In the Hot Seat - Reducing Costs in Public-Sector Organisations in an Age of Austerity

Executive Summary

The current age of austerity has created a compelling need to reduce costs in the public sector. The UK budget deficit is growing as revenues have been depressed by the recent economic downturn and total spending has continued to increase. Traditional incremental change and narrowly targeted cost reduction strategies cannot deliver a solution – instead it is time to take a fundamental look at the question of how to deliver better value for citizens. As a result, politicians and public-sector leaders are in the hot seat and must quickly decide how to deliver more with less.

Some in the public sector, particularly in local government, are already reducing headcount, cutting capital projects, adopting new operating models and planning how to reduce spending by 15 to 30 per cent in the coming years. Despite this, for most public-sector organisations, current efficiency savings will not be enough to deliver the required reductions. As well as rethinking their approach to meeting citizen's needs, it will also be important for leaders to signal action visibly and inspire confidence in their plans.

However, there are opportunities that can arise from the situation. A reduction in public sector funding is also a real opportunity to focus and engage the whole delivery network around adding value for citizens, therefore reducing waste and improving both efficiency and effectiveness. As Rahm Emanuel, President Barack Obama's Chief of Staff said recently, "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."1 This point captures the unique combination of urgency, inevitability and opportunity that faces the senior leadership of the UK public sector.

Moving from planning cost reduction to delivering actual savings is often a difficult and complex process. Public-sector leaders need to be aware of the many pervasive myths and emerging realities that can impede effective delivery and undermine cost reduction plans.

To make an impact, public-sector leaders need to take the following three actions:

engage the frontline to reduce costs manage across organisational boundaries to reduce costs hold management to account for cost reduction. In doing this, it will be important for leaders to act as role-models and reward the right behaviours. These are acting in the corporate interest, taking responsibility and delivering against commitments. While relevant whatever the state of public finances, such actions are particularly pertinent given today's financial constraints. They can be seen as prerequisites for delivering significant and sustainable cost reduction, and therefore should be priorities for all politicians, permanent secretaries and chief executives.

Such actions should be part of a wider process of change which involves:

reshaping organisations, to focus resources where they can have the most impact, rather than making uniform cuts within existing structures2 building leadership at all levels3 delivering sustainable cost reduction, which is the subject of this paper. The financial challenge for public-sector organisations

As the Treasury recently reported, "In 2008 the global economy entered the most severe and synchronised recession since the Great Depression".4 Such economic conditions brought unprecedented challenges. Market volatility and increased competition forced the private sector to respond quickly with cuts in spending and headcount. While for many in the private sector this period of retrenchment is largely over, the public sector still has many challenges to address.5

The Government estimates that the UK budget deficit will rise to £178 billion in 2010.6 Projections from the Organisation for Economic Co-operation and Development (OECD) indicate that the Government's total gross debt levels will rise to 120 per cent of gross domestic product by 2017.7 In response, budgets are already being reduced by between 20 and 40 per cent in local government. At the same time, most central government departments have established transition teams to develop initial plans for operating with resource levels somewhere between 15 and 50 per cent lower. Recently announced cuts indicate that the majority of major local authorities plan to shed hundreds, and in some case thousands, of jobs during 2010.8 Indeed, nearly 25 per cent of public-sector employers expect to make people redundant during the first quarter of 2010.9

Ideally, the 2010 general election would facilitate a debate on the strategic challenges facing the public sector, and thus create a clear mandate for change. However to date, longer-term challenges have barely been mentioned, for example the implications of demographic change on demand and resources for health, long-term care and pensions. Similarly, initiatives such as Total Place and 'localism' are primarily focused on improving spending efficiency in implementing central programmes, rather than giving locally-elected leaders the responsibility to allocate scarce resources between competing local needs.10

The public sector must focus on tackling these financial pressures in a sustainable way, avoiding uniform, knee-jerk cuts that directly affect service delivery, while also making the underlying changes that prevent costs from creeping back up. Permanent secretaries, chief executives and their management teams are already making choices about how, where and when strategies for cost reduction will take effect. In this process, they can learn from public-sector peers and private-sector forerunners who have:

developed a comprehensive and credible strategy to lower costs permanently improved the commercial skills which are crucial in judging priorities, managing transitions, commissioning suppliers and assessing value for money, as outlined by the National Audit Office11 collaborated within their organisations, their locality, their delivery network and across government, for example using commissioning to build effective partnerships with the private and third sectors built the capability to deliver a coherent, sustainable cost reduction programme, and to monitor and realise the benefits mobilised their people behind a positive view of the future and invested in leadership at all levels. There are various myths that can restrict this process, the implications of which are outlined in the next section.

Myths and emerging realities

Few public-sector leaders have experience of leading during a sustained decline in resources. Local government has responded quickly to reduce spending, whereas central government is still coming to terms with the scale of necessary change, with implementation largely deferred until later in 2010.

As Rahm Emanuel, President Barack Obama's Chief of Staff, highlighted recently, "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."12 This point captures the unique combination of urgency, inevitability and opportunity that currently faces senior leadership in the UK public sector.

The past decade of significant growth in public-sector spending has made some aspects of leadership much easier. Some senior civil servants describe "a wall of money" being introduced during that period, and one local authority Chief Executive admitted that his role involved "to some extent, directing the flow of money". Partly as a consequence of these more generous financial conditions, and partly due to more deeply rooted cultural norms, a set of pervasive, disabling myths has developed relating to public-sector cost reduction which reinforces the difficulty of cutting back. These myths and their undesirable behavioural consequences, which have been highlighted in workshops involving senior civil servants and local government leaders, are set out in Figure 1

There are significant consequences to believing these myths and not appreciating the emerging realities: for example, strong ideas, particularly those from the frontline, are not applied; leaders do not take accountability for performance; and actions are disconnected and taken in silos. To avoid such problems and increase effectiveness, permanent secretaries and chief executives need to take the following three actions:

engage the frontline to reduce costs manage across organisational boundaries to reduce costs hold management accountable for cost reduction. The interaction of these elements is illustrated in Figure 2 and then discussed in the subsequent sections.

Relative priorities within the three actions will vary according to the organisation and the context in which it operates.

Engage the frontline to reduce costs

Throughout the last two Comprehensive Spending Review periods much of the focus on cost reduction has been on procurement spend and back-office support functions, such as finance and human resources (HR). Political leaders have been promising to protect the frontline from cuts. This is understandable in an election year. However the scale of the current challenge, and the proportion of spend within the frontline, leaves no choice but to seek savings there as well. The frontline is commonly considered to include staff and activities with which customers have direct interactions, for example teachers and benefits advisors, as well as staff who work on customer facing processes such as self-assessment tax returns and driving licence applications.

Given that there is much waste and inefficiency in customer facing processes, if the right techniques are used, significant savings can be found without damaging service quality and outcomes. Indeed in some cases they may be improved. In the last few years Her Majesty's Revenue & Customs (HMRC) and the Department for Work and Pensions (DWP) in particular have led the way in demonstrating what can be achieved. We believe there is considerable potential for further progress in this area.

Achieving such savings requires direct...