The recent economic downturn and the Government bail-out of financial institutions underline the unprecedented challenges facing public-sector finances. Regardless of the result of the next general election, pressure on public-sector organisations and their resources will only increase.1 Those in local government, education and health are already reducing headcount and reshaping organisations in response to tighter budgets. Various initiatives are also being developed such as 'localism' and Total Place.2 Reduced budgets are extremely likely across the public sector for the next three to five years – but without any significant reduction in delivery expectations.
Public-sector organisations have a choice about how they react to these challenges. The temptation will be to act defensively, cutting costs by shedding marginal headcount or applying a uniform percentage reduction, which may result in the loss of core skills and poorer performance. Using a human analogy, getting healthy is not just about losing weight; it is also about building strength, improving flexibility and boosting confidence. Public-sector managers should think more strategically, to address proactively issues around the size and shape of their organisations, their ways of working and priorities.
More broadly, the shape of public-sector structures needs to be reviewed in each policy area. The role of many government organisations is changing, from delivering public services directly, to commissioning others to deliver on their behalf. There is also pressure to reduce the overlap and inefficiency of multiple agencies and non-departmental public bodies (NDPBs) operating in the same delivery chains. In some cases, this implies the abolition or merger of organisations; in others, outsourcing to the private sector.
In this context, public-sector leaders will face significant pressures on:
- Funding, with many already working to indicative budget reductions of five to ten per cent each year.
- Organisational strategy, particularly leading to increased local delivery, and mergers and restructuring.
- The capability of their staff to respond to such changes.
This paper explores some of the new realities of reshaping organisations in an age of austerity. The emerging reality involves a greater radicalism both in intended organisational outcomes and the leadership required to get there. Numerous examples of reshaping have already succeeded in local government, and there are others in central government departments. As an illustration, four public-sector success stories are highlighted in the final section.
The UK public sector is facing major change. Its leaders can choose merely to react to reduced funding and imposed restructuring, or identify proactively how their organisations can adapt their size and shape in order to deliver more − with less.
DOING NOTHING IS NOT AN OPTION
The recent economic downturn has been described as a record recession and has arguably created the harshest conditions since the end of the Second World War.3 According to official figures to the end of October 2009, UK public-sector net debt was £825 billion, equivalent to 59 per cent of Gross Domestic Product (GDP); excluding financial sector interventions, the total was £683 billion or 49 per cent.4 The National Institute of Economic and Social Research, a leading think tank, has warned of government debt potentially soaring to 93 per cent of GDP by 2015.5 Commentators agree that these economic conditions will drastically affect public-sector operations, policies and finances.6 There is political consensus about the need to rebalance public finances – the debate is focused on the timing of possible action.
Capital spending has already been trimmed drastically.7 Indicative budgets currently being issued to frontline managers in health, education and local government imply reductions, sometimes expressed as 5 per cent year on year, other times as 20 per cent over three years. Local government has rapidly increased the pace of headcount reduction. A recent survey of local authorities in England and Wales showed that 59 per cent of respondents had made staff reductions in the last six months, and 60 per cent were planning to cut their workforce in the next year.8 Estimates based on a sample survey of local authorities suggest that 14,000 council jobs could be threatened over a three-year period.9 There is also pressure to reduce bureaucracy which many see as contributing to inefficiency.10
In response to the credit crunch, private-sector organisations slashed spending and headcount aggressively in late 2008 and early 2009. For most of them the focus on retrenchment and reshaping is over. Paradoxically, the recession is still leading to customer service improvements, as companies fight harder to retain their customers by deploying new technology and service improvements in response to intensifying competition. For the public sector, the delivery challenge remains. The need to deliver high quality programmes, on time and on budget, will become ever more critical. Despite funding reductions – and perhaps because of a decade of tax increases – citizens still expect the quality of public services to improve.
The Need To Deliver More With Less
The net result is that central and local government leaders will need to achieve better quality and more effective public services with the dramatically tighter budgets now emerging. To succeed, commercial skills in the public sector will be crucial in judging priorities, managing transitions and assessing value for money, as recently outlined by the National Audit Office.11
A key pillar of success will be critically reviewing and reshaping traditional service delivery models and organisational structures. Until now, many local and central government cost reduction initiatives have relied on delivering marginal savings, for example by not filling vacancies or reducing the seniority and number of hours when filling roles. While these marginal savings will continue to be important, they will not suffice given the scale of expected funding reductions. Typically, those seeking more significant savings have often resorted to uniform percentage cuts with minimal prioritisation. Such an approach risks delivery failure and may miss the opportunity for more radical reshaping.
