At the cutting edge_2

11 Jun 09
As the public sector tries to square rising demand for services with harsh spending cuts, a lot is resting on the Treasury's efficiency programme.
By Jon Sibson and Anna Dunne

27 March 2009

As the public sector tries to square rising demand for services with harsh spending cuts, a lot is resting on the Treasury’s efficiency programme. Jon Sibson and Anna Dunne suggest what the efficiency team should include in its Budget report

In July last year, the Treasury launched the Operational Efficiency Programme, which is due to report in next month’s Budget. The programme team was charged with examining the potential for further efficiency savings across the public sector (central, local and health) in four main areas: back office and IT, collaborative procurement, asset sales and property. This is an ambitious undertaking, covering between a quarter and a third of total public sector spending.

The OEP staff are currently preparing their Budget announcement, which will be accompanied by detailed papers on the Treasury website. They have consulted widely with both the public and private sectors. Given the profound changes to the public finances since July, their work should now take on even more importance.

The most recent Pre-Budget Report highlights the scale of the problems, with public sector borrowing projected, even on relatively optimistic Treasury growth forecasts, to hit a post-war record level of around 8% of gross domestic product in 2009/2010, and some commentators expect it to be higher still. This is due to the effects of the recession, with the tax take shrinking (local and central) as demand for public services increases. This would be problematic enough in itself, but has been added to by the cost of the government’s short-term fiscal programmes to shore up the economy.

The problems in the UK economy and the growth of the public ‘debt-bubble’ will result in a much larger long-term budget deficit than currently predicted. We estimate that by 2013/14 this fiscal gap will be more than £40bn at today’s values (around 3% of GDP). This gap can be closed only through two interventions: raising taxes and/or cutting spending. Which is it to be?

There might still be questions on the size of the gap but the real question is what can be done to get the UK’s public spending back on track. In July last year, the OEP was probably seen as just another efficiency exercise, but it is much more important now, not only in what practical steps it recommends but also what it can do to boost confidence that something is being done.

Apart from the temporary fiscal stimulus in 2009/2010, public spending is already on the decline after its phenomenal growth in the early part of the decade. Most of the public sector is expecting a tough settlement in the next Comprehensive Spending Review, whenever that happens. However, the public has come to expect a rising standard of frontline services and indeed will expect more as they experience a range of difficulties due to the recession. Nobody wants cuts to the front line so the government must look to the back office and the OEP to deliver the goods.

There will be very painful choices ahead, but this is also a significant opportunity to radically reshape the public sector cost base, while maintaining and even improving the provision of frontline services for the future. There are two areas of focus: prioritising areas of public spend, accepting that to meet continued real growth in health, education and benefits support, other services will need to be cut or major projects delayed; and a fundamental review of back-office activities across the public sector to identify inefficiencies.

The first set of choices is one for the government in line with its manifesto commitments; the second is any government’s choice, not on where to spend, but how. PricewaterhouseCoopers’ December response to the OEP looked at a more comprehensive approach to efficiency in the four areas identified (as listed above), much of it based on current work in the sector but not widely rolled out.

For back-office and IT savings, PwC employs a benchmark database to identify the potential. A high-level analysis suggests that, in human resources services alone, the public sector could be up to 85% less efficient than the private sector.

Why is this? There are approximately 1,300 organisations across the public sector, most of which operate their own back-office services. In the private sector, the use of shared back-office support functions has become more commonplace. Many have outsourced their transaction processing to enable them to concentrate on core business. The public sector has a long way to go to match the efficiency levels of the best in the private sector.

However, there are good examples, such as NHS Shared Business Services, which provides finance services across 98 NHS organisations. This type of operating model is required across the sector (central and local as well as health). Services could be provided by a core of value-added, in-house and outsourced providers, supported by increased standardisation and simplification of non-value added activities to enable a greater focus on the front line.

Collaborative procurement is also a big area for potential savings. More than £160bn is spent annually across the sector, with the same devolved approach as in the management of back-office activities. This leads to a significant amount of duplication and inconsistency in what is procured and how to procure it. The challenge of maximising value is immense. PwC has been working on collaborative models based on a ‘build once, use many times’ approach. This type of model does not require wide-scale organisation change, but creates momentum, with a view to producing benefits quickly.

Property is another area ripe for savings. The majority of public sector organisations are battling with property portfolios that are too large, do not meet current service needs and are unlikely to meet future needs. Property (in terms of location and build) also substantially affects CO2 targets and will be the visible face of the recession and the catalyst for reinvigoration once the economy starts to revive.

Again, this is an area that benefits from a collective approach. Not only is it easier to use a larger portfolio efficiently than a smaller one but there is also the potential for other efficiencies and improvements. A collaborative geographical approach to property planning and use across the sector, at a manageable scale, would release efficiencies and capital.

Overall, the very diversity of the public sector, dedicated to meeting the diverse needs of the frontline user – one of its strengths in many respects – is now the weakness that builds in systemic back-office inefficiency. The current ‘burning platform’ of public debt and rising demands on the sector require a radical reshaping of the operating model and cost base. This should not in any way detract from dedicated frontline services but rather should support the front line, leaving the 1,300 public sector bodies to get on better with providing services.

The current problems are an opportunity for a programme of far-reaching transformational efficiency and productivity improvements across the sector. The OEP should try to focus the current fiscal stimulus on projects that will lead to a more efficient and effective use of diminishing public funds.

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