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

Last Updated: 11 November 2010
Article by Deloitte Government & Public Sector Group

Most Read Contributor in UK, August 2017

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 Ł178 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 engagement with frontline staff: they know the detail of what works and where opportunities for innovation might lie. What they need to act on this knowledge is the right leadership and the right tools.

Over the last three decades, the private sector – and increasingly the public sector – has redesigned frontline delivery in various ways. In the 1980s and 1990s, the favoured approach was 'core process redesign', driven by centralised project teams. In the last decade the favoured approach has been 'Lean'.13 Lean is in part a set of best practice analytical techniques for driving operational innovation. More importantly, it creates a shared perspective across the organisation about how customer value is created. It focuses on matching delivery to the citizens' needs. Lean techniques can empower frontline staff to eliminate waste and improve the customer delivery chain in terms of cost, quality and time.

Many Lean programmes have been implemented across central government departments, local authorities, and policing and health organisations. These successes have been recognised by the Treasury:

"There are numerous and diverse examples of continuous improvement in public services, based on Lean principles, which have delivered substantial improvements. Continuous improvement driven from the frontline is effective, sustainable and comparably inexpensive."14

There is often some initial resistance to Lean programmes, especially if cost reduction is identified as an objective. There is a widespread misperception that Lean is yet another euphemism for just making everyone work harder. Nothing could be further from the truth. Lean programmes quickly, and with minimal capital outlay, reveal ways of improving work to make it easier and more effective. Further, morale in teams that have adopted Lean processes is often higher, because people find that they can focus on serving customers, barriers to delivery are reduced and the senior team listens to their views.

To be sustainable, Lean must be supported by investment in skills: for example, frontline staff should learn to use simple analytical tools to assess customer value and continuously improve effectiveness and efficiency.

A key consequence of looking at processes from an outcomes and end-customer perspective is removing waste that flows from 'failure demand'. Failure demand includes time spent fixing initial problems which have occurred as well as extra work that may have been generated as a result (for example, managing increased customer contact). A Lean review will determine the root causes of the failure and redesign the process so that mistakes occur less frequently. Similarly, it can identify opportunities to intervene earlier, thus reducing the cost associated with rectifying mistakes. In some cases this could lead to reductions in Annually Managed Expenditure as well as the Departmental Expenditure Limit, since earlier interventions can reduce the demand for certain benefits or remedial services.

Move from simple cost-cutting to strategic change

Lean initiatives in the public sector have helped to identify efficiencies and build skills, yet the main approach to date has been tactical: namely, focusing on individual steps within each process and limited by organisational boundaries. More strategic opportunities have so far largely been missed, and therefore public-sector leaders need to:

  • apply Lean techniques beyond organisational boundaries – to tackle a greater range of interdependencies and hence of improvement opportunities
  • integrate operational improvement programmes – to ensure methodological synergies and better prioritisation
  • use insights from frontline staff to guide strategic decisions – by thinking through frontline operational implications.

These three points are described below.

Apply Lean techniques beyond organisational boundaries

Individual Lean projects should cover value chains (the sequence of activities that adds value for the customer) from end to end – from the customer, deep into the organisation – cutting across organisational structures. This reduces the risk that making savings in one area would only shift costs elsewhere; in fact Lean can highlight how changes in operations in one unit can save money in another. Assessment of the whole value chain can highlight the benefits of stopping certain activities or introducing citizen self-service. It also enables members of staff who do not have direct contact with service users to understand the ultimate impact of their work on customers.

The immediate priority is to broaden the scope of projects across functions within the same department or agency. The principle can be further extended when multiple bodies are involved in working together to deliver outcomes. This is elaborated on in the next section of this report which looks across organisational boundaries.

Integrate operational improvement programmes

Reviews of operational processes will not deliver their full potential savings unless they are integrated into other change programmes. Lean provides an understanding of key delivery processes, skills and capabilities, information flows, the role of information technology (IT), and supplier inputs. In other words, Lean is concerned with improving what the workforce does every day to deliver value for the citizen. A process can be inefficient for several reasons: because the steps of the process are poorly arranged, because people do not have the information needed to do their jobs, staff do not have the required skills or the interaction between the process and the organisation is clumsy.

