Supplementary memorandum submitted by
HM Treasury
DEPARTMENTAL GUIDANCE—EFFICIENCY TECHNICAL
NOTES
BACKGROUND
Ivan Rogers's letter of 17 May 2004 set out
the conclusions of the Prime Minister and the Chancellor for taking
forward the Efficiency Review. As set out in that letter, "departments
should agree efficiency targets with the Treasury and No 10 as
part of the Spending Review settlement, including the subsidiary
indicators to be monitored and robust processes for the measurement
of savings". It also detailed how John Oughton's Efficiency
Team (ET) will lead work on the development of Efficiency Delivery
Plans. The intention with this framework is to mirror, as appropriate,
the strengths of the PSA framework with which departments are
already familiar. John Oughton has already written around with
guidance on implementation, and this note sets out guidance for
departments on how to draft Efficiency Technical Notes (ETNs).
THE PROCESS
Draft ETNs should be submitted to HMT by Friday
23 July. HMT and ET will feed back initial comments on the
notes, before a formal scrutiny process is undertaken in September.
The NAO and Audit Commission have agreed, in principle, to a role
in this scrutiny process. Departments will then need to publish
final ETNs on their websites by the end of October.
WHAT IS
REQUIRED
Each department should produce one ETN, which
in turn should cover all of the actions that departments intend
to take to reach their efficiency target. It should as a minimum
set out, for each of the major efficiency programmes, a robust
means of measuring, monitoring and quantifying financial impacts.
Efficiency savings should be measurable in cash terms (ie £
million), and be robust and auditable.
ETNs are fundamentally about measurement, and
clear methodologies are essential. Factors such as data sources,
validation arrangements, baselines, and timeframes are crucial
to properly defining measurement, and they should form the basis
of all ETNs. In particular, data sources are a critical part of
ETNs, and departments should ensure that these are clearly specified,
with details of quality assurance methods. Baselines must be clearly
stated. Much of the work on measures and methodologies will already
have taken place as part of earlier discussions with the Efficiency
Review team, and departments will be able to draw on their ER
submissions and Efficiency Delivery Plans when drafting ETNs.
COVERAGE
ETNs should begin with a short summary list
of all the activities that departments plan to score towards their
efficiency target. The body of the note will then set out, for
each of the activities listed, how efficiency gains are to be
monitored and measured.
It should be clearly stated for each measure
whether the saving is cashable (ie releases recyclable savings)
or not. All data sources, and assurances of quality for these
sources, should be clearly specified. Departments should bear
in mind that the scope for efficiencies covers all elements of
departmental spending, including local authorities, NDPBs and
the wider public sector.
EFFICIENCY WORKSTREAMS
Departments should consider the overarching
principles set out in Jonathan Stephens' letter to FDs of 8 April
(MS FD (04) 13), that Efficiency improvements are transparent
and auditable and represent:
— reduced inputs (money, people,
assets, etc) for same outputs;
— reduced prices (procurement,
labour costs, etc) for same outputs;
— additional outputs (extra service,
productivity, etc) for same inputs; and
— improved ratios of cost/output
(unit costs, etc).
More specifically, the scrutiny panel will be
looking for the following:
1. For efficiency measures based on reduced
inputs/same outputs:
— Clear descriptions of any planned
changes to input levels.
— Detail of staff reductions,
including differentiations between staff cuts and reprioritisations.
— Systems for measuring volumes
of activities or outputs, including measurement of quality of
outputs.
2. For efficiency measures based on reduced
prices/same outputs:
— Clear systems for ensuring continuation
of quality (eg quality of product procured, timeliness of delivery
etc).
— Monitoring of end outputs to
ensure continuation of quality of service.
— Systems for measuring levels
and quality of outputs.
3. For efficiency measures based on improved/additional
outputs:
— Systems for measuring levels
and quality of outputs.
— Methodologies for monitoring
related inputs.
— Proof that additional costs
have not been passed on to customers.
4. For efficiency measures based on improved
cost/output ratios:
— Elements of 1, 2 and 3 shown
above should be considered.
Different types of efficiency savings will be
validated in different ways, and departments should group their
efficiency savings under the different workstreams used by the
Efficiency Review team, namely:
— Transactional services.
Further criteria follow at the end of this note,
grouped around workstreams. Annex A also includes the initial
workstream definitions, as issued by Sir Peter Gershon's letters
"Spending Review 2004: Efficiency Review response"
to Permanent Secretaries in January 2004.
* Where efficiency proposals do not fit into the
six workstreams, it is essential that departments are especially
clear about the methodology and measures employed to deliver efficiency.
Some things will not be acceptable as efficiency gains, including:
— Cost shifting, including moving
people/tasks into agencies & NDPBs, outsourcing delivery of
schemes, using consultants to replace staff, moving staff to new
activity in related area (eg less inspection, more advice).
