Monday, July 15, 2013

The Power of Incentive Competitions – Abundance and Priority Based Budgeting (Part II of III)

In this second Center for Priority Based Budgeting blog installment in our 3-part series on Peter Diamandis’s book, “Abundance: The Future is Better Than You Think” our focus is on the power of incentives, incentive competitions, and their application in local government. See prior "Abundance" related blog posts CPBB Hangs Out with Peter Diamandis - PBB as a Resource Liberating Tool  &  From Scarcity to Abundance: Resource Liberation Through the Power of Shared Services.

The Spirit of St. Louis

In 1919 Raymond Orteig established $25,000 prize (the “Orteig Prize”) for the first non-stop flight between New York and Paris. In 1927, with the whole world watching, Charles Lindbergh won the prize and became a global celebrity.
Says Diamandis, “I’d always believed that Lindbergh woke up one day and decided to head east, crossing the Atlantic as a stunt. I had no idea he made the flight to win a prize.”

In the book, Diamandis describes how Lindbergh gets attributed with being a risk-taker (which he was), an ambitious adventurer (probably was too) and a pioneer in aviation (all likely true). But he concludes with the fact that the reason Lindbergh made the flight, was to win the cash prize!

What came next was nothing short of exhilarating and unexpected. “A landscape of daredevils and barnstormers was transformed into one of pilots and passengers. In eighteen months, the number of paying US passengers grew thirtyfold, from about 6,000 to 180,000. The number of pilots in the United States tripled. The number of airplanes quadrupled…we can draw a direct link between his winning of the Orteig Prize and today’s three-hundred-billion-dollar aviation industry.”

Incentivizing Breakthroughs in Local Government – a TRAGEDY

Within the first few weeks that CPBB co-founders began their work to help Jefferson County, Colorado overcome a $13 million deficit, the County’s mail-room operations were under evaluation. Why the mail-room? Well, it turned out that mail collection and delivery across the County’s campus had reached an unprecedented level of service, with four deliveries of mail per day! “It was essentially ‘real-time’ – four deliveries of mail per day? It was faster than email!”

Upon diagnosing the situation, a funny story emerged. The reason four deliveries were required was because of one limiting factor – the mail cart, sadly enough, could only hold a small supply of mail, before the envelopes started falling off it’s sides. With a larger cart, mail delivery could be reduced to twice a day, eliminating the need for half the staff! Problem solved!

Except for one thing…

Eliminating two deliveries of mail per day created a new problem – eliminating employees. Everybody liked the mail-room staff – they were delightful, hard-working, dedicated and highly performing employees. Digging into the issue a little further revealed one more reason that there was a problem: since the costs of providing mail-room services were buried in the General Fund, and since none of the customer departments paid for these services, there was no incentive for the departments to insist on decreasing the level of mail-room services.

Listening to this story re-told several years later, a County Commissioner reflected, “nobody thinks to turn out the lights in the office, if you’re not the one responsible for the costs of the utility bills.”

The efficiency in mail-room services went by the wayside; but not without a key lesson learned about incentives.

Incentivizing Breakthroughs in Local Government – a TRIUMPH

The lesson learned was clear – without incentives in place, it’s tough to drive motivation to
make a breakthrough. Or, another way to put it, the lesson learned was that with the right incentives in place, maybe we could change behavior. And that’s exactly what happened next!

For the three major cost centers of internal services IT, Facilities, and Fleet, the costs for providing those services were allocated to budgets of the customer departments. Furthermore, for services that the departments could find cheaper elsewhere (either through decentralization, or through another service provider), an evaluation would take place to figure out the best next step. The incentive was clear: with a $13 million deficit looming, and cutbacks on the horizon, departments had an opportunity to help solve the deficit to the extent that they could spur the research of alternative service options for the County’s major internal services.

And it worked!

Between IT, Fleet and Facilities (each department with budgets nearing $10 million), this incentive system led to 20% reductions in costs – covering over half of the deficit, without reducing services to citizens, without requiring tax increases, and with very reasonable changes to the way internal services were provided. This was a major triumph!

Fleet changed the way they went about maintaining their parts inventory – updating business practices to adjust for the “just-in-time” nature of parts delivery.

Facilities costs plummeted from the reduction in office remodels – once those costs were in the department’s budgets, when it wasn’t “free” to the departments, remodel demand went down to a far more reasonable level.

And in IT, changes ranged from automating common requests of the Help Desk, to eliminating the production and development of in-house applications and customized application support, to getting smarter about project management.

The power of incentives can’t be underestimated. Read more about the history of incentivized competition.

1 comment:

  1. While it is important to encourage departments to turn out the lights and use less IT and facility services, how do we incentize operational efficiency among professional staff in public works, public safety or human services? Is anyone driving innovation in these areas?