Central government: saving £15bn

The Treasury’s announcement a day before the Budget that it has found the
potential for a further £15bn worth of savings in operational spending has, for
the most part, been received with little surprise. What is of concern, however,
is how the proposals will be achieved.

It is widely accepted that the public sector can gain considerable savings by
implementing new methods, such as shared service centres and other collaborative
processes, to improve efficiency and cut costs.

Indeed experts agree that savings in operational spending are not only
possible, but urgently needed.

What is debatable is the way to achieve these cuts. And they are cuts.
Despite the lexicon used by the government – with a general election looming
words become more vague – whichever way you look at it, ‘operational
efficiencies’ ultimately mean job cuts. Roughly a quarter or as much as a third
of public sector expenditure consists of salary costs, so generally speaking,
20% efficiency gains tend to equate to a 20% cut in jobs, explains Alan Downey,
partner at KPMG.

‘Efficiency is gained by a determined, clear plan and the consequences won’t
be popular because there are those that will be adversely affected,’ adds
Downey.

Finance staff will be pivotal to achieving the government’s goals because
much of what is needed centres around providing timely financial management data
to ministers. It is unlikely that finance teams will be the hardest hit in any
job cuts but they won’t be immune.

‘There may be some reduction as finance staff shouldn’t be beyond the process
of cost cutting,’ says Nigel Johnson, partner at
Deloitte.

What’s more likely is that semi-skilled staff will be affected. ‘It’s about
efficiency and that’s where better information comes in. In terms of qualified
finance staff they will be needed in shared services. But you will need to take
out the semi-skills jobs, such as payroll clerks,’ says Ian Carruthers, director
of policy and technical at CIPFA.

Nonetheless, with the evolution of finance in central government over the
past five years financial professionals are, arguably, better placed than other
professions in the delivery of the Operational Efficiency Programme.

Carruthers adds: ‘The reality is that the delivery will require real skill.
Directors of finance will play an absolutely critical role in helping
organisations to rise to these challenges and to make the right decisions for
the long-term public interest.’

Over the past few years the public sector has undergone fundamental change in
streamlining departments and sharing services in order to cut costs, speed up
processes and generally modernise the public sector.

Although the shake-up has achieved savings, it has also taken its toll on
certain departments, such as
HMRC, where
accountants and taxpayers complain that service has dipped.

‘We think large amounts of money have been spent without a game plan. It’s
not surprising that change has been somewhat haphazard. They need to define more
clearly the plan for shared services
and how to get there,’ says Cowan.

Implementing the next stage of the plan means the question of how best to
achieve the ‘efficiencies’ without lowering quality of service is of utmost
importance. Curiously, say experts, the government is leaving it up to
departments to decide how they achieve these savings, prompting questions over
the extent of connected thinking on the matter.

‘We think increasingly the public sector should focus on service delivery and
leave the provision of back office service providers in the public sector to a
combination of private and public sector specialists,’ says Mike Cowan who leads
the PwC government and public sector finance effectiveness practice.

Strong arguments exist for employing private sector specialists. The past ten
years have seen companies undergo efficiency drives similar to what government
is having to go through now, so their experience is broad and multifaceted.
Indeed the government’s OEP could prove to be a cash cow for accountancy firms
and other outsourcing specialists. But myriad examples of outsourcing contracts,
from cleaning hospitals to IT outsourcing, that have been awarded to the private
sector have resulted in disastrous outcomes, raising serious questions about any
such future moves.

Moreover, some central government departments have made significant progress
in sharing services, showing they are learning from the private sector
experience. The Department for Work and Pensions, which already has a SSC, began
providing HR, payroll, finance and procurement transactional services to the
Cabinet Office on 6 April with the aim of further reducing costs.

‘There’s a range of models that you can adopt to arrange shared service
centres, so it depends on what is the best approach in your particular area. I
don’t think contracting out is the whole answer. We have tried that in the past
and it can generate short-term savings but, unless it’s done well, you can end
up with more costs,’ says Carruthers.

Despite developments, public sector experts argue that progress hasn’t been
made as fast as it should be in order to reduce expenditure. It is worth noting
that it took well over two years between ministers announcing that the DWP was
to provide shared services to the CO and the system going live.

‘That’s commendable and it’s a good start, but there’s an awful lot further
the DWP and other departments can go on a similar journey. Given the importance
of back office services to the delivery of frontline services, we argue there
should be a clearer picture from the centre about how they should look in, say,
ten years time or so,’ says Cowan.

On paper, the proposals look achievable, but the practical reality will
undoubtedly be different and, with no clearly defined centralised strategy to
achieving the cuts, plans could be built on shaky ground.

Whatever way you look at it the plan will involve a great deal of pain, not
to mention work, for central government.

Proposed savings breakdown:

• In back office operations and IT, better management information,
  benchmarking and review of costs can be achieved to save £4bn a year on back
  office operations, and £3.2bn of savings a year on IT spending;
• £6.1bn of savings can be made a year in collaborative procurement through
  collective buying power through collaborative channels;
• One report found that up to £1.5bn of annual running cost efficiencies could
  be achieved in properties by 2013-14, rising to £5bn a year over a 10- year
  period.