Memorandum submitted by Colin Talbot,
Manchester Business School
The Pre-Budget Report 2006 claims that the government
is on track to meet its Gershon efficiency target of £21.5
billion in savings and has so far accrued £13.3 billion.
In a written answer the Chief Secretary moreover claimed specifically
that £5.5 billion had come from procurement savings, £2.5
billion from productive time and £1.5 billion from policy,
funding and regulation. The government also announced a target
of 3% pa efficiency savings across central and local government
for the period of the 2007 CSR (up from 2.5% pa) and a target
for savings from administrative budgets of 5%.
These are big claims and ambitious targets which
deserve serious scrutiny. The NAO is due to issue its 2nd Report
on the efficiency programme early next year, so we will have to
wait until then to see if the problems with measuring efficiency
gains have, in the NAO's view, been overcome since their 1st Report
in February 2006.
The PBR 2006 however offers surprisingly little
evidence for the claimed £13.3 billion savings, other than
a few examples. The Committee might wish to consider asking
for the six monthly reports of the OGC Chief Executive to the
Prime Minister and Chancellor to be made public as a way of getting
at the data behind these claims.
There seems little reason for these reports to remain secret and
every reason to see how the government is making its calculations
about efficiency savings. They must have arrived at these totals
somehow and even if the reports cannot be made public the OGC
and HMT can certainly make public how they arrived at the claims
made in the PBR and by the Chief Secretary.
This note seeks to clarify some of the problematic
issues surrounding the government's efficiency agenda. It seeks
to ensure firstly that these issues are discussed using the same
terminology and definitions, which otherwise can lead to great
a great deal of confusion and misinformation. And secondly it
tries to identify what are the key challenges in achieving the
substance and measuring the reality of efficiency savings in government.
It may appear to be somewhat over-academic to
place great emphasis on getting the terminology right in discussions
of efficiency but it is actually an immensely practical issue:
one person's "efficiency gain" can easily be someone
else's "cuts" unless we can at least agree on terms.
Back in 2001 HM Treasury, together with Cabinet
Office, NAO, Audit Commission and ONS issued a small booklet called
"Choosing the right FABRICA Framework for Performance
Information" (Treasury . One of the main purposes of this
publication was to clarify terminology so that some of the confusion
in discussions about performance, delivery and efficiency could
be minimised. Unfortunately the Treasury seems to have forgotten
this agreed set of terminology in reporting on the efficiency
FABRIC made an important and useful distinction
between "efficiency", which it defined simply as the
ratio of inputs to outputs, and "cost-effectiveness"
or "value for money" (VFM), which it defined as the
relationship between resources consumed (inputs) and outcomes.
These definitions are important for several
They help to clarify the difference
between narrow efficiency (input:output ratios) and VFM which
are clearly highly important in policy-terms. It is quite possible
to have activities which are efficient, but not cost-effective
This also helps to clarify that some
so-called "efficiency" savings are nothing of the sort.
For example, proving that the cost of inputs has been reduced
(eg in purchasing and supply) is merely an "economy"
unless it can also be shown that these reductions have not led
to a reduction in the quantity or quality of outputs. Indeed it
is perfectly feasible to have economies in purchasing lead to
reductions in efficiency (due, for example, to higher failure
rates due to inferior supplies being used) and also of VFM (due
to, for example, adverse outcomes caused by lower quality inputs).
Given that 37% of the Gershon target is due to come from procurement
these are vital distinctions to maintain.
Throughout much of the government documentation
on the efficiency programme the concepts of efficiency, economy
and VFM are regularly confused.
This matters because opponents of the government
and critics of the efficiency programme, such as the trade unions,
will seize on these inconsistencies to argue (rightly or wrongly)
that the efficiency measures are actually leading to reductions
in services or outcomes. This debatewhich is a very important
one and should be taken seriouslywill be meaningless and
sterile unless common definitions are consistently applied. Moreover
government itself will not know what is real and what is "smoke
and mirrors" if it doesn't stick to rigorous definitions
(and measurement procedures).
For the purposes of this note the Gershon targets
split by "work streams" (Computer and Auditor General
2006 p 4) are the most useful.
