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President Obama's 2013 budget proposal is now public. While the effectiveness of his plan will be debated by politicians and economists for some time, one thing is clear: the president is focused on cutting debt and creating a more sustainable fiscal policy.
But wait, haven't we heard this before?
The economy has been volatile for years and the root of the problem goes well beyond the intricacies of any president's budget proposal. Take last year, for example. One word could describe federal spending in 2011: imbalanced.
Despite rising federal debt and a year-long budget crisis, lawmakers still introduced 874 new bills that would have increased federal spending by $1tr had they all been passed. Washington talked the cost-cutting and financial discretion talk all year, yet Congress still leaned more towards spending than it did towards proposing solutions to reverse the deficit. For every dollar in cuts in 2011, Congress put $4.40 on the table in new federal spending, according to the National Taxpayers Union Foundation.
With the economy continuing its volatility - to say the least - the scales are tipping in the wrong direction, and a new budget proposal won't be enough to save the day. Can the economic ship be righted?
Growth Slows: Opportunity for Savings Remain
"While his budget stabilizes debt over the next decade, the real problem arrives thereafter, as entitlement costs spiral out of control and revenues are inadequate to deal with a wave of retiring baby boomers," said former White House budget office director Alice Rivlin and former Senate Budget chairman Pete Domenici in a statement about the president's budget proposal.
Much like the U.S. government, private companies are also under increasing pressure to deliver tough cost savings in the face of economic instability, rising debt and slower-than-expected growth. As top-line revenue continued to shrink, in 2011 the private sector invested in procurement to identify more efficient allocations of resources and spending. At the root of their procurement strategy was attaining spend visibility: finding out what they spent money on, how much money they spent and who they spent it with.
The result was hard savings. There were some companies where procurement delivered cost savings of up to 40 percent, even when little or no savings were previously expected. The federal government should take notice.
Because of tight regulations on bidding for federal contracts, the U.S. government is sitting on mountains of data relating to its pool of suppliers, current contracts and negotiated savings. Unlike the public sector, companies are using similar data pools to fuel efficiency and shave the bottom line.
By coupling supplier data with powerful analytics, companies gain better insight into expenditures, monitoring compliance, improving visibility, and identifying cost savings opportunities. Moreover, these savings are not "one-off." Rather, companies integrate supplier and spend analysis to continuously improve their bottom lines.
Federal spending can benefit from a similar approach - putting data to work to uncover savings and vet proposals before pushing them into law.
Mergers and acquisitions are always big news, but in this volatile economy, they can easily go sour or fail to meet expectations for growth or innovation. Similar to the private sector's use of spend analysis to vet potential M&As, the federal government can apply spend analysis to better understand which federal agencies to merge, and how much cost savings could be realized.
For example, instead of just making cuts, the federal government could use spend analysis to analyze the procurement function of different agencies to identify areas where separate agencies could combine the volume of their purchases with the same supplier, thus reaching previously unattainable volume discounts. Or, different agencies could look at where they are using separate suppliers for similar items, and then consolidate. Another potential positive outcome of spend analysis at the federal level: the standardizing of contracts.
When done right, spend analysis does more than just identify areas for savings. It also powers procurement to spend more money.
President Obama recently introduced a plan to merge six trade and commerce agencies into one to save $3bn over the next 10 years - an extremely small financial gain when looking at the entirety of the federal spending picture. But then again, that's only six agencies. Imagine what could be achieved if a similar approach was rolled out across the entire federal budget.
Learning from the Corporate World
The public and private sectors are more similar after a closer look; both strive to produce first-in-class products or services while reducing costs and maximizing efficiency. But the public sector faces much stronger scrutiny from its largest stakeholder group - the American people. Imagine the facelift federal spending could receive if millions or billions of savings were uncovered? European governments have turned to procurement and supply management tools for years; it's time for the United States to do the same.
The bottom line: Before impactful budgets can be proposed, real visibility is needed into how much is being spent, on what and with what supplier. Without that concrete analysis, it's all just a guessing game, and the economic volatility will continue.
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