— Shifting grant/schemes to similar
objectives/criteria or which would largely support the same businesses;
moving costs from one policy to another; avoided future costs
(eg underspend on a policy project).
LINKS TO
OTHER WORK
Departments should make use of existing methodologies
where appropriate, and ensure that work to deliver efficiency
savings is fully aligned with work undertaken by, or for, the
Atkinson Review team to improve measures of public service output
and productivity. Other methodologies that may be useful include,
for example, those developed for productive time in the health
service and in police forces.
CASHABLE/RECYCLABLE
SAVINGS
Departments should set out clearly whether each
saving is cashable (ie releases recyclable savings) or not. Cashable
savings represent the potential to release savings in cash for
other areas of programme spend. For example, it would ordinarily
include savings through reduced procurement costs or reduced back
office headcounts. Likewise, it therefore excludes savings in
the form of:
— reductions in fees and charges;
and
— productive time (unless fewer
staff are needed as a result).
For each of the workstreams, the attached annex
sets out examples of savings that are cashable and non-cashable.
SAVINGS OUTSIDE
THE SR04 PERIOD
2004-05 savings can only be counted if they
represent efficiency gains that are sustained throughout the SR04
period.
MEASURING GAINS
AND HANDLING
INFLATION
The Spending Review White Paper will set out
total annual efficiency gains to be achieved by 2007-08. In accordance
with the Efficiency Review's approach that efficiency savings
should be expressed using price levels relating to the year in
which they are realised, annual efficiency gains for 2007-08 should
be presented in 2007-08 prices.
When making adjustments for inflation, departments
should use GDP deflators published at http://www.hm-treasury.gov.uk/economic_data_and_tools/gdp_deflators/data_gdp_fig.cfm.
The only exception to this would be for procurement savings, where
departments can consider sector specific deflators. However, in
these instances, these must be agreed with HMT and the scrutiny
panel.
QUALITY
When setting out measures which relate to quality
improvements, departments should be clear that "higher quality"
directly provides a business benefit.
This may be:
— because the good or service is delivered
directly to a customer who will perceive and value the improved
quality;
— because an improvement to the procured
good or service is required to meet legal obligations or the department's
reasonable responsibilities as a good employer (eg bringing sub-standard
accommodation up to scratch); and
— because the improvement in "quality"
will reduce costs (greater energy efficiency, lower maintenance
costs).
OTHER INDICATORS
Separately, the Efficiency Team (working with
workstream change agents and departments) will be developing a
number of performance indicators to inform implementation of proposals
and planning for future efficiencies. By contrast, these indicators
will be:
— internal to government;
— internally audited or unaudited;
— typically ratios rather than £.
MEASURING WORKFORCE
NUMBERS
Departments have provided workforce trajectories,
which will be finalised as part of SR04. Treasury will work closely
with departments on monitoring the changes in workforce numbers
in accordance with these trajectories.
In response to a request from the Public Service
Reform (PSR) committee, the Treasury is also working with CO and
the ONS to develop a more appropriate baseline for monitoring
changes to the public sector workforce.
MEASURING RELOCATION
Departments have provided relocation proposals,
which will be finalised in headline efficiency indicators as part
of SR04. As a key strand of the efficiency programme, departments
will need to demonstrate that they are working towards full implementation
of Lyons proposals.
Departments should provide dates by which time
relocations would have occurred; the organisations, bodies, or
offices from where the relocations originate; and the proposed
location choice of relocations. Where these details are not available,
departments should specify a date by which time details will be
available.
Relocated posts are defined as full-time equivalent
permanent posts (including military personnel), net of posts lost
through efficiencies, which have moved from, or would otherwise
be, in the government regions of London or the South-East. These
posts are from a government department, its executive agencies,
or the public bodies it sponsors. The baseline for all locations
is set as 1 April 2004.
NB: Where jobs removed from London and the South-East
(ie gross relocations) exceed those created in the regions (ie
net relocations)—both figures should be provided.
OTHER ISSUES
Some of the information set out in the annexes
reflects information that goes beyond the strict definitional
measures. This is information which will allow the scrutiny panel
to assess methodologies based around trends in costs, inflation
assumptions etc. Departments should, for all efficiency savings,
set out methods for dealing with transactional costs.
In most cases, departments will need to set
out a clear "null hypothesis" against which gains can
be measured. Departments will also need to have processes in place
to demonstrate that the claimed results are being achieved. This
may require particularly careful liaison with inspection and audit
bodies to avoid duplication and bureaucratic burdens.
Departments will need to be careful to avoid
"double counting" across the workstreams of the Efficiency
Review. For example, savings under the PFR workstreams might also
have impacts on transactional services or Back Office proposals.