The most effective operational improvement programmes will consider how all these elements work together as an integrated system. As a result integrating Lean projects with IT initiatives and culture change programmes can provide a more holistic view of how operations work and a more effective and sustainable solution.

As an example, one of the most common causes of IT programme failure is inadequate focus on process redesign in advance of systems requirements specification. This will automate existing inefficient processes, adding cost to both the IT build programme itself and also the ongoing operational execution.

Lean thinking can also reduce supplier costs by reviewing processes throughout the organisation and its suppliers from end to end. This will identify opportunities for suppliers to reduce their costs, and hence reduce prices. Equally, suppliers may find ways to change their methods, saving costs for the buyer. Such projects need to be run collaboratively, with both parties sharing the savings.

Use insights from frontline staff to guide strategic decisions

Organisational barriers must be broken down to improve frontline operations. A critical principle of Lean thinking is to identify and address the root causes of operational problems, not just the superficial symptoms. In many cases, these root causes lie outside the span of control of the project's immediate sponsors, for example in another function elsewhere in the value chain, or in a strategic decision taken further up the management hierarchy.

Those working on the frontline need to see that when they identify such issues, they are easily referred up the management chain and appropriate action is taken.

Specific details of policies and legislation can affect the operational cost of delivery in unanticipated ways, and frontline staff can play a key role in identifying avoidable costs. For example, one central government department spends tens of millions of pounds each year producing a paper document for millions of citizens. However, due to modern technology, this document now plays absolutely no role in the process for which it was originally designed. Nonetheless, secondary legislation creates a legal obligation for the document to be produced, thus creating unnecessary costs.

Drawing on the points in this section, two examples of frontline change are identified in Figure 3.

Manage across organisational boundaries to reduce costs

While it is important to identify efficiencies within an organisation, this is unlikely to deliver the scale of savings required, given the current financial climate. Achieving savings across organisational boundaries is hard, requiring organisations to collectively overcome significant stakeholder, leadership and co-ordination challenges. However they do offer the opportunity for fundamental reconsideration of how services are provided rather than purely fixing pieces of a complex delivery chain. Public servants, when stepping back from their immediate tasks, often admit that waste is considerable. They frequently cite organisations that act as funding conduits while providing minimal services or adding minimal value, and activities being undertaken at the wrong level (e.g. nationally rather than locally or vice-versa). Therefore, leaders need to consider the following questions:

  • How are we contributing to the overall cost effectiveness of the public service provided?
  • Is the scope of services appropriate from a broader system perspective?
  • Is cross-boundary management effective?

It is important to consider the boundaries between central government departments and their arm's-length bodies, and between delivery partners, whether in the public, private or third sectors. For example, involving private-sector providers in the delivery of public services can improve the management and reduction of costs, and allow responsibility for cost management to be devolved. However, such benefits can only be realised if private-sector providers are commissioned within a competitive framework and given strong incentives to manage costs, quality and risks.

More recently, much attention has focused on the various boundaries between public-sector organisations operating in particular localities. In this context, there are many examples of inefficiencies, including:

  • local service providers with physical premises which are neighbouring, but separate
  • duplication in back-office services and frontline provision, because each organisation often has different incentives. One Director-General described "massive duplication and confusion" between his department and its agencies
  • repeated overlapping funding streams and assessments. In one locality, four different assessments were identified for different types of mobility allowance, each with separate objectives, funding streams and access criteria.

Take a system-wide perspective

Many system inefficiencies originate from well intentioned decisions. For example, funding for children's early years is ring-fenced to maintain support for children from disadvantaged families. Despite good intent, this has contributed to a patchwork of service provision and increased the difficulty faced by families struggling to access support.

