Will the shrunken state really be more efficient?

Over recent months, the Guardian has provided the most detailed, and the most apocalyptic, commentary on the government spending cuts. Yesterday the Financial Times joined in with a series of articles analysing the impact of the spending cuts and drawing broadly similar conclusions. The new financial year has seen drastic budget cuts and councils are preparing to withdraw from many activities they have traditionally funded. As the vice-chairman of the Local Government Association put it, “The council that has existed for the last 150 years has gone.” Faced with year on year spending cuts, the state is just going to stop doing stuff.

Outside the immediate government circles, the heady “more for less” optimism of last summer seems to have disappeared. There is less talk of efficiency savings and social innovation coming to the rescue. Most people now seem to have accepted that we will get less for less. Quite a lot less.

Which is not surprising when you look at the scale of the task and at the private sector’s record of efficiency improvement. After the recent increase in inflation, the real-terms cuts to ‘unprotected’ departments will be around 20 percent. According to a report by the government’s policy advisor, when he was still with his old firm, it took private sector service organisations ten years to make productivity improvements of 20 percent. The Coalition wants the public sector to do the same in four.

It was never going to happen, of course. Only someone completely delusional would expect public sector organisations to make productivity improvements at more than twice the rate of the private sector. Funding cuts of this size were always going to lead to cuts in frontline services.

However, the hope is that public sector efficiency can still be improved to the extent that a 20 percent cut doesn’t lead to a 20 percent drop in services. Across the public sector, managers are being encouraged to press ahead with various savings programmes. But some fear that even these savings may be beyond the state’s ability to deliver. Last month, the National Audit Office expressed some serious doubts about government efficiency savings. Again!

Lord Adonis sounded a similar note of caution last week:

Even in the private sector, the success rate for major change programmes is about one in three. If that holds true for the civil service, reforms in about 12 out of 19 main departments could fail.

At best, this means the administrative savings won’t be realised. At worst, whole areas of the reform programme would be jeopardised.

I don’t know where his figures come from but they are probably not that wide of the mark. Two McKinsey surveys concluded that efficiency savings are very hard to maintain even in commercial organisations. Of 230 organisations studied in 2005, only 10 percent managed to sustain their cost reductions for more than two years. A 2010 survey on back-office savings came up with similar results: 

[W]e find that barely four in ten companies meet their targets one year into a cost-cutting program, and by year four fully 90 percent of back-office costs are right back where they started.

Central government’s back-office efficiency programme has already been put on the back burner. So much for that panacea then.

There are many reasons why efficiency savings in the public sector are difficult. I discussed them at length earlier this year (here, here and here). But where organisations, in any sector, have achieved such savings, they have usually done so with skilled and highly motivated management teams and significant amounts of investment. This too does not bode well for the public sector. Thousands of its managers have been sacked over the last few months and morale among those that are left is generally low. A sense of shock and confusion seems to have pushed many managers into survival mode. Demoralised executives do not make good change leaders. And as for the investment…..

This is not to say that no organisations will achieve efficiency improvements. A few already have, especially in local government. The overall picture, though, is one of shrinking budgets and of services shrinking by the same amount. As the FT warns:

People will have to fundamentally change their expectations about what local authorities will provide over the next four years.

So far, there isn’t much evidence of the efficiency savings and social innovation that were supposed to protect frontline services. Some finance directors believe that the savings programmes might even cost more and deliver less. Looking at the odds stacked against public sector managers, it is unlikely that we will see significant productivity improvements any time soon. It is possible that the shrunken state of four year’s time might be just as inefficient as it is now. It could also, of course, be smaller and even less efficient but that’s too pessimistic a thought even for this blog.

For all the glib talk of efficiency from politicians and journalists, most of whom have never actually tried to do it, it is looking increasingly unlikely that the public sector as a whole will make significant savings from improved productivity. The state in 2015 will be cheaper not because it will be more efficient but because it will just do a lot less.

Update: There is a map of the cuts in local government budgets on the FT’s website.

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10 Responses to Will the shrunken state really be more efficient?

