3 Lessons for cost reduction |
12. The next spending period will involve substantial
cash reductions over the next four years in most departments.
Previously most departments could redeploy efficiency savings
to spend on services, but the need to cut total cash costs in
future increases the urgency of making improvements in efficiency.
With expenditure on most programmes falling, it will become more
obvious whether departments have kept within spending targets,
and there will be less need for a separate savings target. The
key test of value for money will be whether departments are able
to maintain services.
13. Instead of headline targets, there is likely
to be a greater emphasis on transparency with more information
published to quantify inputs and outputs, which in turn is intended
to lead to stronger public accountability and better decision-making.
The Treasury aims to develop a structure that creates an incentive
to free up resources for departmental priorities, but acknowledges
that ways other than pay incentives will have to be found given
likely pay constraints.
The Treasury argued that, while the measurement of efficiency
was complex when budgets were increasing overall, clear spending
allocations and falling baselines would simplify this task: it
would be clear that costs had been cut, and it was a matter of
testing whether service provision was maintained. However, there
is clear evidence, for instance from police forces, that spending
does not have to fall for efficiency to improve.
14. The Treasury also expects improvements in
value for money to come from the spending review, when the programmes
with the lowest rates of return are cut. This may work for capital
projects with a monetary rate of return, but requires metrics
such as unit costs to measure the relative efficiency of services.
While this can be done in areas such as tax collection, the multiplicity
of objectives in some departments makes it very challenging to
develop appropriate metrics.
15. The experience of the current Programme shows
that there are a number of challenges for departments in implementing
cost reduction. The Programme focused departments on meeting their
target at the expense of thinking more widely about how to improve
value for money. The Programme has not resulted in departments
working together effectively, with little evidence of collaboration.
Departments will be more successful at making savings if they
take value for money seriously at the highest level, and instil
a culture of efficiency where people throughout the organisation
are engaged in seeking improvements.
16. Most departments did not plan changes which
would take longer than three years to deliver. Having a long-term
framework helps create an environment where real structural changes
can be made with a longer-term pay-off and there is more opportunity
to embed changes. International examples of savings programmes
had longer-term plans even where lower savings were targeted.
There is a risk that a long-term target means action will be deferred,
but it is clear that the current programme has not created incentives
for major change in most areas. Few, if any departments have made
much progress in redesigning services despite being aware that
cost reductions would be needed in the future.
17. Departments also struggled to provide evidence
of real savings where they were being delivered by the bodies
they funded. The Treasury assumes there is capacity to drive up
efficiency in front line services, but does not think central
government should seek to influence how, for example, schools
spend their money. Instead, the centre needs to design a system
which creates incentives for improvements to be made locally.
Even if such incentives are in place, performance data will also
be needed to assess the impact of cuts to the cost of services.
18. Where savings were made by departments themselves,
information systems were not always adequate to support them.
Better monitoring of efficiency will depend on improvements in
financial management in future years. The quality of leadership
and decision-making in departments, and the management of disciplines
such as procurement, will continue to be essential to achieving
value for money.
23 Qq 1, 24, 43, 46; C&AG's Report, para 4.1 Back
Qq 18, 34-35 Back
Qq 3, 18, 21, 40 Back
Qq 24, 43-45 Back
Qq 17, 19; C&AG's Report, paras 3.11, 4.2 Back
Qq 41-42; C&AG's Report, paras 3.11, 4.3 Back
Qq 20-21, 25, 35; C&AG's Report para 4.2 Back
Qq 37, 45; C&AG's Report para 4.2 Back