In many cases, efficiencies depend greatly on how the system is defined. For instance, the National Health Service has traditionally prided itself on thinking and operating as a system, yet barriers such as those between health and social care remain extremely challenging. The Total Place initiative provides further analytical impetus to central and local government efforts to implement more rational funding and management of cross-boundary working.

Change is required to improve efficiency in many public-sector areas; however this is difficult because responsibility for the overall management of many systems does not sit with one individual. For instance, the need for reform has been acknowledged by:

  • reviews in Cumbria and Kent, which identified how well intentioned nationally-driven programmes have resulted in contradictory activities at local levels and led to the establishment of the Total Place initiative
  • the Government, which recently pledged to give more freedom to local authorities to set priorities and allocate resources, and the Opposition, which has also promised increased decentralisation15
  • the Government and Opposition, who have called for a rationalisation of arm's-length bodies to reduce spending and minimise conflicting activity
  • local authority leaders, who are campaigning for greater flexibility to allocate resources locally, not only to improve effectiveness, but also to ensure that more citizens benefit from public-sector services.

At present, the UK political system is very centralised. For example, according to the Institute for Government, the UK Government controls 70 per cent of public spending centrally, second only to New Zealand among OECD countries.16 Success with the initiatives listed above would provide more opportunities to reduce costs throughout the delivery network.

However, building consensus throughout the entire delivery network is challenging, particularly because of the numerous organisational boundaries involved. Barriers can include:

  • the size of stakeholder groups, which become unmanageable as the number of partner organisations increases
  • separate lines of decision-making and ultimate accountability, both political and managerial
  • differences in organisational culture, ethos and professional background
  • a culture which implicitly accepts the status quo and prioritises safety, thus creating a desire for unrealistic guarantees of improvement before action can be taken
  • the time needed to create consensus, which often encourages a perception that system-wide changes cannot deliver short-term benefits.

Politicians can help to create the momentum needed to break down these barriers by ensuring that their actions encourage working across organisational boundaries, rather than reinforcing existing professional and structural silos. However, system-wide changes do take time, and often there is political pressure to deliver quick results to satisfy the demands of the electorate and continuous news coverage. Many public-sector organisations have encouraged staff not to think and work in silos, and in doing so have used tools and techniques which are also important in making systemwide changes. To embed such change, political and public-sector leaders need to:

  • challenge the effectiveness of partnership working
  • change the culture of risk and control
  • reshape the network.

These three points are described below.

Challenge the effectiveness of partnership working

Public-sector partnerships with others in the public, private and third sectors have created significant benefits. Local authorities in particular have managed to co-operate beyond existing structures to achieve better outcomes at lower cost. Cross-boundary and cross-functional partnerships have been established without formal mergers, and joint senior appointments are increasingly the norm. In some cases, the leadership of a local authority and Primary Care Trust (PCT) has been combined in one role to improve co-ordination, agility and cost.

The most effective partnerships challenge existing practices and behaviours. When co-operation is between different organisations, pertinent questions might include:

  • Are we duplicating the outputs of other organisations?
  • Have we invested in the right parts of the delivery chain?
  • Are we distorting or discouraging private-sector investments?
  • Is this an area where prevention is better than cure, or are our current preventative activities using funds inefficiently?
  • Are there areas in which we are adding complexity without improving the delivery network?
  • How, and why, are we managing activities across our organisational boundaries?
  • How is the cost of delivery affected by any regulatory standards and entitlements that we have established?
  • What are our organisations collectively doing to manage current demand levels?
  • Are we communicating effectively with citizens at the relevant points in the delivery network, to ensure that enquiries can be redirected as appropriate, and problems are identified promptly?
  • Can we achieve further savings by re-evaluating our delivery channels, exploring options such as self-service?

Partnerships are potentially a very effective way of helping organisations work towards achieving the financial targets imposed. While challenging, there are significant rewards for leaders who recognise that partnership working towards public service goals may mean they need to adjust their own organisational remit and focus. Treating the financial challenge as a shared problem will be one of the first steps towards a successful response. Although we see examples of local authorities and health authorities beginning to collaborate, there are still too few central government departments working assertively with their agencies and NDPBs to drive down shared costs and duplicative activities.

