Smaller Government: Shrinking the Quango State - Public Administration Committee Contents

Written evidence from BDO LLP


    — The challenge of the reform agenda cannot be underestimated, and an informed understanding of the non-departmental public body (NDPB) landscape is needed.

    — NDPB reform has the potential to be an unsupported government agenda, given the lack of expertise within public sector organisations for fundamental organisational review.

    — Departmental sponsoring bodies and NDPBs should consider a strategic review approach to NDPB reform.

    — The strategic review should encompass a fundamental business appraisal, which distinguishes core from non-core functions of the organisation and assess the NDPB and its functions against strategic organisational objectives.

    — Options for organisational reform should be more diverse than an "abolish-keep" spectrum; the public sector could look towards the private sector for models and the expertise to do this.


  1.1  BDO is pleased to have the opportunity to submit written evidence to the Committee's inquiry into Smaller Government: Shrinking the Quango State and welcomes the Committee's examination of this important issue.

  1.2  BDO is the UK's 6th largest accountancy and audit practice and part of the world's fifth largest accountancy network. We employ over 2,600 staff across 14 offices in the UK. We partner with a number of public sector organisations across a number of sectors. These include the National Lottery Commissioner, The Meat and Livestock Commission, Epsom and St Helier University Hospitals NHS Trust; Hartlepool Council, and the London Borough of Hillingdon. We are also an approved supplier to the Audit Commission and a member of Buying Solutions Management Consulting and Accounting Services framework.

  1.3  As a firm working with a number of public sector organisations (including a number of local councils and NHS Trusts), we are alive to the need to drive value for money across government activity. The scale of the challenge of NDPB reform cannot be underestimated. There are 742 "Arms Length Bodies" (defined as organisations that are part of the state but do not operate within traditional departmental structures by the Institute for Government Report "Burn Before Reading"). In total these bodies account for almost 13% of government expenditure receiving £63.5 billion of government funding.

  1.4  Our submission focuses on our experience and understanding of NDPBs and the lessons learnt from both the private and public sector. We would welcome an opportunity to give oral evidence to the Committee and are happy to provide additional information.

2. Question 1:   How should the Government decide which public bodies should be abolished

  2.1  BDO agrees in broad terms with the Government's analysis of the lack of accountability and of strategic purpose of NDPBs. Indeed, we see this as a threefold challenge:

    — Lack of accountability—NDPBs operate (with good reason in many cases) at arm's length from government, which can in many cases be used as an excuse for them to define their own remit and avoid meaningful accountability for their use of public resources;

    — Many NDPBs lack the internal expertise and incentive to exercise best practice cost control; and

    — The remit of NDPBs are often well defined at their creation, but do not evolve through their existence. This means many are left with a lack of clarity of purpose, which can often lead to duplication between bodies in strategic objectives and resources (a notable example of this is the Carbon Trust and Energy Savings Trust). The absence of sunset clauses in framework agreements means there is often no regular opportunity to address these issues.

  2.2  Central government, in our view, faces two fundamental options. First, there could be an immediate cull of a number of bodies, driven almost entirely by a cost cutting imperative. Whilst value for money should underpin the entirety of government activity, this could be a blunt tool in assessing the reform of NDPBs.

  2.3  Research conducted by the National Audit Office (NAO) shows that nearly 80% of NDPB expenditure is located in just 15 NDPBs, with just seven executive agencies employing more than three quarters of all agency staff.

  2.4  It is clear that a more focused and strategic approach is needed to evaluate how and which NDPBs to reform, and a broader assessment than just value for money is required.

  2.5  The second option is to undertake a strategic review of NDPBs to assess the fundamental business operations and identify duplication with other bodies. This could lead to a refocusing of a number of bodies and a streamlining of the NDPB landscape.

  2.6  The future NDPB landscape—democratically accountable to ministers—should satisfy at least one of the three criteria set out by the Prime Minister:

    — Efficient technical operations;

    — Political impartiality; and

    — Transparency in operations and accountability.

The challenge of reform

  2.7  The challenge for government will not only be in assessing which of the NDPBs to reform, abolish or merge, but how.

  2.8  In many respects, this will be an unsupported reform agenda within government. There are limited tools and expertise both within NDPBs and within their sponsoring departments to deliver:

    — the sort of analysis needed for a strategic review of these bodies; and

    — more crucially, the reform of these bodies.

  2.9  In terms of the challenge there are, however, strong parallels to be drawn with strategic reviews in the private sector. Indeed, a range of private sector organisations use the strategic review process to determine business restructuring needs and priorities.

