behind the private sector in technology innovation in terms of taking advantage of the latest developments and using cloud computing and other new things,’ he said. A specific area where the private sector has a leg up on the public sector regards streamlining the procurement process so that it’s easier for agencies to buy and integrate new technology, West said. Until recently, technology contracts used to be negotiated on a department-by-department basis at the federal level. ‘So even though the federal government spends $76 billion on information technology and $20 billion on hardware and software, it never really was able to use its large size to negotiate the deals with contractors,’ he said. ‘That can certainly be an area where there can be big cost savings.’ … If more federal agencies embraced technology in the ways outlined in the report, West added, it would provide a model for states and localities that are facing their own budget problems and there could be a good chance that states and localities would follow their lead. ‘Some of the hardest-hit sectors have been state and local agencies, so they need to figure out ways to use technologies to innovate so they can cope with the massive budget problems that they have,’ West said. ‘If a federal agency can demonstrate cost savings through technology, you are going to see that spread throughout government because everybody needs to get faster and smarter — and what we need are some successful role models to lead the way.’ … West said a huge amount of money could be saved if federal, state and local governments followed the recommendations. ‘There are great economies of scale to be had,’ he said.”

Mulholland next asked Michael Nelson, the same Georgetown technology professor interviewed by Yang, the same question.

“Nelson, … who previously was director of Internet Technology and Strategy at IBM, said saving $1 trillion (at least) would most definitely occur, because the council has listed the easiest solutions. Most of what the report calls for follows the best practices of companies and certain agencies. The General Services Administration, for example, has taken steps to make it easier for agencies to buy cloud computing, and the National Science Foundation is making cloud computing available to the research community. ‘It’s not like they’re asking for a total transformation of government,’ Nelson said. ‘They’re not restructuring government. They’re not going to change a whole bunch of laws and practices. This is just taking what the government does today and doing it more efficiently by using information technology.'”

Unlike West, Nelson didn’t even attempt to say how state and local governments might be affected. As a result, Mulholland again asks, “But would another trillion or two of savings happen should states and localities follow suit in the other report recommendations?” Since her first two experts failed to answer that question fully, she concludes, “That’s ultimately a difficult question to answer.” Nevertheless, she asks one final expert — Alan Shark, executive director of Public Technology Institute, who deals more closely with state and local governments. She continues:

“Shark … said he thinks the savings would be a bit less, since a lot of innovation in this area already has begun. Many state and local IT offices have or currently are pursuing consolidation and digitization efforts. ‘We’re way ahead of the federal government in doing things,’ Shark said. ‘We spend a lot of quality hours sharing best practices, and I think the federal government could take that as lessons learned on what we’re doing and how well it’s working.’ When looking at the breakdown of $1 trillion over 10 years, Shark said that roughly $100 million per year technically could be feasible, but he has two main issues with the figure. ‘One, it’s not going to happen all at once,’ he said. ‘To save $100 million a year, that means they needed to start, like, yesterday.’ The second issue regards re-investment: money set aside to take care of aging equipment, replenish aging software systems and invest in innovation. Shark said that when he sees those things accounted for as opposed to just cutting, he feels more comfortable. ‘But I don’t see any of that mentioned in this report,’ he said. … But Shark points to an issue with the potential savings: ‘Since states are in such dire financial pressure, they will have to come up with new monies as investments for the future — will they be able, politically and financially, to spend more today in order to save for tomorrow?'”

As noted above, I agree with Shark’s assessment and Mulholland agrees that the question Shark asks is “a good question for all levels of government, indeed.” With the new Congress determined to reduce government spending, will its members have the foresight to take the long view (you have to spend money to save money) or will they simply implement slash and burn policies that generate short-term savings but ultimately kick better solutions down the road for others to implement? I hope they see the next two years as an opportunity to find real solutions — but it’s a slim hope. Politicians like kicking looming challenges down the road. If the TCC recommendations are acted upon, you might hear lawmakers echoing the current UPS advertising campaign, “I love logistics!” The new members of Congress were elected because they claimed they were going to reduce government spending. Reducing spending without reducing services would be a win-win for them and the country.