Where there are risks to quality and timeliness
of delivery, departments should take these into account when developing
measurement systems. Full risk analysis and mitigation should
be covered in the Efficiency Delivery Plan.
PROCUREMENT
Savings from procurement will be delivered where
departments have reduced the whole-life costs of procured goods
or services or have increased the quality of procured items, to
demonstrable business benefit and without increased costs.
Increases in cost elsewhere will need to be
netted off from procurement savings. For example, a department
might reduce its consultancy spend by increasing the skills of
its own workforce; in this case, any additional training costs
and costs of recruitment and retention would need to be netted
off. Similarly, any increase in the cost of the procurement function
would need to be netted off.
In setting out the methodologies and measurement
relating to procurement, departments should also cover issues
such as:
— Specification changes that have a
significant impact on price (eg known changes in health and safety
legislation).
— External market influences that lead
to significant differential price changes (eg specific labour
resources or materials).
— Transition costs; including new agent
start-up costs, internal procurement staff exit costs, etc.
— Cost of conducting e-procurement
transactions (eg tendering, selection and payment).
— Specifics of savings delivered through
collective procurement.
Cashable vs non-cashable procurement savings
Savings realised through greater economies of
scale or lower prices would normally be cashable. This would include
instances where prices have been negotiated to below the level
of inflation. Where higher quality goods and services are procured
for the same prices, efficiency savings are non-cashable, but
cashable savings may be derived elsewhere (such as through reduced
energy or maintenance costs).
BACK OFFICE
Reform of back office functions will be a key
part of delivering efficiency. Costs may be reduced through greater
standardisation, process simplification, increased economies of
scale, getting better VFM from suppliers, or through eliminating
unnecessary activities. It may also be appropriate to review service
levels, reducing service in areas where business outcomes will
not be affected, or increasing service levels to increase productivity
elsewhere.
In setting out the methodologies and measurement
relating to back office savings, departments should also cover
issues such as the assurance of appropriate quality of service
for staff, monitoring of fraud and error rates, etc. Departments
will need to ensure that they have processes in place to maintain
service levels appropriate to business needs and appropriate but
not excessive controls and management of risk.
Cashable vs non-cashable back office savings
Cashable savings include more efficient HR processing.
Non-cashable savings might include better standards of IT (eg
less down-time) or the benefits of better HR management or as
line managers make use of greater information available through
standard HR systems.
Most back office savings will be cashable and
relatively straightforward to measure. Where an indirect productivity
saving is claimed (eg reduced downtime making front-line staff
more productive) then the means of benefits realisation and measurement
must be set out. Such gains might be cashable (fewer staff, same
outcomes) or non-cashable (better outcomes for the same number
of staff).
TRANSACTIONAL SERVICES
Efficiencies delivered through improved transactional
services centre on reduction of the costs of citizen and business
interaction with government. In general, savings will be achieved
through: encouraging use of the least-cost appropriate service
delivery channel (eg "e" channels and call centres rather
than postal and face-face, or payment into bank accounts rather
than by payable order); process simplification; reducing error
rates and rework; levelling up performance across offices or districts;
and achieving greater economies of scale through centralising
functions.
In setting out the methodologies and measurement
relating to transactional services, departments should also cover
issues such as levels of error or fraud, customer satisfaction,
unit cost per transaction (including differences between transactions
conducted by paper, in person, over the phone or submitted electronically),
headcount reductions or changes in personnel deployment (eg where
genuine benefits are realised from a move from data entry and
checking to customer services or compliance roles) etc. Where
improvements in changes in delivery of transactional services
have genuine wider benefits to the end user, these should be taken
into account.
Cashable vs non-cashable transactional services
savings
Most savings in transactional services will
be cashable, and are likely to be realised via headcount reductions
and reductions in property—office accommodation, paper handling
and storage space. Other cashable savings may be realised through
reduced payments-in-error and fraud.
Where a non-cashable saving is claimed then
a robust means of measurement must be set out. It must be clear
that the improved output is genuinely beneficial to the end user
(for example, because it allows a genuinely unavoidable increase
in demand to be dealt with without recruiting more staff).
PRODUCTIVE TIME
Productive time efficiencies are delivered through
increased productivity of front line staff; for example teachers
and classroom support staff; police officers and police support
staff; and GPs, consultants and those who support them. Reductions
in the bureaucratic burden on frontline service deliverers, or
investment in ICT and workforce reform, can free up time to deliver
improved services to the consumer. Savings delivered through this
route might need to take into account the costs of additional
support staff or technology.
In setting out the methodologies and measurement
relating to productive time, departments should consider:
— Cash savings, for example from cutting
out the need for supply teacher/agency costs.
