On the money

8 Jun 09
The Operational Efficiency Programme puts public services under renewed pressure to save money by rationalising back-office functions. It's a big challenge, and accurate data and strong management are needed to make it a reality

by Colin Craig

05 June 2009

The Operational Efficiency Programme puts public services under renewed pressure to save money by rationalising back-office functions. It’s a big challenge, and accurate data and strong management are needed to make it a reality

The final report of the Operational Efficiency Programme is the latest set of recommendations to emerge from the government aimed at performance management in the public sector. One of the main political drivers behind the initiative is a sense that the public sector needs to share the pain being endured in the wider economy. This was clearly expressed by Chief Secretary to the Treasury Yvette Cooper when she launched the review, explaining it was ‘necessary to illustrate that government was dedicated to money saving in difficult economic circumstances’.

In recent years, we have become familiar with Sir Peter Gershon’s 2004 efficiency programme, which identified savings of £26.5bn. This was followed by the 2007 Comprehensive Spending Review, which planned to provide £30bn of value-for-money savings by the end of 2010/11. These are two hard acts to follow since easy savings and productivity gains have already been made – acknowledged by the admission in the OEP final report that any savings will require sustained action over the coming years.

The report’s section on back-office operations and IT focuses on how elements of private sector business practices could be used to improve efficiency in the public sector. It criticises the lack of consistent and reliable management information on expenditure, evidenced by estimates of total back-office spending of between £16bn to £20bn a year, with IT expenditure estimated at between £12.5bn and £18.5bn a year. The report concludes that what is not measured well cannot be managed well.

A major strength of the April 2009 Operational Efficiency Review is the way in which, with very little hard data to go on, it establishes the size of the prize – savings of £4bn a year in back-office operations and £3.6bn a year in IT spend – and the means to achieve them.

To achieve targeted savings, the report advocates: the use of benchmarking; systematic operational reviews; greater sharing of common services by the adoption of shared services models; better use of management information systems; stronger governance of IT projects; more collaborative IT procurement; and the standardisation of IT infrastructure. These should be developed without delay.

However, achieving performance improvements that will endure and can be built on each year with further improvement requires a road map.

Managers need to know precisely where to hone their operations using the templates of best practice that have been proven to work in parallel cases and so reduce the risk of change. Any benchmarks must be accurate and rigorously conducted before being used, to determine the nature of comparisons and the direction of improvements. It is a weakness in the process if there are inconsistencies in the approach and level of detail.

The report also recommends giving government chief information officers and the Office of Government Commerce’s category boards responsibility for ‘greater standardisation and simplification of IT systems, desktops, infrastructure and applications across the public sector’. While standardisation can undoubtedly lead to potential cost savings, it is less clear who will enforce such standards across different departments, within which many users will claim the status of a special case.

The report recommends that all organisations use the audit agencies’ value for money IT indicators as part of a drive towards more unified management information. There is merit in the greater integration that is being aimed for by this approach but these indicators are not without flaws and can result in unintended consequences.

One example is in the use of technology (such as web-enabled automation of council tax payments), which might mean that front-office facilities, buildings and significant staff costs can be eliminated. Overall costs will fall and yet IT will be shown as a relatively high proportion of overall running costs. This will be seen as a ‘problem’ to be solved by this measure, rather than the key to best practice that it is.

It is surprising, perhaps, that the report did not go further in encouraging consideration of open-source software. This was suggested by Mark Thompson of the Judge Business School in his January report for shadow chancellor George Osborne. He identified potential savings of £600m by adopting this approach.

Departments are likely to challenge the report over the setting of targets rather than the means of achieving them. This is because the high-level savings are not broken down into detailed areas to be addressed on a departmental basis. In IT, for example, it is recommended that a flat 20% be removed from departmental allocations. This broad-brush approach is too simplistic and effectively penalises departments that have already improved efficiency. A more useful approach, which must be the next stage, will be to agree efficiency targets on a departmental basis.

Similarly, some efficiencies will require investment to achieve the expected gains. There will be a cost in migrating towards shared service environments, in re-engineering and rationalising processes. The costs required to provide the expected benefits are not mentioned in the report and must be identified.

Another challenge will be in providing evidence that the recommended changes would actually provide benefits. A major source in the back-office area will be in the increased use of shared services. However, the 2007 National Audit Office report, Improving corporate functions using shared services, identified that reported savings on shared services were relatively small, mainly due to the different ways departments allocated costs.

The focus of the OEP’s final report on tangible improvements is promising, but its credibility might be limited since it excludes some of the unique factors that influence public sector spending. The complexity, cost and risk involved in making transformational change, and the diversity of interested groups and their differing agendas make savings hard to achieve. But with effective baseline information, strong management and ongoing measurement and governance, good managers can achieve positive and lasting improvements in performance.

Colin Craig is regional consulting director at Compass Management Consulting 

Did you enjoy this article?