Happy Tuesday, Transformation Friends. Another week, another opportunity to go Beyond the Status Quo.
It’s the start of a new fiscal year, and it’s the first where departments are seeing their budgets reduced as part of the Comprehensive Expenditure Review, which is aiming for broad savings across the board over the next three years, reaching 15 percent by 2028-29.
If there are ways for us to deliver more efficiently and cost-effectively, we should do it, and the CER is forcing departments to rethink and challenge their spending.
But one interesting part of all of this is the human factors that come into play. Generally, in a department, every branch is asked to find its share. Label what’s critical, identify what can be cut, then work to generate savings.
But then there’s this interesting dance that happens. Branches think, “On the one hand, if we propose too many things and others don’t, there’s no taking it back, and our stuff will get the axe. On the other hand, if no one proposes enough, we’ll have to do another round, so I need to leave some things on the table that can be cut later.” We think to ourselves, “I don’t want to be punished for playing fairly if someone else doesn’t.”
We go around in circles, and inevitably, we complain that nobody is playing as one team.
In thinking about this, I see parallels to game theory and a famous thought experiment that tells us this is predictable behaviour: this defensive posture is the rational play when we design the exercise the way we have. And running cost-cutting exercises without changing that design is a choice to accept defensive behaviour as the operating mode and, ultimately, to achieve a less effective result.
We’ll explore this idea today and think about what we can do differently. We’ll start by looking at the famous prisoner’s dilemma paradox, then connect it to how cost-cutting exercises typically run, look at what gets hollowed out when this dynamic plays out over multiple rounds, and finish with ways we can actually change the equilibrium.
Grab your morning coffee, and let’s get started.
A defensive posture is the rational play
The prisoner’s dilemma is a paradox in game theory that reflects a common problem in real life: individually rational choices can lead to a worse outcome for everyone. Here’s how it works. Police have two suspects in custody and are questioning them separately. Each is offered the same deal. If both remain silent, each receives one year on a minor charge. If one testifies while the other remains silent, the one who testifies walks free, while the silent person receives three years. If both testify, they each receive two years. Since neither suspect can communicate with the other, each sees testifying as the safer choice, regardless of what the other person does. The result is that both are likely to testify, even though they would both be better off if they stayed silent. The dilemma shows how rational individual choices can create a poorer collective outcome (Axelrod, 1984).
The same structure appears in many cost-cutting exercises. The organization has a collective savings target, just as the two suspects share an interest in a lighter outcome. The consequences, however, land separately at the branch level. Each branch must decide what to offer without knowing what others are offering. A branch that volunteers real reductions risks permanently losing base funding, since reductions are difficult to reverse once implemented. A branch that protects its work may avoid deeper cuts if others come forward first. The system creates a shared interest in meeting the target, but gives each branch a strong individual reason to hold back.
Under those rules, the rational move for each branch is to defend as much as possible, frame most work as critical, and disclose only limited flexibility. A branch that plays in good faith can end up permanently weaker if others protect their funding. A branch that holds back may preserve room to manoeuvre, especially if the collective target is met through reductions offered elsewhere. That is the prisoner’s dilemma in administrative form: each branch is reading the incentives correctly, yet the combined result is weaker transparency, poorer prioritization, and a cost-cutting exercise that rewards defensive behaviour.
What gets hollowed out
Across multiple rounds, this pattern creates a predictable result. Branches that can defend their work through strong narratives are better positioned to protect their funding. Branches that disclose real flexibility early can end up carrying a larger share of the reductions. The exercise still produces a savings number, but it is based on uneven information.
The deeper cost shows up later. Call it cultural debt: the trust version of technical debt. Each cycle teaches leaders that honest disclosure can be punished. After two or three rounds, the organization starts to lose access to accurate information about its own capacity. Capacity conversations become negotiations rather than honest assessments. Leaders learn to protect their areas first, disclose less, and frame every activity as essential. The organization may achieve the short-term savings it needs, but it pays for them with weaker evidence, lower trust, and a reduced ability to make good strategic choices in the next round.
Rules shape the outcome
Two strands of research help explain why this matters.