Change the culture of risk and control

System-wide changes are often more complex, uncertain and speculative than organisational changes made internally, and leaders need to recognise, understand and allow for these differences. Such changes often meet resistance with responses such as 'it's too risky', 'we don't want to lose control of delivery' and 'the proposals are not sufficiently proven'. Responses like this, similar to arguments within organisations about maintaining professional silos, are often based on underlying defensive mindsets and leaders may find it constructive to respond using the suggestions provided in Figure 4.

A desire to maintain full control, and insist on an unachievable level of clarity for the business case, has contributed to many failed system reforms in the public sector. A cultural change is required to enable political and public-sector leaders to combine robust professional planning with leadership skills, to implement new ways of service delivery.17

Reshape the network

Some central government departments deliver many of their functions through a group of agencies and boards. Given that the Government and Opposition have committed to reducing the total number of arm's-length bodies, departments need to assess:

  • whether the shape of this network needs to change, such as the number of bodies and their relative roles
  • which functions, such as IT, should be organised centrally as a 'shared service', and which should be more explicitly decentralised?

Changing the shape of delivery networks can be difficult and expensive, and if managed poorly, can fail to realise intended benefits.18 Nevertheless, there will be cases where the inefficiency of the whole system is so great that the benefits justify the effort.19 Leaders in central government departments should therefore take the once-in-a-generation opportunity presented by the current financial climate to evaluate their entire delivery network. It may be appropriate in many cases to abolish whole agencies or activities which hinder local delivery, and devolve power to those closest to each policy problem.

Even where complete redesign or abolition is not possible, it is important to review all the organisations, relationships and incentives to confirm whether the entire delivery network could be more appropriately arranged or managed. For example, smaller agencies often have their own back-office finance and HR teams, which from a system-wide perspective may be an inefficient arrangement. Further, some central departments micro-manage local agencies via policy guidelines and performance measures, despite often lacking essential knowledge of the local context. Performance could be improved or costs reduced if such relationships were recast.

Drawing on the points in this section, two examples of challenges within entire delivery networks are identified in Figure 5.

Hold management accountable for cost reduction

Given the significant challenges presented by the current financial climate, simply improving efficiency and redesigning processes within existing business models will not suffice. The situation also requires:

  • explicit prioritisation and a willingness to give local bodies and the frontline the freedom to make changes to improve delivery channels
  • real accountability for performance – an approach that may be unfamiliar to many public-sector leaders.

Building on the previous ideas about engaging the frontline, decentralising delivery and making system wide changes, this section focuses on creating real accountability for performance. Many public servants describe their envy of the private-sector's ability to focus on performance and hold management accountable for it. Although there are lessons that the public sector can learn from the experience of their private-sector counterparts, it is also important to acknowledge the following differences between the two sectors:

  • Private-sector organisations focus on improving a unifying set of measures, often described as the 'bottom line', although other outcomes relating to customers, sustainability, talent and growth are also important. While the public sector does judge financial performance, based on concepts such as value for money and probity, the priority is usually to deliver non-financial outcomes. However given the current financial climate, public-sector priorities in the next five years will change, with financial performance becoming increasingly important.
  • The private sector almost always operates with real customers and competition. This helps to encourage innovation and a willingness to accept certain levels of risk. In contrast, no matter how much the public sector increases the elements of commissioning and choice, it will always carry the residual risk of failure to deliver services that are vital to society. Citizens will always struggle to switch from a failing public body when there is limited or no real local competition. For example, publishing hospital mortality rates may encourage improvement, yet it does not appear to result in users switching to alternative providers. People continue to insist that their local hospital must deliver good standards.
  • The public sector usually operates on a different scale to the private sector, and this significantly affects the ability of management to control and influence different levels of their organisation. The chief executive of a UK retailer can be expected to probe outlet productivity or the credit status of certain accounts; yet such organisations are likely to be smaller in scale in terms of transactions, complexity and assets than, for example, HMRC or DWP.
  • There is evidence that motivations and behaviours in the two sectors tend to differ, with public servants attaching greater importance to the alignment of personal and organisational values, while being less responsive to financial incentives and more risk averse.20 This places a greater premium on active and visible leadership, to reinforce the behavioural changes necessary to deliver sustainable cost reduction.