For some, reshaping might mean changing the size of the organisation or individual functions. Leaders will need to ask: Do we have the right number of people in this organisation? In the current financial climate, it is unlikely that minor changes to staffing levels will be adequate. More radical changes will probably be needed, and the more significant the change in size, the more likely that shape will also need to be changed.
In effect, leaders need to ask:
- Have we got the right number of people, in the right place, doing the right things in this organisation?
- Are we delivering the right services – do we need to deliver them at all?
- Is this organisation in the right shape to deliver services in the different ways that will be required, given the expected funding cuts?
MYTHS AND NEW REALITIES
Even during the painful economic restructuring of the 1980s, the public sector did not reduce operational spending – it privatised assets, reduced capital spending and slowed the growth of operational spending. This pattern underpins myths that persist today. The recent financial crisis, and the innovation already emerging in some parts of the public sector, is shaping a new reality, as outlined in Figure 1.
Figure 1: The Myths And Emerging Realities Of Reshaping Public-Sector Organisations
The emerging realities faced by the public sector underline the urgent need for change as outlined below.
Changes Needed In Structure
The challenges of effective government can be structural, for example public agencies and NDPBs are often targeted for cuts. In some cases, an assessment is needed based on efficiency and effectiveness. A recent report on education quangos asserts that schools are being stifled under central control and bureaucracy which is undermining initiative.12 It notes that the spending of such organisations has increased in real terms by 10 to 15 per cent over the last few years with no evidence that their performance has matched their growing budgets. The report identifies a number of organisations that it recommends could be abolished or moved out of government control. It estimates that net savings of £633 million a year could be achieved by adopting these reforms, although these savings might not be achieved without fundamental changes to government policy and delivery mechanisms. As an example, the recent failure of the capital programme to rebuild and refurbish England's further education colleges suggests that the multitude of agencies in the United Kingdom may lack financial management competencies and sufficient overview of their customers.13
There are also questions about remit: for example, do the Environment Agency and Natural England both need to issue environment reports for England? In other cases, it is a question of public versus private funding: does government need to fund the Meteorological Office and its climate change work? Does government need to fund the work of multiple energy savings organisations, especially when the power utilities are the natural owners of the business? Such questions are likely to come to the fore as budgets become further stretched.
Changes Needed In Resourcing
As well as structural reform, government will have to reconsider the amount of resources it invests in delivering public services. Historically, the public sector has tended to apply a uniform percentage reduction across all budgets, which can damage service delivery and neglect priorities. This time around, leaders agree that protecting service delivery is crucial and this requires a radical re-examination of delivery models. One initiative led by the Treasury is Total Place, which examines the core services delivered to a particular location and considers how improvements can be made across government boundaries.14 In this context, resource allocations will come under increasing scrutiny; for example, children's services professionals are questioning why the Sure Start and Children's Centre budgets are ring-fenced to prevent re-evaluation, meaning that local authorities cannot fully optimise total local spending.
Other authorities are considering more radical service delivery changes. Barnet Council is considering providing premium services only to residents who are willing to pay extra.15 Dubbed 'easyCouncil', householders who are seeking planning consent will be able to pay extra to jump the queue, just as budget airline customers can pay more to board the plane first. Residents will also be able to pay more for services such as extra rubbish collections, while recipients of adult social care will be able to choose to spend a limited budget on respite care or on a cleaner. The initiative, known officially as the Future Shape proposals, is described as part of the Council's relentless drive for efficiency by bringing private-sector flexibility and choice to the provision of public services. Mike Freer, the Council Leader, said: "If the next round of public-sector reform is just about cutting costs we will have failed. Public services in Barnet need to reflect the changes in customer care that have become standard across the private sector".16
Changes Needed In Ways Of Working
Agility in delivering public policy has been on the government agenda for over 20 years, as outlined in Figure 2. Beginning with the Next Steps agencies, there has been a series of reforms aimed at delivering greater flexibility and improved performance. The traditional central government departmental structures were changed during the early initiatives with the creation of new agencies and project teams; the most recent evolution focuses on reshaping processes and encouraging new behaviours to increase organisational agility.
Figure 2: Evolution Of Organisational Agility In The UK Public Sector
Despite this recent focus on delivery, central government's record in this area has been mixed according to the Institute for Government.17 Delivery against cross-government Public Service Agreements (PSAs), where major policy priorities require a range of departments to collaborate in delivering outcomes, has been particularly poor. A major problem is that participating departments struggle to build the trust necessary to work effectively across departmental boundaries. Although many civil servants comment that joint working is better than it ever has been, there are still anecdotal examples to the contrary, where data and analyses are concealed or decisions are taken without consultation.
