Doing Business in the Logic-Free Zone

This column is first in a series comparing federal and private-sector management in business planning, human resources and customer service.

n late 1998, I was testifying at a hearing on the Forest Service's serious financial management problems when Montana's Republican senator, Conrad Burns, made a caustic observation. "Why," he said, referring to the nation's capital, "should we expect better performance in this 17-square-mile logic-free zone?"

As the first chief operating officer of the $3.2 billion, 35,000-employee Forest Service, I walked into a situation where financial and business management were virtually nonexistent and seemed to verify Burns' contention. The agency was saddled with:

• Almost 2 million management codes defining the agency's expenditures
• Seventy-five million financial transactions each month
• Data being entered from 800 points around the country, mostly by untrained personnel
• An outdated, 20-year-old general ledger running on a limited-capacity mainframe
• A lack of audit trails
• Little employee concern for the issues.

It was no wonder the agency had no financial statements whatsoever and the inspector general was reducing the Forest Service to sawdust in report after report. "Cooking the books" is how he publicly described Forest Service financial management practices.

From my first day at the agency, I spent a great deal of my time in the field working side by side with employees. My experiences made it clear that two major problems plague government in its effort to become more efficient. The first is philosophical and involves the creation of policy without simultaneous attention to its implementation; and the second is the burden of rules, specifically those governing the civil service process.

When government makes policy with little or no regard for its implementation, the effects often include very complex bureaucracies, a lack of priorities and inferior customer service, as conflicting tasks compete for scarce resources.

For example, more than 200 Forest Service laws dating back to the 1800s still have provisions governing agency activities today. Were the implementation of these laws as important as their content, legislators would realize there is no humanly possible way they could all be accurately carried out.

The federal government is good at many things. But business management is not its strong suit. In the private sector, managers are held accountable for the bottom line and have the flexibility to use an unspent budget for one item to cover a shortfall in another. But because of congressional micromanaging, federal managers must spend untold hours creating logic that allows money from one line item to be used elsewhere when conditions have changed since the budget was created. Thus financial management absorbs valuable resources badly needed in the field.

The issue in Washington is not that government can't accomplish things, but that it does so inefficiently. There is little incentive to be efficient, beyond professionalism, self-satisfaction or a concern about being embarrassed in public. But these motivations alone are inadequate to counteract a basic lack of knowledge of how to operate efficiently.

In an enlightened society, certain functions are best performed by the central government; but unfortunately they are usually performed with great waste caused by inefficiency. On the other hand, could you imagine the private sector running the Gulf War during a period when profits were slipping? "No air cover for the troops this week!"

Government's inefficiency is enough to make any private-sector executive, who is used to performing against a budget and making a profit, wonder how things ever got this bad without taxpayer revolt. After all, stockholders would never stand still for such performance. So why have good systems broken down? Partly because government has become more complex and these systems were designed for simpler times.

For example, personnel administration systems in which the requirements for choosing new managers have grown dramatically as government tries to increase diversity, assure fairness and prevent abuses. In an attempt to assure the needed objectivity, screening panels at the Forest Service are frequently composed of people who may know little or nothing about the requirements for a management position with which they have only peripheral involvement. While this procedure improves the agency's insulation from lawsuits, it assumes all people have the same background and that there are no distinctions worth pursuing. The best managers cannot be chosen in this fashion, because the private sector's requirements are far less cumbersome.

However, the more important reason that good systems have failed is that policy-makers-totally enamored of their craft, the politics surrounding it and how the media reports their efforts-pay little attention to how their policies will be executed in the real world. After all, Medicare, Social Security and national defense fill the hearing rooms and get far more prominent headlines than business planning and bookkeeping. The news is the policy, not how services are delivered two or three years later when the country is focused on new priorities.

Policy-makers rarely respect the need to spend money efficiently. However, they love to criticize the agency line managers for this same inefficiency. That's the game they play in Washington.

A graphic description of these federal management shortcomings can be found in the General Accounting Office report, "1997 Consolidated Financial Statements of the United States Federal Government." Believe it or not, the document provides Tom Clancy-type excitement for financial managers. "For over 200 years, effective management of the U.S. Government has suffered from a lack of comprehensive financial information," the report says. Compounding the problem, the federal government has approximately 2,000 individual financial reporting components spending a total of $1.7 trillion per year. Talk about a challenging control problem.

So what can be done to improve financial responsibility in light of this lack of concern for implementation? Let's try something that is de rigueur in the private sector but largely unused in government. Let's create business plans before trying to implement any new major activity. No new private-sector business would ever be undertaken without a complete business plan. The same must be done in government. And it must be able to stand up to the scrutiny of informed questioners.

The heart of a business plan is in the numbers projecting income (if any) and costs, which articulate the assumptions on how a new activity will be run. Therefore, no law should be passed without a financial impact statement fully disclosing to the public the cost and benefits of implementing the law. Second, policy creators should be required to recommend a source of funding (e.g., eliminate existing programs or raise taxes or both). As it stands now, agency managers are forced to make the financial trade-off decisions and then take the heat. Having policy-makers indicate a source of funding would only be a recommendation, with the implementing agency making the final determination. But at least policy-makers would have to go public with a recommendation.

Financial impact statements should be produced by an independent Office of Financial Impact (OFI) headed by commissioners appointed by the President (with Senate confirmation) for staggered 10-year terms. The commissioners should be free to hire the best economic and financial analysts available at competitive free-market rates, not civil service pay scales.

On the three-year anniversary of each law, the OFI would issue a public statement comparing actual implementation costs to those projected. The agency in charge of implementing the law would then have 90 days to explain the variances.

The OFI and its related financial impact statements may sound like building more bureaucracy to control the bureaucracy, but it's my bet that the return on investment of this new activity would be quite high. The information it would generate would likely make folks think twice about the value of new legislation in relation to its cost. Perhaps some ideas for new laws would be abandoned by embarrassed legislators or modified if efficient implementation were an important objective.

It is true that the much-maligned overhead levels in government are high. But overhead is often justifiably created as complexity increases and new activities are added without business plans and without removing any old activities.

Overhead is almost universally assumed to be bad since it eats into a defined pot of available funds, thus reducing an agency's ability to fulfill its mandate. What government managers and policy-makers do not understand is that overhead itself is not bad. What is bad is too much overhead, specifically too many untrained or ineffective overhead employees. The purpose of overhead is to manage central processes and monitor results, without which the organization would fail. But good business plans would address this issue up front and prevent the agony later.

Thus the OFI and its financial impact statements would prevent the nonsense that creates policy after policy, law after law, with almost no consideration for cost and what programs would have to be forfeited if there are limited funds available. Congress and policy-makers throughout government exercise their creativity as if there were no funding constraints and later exercise their "duty" to criticize the resulting inefficiency as if they had nothing to do with creating it in the first place.

Business planning and financial management through the stimulation of an Office of Financial Impact could easily be started on a test basis covering just a few agencies. A single Cabinet department could provide such a test site. If successful, the program could be rolled out after several years.

This concept would promote priorities and reduce complexity in government, where agencies like the Forest Service labor in a swamp of conflicting laws.

Francis P. Pandolfi, who has spent 25 years as chief executive officer of a number of private firms, was the first chief operating officer of the U.S. Forest Service. After three years in government he returned to the private sector this year as a management consultant and private investor in Briarcliff Manor, New York.