INTERVIEW: Lydia Segal on Government Waste and Corruption

Some of the most dramatic examples of IT-related waste can be seen in public sector projects.

To get a handle on why government projects are so problematic, I spoke with Lydia Segal, one of the nation’s foremost experts on waste and corruption in public schools. I asked Lydia to explain why government projects are so susceptible to waste, failure, and corruption.

The organizations Lydia has studied are very large. For example, she says, “New York City ’s operating budget would rank it 7th in the nation if it were a state. It runs on $16 billion a year for 1.1 million students. That’s not including its capital budget. Los Angeles’s school system, colloquially known as the LAUSD, costs over $13 billion year for 727,000 students. The New York City school system serves over 850,000 meals a day, making it the second largest food provider in the country after the U.S. Army.”

These organizations are enormous. What makes their projects so prone to  waste?

Waste can be sporadic or it can be systemic and built-in. The biggest drain is obviously the latter. Built-in waste hemorrhages money day-in, day-out. In schools, as in most government agencies, the major cause of built-in waste is structure and orientation: a command-and-control organizational structure concerned with inputs at the expense of outputs.

In schools, the root of waste (as well as corruption) lies in the layers of bureaucratic oversight, detailed standard operating procedures, and regulations built up over the years to control waste and fraud. Every time anyone wasted or, heaven forbid, stole, money, school districts would respond by establishing a new layer of supervisors and a new set of rules and tightening control at the top. Rules prescribe virtually every little thing: how it must be done, by whom, and by when. As I describe in my book, as urban public schools grew, the focus on saving every penny eventually displaced the focus on productivity. The entire oversight machinery became the source of the very waste, abuse, and mismanagement that it was intended to curb.

I have a chapter in my book called “Watching the Pennies, but Missing the Millions,” that offers many examples of how red tape sucks away millions of dollars in large districts. Consider the case of the $4 battery pack. To prevent waste and abuse, the New York City school system passed a rule saying that, to get reimbursed for small expenditures, employees must submit a detailed explanation for why they needed the item along with the receipt.

Well, one high level official requested reimbursement for a $4 battery pack. Unfortunately, he didn’t include a detailed enough explanation for why he needed it, so the clerk in the central office rejected it. The clerk’s supervisor also dinged it. He explained that the clerk was following rules to protect taxpayers against waste. The supervisor’s supervisor, however, panicked because a high level official was involved. A flurry of meetings ensued with managers at successively higher levels until they got the Director of the Division of Financial Operations — the top guy of the division responsible running the finances for a $16 billion-a-year school system! So with the all man-hours involved and with managers averaging between $80 to $100 an hour, they spent thousands of dollars to process a $4 claim. So you have rules designed to stop waste that now cause it. The waste is built into the rules and reinforced by the myopic organizational culture that those rules fostered.

You describe how a system designed to avoid waste actually creates failure. Can you elaborate on that?

Another example of how rules designed to stop waste cause it, is the way schools deal with outside contractors. For most school systems, the name of the game – the way they try to prevent waste and save money – is to disallow as many contractor invoices as possible. They require contractors to follow a maze of rules and submit volumes of paperwork that must be approved by dozens of supervisors to get paid. Schools use these procedures to play “gotcha” with contractors. So if a contractor, say, fails to sign, date, attach a proper receipt, or properly complete his paperwork in any way, school officials will reject the invoice, no matter how minor the transgression.

From the contractors’ perspective, it becomes extremely expensive and unpleasant to do business with schools. It can take years to get paid for legitimate work. One contractor did $800,000 worth of work for the LAUSD without receiving a nickel. Many contractors told me that they had to hire about 30% more personnel just to deal with the stead flow of rejected invoices.

One contractor told investigators that the LAUSD refused to pay him for work he had done on a school vacation day. Since that day was not a day-off for his company, he showed up with his laborers, did the work, and submitted an invoice with documents certified and signed by each employee. To no avail. Another contractor described how school officials rejected his expenses because he filed them late - even though his reason was that the Facilities Division had not approved his work authorization in time, a common complaint.

Are there specific conclusions we should draw from all this?

The upshot is that, while these gotcha procedures might save schools a couple of dollars in the short-term, they waste millions of dollars in the long-term. Small companies without enough cash reserves or borrowing ability simply can’t do business with schools, while the best contractors refuse to do business with them. So schools lose out on the benefits of free market choice and are left with a tiny pool of large companies to select from. Also, contractors do what any contractor would do to a difficult client. They stick it to him. So contractors overcharge. They cut corners. They put in phony orders. They drag their feet on projects. All this to get even and make up for the exorbitant costs and hassles of doing business with an intransigent bureaucracy.