Taking these sectoral differences into account, the following key actions will be important in establishing real performance accountability for both political and public-sector leaders:

  • take accountability for strategic choices
  • engage visibly on key questions
  • empower the delivery network, but lead from the top
  • challenge assumptions and track progress.

These four actions are described in more detail below.

Take accountability for strategic choices

Public bodies are increasingly focused on improving efficiency, yet this will not suffice for today's cost challenge. Many options available to reduce costs require leaders to make explicit policy choices, and it is no surprise that the greatest potential benefits require some of the toughest choices.

Leaders need to reduce costs at three different levels:

  • removing waste and improving efficiency, within existing organisational structures
  • re-evaluating operating models, to consider whether the same policy outcomes can be delivered at a lower cost21
  • re-assessing policy priorities, to identify areas where the cost of delivery is not justified by the achieved benefit. Hence, some policy and legislative changes need to be prompted by cost, rather than solely socio-political priorities.

Leaders have a scale of options to consider, ranging from operational improvements to underlying policy change. Some of these choices are highlighted in Figure 6.

Engage visibly on key questions

While visible leadership and top-level accountability are prerequisites, cost reduction will only be sustained if accountability is also shared throughout the delivery network. Micro-management is another issue that must be addressed. Leadership by decree has limited efficacy when budgets are growing, and it is usually wholly ineffective when cuts must be made.

Leaders need to foster a culture of challenging cost throughout the entire delivery network. Every team, from those working on core policy activities to the frontline, regularly needs to ask: 'Is this activity really needed?' This contrasts with the prevailing public-sector culture, and therefore leaders will be key in making this change.

Ideas about how to reduce costs can come from anywhere in the organisation, from those with a strategic overview, to those working on the frontline. To build on these valuable suggestions, the entire delivery network must be empowered to be innovative, to capture ideas and trial them, and then communicate them to the senior team.

Empower the delivery network, but lead from the top

Typically, the strength of the modern public sector has been its networked delivery, with policy set centrally and then delivered through a range of organisations including local authorities, non-departmental public bodies (NDPBs) and the third sector. However in the current age of austerity, this arrangement can be a weakness: ministers may be accountable for cutting spending, yet cannot necessarily control delivery.

The public-sector delivery models range from linear arrangements, such as defence procurement and tax processing, to complex, multi-party ones such as children's services and environmental protection. Shorter, linear chains more closely resemble privatesector operations, where a chief executive has both accountability for spending and authority to change delivery arrangements.

Complex chains are very different – those with accountability for spending simply do not have the power to change how services are delivered. In such cases, sustained cost reduction requires leaders to challenge decisions regarding organisational structure and shape, and to engage players throughout the entire delivery network. Part of this leadership role is to accept their accountability for financial performance explicitly, and to declare that reducing costs throughout the network is one of their personal goals.

Drawing on the points in this section, two examples of the challenges of establishing accountability for cost reduction are identified in Figure 7.

Challenge assumptions and track progress

Leaders in the private sector who successfully cut costs tend to view this as one of their top priorities. However public-sector leaders often disengage from non-policy matters and delegate such decisions to others. This approach is not appropriate given the scale of current financial pressures. Cost reduction is a leadership priority that requires accountability, visibility and genuine engagement from the senior team.