This breakdown is important because the different
work streams have very different dynamics in achieving and measuring
successful efficiency improvements.
A basic issue here is how labour or capital
intensive the areas of work are. As a general rule, it is much
easier to achieve substantial net efficiency and productivity
gains in areas of higher capital intensity than in those of greater
labour intensityalthough of course the initial capital
costs are much higher.
GERSHON EFFICIENCY TARGETS BY WORK STREAM
|Actual as of December 2006
||Percentage of target met
|Policy, funding and regulation||3.66
Thus it can be assumed that those areas of more capital intensive
activityprocurement, corporate services and transactionsare
going to be in principle areas where efficiency gains are easier
to achievewith the right investmentthan in the area
of productive working. This seems to be at least partly born out
by the partial figures we have which suggest that 70% of the procurement
target has been met as against only 49% of the productive time
The productive time efficiency gains are mainly targeted
at very labour intensive public services. Education is expected
to produce £1.3 billion and health £3.25 billionwhich
together comprise 88% of the total productive working target.
These are areas where technical solutions have limited scope
for improving individual productivity. Indeed, the recent emphasis
successful outcomes in education and health (and
some other fields);
on the need for much more "co-production"ie
actively engaging "users" in the production of services
and outcomes (eg in health promotion); and
and addressing so-called "wicked issues"
across organisational boundaries;
can all demand the increased use of labour powerfor example
longer consultations with GPs; more counselling type activities;
more intensive pupil engagement; etc These may all increase VFM
whilst appearing initially to reduce narrow efficiency.
The crucial point here is that a "one size fits all"
efficiency agendaincluding an across the board 3% pa target
across al departments and areas of activityis simply unrealistic.
Some areas can make much greater efficiency gainswith the
right investmentwhilst others will struggle to achieve
anything like a 3% pa annual gain and may even appear to drop
(more on this below).
Although efficiency in the public sector is clearly different
in many respects from productivity growth in the economy as a
whole it is interesting to compare the expected growth in efficiency
with expected productivity growth. Most importantly, the public
sector as a whole is much more labour intensive than the UK economy
as a whole. It would therefore probably unrealistic to expect
similar gains in productivity or efficiency in the twothe
public sector would almost certainly lag the private sector.
According to the PBR 2006 trend growth in productivity in
the UK economy is running at 2.4% pa (in the period 2001Q3-2006Q3,
p 39). Productivity (output per worker) is not the same as efficiency
(input:output ratios), in fact it is a subset of efficiency. But
especially in relation to the productive working targets it is
The Committee may therefore wish to ask HMT to explain
why it is reaslistic to expect a growth rate of 3% pa in public
sector efficiency in the context of growth in national productivity
of 2.4% pa?
The NAO's first report on the efficiency programme identified
major concerns about the measurement of reported efficiency gains.
These are reported in generic terms, but the issues of differentiated
efficiency work programmes raised above also apply to measurement
Put simply, there are some areas where at least some aspects
of measurement are much easier than others. For example, purchasing
areas are likely to have relatively good long-term data about
the costs of various inputs. This is unlikely to be true of the
measurement of working practices, where data is unlikely to be
available from before the various efficiency initiatives started.
However, in all cases the biggest problem of all is measuring
outputs accurately and especially the quality of outputs, an issue
which the Atkinson Review and the ONS have been struggling with
for some time. Although progress has been made, no-one would claim
that this problem has been "solved" and there are still
both technical and political disputes surrounding the measurement
of outputs. Moreover the approaches developed by Atkinson and
the ONS are designed for macro level analysis of outputs in relation
to whole sectors (eg education) and are not fine-grained enough
to address more micro-level issues of efficiency.
Without such agreed metrics measuring any efficiency gains
is going to be at best problematic and probably impossible in
most cases. It is very difficult to see, for example, how the
reported efficiency gains of £2.4 billion from productive
workingwhich must have come mainly from health and educationcan
be squared with existing ONS estimates of changes to productivity
in these sectors which appear to be flat-lined or reducing, depending
on the assumptions used.
