Sense of balance

19 Jun 09
There's no getting away from it - public bodies are going to have to find more savings. But there are ways of making this less painful, particularly for those that start now. Mike Turley explains

By Mike Turley

There's no getting away from it – public bodies are going to have to find more savings. But there are ways of making this less painful, particularly for those that start now. Mike Turley explains

No politician will say so in public, but as government receipts fall short of expectations and public debt grows, the probability of significant cuts to public services after the election becomes more likely. Inflating our way out of £1.37 trillion of debt is risky, working our way out through supercharged growth in gross domestic product is improbable, and tax rises remain as they always have been: unattractive.

In that context, service cuts are less about political choices and more a case of the only viable option for a new government.

By 2008, there were around 790 public bodies, and around 570,000 jobs have been created in the public sector since 1997. The prevailing view is that across-the-board top-slicing of organisations is less appropriate than targeted reductions in the ‘nice-to-have’ areas of government. T

his bodes ill for the kind of preventative policy-making tradition that has characterised the past ten years. If, as expected, departments and local authorities revert to their statutory obligations en masse, the outlook for social problems that cost the state so much becomes worse.

But all this has, for the present, been deferred. Average spending growth for 2008/09  to 2010/11 will be 4%, with current spending expected to grow by 0.7% in the three years from 2011. But just as the public sector might be the last aspect of UK Plc to go into a recession, it might also be last out.

And the period of austerity might be elongated if the government’s various efficiency initiatives – the Operational Efficiency Programme, the 2007 Comprehensive Spending Review and the Public Value Programme – are unable to offset the need for the 4%–5% real-terms cuts that the Institute for Fiscal Studies deems necessary.

But while everybody inside government looks with trepidation toward the post-election period, there are things they can do now to reduce their costs and prepare their organisations for difficult cuts in 2010 and beyond.

Deloitte’s report, Counting the cost, sets out a number of common areas where department and local authority managers could respond to the ideas described in the OEP and take action to achieve operational cost savings across a series of functions.

These won’t, by themselves, pay off £1.37trn. Counting the cost asserts that the long-term solution to sustainable government lies in the ability of public bodies to transform their largest and most expensive businesses, and apply new models of operation and funding to the main public services. But fundamental change of that scale and complexity takes time.

The report contends that, by taking action today, public organisations could prepare themselves for change of this kind when it does arrive. 

So what improvements could public bodies make? First, they need to consider hidden costs that lie between core support services and frontline provision, or are brought about by the particular constraints of public sector risk management, where profits are substituted for costs and reputation.
Ways of doing this could include end-to-end reviews of the most expensive supply chains and capital spending programmes and independently assessing supplier compliance with contractual obligations or service level agreements.

Sometimes this duty is delegated to the suppliers themselves, who not surprisingly report each month that their obligations to the client have been fulfilled. If independent scrutiny shows this not to be the case, public managers can seek rebates or discounts in line with penalties set out in the contract.
Secondly, public bodies need to consider the principles set out in the ‘property’ and ‘asset management’ strands of the OEP – how these relate to their businesses and whether particular assets that have not been previously considered could be sold. As a baseline principle, any public asset that has no policy function should be assessed for possible sale.

There is a hearts and minds angle to this: the public sector as a whole needs to reverse its mind-set from one of having to justify asset sales to one of justifying ownership. It is not enough, however, to assess an asset’s commercial potential.

Public bodies might need to ensure an asset is ‘fit for purpose’ before selling it. If the asset is a trading organisation, this might involve introducing commercial disciplines and capabilities ahead of the sale. Assets that have been managed in the public domain might have underdeveloped management and commercial capabilities, weak governance, and poor pricing and risk management expertise.

Potential risks will also have to be assessed, such as if the new entity fails or is constrained from effectively competing in markets. The history of government sell-offs includes cases of assets that have failed commercially having to be bailed out in some way by the government.

Thirdly, the need to cut staff numbers will grow as cost pressures increase. Around 25.9% of Total Managed Expenditure in 2007/08 was spent on paying public sector workers – around £151bn. This excludes employer pension liabilities. To comment on reforming the public sector labour market without mentioning industrial relations is to miss a major aspect of the problem.

But that aside, public bodies could start to make inroads into their pay bills by aggressively pursuing a policy of ‘backfilling’ or closing down vacant roles and introducing greater flexibility into standard contracts to aid redeployment. They could also establish lasting and meaningful performance management frameworks.

The OEP also sets out opportunities for collaborative working by expanding the categories of common spend, and introducing new accountability mechanisms and specific targets. Some previous collaborations in the public sector have failed because the concept of ‘partnership’ was misunderstood.

At the outset, each party needs to understand the strengths and weaknesses of their partners, their motivations and mutual interests, as well as possible areas of difference. Managers need to establish a governance model that enables this understanding, and the role and function of passive partners, to make collaborative working worthwhile.

Finally, the Deloitte report also looks at potential savings public bodies can make by improving their rate of tax compliance. While doing so cannot save money for government as a whole (on the basis that tax is a zero sum game – a department’s gain is Revenue & Customs’ loss), for individual organisations there are opportunities for savings. These include the recovery of VAT payable on capital investments and procurement; a more strategic approach to tax-intensive functions, such as fleet management and capital infrastructure investment; and the introduction of ‘smart benefits’ for employees as an alternative to salary increases.

These examples show that, in spite of the gloominess that pervades public finances, there are always opportunities to make short-term savings through doing things differently. Each of these opportunities depends on public bodies having leadership capabilities and a corporate culture that encourages individual involvement in efficiency across all levels and business areas.

If efficiency programmes are to be implemented effectively, they must be seen by line managers to be important – and responsibility for them must be given to individuals who have played an active role in developing them. Effective leaders will be those who take personal responsibility for executing efficiency programmes and who involve their political and official colleagues at an early stage to build
support for hard choices.

If departments and local authorities can get these basic requirements in place, they will have a foundation from which to build meaningful efficiency and change programmes and to prepare their organisations for the difficult times ahead. Those that go into it in the best shape are likely to emerge relatively unscathed at the other end.

Mike Turley is head of Deloitte's public sector practice. The Counting the cost report is available from www.deloitte.co.uk/countingthecost

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