I’m rewarded for spending not for saving, says government IT director

In an interview with Silicon.com Phil Pavitt, CIO at HM Revenue and Customs, told this story:

In my first few weeks of the job I was visited by leading members of the Cabinet Office.

In that conversation with me they mentioned I am in the top purchasing club… That means you have tremendous influence on buying power, buying ideas and management and so on.

I said ‘If I reduce costs by 50 per cent what happens?’, ‘Well, you leave the club,’ I was told.

So here I am relieved of my ability to influence government’s ability to purchase if I am clever and do my job. It’s one of the most perverse things that I’ve heard.

We don’t have a ‘demonstrable reduction of cost club’, we have a ‘sheer size of spend club’. Surely this is the wrong way round.

Which is one of the reasons why costs in the civil service keep rising. Not only is there no incentive for senior managers to cut costs, they are often penalised for doing so. As one civil servant explained to me:

It’s better to over-spend against your budget than to under-spend. As long as you don’t take the piss, you can always come up with a good reason for over-spending. If you put up a good enough argument they will find the money from somewhere. If you under-spend, though, they will just give you less next year and it will be much harder to do your job.

In a system like this, no-one is willing to make cost-reduction plans on anything more than a piecemeal basis. There is no point in anticipating problems and making your team lean and mean to face future challenges. No-one will reward you for it. Better to wait until you are forced to make cuts, make as few as you can get away with this year then hope your won’t get hit again next year. After all, as Phil Pavitt says, your prestige depends on the size of your budget. Only a fool would cut any more than he had to.

As Edgar Schein told us, twenty-five years ago, organisational culture is based on deep assumptions which are shared by a particular group. In the Civil Service the prevailing assumptions are that the size of your department is a key determinant of your status, that budgets keep increasing year-on-year and that there will always be extra money if you can put up a good enough case. Intellectually, civil servants might know that public spending needs to be cut but this knowledge can sit quite comfortably with a belief that it won’t actually affect their own departments. Chris Dillow could probably name a cognitive bias for this. For now,  I will call it the It’ll-happen-to-all-the-rest-of-them-but-not-me bias.

This way of thinking is deep rooted in the Civil Service and it will take some changing. It is yet another force militating against the public sector cost savings on which both major parties’ spending plans rest.

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5 Responses to I’m rewarded for spending not for saving, says government IT director

  1. Graeme says:

    This is explained very well in “Yes Minister”. In fact the episode on waste is very closely based on fact (especially in the book version) with only slightly tailored real life examples.

  2. mkeeffer says:

    It’s over on this side of the pond, too. It’s all about bureaucracies.

  3. Jez says:

    Sadly this isn’t just a public sector problem. I work for one of the world’s largest listed companies. Last year (which was, after all, a time of supposed restraint) I screwed my suppliers and my team and underspent by 25%. As a result, my budget for this year is 25% lower than last – and there is an expectation that I can squeeze this still further. Meanwhile my overspending colleagues have raised budgets because, obviously, they need more money to do their jobs. So my corporate responsibility funds their profligacy. Lesson learned.

    And yes, in the private sector as well as public, budget=influence. Perverse but, it seems, widespread.

  4. Luis Enrique says:

    you likely already know this, but there is a long tradition in economics of investigating whether bureaucrats are “budget maximizers” and of looking at systems whereby if you save money one year, your budget is merely cut next year (google scholar will throw up tons of hits). The same problem plagues foreign aid, where managers are rewarded for disbursing aid, even it is wasted, and effectively punished for withholding it. Nobel winner Oliver Williamson’s 1965 thesis looked at how mangers in private firms might act the same way, with monopolists thought to be more susceptible to it

  5. Rick says:

    Thanks Luis I’ll dig some of that stuff out.

    You and Jez raise an interesting point about bureaucracy in the private sector. In large organisations where monopoly, oligopoly, barriers to entry or government restrictions protect them from the full force of the market, the internal bureaucracies often look and feel not much different from the Civil Service.

    It’s a subject which I hope to return to in a future post.

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