— Decreased input costs, for example
from passing skills along the skills chain to enable activities
to be performed at a lower cost or using competition and contestability
to reduce costs.
— Increased inputs levels, for example,
increasing the amount of productive time by removing bureaucratic
burdens: reducing absenteeism and staff turnover.
— Increased output levels, for example,
as a result of changing skill-mix, configuration, or re-engineering
processes.
— Pay restructuring (eg change to consultants'
contracts, change to teachers' PRP arrangements).
Departments will then need to carry out their
own spot checks to ensure that reform is being implemented on
the ground as expected.
Cashable vs non-cashable productive time savings
Cashable productive time savings would include
those where cash savings had been realised, or input costs had
been decreased. Increased input levels (eg through reduced absenteeism)
or increased output levels would represent non-cashable savings.
PUBLIC POLICY,
FUNDING AND
REGULATION (PFR)
Public sector PFR generally refers to those
bodies that are above the management of delivery units and are
engaged in:
— setting policy for service delivery;
— allocating revenue and capital funding
to delivery bodies;
— regulating quality by setting standards
and targets, which requires delivery planning, inspection and
audit; and
— seeking to influence quality through
initiatives and national support.
PFR savings are most likely achieved through
reduced headcount and costs, assuming that front line services
have not been affected, or through a richer grade mix in core
departments.
In setting out the methodologies and measurement
relating to public PFR, departments should also cover issues such
as the new approach to be implemented including revised funding
envelopes, consequential structural implications and any transitional
costs (including staff exit costs).
Cashable vs non-cashable public PFR savings
Most public PFR savings are likely to be cashable,
for example a reduction in the number of people administering
a funding stream. Potential areas where gains are non-cashable
include better policy making.
PRIVATE POLICY,
FUNDING AND
REGULATION (PFR)
Private PFR efficiencies are those where there
is scope for a significant saving in current costs of functions
relating directly to private sector policy, funding and regulation
activities across government. This applies to activities within
the entire chain from policy to delivery, within both administration
and programme costs, which intentionally impact or intervene in
the private sector. The relevant activities include policy setting,
market monitoring, ensuring compliance with regulation (education
and guidance, monitoring & inspection, licensing, enforcement),
standard setting, consumer & market advocacy/redress and funding,
subject to exceptions below in both central and local Government.
These savings could be achieved by a combination of a simplified
delivery landscape and lower cost regulatory/compliance regimes.
They include net reductions in end-to-end costs of a PFR process/activity,
elimination of PFR activity of zero/negligible value and higher
PFR output activity or lower unit cost, where the activity is
discrete and standardised.
In setting out the methodologies and measurement
relating to private PFR, departments should also cover issues
such as:
— Analysis of current Private PFR spend
in the department and its arms length bodies.
— Breakdowns of approximate costs by:
organisation; regulatory/market area; and by the activity types
described above.
— Associated staff numbers.
— Outline projections for the above
costs.
Cashable vs non-cashable private PFR savings
Cashable savings would include things like reductions
in the cost of inspection. Non-cashable savings include those
passed on to the private sector/customer in the form of lower
fees and charges.
ANNEX: WORKSTREAM
COVERAGE
Transactions
The transactions workstream applies to those
efficiencies that can be gained through such means as shifting
customers to more-efficient channels and deploying best practice
within each channel; and making a major shift from manual to electronic
processing.
Procurement
Procured goods and services include commodity
goods and services—utilities, commodity IT, equipment and
supplies, telecoms, vehicles etc—as well as professional
services, temporary labour and construction. The Review has also
considered sector specific markets in areas such as roads, social
housing, social care, environmental services and police.
Back office
Back Office includes, but is not limited to,
Finance, HR (in respect of training; only the function, not the
spend), ICT, Procurement (the function, not the spend), Legal
Services, Facilities Management, Travel Services, Security Services
and Marketing & Communications.
Productive time
The focus is on increasing the productivity
of front line staff, for example teachers, police officers, consultants,
GPs, nurses and those who support them.
Public PFR
The Efficiency Review definition of public sector
PFR is those bodies that are above the management of delivery
units and are engaged in:
— setting policy for service delivery;
— allocating revenue and capital funding
to delivery bodies;
— regulating quality by setting standards
and targets, which requires delivery planning, inspection and
audit; and
— seeking to influence quality through
initiatives and national support.
The Efficiency Review has interpreted the bodies
involved to be above the level of schools, colleges, basic command
units, NHS Trusts, or local government.
Private PFR
This workstream applies to activities within
the entire chain from policy to delivery, which intentionally
impact or intervene in the private sector. The relevant activities
include policy setting, market monitoring, ensuring compliance
with regulation, and standard setting.
February 2005
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