  1. Alex M says:

    Great post – although pretty miserable reading!

    It is peculiar that the Govt has not been challenged more effectively on its assertions regarding the extent of efficiency gains and the impact on frontline services. Even a passing familiarity with the empirical literature on organisational change should tell them that it’s a risky business with a high probability of non-delivery – and that’s when attempted by those who know what they’re doing.

  2. Pingback: Will the shrunken state really be more efficient? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  3. Jim says:

    Umm, how is the State shrinking when spending is rising through to 2014/15?

    • Rick says:

      Jim – No it isn’t.

      The Telegraph’s Edmund Conway debunked this rather silly argument last summer:

      http://blogs.telegraph.co.uk/finance/edmundconway/100006701/please-read-this-before-trying-to-claim-the-government-is-not-cutting-spending/

      Public spending is reducing by around 4% in real-terms. (Government figures from the last budget.)

      Take off interest payments and the recession-linked increased in welfare payments and you are left with a cut to spending on services of 11.2% (according to the IFS). Once the NHS has had its inflation linked increase, everyone else is left with real-terms cuts of around 19% – probably more now inflation is higher (IFS figures again).

      The amount available for delivering public services is shrinking significantly.

      • Jim says:

        Well, spending isn’t rising across the board, no. And some areas will have to find savings. But that happens all the time in the private sector. Revenue comes in under projection, savings/efficiencies have to be made. Why should the State sector be any different? Or should every government dept have a real increase in its budget every year in perpetuity?

        And to argue that overall rising government expenditure is actually ‘shrinking the State’ is hall of mirrors stuff.

  4. PinkPolitika says:

    Rick, I think the only way we can make ‘sense’ of this grim march towards unreality is to look at the possible motivation/s of those inflicting the present pain upon us.

    Perhaps it’s not really about a decent reduction in expenditure, handled carefully and with due regard to the vulnerabilities of mere mortals. Maybe, instead, it’s fundamentally about how some politicians are looking to their legacy: http://pinkpolitika.wordpress.com/2011/04/04/zeroing-the-deficit-zoom-zoom-essentially-a-grim-vanity-project/

    Given the focus which Tories traditionally have on history, an eye above all others on their ‘legacy’ would not surprise me.

    Though what the rest of us do about it right now, I can’t as yet quite see.

  5. Brian says:

    I must be one of the completely delusional people because I do expect the private sector to make far more radical productivity improvements than the private sector, given where they are starting from. I was waiting for the bit in the article where it was pointed out that the likelihood of whether a private sector company survives in competitive markets is determined by their ability to achieve continuously higher levels of efficiencies, unlike the public sector. But it never came. Did you know inefficient companies go out of business and are replaced by more efficient ones?

    • Some inefficient companies go out of business. So do some efficient ones for that matter. I’ve always worked in the private sector (financial and publishing) and I’ve worked for large and small organisations. I’ve always seen great swirling masses of inefficiency all around me. Come to think of it I may have been responsible for some of them!

  6. Alex M says:

    @Brian – I would say that while that is no doubt true in general terms, the competitive mechanisms become much weaker when the organisation is providing a ‘public’ service that requires continuity of provision. It is harder then for the govt just to let them go to the wall and wait for a new provider to spot an opportunity for profit and enter the market (assuming there is profit to be made).

    One of the biggest tangles here might be something like the failure of rail franchises. Competitive mechanisms still work – but providers have more leverage over the govt to go back and say “costs have risen or revenues are not as expected etc etc. and as a consequence you need to give us more subsidy to keep going or we walk away”. There is a hold up problem. Of course it can be re-tendered, or it can be taken back into public ownership like the east coast mainline, but that just all adds to the costs and complexity.

    While the idea that the harsh winds of competition act as a disciplinary mechanism on providers is one that it is worth keeping hold of, it is also important not to assume they are always effective: there are plenty of circumstances when the winds of competition are not much more than a light breeze.

  7. Rick says:

    @Brian – I’m not sure what your point is here. Wherever you are starting from, making 20% efficiency savings in 4 years is extremely difficult, regardless of your reason for doing so.

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