Within the largest cross-government PSAs, only a few programmes will usually be actively managed across central government departments. The vast majority will be departmentally-led with reporting to the Senior Responsible Officer (SRO) required only if the project deviates beyond agreed margins. Nevertheless, the few programmes coordinated across Whitehall will typically account for a disproportionate share of the impact and complexity of a PSA, as outlined in Figure 3.
Figure 3: The Typical Balance Of Impact And Accountability Within PSAs
The challenge for ministers and central government officials is to work effectively across Whitehall. In addition, the cross-cutting nature of PSAs creates a huge reliance on delivering through private-sector activity, which is beyond government control but within its influence. Hence, effective delivery involves:
- taking a holistic view of each policy problem
- focusing on the few critical priorities rather than the undifferentiated mass of departmental initiatives
- ensuring that trade-offs between conflicting policies are made transparently
- providing independent programme management support.
PSAs entail complex delivery chains, engaging numerous public servants from different agencies. Many seek to attract industry investment and influence citizen behaviour. This raises the stakes in policy execution. It requires organisations that are appropriately shaped to guide the implementation of policy through a diverse and decentralised delivery network.
Influencing the performance of such complex delivery chains arguably requires new processes and behaviours rather than new structures or expensive new systems. In this context, delivery would benefit from reshaping to:
- cull many overlapping, sub-scale initiatives and separate targets
- increase understanding of the effectiveness of alternative policy instruments
- develop a holistic view of the full range of planned interventions
- provide more continuity in the policy and investment climate where private-sector investment is needed to deliver key outcomes.
SHAPE MATTERS AS MUCH AS SIZE
Organisations have a choice about how they react to the increasing pressure on public finances. The temptation is to act defensively, employing a knee-jerk response to cost cutting, which risks losing core skills and impeding performance. However, public-sector managers need to think strategically, by proactively assessing the size and shape of their organisations and anticipating challenges.
What Exactly Is Meant By Size And Shape?
Using a human analogy, getting healthy is not just about losing weight; it is also about building strength, improving flexibility and boosting confidence. Too often, organisations focus on reducing their size, assuming that if staff numbers are cut, everything else will take care of itself. A more proactive approach acknowledges that shape is equally important, as highlighted in Figure 4.
Figure 4: Comparing Public-Sector Organisational Size And Shape
Failure to appreciate the importance of both size and shape can lead to ineffective decision-making. For example, by overlooking staff numbers in their fullest sense, including commissioned services, agency and contract staff, organisations strive to hit their headcount target, but may fail to reduce costs as intended. Whereas viewing shape purely in terms of structure leads to a focus on redesigning the organisation chart, which may significantly alter the managerial levels, but rarely impacts the frontline.
Some fundamental questions should be asked when assessing shape:
- Is the overall organisational shape optimally configured to deliver the strategy?
- Are the right capabilities in the right place in the organisation?
- Are the building blocks of the organisation appropriate?
- Are the leadership team and governance structures appropriate for the objectives of the overall organisation?
Without changing organisational shape, budget reductions risk either staff being asked to do more, or simply less being delivered. Improving efficiency, or addressing size without fundamental change in shape, can achieve greater or at least the same output, yet this benefit tends to be at the margins. Such changes will not deliver the double digit percentage savings that much of the public sector will soon be asked to provide.
Evolution Versus Radical Change
Size and shape have a tendency to evolve over time rather than be designed. Typically, this evolutionary approach is sub-optimal and will tend to lead to a shape similar to the existing one, rather than the most appropriate model.
In the private sector, competitive pressures demand that organisations respond or go under and the media have recently focused on household names such as MFI, Zavvi and Woolworths ceasing to trade. Although it is too early to predict the new generation of businesses that will be born in this recession, previous downturns have provided the stimulus and market opportunity that have spawned many of today's largest companies such as IBM and Unilever.
It is often difficult for public-sector organisations to justify making challenging or fundamental changes when it is 'business as usual' and there is no competitive spur. However, the massive challenges currently facing the public sector mean that citizens understand that significant changes are needed. It is in these challenging times that the public sector has a real opportunity to re-invigorate itself.
The Finances Of Headcount Reduction
A robust business case should be at the core of any major transformation programme.
Large system or process change projects have an unattractive financial and risk profile, typically requiring large upfront investment, and a significant delay between investment and return, as outlined in Figure 5.