  2.10  However, fundamental differences with the private sector approach must be noted, most obviously the objective and metric of profit and loss does not apply.

  2.11  The purpose and objectives of NDPBs are often complex and can change over time, with multiple outputs and outcomes that are often difficult to measure.

Question 3:   How does the Government decide whether a public body that fails the tests should be merged, abolished or re-absorbed into department?

Strategic Review Process

  3.1  Any process to assess the reform of NDPBs must understand the strategic drivers for change. We see these as the following:

    — Driving value for money and efficiency throughout the organisation to contribute to deficit reduction;

    — Increasing democratic accountability across Whitehall;

    — Increasing the effectiveness of organisations, through decentralisation and leveraging external expertise, including that from the public sector; and

    — Yielding the flexibility for departments and spending teams to respond to budget cuts.

  3.2  A strategic review must take heed of these strategic imperatives and draw in a fundamental business appraisal process to determine an action plan for the organisation. This process is explained further below.

Fundamental Business Appraisal (FBA)

  3.3  The concept of the FBA is simple and based on assessing a public body or service they offer against two key variables:

    — How core it is to delivering departmental objectives; and

    — How effective it is at delivering its objectives.

  3.4  By analysing against these variables on a matrix (such as that illustrated below), decision makers are able to clearly focus on making rational decisions based on which quadrant the organisation or service is determined to fall within.

  3.5  The grid below illustrates the broad course of action highlighted as a result of this analysis. Services that are core and effective should be retained and possibly improved, whereas ineffective non-core services should be stopped. It may be appropriate to transfer non-core but effective functions into new delivery structures that sit outside of the departmental family. This may be in the form of a direct sale, or a new structure that operates on a mutual or not for profit basis. This can create value for the Government with the proceeds of sale or transfer of appropriate debt into the new structure, and for the public through the continued provision of non-core functions.

  3.6  Ansoff's matrix (used to analyse products and markets) and the BCG matrix (used to analyse products according to growth rates and market position) are established analytical tools to aid decision making in private sector organisations. The FBA applies similar principles in the public sector. FBA techniques have been used to great effect in NHS organisations.

  3.7  A strategic approach to organisational review must encompass the following process.

  3.8  There should be objective analysis of what the NDPB actually does—its core and non-core functions. There are important differences in how this methodology is applied in a public sector context, given the lack of a profit rationale for organisational functions.

  3.9  Therefore an analysis of how business functions meet the strategic, and indeed the political, objectives of the organisation must be agreed up front. This will be a challenging undertaking, and must be agreed with the sponsoring department or NDPB in advance. In particular, evaluation criteria for determining core and non-core and effective and ineffective functions will need to be agreed with the department or organisation.

  3.10  In addition to the development of criteria, an objective scoring mechanism should be developed with the NDPB (or the functions within the NDPB) so functions can be scored against the criteria.

  3.11  These functions must also be mapped against the NDPB's delivery objectives. This analysis can then be used to make recommendations on potential options for future arrangements.

  3.12  The FBA is a tool to help segment different functions of a NDPB and thereby facilitate objective thinking about what an organisation actually does compared to what it should do and provide an audit trail of the process. We have found that the act of defining separate functions and allocating them to a quadrant is a useful exercise in itself.

Question 5:   How can the Government ensure that the abolition/merger/re-absorption of public bodies result in long term savings?

What to do next

  4.1  The FBA process will highlight broad options for reform. These are complex and should be more sophisticated than a simple abolish/maintain spectrum. Options for reform range from organisational improvement to organisational wind-down, and encompass a gamut of activities.

  4.2  Organisational improvement or turnaround may require:

    — Establishment of a forward looking business plan with strategic objectives and imperatives agreed between the body and sponsoring department;

    — Systems realignment between organisations or with the department to introduce greater efficiencies into back office functions; and

    — An operational improvement strategy to ensure inefficiencies are identified and driven out and organisational processes are streamlined.

  4.3  Care must be taken when implementing decisions to stop certain activities. Especially where there is value that can be preserved either to the Exchequer through a sale or divestment process, or to the public through the continued provision of a service via a more innovative structure, such as a mutual or collective ownership arrangement.

  4.4  It is at this stage of reform where stronger parallels can be drawn with the private sector. Indeed, ministers and sponsoring departments could draw upon private sector experience with organisational restructuring to ensure any operational wind-down is done efficiently, while maximising value and technical efficiency from organisations which remain in operation.

  4.5  It may be appropriate to merge organisations or functions and/or bring them back into departments to create fewer larger bodies. The FBA approach can be flexed to look at functions across departmental boundaries to identify overlap and duplication.

October 2010

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