Are Darling’s cost savings achievable?

Everyone and his dog is commenting on the budget this morning so, for the moment at least, I will restrict my thoughts to the area where I have some first hand experience; making efficiency improvements and cost savings in organisations.

Alistair Darling’s calculations assume that the government will be able to cut costs in the public sector. He has allowed for a public spending growth of only 1.7% in 2010 and 0.7% per year in 2011 and 2012. Even Margaret Thatcher didn’t try that. Set against that is the increase in demand for public services and benefits as a result of the recession and the generally higher expectations of the state than people had twenty years ago. Mr Darling’s plans for the public sector look ambitious to say the least.

As if that isn’t stretching the bounds of credibility, he then claimed that the cuts would not fall on frontline services:

[E]fficiencies in public sector back-office functions and IT, improved procurement, and better collaboration and innovation at the local level……will allow us to protect frontline public services, while keeping current spending growth, in real terms, at an average of 0.7% a year from 2011-12 onwards.

In other words, this master plan to curb public spending at a time of increased public demand while not cutting any services is dependent on making massive savings by reducing the cost of back office support functions. The whole plan rests on the assumption that these savings can be made without anyone who uses public services noticing. Many people are sceptical about these claims, and rightly so.

Regular readers of this blog will know that I have been tracking the plan to conjure up these back-office savings ever since the Chancellor suggested it back in November. On Tuesday, just before the budget, the Treasury’s Operational Efficiency Programme (OEP) published its recommendations. Its report claims that £3.2 billion a year can be saved on IT services and that savings on Finance and HR support could deliver £5 billion a year by 2011-12, rising to £9 billion a year by 2013-14.

Wow! That’s a hell of a lot of money.

The OEP calculations are based on taking the best examples of back-office cost saving programmes from the private and public sectors than applying the savings they made across the board. The report concludes that “savings in the region of 25 to 30 per cent can be made in the cost of back office operations.”

The trouble is, not all such projects go well. Ask the people at the Department for Transport about their plan to cut back office costs. Consolidating back-office services into shared service centres is difficult enough in central government but in local government and the NHS, the picture is complicated by the sheer number of organisations.

In theory it should be possible to provide HR, payroll and finance support to a number local authorities and NHS trusts from various consolidated shared-service centres across the country. Local authorities have similar terms and conditions as do NHS trusts. The NHS has the added advantage that all trusts now use the same Oracle HR and payroll system. Organisations in both sectors could save a lot of money by pooling resources as the OEP report suggests.

But local authorities are stand-alone sovereign organisations. Increasingly, so are NHS trusts as more of them move to Foundation Trust status. There is no over-arching body to co-ordinate and drive the consolidation of back office services. Consequently, very little has happened so far, even though Alistair Darling and Yvette Cooper have been getting very cross.

I talk to senior people in local authorities and the NHS regularly and they are just not discussing this initiative. My evidence is anecdotal but I would guess that very few local authorities or NHS trusts have plans to pool back office resources with other similar organisations. 

It’s very unfashionable and it goes against the localism that is currently in vogue but a top-down approach is the only way to ensure that these savings are made. Most public sector organisations don’t have the skills to create these consolidated back-office operations. The few that do need to share that expertise if massive spending on external consultants is to be avoided. There needs to be central co-ordination to make sure that organisations pool their back-office functions in the most effective way and, where necessary, to compel organisations to take part.

If the government is serious about making these savings it can’t rely on woolly voluntarism. The scale of the savings required is huge. To even get half way to its first £5 billion target the government needs to take a much more directive approach than it has been taking so far.

That the savings suggested by the OEP can be achieved is one of the major assumptions behind Alisair Darling’s budget calculations. If he’s really serious about achieving them he needs to take drastic action soon, or else, as in the past, most of the spending cuts will fall on front-line services.

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3 Responses to Are Darling’s cost savings achievable?

  1. Chris Dillow thinks more or less the exact opposite – that large scale cuts are almost impossible to achieve sensibly on a top down basis.

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/04/waste-decentralization.html

  2. Rick says:

    Thanks for that Charlie. I’ve just added my two penn’orth in the comments thread.

  3. Rick – your statement that “If the government is serious about making these savings it can’t rely on woolly voluntarism.” is clearly evidenced by the 9 newly formed unitary councils.

    At 18 months each, they are probably the quickest shared service projects in the history of local government. It normally takes about a two years to bring one heavy-weight shared service together when they are voluntary – so we should salute the unitarys for delivering a whole bunch in that time. (They are probably still picking up the pieces as we blog, but lets not worry about that!)

    Dominic

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