Figure 5: A Comparison Of The Financial Profiles Of Large System And Staff Change Projects
Headcount reduction initiatives require lower upfront expenditure, with costs focused on transition, typically in the form of retraining costs and severance packages. This usually results in a stronger link between transition costs and benefits, thus ensuring a lower financial risk exposure. The entry costs also tend to be more modest, which makes such projects more affordable in terms of cash flow.
This raises the potential to create virtuous circles of investment: an initial investment is used to generate savings, which are then reinvested in a further round of reshaping activities. As a result, small sums of 'pump-priming' funding can be used to generate significant savings.
What Does Radical Organisational Change Look Like?
While there are no clear benchmarks as yet, experience in local authorities suggests that targets of £30 million to £50 million savings per annum are not uncommon, with expectations that around half of this will be generated by staff reductions. A compelling business case should be approved preferably before embarking on a headcount reduction programme. Interestingly, few business cases have been published prior to 'machinery of government' changes, although the O'Donnell Review, which recommended the creation of HMRC, is an exception.18
Historically, shaping organisations and structures has often been undertaken in an unfocused way, as outlined in Figure 6. Efforts have typically been in response to a particular event, such as a change in responsibilities, or a need to reduce costs. This often focuses attention on the structures and reporting relationships in the organisation chart. New organisations have often been developed in an unscientific way, based on leaders' perceptions and have tended to reinforce existing ways of working and silos rather than creating genuine change. In extreme cases, chief executives simply draw a new leadership structure without a clear understanding of how the changes will impact frontline service delivery. While this approach may be effective in dealing with short-term challenges, changes are often found to be unsustainable over the long term.
A progressive approach to organisational reshaping tackles these shortcomings by providing a structure to assess the most effective model for services. The focus is a broad one, considering how the different aspects of an organisation, such as culture, processes and structure, can best be arranged to achieve its strategy.
Common Reshaping Themes
Public-sector organisations are increasingly considering more fundamental shifts in their delivery models. These new shapes tend to be structured around customer segments or service pathways rather than professional or functional capabilities. They build in flexibility to enable:
- Responsiveness to change. This requires organisations not just to shift existing silos and boundaries, but to keep them flexible so that they can adapt further over time.
- Adjustable scale. The economic downturn has seen significant changes in the pattern of demand for public services, and the coming years promise further significant changes. New organisational shapes need to be able to adapt capacity to meet changes in customer demand.
- Empowering management layers. Most public-sector organisations are trying to create empowering and enabling (rather than command and control) management layers, but they also need the structures, culture and capabilities necessary to support such an approach.
- Shaping flexible resource pools. Organisations typically contain areas of common skills, processes and responsibilities. While administrative and support functions often collaborate well, there is significant potential for further co-operative working within policy and delivery organisations.
Although every organisational project is different, there are a number of common challenges including:
- Headcount reduction. There can be cultural resistance and a reluctance to own the changes.
- Sponsorship and leadership. Most leaders will have limited experience of organisational change.
- Decision-making frameworks. Leaders will often infer too much from incomplete or misleading information.
- Resourcing. Internal staff rarely have reshaping experience and skills and may struggle to remain impartial, whereas external resources may lack local knowledge or credibility within the organisation.
- Pace. Organisations may not have the luxury of time. Hasty decisions can have long-lasting consequences, but it is important not to lose momentum.
- Stakeholder management. Relationships might be strained if the final project outcome is unknown. Staff must feel involved, but not intimidated by any difficult decisions that are necessary.
- Staying the course. Leaders must be committed to finishing the project, despite hazards during implementation.
Figure 6: A Comparison Of The Traditional And Progressive Approaches To Organisational Reshaping
The First Steps Of Resizing And Reshaping
Organisations facing funding or strategic changes need a full understanding of their current positions. Numerous issues must be addressed from different perspectives within the leadership team, which include:
Chief Executive Or Permanent Secretary
- Are you clear about why each of your agencies and NDPBs need to exist separately?
- When did you last shut down a major programme, an agency or NDPB?
- Have you considered outsourcing or sharing major corporate services with other organisations?
- What progress has been made on your PSAs and departmental strategic objectives, relative to the average across departments and authorities?
- How easily can new policies be accommodated within your organisation?
- Is your leadership team prepared for change and capable of delivering it?
- Have you embarked on the necessary planning for what is likely to be a long transformation process?
Human Resource Director
- Is your manpower plan tailored to adapt to your future expected funding levels and strategies?
- When was your last organisational review?
- Are your bonus payments focused on rewarding the few genuine top performers?
- Is it easy to move your strongest performing staff quickly to work on a major new priority?
Frontline Operating Director
- When did you last change organisational shape in response to citizen demand?