Governance and programme management are crucial and in this respect the needs and lessons of the public and private sector are identical. Successful programmes set their cost reduction targets by applying benchmarking against top-performing comparable organisations from the public and private sectors. They also apply rigorous analysis to assess continually the expected impact of the programme and avoid double-counting. They employ tracking mechanisms with definitive baselines and targets, which are regularly reviewed by senior leaders who evaluate progress and lessons learned. Getting 'under the skin' of comparative performance means taking account of the local environment and using techniques, that while well established, are not routine.

Although accountability should be shared throughout the delivery chain, measurement of progress and outcomes should come from a single source. Ideally, this should be an agile, central team that monitors activity and financial success, and helps focus the attention of senior leaders. This team should ensure that waste is removed, while also considering whether changes to policy and operating models might be beneficial. In addition, the most effective programmes are led by a board-level sponsor who can challenge thinking within the organisation, share ideas and good practice, remove internal barriers and engage with the delivery network. Questions for public-sector leaders

Questions for public-sector leaders

Are you letting a serious crisis go to waste?

To respond to current financial constraints, and realise the opportunities they offer, leaders should consider many questions, including:

Chief executive or permanent secretary

  • Do you have a comprehensive financial and operating plan in place with goals, milestones and means? Have you created appropriate networks to enable leaders across the organisation to interact with the plan and discuss challenges and opportunities with you directly?
  • Do you have a senior team that is visibly leading and working collectively to deliver the plan?
  • Can you articulate a brief, compelling message of change, framed appropriately to connect with your staff?
  • Do you have a team that reports to you centrally, to oversee the rigorous financial analysis and benefit tracking across your cost reduction programme?
  • Have you energised the chairs and chief executives of your agencies and NDPBs behind a unified approach to the financial challenge?
  • Are accountabilities for performance completely clear? " Have you created a personal feedback channel that enables you to respond and help your team through critical periods?

HR director

  • Where do you need to intervene to close gaps in organisational leadership that are critical to short term performance?
  • What is your headcount reduction plan?
  • Are your smaller agencies and NDPBs exposed by a lack of skills?
  • Are headcounts being reviewed across your network of agencies and NDPBs? Frontline operating director
  • Which lower priority activities can you cancel?
  • What are your customers telling you about quality, productivity and timeliness?
  • Which major operating risks are likely to be exposed when budgets are reduced, and what is your mitigation plan?
  • Are you connected to, and learning from, other leaders across the organisation, giving the opportunity to solve 'wicked issues' together?22
  • How are your people engaged in Lean redesign of processes and systems?
  • Are you maintaining strong connections in your locality?
  • Do your people have the skills to perform after headcount has been reduced? Finance or planning director
  • Do you have a cost reduction plan in place with goals, milestones and means?
  • Have you measured and agreed a specific financial baseline which can be used to judge future savings?
  • Have you applied a 'zero base' to budgets, to ensure that all spending is questioned?
  • Do budget projections assume that cost reduction targets will be achieved, thus forcing teams to deliver savings?
  • How will you check that delivery is sustainable?
  • Are governance and control processes simple, understood and effective?
  • Are you transparent about decisions, targets and progress throughout the organisation?
  • Do you know which of your agencies or NDPBs will close or merge?

Conclusion

Current financial pressures have already placed publicsector leaders in the hot seat – and few of them feel well equipped to manage resource cuts of this magnitude.

Disabling myths about the inability of the public sector to cut costs still persist. There are also many lessons to be learned from the private sector, although to be effective they must be tailored to the realities of the public sector.

In this report we have identified three potential ways of enabling the public sector to rise to the unprecented challenge it faces, which traditional incremental change and current efficiency plans cannot address. Firstly tackling inefficiency that exists within individual public-sector organisations by reducing work that does not add value; secondly tackling duplication and siloworking within delivery networks; and thirdly, increasing accountability for, and performance management of, cost reduction to really drive results.

Engaging the frontline will enable organisations to capitalise on the expertise of frontline staff, using it to reduce inefficiency and focus on customers' needs. In some cases, looking at how services add value to customers could lead to a fundamental rethink of delivery structures. In other cases, improving partnership working and aligning performance frameworks could be used to reduce costs.

