MITT ROMNEY ON BUDGET CUTTING

“One department might have tons of cost reduction opportunity; another only ounces.  An overall 15 percent cost reduction goal is too easy for one, too hard for the other.  The approach is subject to the age-old ploy of manager putting an item that is obviously critical on the list of things to be cut.  The senior executive quickly restores the critical item and is thereby convinced his subordinate has no fat whatsoever left in his budget.   ”   Mitt Romney

So how do you get around this problem?  While at the Salt Lake Organizing Committee (SLOC), Romney utilized a comprehensive bottom-up budget review that allowed senior management to become completely familiar with all of the organization’s programs in a relatively short time.  It identified core functions, discretionary programs, duplication of services and required managers to immediately make structural and budgetary adjustments.

When Romney arrived in Salt Lake City as the President and Chief Executive Officer of the Salt Lake Organizing Committee, SLOC was facing a financial crisis of huge magnitude – a minimum of $379 million out of a $1.9 million budget.  Working with SLOC managers, Romney initially conducted a “top down” budget review that resulted in reductions of $98 million. 

Shortly after Fraser Bullock joined SLOC as COO, a comprehensive line by line, bottom-up analysis was undertaken. During this effort every line item was reviewed and subject to adjustment.  Prior to their budget review, each of the 40 plus directors divided their entire budgets, line by line, into those items that were “Must-Haves” and those that were “Nice-to-Haves.”  Must-Haves were items without which the Games could not proceed.  Nice-to-Haves were enhancements and these were divided further into three levels of priority – first tier, second tier and third tier.

As Romney explains the process:

Fraser’s approach was all encompassing.  In most budget meetings and cost-cutting exercises I have seen in corporate America, managers bring in the recommendations for reductions.  There are a number of problems with this approach.  First, it’s very hard for the senior executive to know just how much excess there is in each and every department.  One department might have tons of cost reduction opportunity; another only ounces.  An overall 15 percent cost reduction goal is too easy for one, too hard for the other.  The approach is subject to the age-old ploy of manager putting an item that is obviously critical on the list of things to be cut.  The senior executive quickly restores the critical item and is thereby convinced his subordinate has no fat whatsoever left in his budget.  As governor of Massachusetts, I see some municipal officials announce drastic cuts needed in police, fire and teachers.  Predictably, the public is appalled.  But what about patronage jobs, less essential functions, excessive pay contracts?  From them the attention has been deflected.[1]

Once budgets were broken down into Must-Haves and Nice-to-Haves, Bullock and the SLOC finance staff met with program managers responsible for developing and administering their budgets.  They quickly reviewed each line item.  Decisions were instantaneously made as to whether the item was a core “must-have” or an optional “nice-to-have.”  “Nice-to-haves” were immediately cut from the budget and moved to a prioritized list that could be considered for funding at a later date if a need arose for it.  Budgets were updated immediately to reflect the changes.

At the end of the first bottom-up analysis, Fraser and the Management team had identified $97 million in further cuts……They had placed an additional $72 million into three Nice-to-Have tiers of enhancements that would be held back until or unless revenues became available.  At the same time they identified another $56 million in previously unbudgeted expenditures.  The net savings from the bottom up exercise was $113. 

We committed our finance team to performing a bottom-up analysis every quarter….Another $16.5 million in cuts came in September.[2] 

Bottom-up reviews significantly reduced the initial budget and the immediacy of the process required managers to achieve their objectives with the limited funding and lean programs that were left at the end of the exercise.  Items were only added back into the budget when they met a core operating need and as increased revenues became available to support Nice-to-Haves.  Managers were held responsible for maintaining spending limits and rewarded financially for meeting their budget and operational targets.

The process required the COO to dedicate a great deal of time to it; however, it allowed him to learn virtually every detail about a 1.9 billion dollar budget, to identify overlapping programs and to cut out items that were not absolutely necessary to the production of an outstanding Winter Olympic Games.  When combined with an aggressive marketing effort, careful budget and program control enabled SLOC to realize a $100 million profit.

[1] Mitt Romney.  Turnaround: Crisis, Leadership, and the Olympic Games.  Regnery Publishing, Inc. 2004.  p.111.

[2] Ibid, pp. 114-15.