Another example of how the centralized structure causes waste concerns computers. Central school bureaucracies control all the money and sign all the contracts. But since they remote and are out of touch with what is happening in the field, their rules and contracts often end up being a waste.

To illustrate with another example from the New York City schools, they recently has spent $85 million on computer technical support. Yet many computers are sitting around unused. Why? Because when central headquarters signed a contract for technical support with its primary computer contractor, they stipulated that the company offer technical support primarily via telephone. Sounds like a good idea, right? Well, the problem is that most classrooms have no telephones. So when a computer goes down, the teacher has to take a note to the principal’s office and have the secretary call tech support. When the technician asks what the problem is, the secretary, needless to say, does not know. So a technician must be dispatched to the school, which can take days. And the problem is sometimes as simple as a cable that isn’t plugged in. how much better would it have been to let school principals buy their own computers and arrange for tech support themselves, as they are closer to the problem and know what their teachers need?

Are government projects doomed to fail or is this problem solvable?

My whole purpose in writing the book was to offer solutions. A number of school districts that have curbed waste and abuse and describe what they did and how other districts can replicate their efforts.

Since the root of the pathology is the effort by school headquarters to control virtually every detail of what happens below, the solution is to loosen top-down controls, push decision-making authority down the chain of command, and find other ways to check employee behavior, such as through software that can track how people spend money.

I advocate radically reshaping school districts to put real decision-making authority in the hands of principals and local school managers. I recommend a new balance between accountability for job performance and fiscal compliance.

Can you offer a real-life example of IT success?

One of the many success stories that I describe in my book is the example of the school system in Edmonton, Canada. It used to be a bloated bureaucracy rife with waste that transformed itself through a series of radical structural changes into a highly effective, lean district where children are learning and employees at all levels display great pride and creativity in their work.

Let me illustrate with the story about Edmonton’s Information Technology Unit (IT). During the 1980s and most of the 1990s, Edmonton’s central IT Unit was a tiny, moribund unit that hardly interacted with schools . They received their funding from the top and had a lot of cumbersome red tape designed to prevent waste, which made it hard for schools to get assistance from them.

Then, in 1998, when the government allotted a huge infusion of money for school technology, Edmonton tried something new. In Edmonton, as in most school districts, the top controls all the money – it tells schools what services they are eligible for and they control those services. Edmonton, however, decided to send the IT funds directly to its schools, bypassing the entire central bureaucracy. It allowed principals to decide whether to buy IT services from the central IT Unit or hire private sector IT contractors.

Well, the central IT Unit realized that, if it didn’t act quickly to attract that money, it would die as business flowed to outside competitors. Within days, IT Unit officers were visiting schools and handing out questionnaires to find out what they needed. The Unit set up a help desk. Most important, it did away with all the superfluous anti-waste, anti-corruption rules and regulations that had stood in the way of its helping principals. And instead of losing money to waste, business started booming. So many principals clamored for central IT services that it grew from 20 technicians to 65 in just three years. Today it has contracts with virtually every school and receives glowing evaluations all around.

Government IT leaders read this blog. Can you offer these folks advice on how to make their projects more successful?

The most important thing is to give people in the field – or the people for whom the project is intended — a major role in shaping it. In government agencies, projects usually fail because central headquarters thinks it knows best what everyone else needs and wants. But the larger the agency, the more out of touch the top generally is with what people actually need and want and how they do business. So it is absolutely critical for executives to have feedback loops with people in the field.

Also important is achieving balance in oversight and controls against waste and fraud. Bad controls will wind up creating incentives for more waste, abuse, and corruption than they prevent. As I describe in my book, there are many ways using modern technology to control waste and fraud while simultaneously allowing for flexibility and creativity.

Lydia Segal  is a professor of Law and Public Management at John Jay College, City University of New York. She has a J.D. from Harvard Law School and a Masters degree from of Oxford University. Her most recent book, Battling Corruption in America’s Public Schools, (Harvard University Press), chronicles waste and corruption in large school systems and is the standard-bearer on the subject. Lydia is a consultant to government agencies on reducing costs and improving accountability in the public sector, and can reached by email at lsegal@jjay.cuny.edu.