But it is important to remember that cost reduction goes well beyond funding issues – it provides a real opportunity to refocus the public sector on its core role of creating genuine value for citizens.

Ultimately though, it is public-sector leaders (and politicians) who will need to drive cost reduction through greater accountability and focus on financial performance measures, as well as visibly and actively demonstrating leadership and corporate behaviours.

Footnotes

1 A 40-Year Wish List, The Wall Street Journal, 28 January 2009 . See: http://online.wsj.com/article/SB123310466514522309.html

2 New shapes and sizes, Deloitte LLP, December 2009. See: www.deloitte.co.uk/newshapesandsizes

3 Leadership at all levels, Deloitte LLP, February 2010. See: www.deloitte.co.uk/leadership

4 Securing the recovery: growth and opportunity, Pre-Budget Report, HM Treasury, 9 December 2009.

See: http://www.hm-treasury.gov.uk/d/pbr09_completereport.pdf

5 This report uses the terms 'the public sector' and 'public-sector organisations' to describe central government departments, local authorities,

devolved administrations, executive agencies and non-departmental public bodies.

6 Securing the recovery: growth and opportunity, Pre-Budget Report, HM Treasury, 9 December 2009.

See: http://www.hm-treasury.gov.uk/d/pbr09_completereport.pdf

7 OECD warns Britain risks 'debt spiral', The Daily Telegraph, 19 November 2009.

See: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6608234/OECD-warns-Britain-risks-debt-spiral.html

8 For example:

9 Labour Market Outlook, Quarterly survey report, Winter 2009-10, Chartered Institute of Personnel and Development, February 2010.See: http://cipd.co.uk/subjects/hrpract/hrtrends/ qtrends.com

10 For example:

  • Total Place: Better for less, Leadership Centre for Local Government. See: http://www.localleadership.gov.uk/totalplace/
  • Localism Policy Paper – Control Shift, The Conservative Party, 17 February 2009.

See: http://www.conservatives.com/Policy/Where_we_stand/Local_Government.aspx

11 Commercial Skills for Complex Government Projects, National Audit Office, 6 November 2009.See: http://www.nao.org.uk/publications/0809/commercial_skills.aspx

12 A 40-Year Wish List, The Wall Street Journal, 28 January 2009. See: http://online.wsj.com/article/SB123310466514522309.html

13. The term 'Lean' was originally introduced in 1986 by Krafcik in his analysis of European, US and Japanese automotive manufacturers. All the methods mentioned in this report have been derived from this experience. It is based on practice originating in companies such as automotive manufacturers but more recently, has been extended to a range of service industries and the public sector.

14. Budget 2009: Building Britain's Future, Her Majesty's Treasury, 22 April 2009. See: http://www.hm-treasury.gov.uk/d/bud09_completereport_2520.pdf

15 For example:

16 Undertaking a fiscal consolidation: A guide to action, Institute for Government, December 2009.

See: http://www.instituteforgovernment.org.uk/pdfs/Undertaking%20a%20fiscal%20consolidation.pdf

17 Leadership at all levels, Deloitte LLP, February 2010. See: www.deloitte.co.uk/leadership

18 Change the name on the door please, Deloitte LLP, September 2007.

See: http://www.deloitte.com/view/en_GB/uk/article/4c26cbdf341fb110VgnVCM100000ba42f00aRCRD.htm

19 New shapes and sizes, Deloitte LLP, December 2009. See: www.deloitte.co.uk/newshapesandsizes

20 For example, The use of sanctions and rewards in the public sector, National Audit Office, September 2008.

See: http://www.nao.org.uk/publications/0708/sanctions_and_rewards.aspx

21 New shapes and sizes, Deloitte LLP, December 2009. See: www.deloitte.co.uk/newshapesandsizes

22 'Wicked Issues in Social Planning' in Policy Sciences, Volume 4, Number 2, Rittel, H W J and Webber, M M, June 1973.

See: http://www.springerlink.com/content/m5050140x48140m3/

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