Making a Digital Transformation: Focus Less on Flash, More on Cash

The Nobel Prize-winning economist Robert Solow famously quipped during the late ’80s, “You can see the computer age everywhere but in the productivity statistics” to describe the seeming disconnect between private-sector investment in IT and slow economic growth. The reason for this “productivity paradox” was that, initially, only some industries invested in IT, and so the evidence was hard to see at the national level. But later studies would find that industries that heavily invested in IT grew productivity at a higher rate than those that invested less. Now a new productivity paradox has emerged — why have states appeared to not do more to use IT to boost government productivity?

Last year, states collectively spent around $30 billion on IT, an amount that steadily increases year after year. While it may look like government is spending freely on IT, most of that money is going to maintain legacy systems. In a survey last year, almost half of state CIOs said that 80 percent or more of their budget is spent on maintaining existing systems, leaving little opportunity to invest in new solutions that could enhance productivity, particularly riskier ones that may have high potential benefits but are harder to implement.

Source: Information Technology and Innovation Foundation

Moreover, while IT spending continues to go up in state budgets, there’s little evidence that it’s translating into a more efficient government. For example, the number of state government employees has remained virtually the same over the past decade, not only in aggregate, but also across most major job categories (see the chart above). The fact that the government workforce doesn’t appear to be changing much should be worrying to public-sector leaders since the main productivity benefits of IT come from eliminating unnecessary jobs as business processes are automated and made more efficient.

For example, the primary cost savings from the shift to cloud computing comes from cutting IT workers as cloud environments streamline many traditional server and network management functions. But public agencies can be slow to cut workers. In fact, the rate at which government employees leave their jobs — either through layoffs, firings or quitting — is consistently lower than the private sector. Los Angeles ran into this problem when it upgraded its email service froma traditional server-based environmentto a cloud provider. The city’s plans to use this project to cut costs hit a roadblock when the IT department balked at the proposed job cuts (after some wrangling, the city eventually did cut those jobs).

Unlike in the private sector, where businesses are keenly interested in the ROI for IT spending, there’s a disappointing tendency in government to de-emphasize the productivity-enhancing benefits of technology in favor of the politically more palatable focus on how IT can enhance service delivery. So agencies are willing to use IT to make services better, just not cheaper. The end result is that agencies are missing out on opportunities to use investment in IT to drive down the cost of government.

To break this dynamic, leaders need to start demanding that IT projects specify how they will improve productivity, including through headcount reductions, and hold these projects accountable for delivering the promised value. One step in this direction would be for states to give the CIO explicit responsibility for improving productivity, as well as the authority needed to carry out that mission, including flexible funding, authority to hire and fire employees, and oversight of relevant contracts. This would change the CIO’s role from one of managing technology to managing IT-enabled efficiency and effectiveness.

States should also closely track and reward IT-driven productivity savings. Minnesota established an Office of Continuous Improvement in 2007 to find ways to cut costs and save money. Every year the governor’s office issues awards to teams and individuals that have had the most impact. For example, last year the state recognized the Department of Transportation for using unmanned aerial vehicles to inspect bridges, a process that cuts inspection time from eight days to five and saves the state money with lower equipment and traffic control needs.

The ultimate goal is digital transformation of public-sector processes, not merely so that states have the latest technology, but so that government and those who use its services can become more productive and efficient.