Fadi Adra, Haroon Sheikh, Rawia Abdel Samad, Ashish Labroo, Sevag Papazian
July 5, 2016
The Gulf Cooperation Council (GCC) countries1 are in a fiscal crunch. Even if the GCC member states can grow non-oil revenues by 10 percent annually over the rest of this decade and the average price per barrel of oil returns to US$50, their budgets will still need to be reduced by approximately $100 billion (7 percent of GCC GDP) on an annual basis to achieve fiscal balance.
All GCC governments have announced spending cuts, but conventional strategies, such as across-the-board or narrowly focused cuts, could do irreparable harm to their economic and social development. Instead, they need a more effective approach — one that enables them to cut costs and grow stronger simultaneously. This approach, which Strategy& developed for the private sector and customized for government, is called Fit for Service.
Fit for Service achieves substantial and sustainable reductions in spending, while bolstering investment in the government services and initiatives that are essential to the long-term security and well-being of governments’ constituents. It involves four actions: articulating strategy; transforming the existing cost structure of government services; building the necessary capabilities; and reorganizing the government’s operating model for high performance. There are two enablers of these actions. The first is digital, which drives the digital transformation of government. The second is the development of the talent needed within government and the national economy at large along with the creation of a change-friendly culture that can support and nurture stakeholders as they undertake transformational initiatives.
Fit for Service initiatives are difficult but worth the effort because the leaders of the GCC member states cannot simply cut costs by conventional means if they are to transform the cost base of their governments and create a more sustainable fiscal future.
In the face of this budgetary crisis, every GCC government has announced spending cuts, which range from 4 percent to 30 percent. Although reduced governmental spending is necessary, conventional cost cutting — either across-the-board cuts or narrowly focused cuts — could do irreparable harm to the economic and social progress of GCC countries.
Across-the-board spending cuts yield short-term savings, but they do not change how a government spends or functions. The government tightens its belt, but it does not attack the cost basis of functions and processes; it defers investments, but it does not optimize them. Worse, across-the board cuts impede the performance of the government’s essential processes and the implementation of its high-priority initiatives, because they are subject to the same reductions as every other activity.
Similarly, narrowly focused spending cuts also sacrifice long-term goals for short-term financial gain. Functions and services that offer the largest and most immediate savings are targeted without due consideration for their long-term impact. Often, these cost reductions are determined by benchmarking similar spending of other countries without taking into account the local context.
GCC governments need a more effective approach to eliminate tens of billions of dollars in spending without the risk of costs creeping back. The scale of the challenge they face means that both the across-the-board and the narrowly focused approaches will cut into the muscle of government. An effective approach must enable the GCC members to lose the fat they don’t need (i.e., cut costs) while simultaneously retaining the muscle to grow stronger (i.e., to invest and fulfill their social obligations). It must empower them to transform their budgetary problems into an opportunity to rethink the fundamental tenets of the public sector, becoming more cost-effective and better equipped to meet constituents’ needs in the process. We call this approach Fit for Service.
The Fit for Service framework for government was first used in the private sector during the 2007–2009 global recession. Strategy& designed its predecessor,
Fit for Growth,* to help companies simultaneously pursue two seemingly contradictory goals: revenue growth and cost reduction.
Fit for Growth achieves this through a proactive and prioritized approach to cost management. Spending on non-core activities is reduced or eliminated, and the savings are reinvested in the development of a set of distinctive capabilities that enable a company to differentiate itself in the marketplace and grow its revenues. This approach uses a deliberately designed operating model and organizational culture to enable and support sustainable cost reduction.
Companies have unlocked significant value using Fit for Growth. In terms of cost-cutting, they recorded savings ranging from 17 percent to 44 percent annually.
Fit for Service is a customized version of the Fit for Growth framework. It is tailored for government entities, as opposed to private-sector companies and state-owned enterprises, in the following three ways:
*Fit for Growth is a registered service mark of PwC Strategy& LLC in the United States.
It is easy to see why conventional cost-cutting has become the default solution to budgetary shortfalls in the public and private sectors. It is simple to mandate across-the-board budget cuts. However, such conventional cost-cutting is a short-term fix that uses today’s numbers to disguise tomorrow’s crises. Instead, by using a Fit for Service approach, GCC government leaders can undertake economic and governmental transformation that will set their budgets on a sound footing and provide the volume and quality of services that their constituents are demanding.
1 The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
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The Ideation Center team that produced this paper was Fadi Adra, Haroon Sheikh, Rawia Abdel Samad, Ashish Labroo, and Sevag Papazian.