This problem is compounded by the weakness of allocation
systemsthat is allocating the cost of inputs against specific
outputs, even where these can be adequately measured. The NAO
has rightly pointed out that the systems needed for this sort
of analysis (activity costing systems) are relatively scarce in
government. Even when they are put in place, back-dating them
to create base-line data for analysing efficiency gains is often
not possible or too expensive.
In the area of productive working all of these problems applyweak
or non-existent and problematic measurement of inputs; serious
allocation issues (which work contributes to which outputs); and
finally problematic measurement of outputs.
It should be noted this only deals with the main difficulties
in measuring narrow efficiency. VFM measurement is even more problematic.
And as noted previously, narrow efficiency gains can have detrimental
effects on VFM. For example, when some NHS hospitals began using
a particular artificial hip joint the initial analysis of narrow
efficiency was positivecheaper inputs for the same quantity
and quality of output. It was only several years later that faults
in these hip joints emerged which led to severe losses in VFM
as the outcomes for the patients deteriorated badly.
Gaming and Unintended Consequences
The issue of "gaming" in relation to all kinds
of performance data have been explored in a number of scrutiny
and research projects. Whilst this is often exaggerated, one thing
we do know is that the more narrow and focussed any measurement
is, the more scope there is for both gaming and unintended consequences.
The Treasury and OGC seem to have now recognised these potential
problems in relation to the efficiency programme and its relative
autonomy from the "normal" business systems. The need
for "mainstreaming" efficiency is currently more clearly
recognised, but it is unclear how far the programme to date has
produced gaming and/or unintended consequences. Not is it clear
that the approaches of HMT, OGC or the NAO will expose such problems.
Realism, Efficiency and Public Value
This note has been a plea for more realism in how much efficiency
can be both achieved and measured in the public services. Unrealistic
promises and claims of success have a high negative impact generating
cynicism amongst staff, managers, users and the public. It does
not suggest that efficiency gains are either impossible to achieve
or even impossible to measure, but the difficulties of both need
to be recognised.
Also, a more nuanced and differentiated approach is neededrecognising
the dynamics and characteristics of different areas of activity.
As I pointed out to the Committee when the Gershon Report was
first published in July 2004, there were in fact very different
levels of relative efficiency savings expected from Whitehall
departments (ranging from 1.2% to 17.4%).
No explanation for these variations has ever been given and
they may indeed relate to the realistic possibilities for efficiency
gains in different areas of work. So despite the apparent "one
size fits all" policy, in fact there has been a great deal
of variation -what is not clear is whether these variations are
due to realistic analysis of efficiency possibilities or some
other reason. Indeed, the fact that there are very big differences
between the two departments where the expected biggest gains from
productive working practices are to be realised6.9% in
health but 12.4% in educationsuggests there are clearly
other unknown factors at work.
The Committee may want to ascertain whether the new 3%
pa target announced in the PBR is an across the board target or
is as variable as the Gershon targets, and if so why?
There is an increasing discussion in the UK of "public
value" which seeks to marry concerns about efficiency and
VFM with issues of trust and legitimacy in the public domain.
Especially in relation to co-production in areas such as education,
health and criminal justice trust and legitimacy are crucial ingredients
to achieving real efficiency and VFM in producing outputs and
outcomes. People will not work with organisations they don't trust.
In terms of increasing the trust and legitimacy of public
services, which is crucial to the value which the public attributes
to public domain activities, the unintended impacts of unrealistic
targets and claims can more than outweigh any genuine and objective
efficiency gains. Paradoxically, rather than increasing public
confidence in public services in the context of the expanded spending
of the past few years, a lack of realism in the claims about efficiency
gains can actually undermine public trustperhaps a more
serious negative outcome than any positive efficiency gains.
Comptroller and Auditor General (2006). Progress in Improving
Government Efficiency (HC802-I. London, National Audit Office.
HM Treasury (2001). Choosing the Right FABRICA Framework
for Performance Information. London, HM Treasury.
The author has made an FOI request to OGC for these reports which
as yet has neither been accepted nor declined. Back
Based on Mr Timms written answer on 7 December 2006, col 435. Back