- Have organisational changes saved headcount numbers without increasing expenditure on agency staff and consultants?
How many organisational layers exist between you and citizens?
Finance Or Planning Director
- Do you know whether your agencies and NDPBs deliver value for money?
- Based on existing cost and headcount trends, how long will it take you to reach your current targets?
- Are you in a position to deliver 15 per cent cost reduction and what would be the implications for citizen delivery?
EXAMPLES OF SUCCESS IN RESIZING AND RESHAPING
The good news is that there are many examples where changes to organisational size and shape has been well-managed, thus delivering significant benefits. Four such examples are outlined below, with a table summarising the types of changes followed by a more detailed explanation of each.
The looming government deficit presents massive challenges for the public sector, which is also facing rising expectations from citizens and the changing nature of service delivery. A focus on tactical cuts, particularly headcount reduction, might bring short-term savings but it could also damage organisational effectiveness in the longer term. A strategic approach, taking account of structure, governance and culture, may help to identify more sustainable savings.
If public-sector leaders are able to resize and reshape their organisations, they will be in a much stronger position to deliver the required savings. Undeniably, such changes will be hugely challenging, yet they could also offer opportunities to deliver reforms that might otherwise be resisted when it is 'business as usual'. For example, redesigning service delivery models with an increased focus on customers' needs could ultimately lead to improved quality.
By drawing on the experiences and approaches outlined in the four success stories in the previous section, public-sector leaders can prepare for the likely pressures ahead. Such approaches can help organisations to develop a size and shape that is more robust, thus enabling them to emerge from the recession stronger and achieve more – with less – in the future.
1. This report uses the term 'public-sector organisations' to describe central government departments, local authorities, devolved administrations, executive agencies and non-departmental public bodies.
- Localism Policy Paper – Control Shift, The Conservative Party, 17 February 2009. See: http://www.conservatives.com/Policy/Where_we_stand/Local_Government.aspx
- Localism – Lyons, CSR and Beyond, Department for Communities and Local Government, 17 January 2007. See: http://www.communities.gov.uk/speeches/corporate/localism-beyond.
- Total Place: Better for less, Leadership Centre for Local Government. See: http://www.localleadership.gov.uk/totalplace/
3. Record recession for UK economy, BBC News, 23 October 2009. See: http://news.bbc.co.uk/1/hi/8321970.stm
4. Statistical Bulletin − Public sector finances, Office for National Statistics, September 2009. See: http://www.hm-treasury.gov.uk/d/psf.pdf
5. Prospects for the UK economy: NIESR's latest forecast for the UK economy, National Institute of Economic and Social Research, 19 October 2009. See: http://www.niesr.ac.uk/pdf/Press/Review%20210/the%20uk%20economy.pdf
6. For example, The State of the Service: A Review of Whitehall's performance and prospects for improvement, Institute for Government, July 2009. See: http://www.instituteforgovernment.org.uk/pdfs/state_of_the_service.pdf
7. 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
8. Survey of Local Authority Staff Reductions, Local Government Association, April 2008. See: http://www.lga.gov.uk/lga/aio/1887372
9. Frontline council service cut due to £1 bn black hole in council funding, The Daily Telegraph, 18 April 2009. See: http://www.telegraph.co.uk/news/newstopics/politics/5172684/Front-line-council-service-cut-due-to-1-bn-black-hole-in-councilfunding.html
10. Needless council bureaucracy, BBC News, 20 November 2009. See: http://news.bbc.co.uk/1/hi/uk/8369693.stm
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. School Quangos: A blueprint for Abolition and Reform, Centre for Policy Studies, 13 August 2009. See: http://www.cps.org.uk/cps_catalog/school%20quangos.pdf
13. College funding fiasco condemned, BBC News, 16 July 2009. See: http://news.bbc.co.uk/1/hi/education/8152714.stm
14. For example, Total Place: Better for less, Leadership Centre for Local Government. See: http://www.localleadership.gov.uk/totalplace/
15. Council backs radical 'easyJet' services plan, The Guardian, 22 October 2009. See: http://www.guardian.co.uk/politics/2009/oct/22/barnet-council-easyjet-services
17. The State of the Service: A Review of Whitehall's performance and prospects for improvement, Institute for Government, July 2009. See: http://www.instituteforgovernment.org.uk/pdfs/state_of_the_service.pdf
18. Financing Britain's Future: Review of the Revenue Departments, Her Majesty's Treasury, 17 March 2004. See: http://www.hm-treasury.gov.uk/bud_bud04_odonnell_index.htm
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