The first is mechanism design, a branch of economics that studies how rules shape behaviour. The field earned Hurwicz, Maskin, and Myerson a joint 2007 Nobel Prize in Economic Sciences (Hurwicz, 1973; Myerson, 1979; Maskin, 1999). The main point is simple: people respond to the incentives built into a system. When the rules are well-designed, people can act in their own interests and still produce a good collective result. When the rules are poorly designed, appeals to good behaviour have a limited effect.
The second is Elinor Ostrom’s work on how groups manage shared resources, such as pastures, fisheries, and irrigation systems. Ostrom (1990) found that co-operation worked best when a few conditions were in place: clear rules, visible monitoring, fair consequences for people who broke the rules, and trusted ways to resolve disputes. These findings matter because they show that co-operation depends heavily on the system's design. It is rarely enough to ask people to “act better.”
Apply this lens to a typical reduction exercise. The definition of critical or non-discretionary is’ is often vague and left to each branch to decide for itself. Monitoring is uneven. Senior leaders may see the savings totals, yet have limited visibility into how each branch made its choices. A branch that holds back may face few, if any, consequences. A transparent branch may lose funding immediately. Disagreements often get resolved through persistence, pressure, and just waiting it out.
That is why a message like “we need everyone to think enterprise-first” has limited power when the financial rule says, “your base will be cut if you admit you can absorb the reduction.” Values matter, but incentives carry more weight. Better communication can help people understand the exercise. It cannot fix rules that reward defensive behaviour.
Changing the equilibrium
The equilibrium is not fixed. It comes from the rules, and the rules can be changed.
Here are four design features worth considering for any reduction exercise, or for any process where shared goals and individual incentives pull in different directions.
Define the decision categories before people act. When people are asked to classify their own work, funding, risk, or capacity, they need common definitions before decisions start. Without shared definitions, each area can interpret the categories in the way that best protects its own interests. Clear definitions make the exercise more comparable and reduce the advantage of self-certifying everything as too important to change.
Put reasonable limits on self-protection. Any process that relies on self-reporting needs boundaries. Without them, the rational move is to protect as much as possible and expose as little as possible. A clear limit forces areas to make real choices, and it makes those choices easier to compare across the organization.
Remove the penalty for honest disclosure. People will not share accurate information if they believe that transparency will be used against them. Any process that needs honest input must protect those who provide credible, evidence-backed information. Otherwise, each round teaches people to hold back more in the next one.
Record the consequences of each decision. Shared decisions need a clear record of the trade-offs being accepted. Without that record, the organization may remember the savings while forgetting the risks, service impacts, and operational pressures created by the decision. A visible record also improves future planning by connecting today’s choices to tomorrow’s consequences.
For people outside the design role, the most useful move is to ask for shared definitions on the record: “Can we agree on a working definition of ‘critical’ so I can classify my spending on the same basis as other branches?” It is a fair question, hard to refuse, and it quietly reduces the advantage held by the loudest defender in the room.
Wrap up
The defensive behaviour we see during cost-cutting is rational behaviour resulting from the rules we set. The good news is that that means we own it as a design choice and can change it. Running these exercises without understanding human behaviour is how we end up with defensive theatre.
Here are a few questions to reflect on:
In the last reduction exercise you were a part of, which of the four design features were present, and which were missing? What did the gap predict?
Can you tell, right now, which organizations in your department played transparently and which defended hardest? Are you treating those two groups differently, or are you about to punish honesty again?
If an auditor asked you to defend the rules of the last cost-cutting exercise (set the savings number aside for a moment), would you stand behind them, or would you discover you’d inherited them from a Finance template no one had revisited in years?
Until next time, stay curious and I’ll see you Beyond the Status Quo.
References
Axelrod, R. (1984) The evolution of cooperation. New York: Basic Books.
Hurwicz, L. (1973) ‘The design of mechanisms for resource allocation’, American Economic Review, 63(2), pp. 1–30.
Maskin, E. (1999) ‘Nash equilibrium and welfare optimality’, The Review of Economic Studies, 66(1), pp. 23–38.
Myerson, R.B. (1979) ‘Incentive compatibility and the bargaining problem’, Econometrica, 47(1), pp. 61–73.
Ostrom, E. (1990) Governing the commons: The evolution of institutions for collective action. Cambridge: Cambridge University Press.