(Yesterday Anchorage reader Meera Kohler (NGP Photo) told us about an error and Ottawa reader Tom Harris informed us of an addition to include. We are always quick to make necessary changes. For the 15-year life of NGP, we have asked readers to help us make this a valuable research resource. Accuracy is critical and for your continuing help, we are grateful. -dh)
| Alberta, Alaska's natural resource sister in Canada is facing it's own fiscal challenges. The revered Fraser Institute says Alberta's problem has more to do with over spending than with low oil prices. Some Alaskans are nodding their heads in understanding and agreement. -dh |
Getting Alaska's Financial House In Order
Alaska's Fiscal Crisis
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More reference to this subject here, includes BPs announcement today, and the Alliance's AK-Headlamp opinion:
(More coming….) |
Today we bring you Bob Kaufman's commentary on preparing Alaska's financial house for long term revenue challenges. It earlier appeared in the Alaska Dispatch News (ADN). He suggests we have much to learn from the private sector. He is right. -dh
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Bob Kaufman. Let’s face it: Low oil prices mean that Alaska is about to fall off a fiscal cliff. And that’s a scary thought. But a lot can be done to minimize the damage.
Early in my career, I led numerous turnarounds of private companies in financial distress, and while public-sector cost cutting is more difficult, I believe there’s a lot that government can learn from the private sector. Here are four insights.
Plan for the worst — it can lead to big ideas
In the early stages of turnarounds, things usually get far worse before they get better. Why? Because enterprises in financial distress often get there by not paying attention to early warning signals, and usually don’t know the true extent of their problems. Even after the crisis hits, they typically remain in a state of denial about how bad things really are.
The best way to break the cycle is to construct the worst imaginable scenario — and put together a viable plan if that happens. Unfortunately, in many cases, the “worst imaginable scenario” turns out to be closer to reality than most people think.
In Alaska’s case, the worst imaginable scenario would be one in which oil prices stay low for most of the next 10 years — not unreasonable given the U.S. alone has hundreds of billions of barrels of recoverable shale oil that can quickly meet new demand at prices in the $60-per-barrel range.
So the question we need to ask ourselves is, “What is a sustainable long-term model of government services and revenue in such a scenario?”
It sounds ugly at first, but forcing people to confront Draconian scenarios actually frees them up to think big and creatively. They contemplate ways of doing things that were previously unimaginable. For this reason, it’s often easier to cut costs by 20 percent than 5 percent. In fact, my experience managing many turnarounds taught me that the prospect of change is worse than the change itself. The hardest part of any turnaround is taking initial action. People fear change. Our brains are wired to exaggerate the effort or cost involved in switching from the status quo.
Reduce costs and improve productivity
Traditional, incremental cost cutting simply won’t work when the underlying operating model remains in place. Once the low-hanging fruit has been harvested, it may appear as if there’s nothing left to cut.
The truth is that enormous savings — up to 30 percent or more — can be reached by eliminating non-obvious waste: an overly complex organizational structure, unnecessary requirements imposed by one part of the organization on another, a lack of root-cause problem solving, poorly designed processes and an ignorance of other underlying cost drivers.
Communicating the need for efficiency improvements is not enough to realize these larger gains. A skilled change manager or facilitator needs to engage the workforce, take an end-to-end view of the process and solicit ideas to fundamentally re-engineer it.
How do you get people to share restructuring ideas that might cost them their job? Have an explicit conversation about what happens to anyone impacted by the changes. Ideally, you would offer generous severance packages, so participants are less concerned about the potential of moving on. In the long run, what you spend in short-term transition activities is far less significant than evolving to a sustainable, lower-cost operating model.
Stop the bleeding immediately
Cash is a huge asset in engineering a successful turnaround. You don't want to use it to postpone the inevitable hard choices, but rather to invest in transitioning to and implementing your long-term plan.
In private turnarounds, organizations are usually hemorrhaging cash, and it’s often necessary to immediately suspend all non-critical disbursements. This buys time to put together a long-term plan and shows the bank — which is your lifeline — that you can correct the situation.
Fortunately, Alaska’s cash reserves make our current situation appear less desperate. However, while Alaska does not have a bank, we do rely on credit markets, and they are not dissimilar. We need to instill confidence in them so they don’t downgrade our bond rating. If that happens, debt payments go up, squeezing your budget even further. Money that would have gone to services goes instead to bondholders in the Lower 48. People who have been through difficult situations will all tell you they would give anything to get back cash they frittered away before taking bold action.
In Alaska’s case, the most immediate, obvious way to preserve cash would be to cut or eliminate the Permanent Fund dividend while we assess the long-term picture. The challenge with this is that some people will be disproportionately impacted — which brings me to my last insight.
Leadership matters
It’s a rare leader who can get people to buy into lasting, transformational change. After all, this process usually involves asking people to take big risks and sacrifice things they’ve gotten used to.
Fortunately, our current governor is not explicitly identified as a Democrat or Republican. That could help him overcome the mistrust that would result from being associated with a specific set of partisan values. But he also needs to hold himself to the highest standards of honesty and impartiality.
I’ve found that most people are willing to do their part, as long as they perceive an equitability of sacrifice across the board. The more they see others concede, the more they will concede. The minute they perceive that others are gaining ground at their expense, that virtuous cycle ceases, and they will viciously fight for their own interests. In the public sector, that could quickly deteriorate into a political stalemate and lack of action.
I’ve also found that people don’t give up their old ways unless called to a higher purpose — one that goes beyond improving profits or performance. In Alaska's case, many of us fear our way of life may be at risk due to low oil prices. The cause needs to transcend partisan differences and focus on our common values.
Fortunately, most Alaskans share two core values that are relevant now. First, we’re resilient. We’ve met great challenges before. It’s true that years of fabulous oil riches may have made us a bit soft. But now we’re being asked to summon the determination and creativity that have allowed us to thrive up here. And second, we’re compassionate. Alaska is a small enough state that we still look out for one another.
The question we should be asking ourselves now is this: “In a world where oil prices will never rebound, how can we draw on these qualities to still build a great state, with a good education system and good public services?” Getting to that sustainable end goal will inevitably and sadly require cuts in government and to certain beneficiaries. But the sooner we confront these challenges, the more cash we’ll have to help those affected in the transition.
Bob Kaufman is the founder of Alaska Channel, an Alaska video and stock footage company. He also is a business consultant and venture capitalist who worked in turning around struggling companies while at Bain & Company and as an interim CEO.
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