In 2007, the BBC Trust set the BBC the target of delivering efficiency savings of 3% a year for the five years up to, and including, 2012-13. This level of saving was necessary to live within the licence fee set by the Department for Culture, Media and Sport for the period. To achieve its target, the BBC needs to be delivering annual savings of £487 million by the end of 2012-13.
The BBC has managed the efficiency programme well and is forecasting that it will deliver £560 million of annual savings by the end of 2012-13, comfortably exceeding its target. It took the pressure of the licence fee settlement, however, to force the BBC into finding these efficiency savings.
When negotiating the licence fee, the BBC had claimed that it would be at the "efficiency frontier" by 2008 - in other words, that it would not be able to deliver any efficiency savings after that without the development of new technologies. Yet the BBC found almost half the required savings in the first year of its programme, showing that its earlier pronouncements about the limited scope for savings had been very wide of the mark. By underestimating the scope for efficiency improvements, the BBC risks undermining public trust in its financial management and openness, and failing to deliver value for money. It also leaves itself in a weak position to argue that future cuts to its budget could damage services to the licence fee payer.
When identifying savings under its efficiency programme, the BBC did not prepare a detailed analysis of the costs of its services and the value they bring to licence fee payers. Such an analysis is vital in deciding where future cuts should fall and should be based on a rounded assessment of feedback from licence fee payers about the value they place on services. Although the BBC has delivered its efficiency savings whilst maintaining overall levels of performance it does not fully understand the impact individual savings have on the quality of its services. This is particularly important when considering cuts to local radio, which provides a different type of service from commercial alternatives - and we welcome the BBC Trust's report, published after our hearing, recognising the importance of the BBC's local radio services.
In the future the BBC will be making cuts as well as delivering efficiency savings and understanding the relationship between cost and performance will be increasingly important. The BBC exists to serve licence fee payers and cuts to services should have the least possible impact on the audience.
As a result of the 2010 licence fee negotiations, the BBC now needs to find a further £700 million annual savings by the end of 2016-17. In October 2011 the BBC published Delivering Quality First, which set out its proposals for meeting this challenge. The BBC plans to deliver savings of £400 million through further efficiencies and £205 million by cutting services, but its plans include a contribution of only £40 million from increasing commercial income.
On the basis of a Report by the Comptroller and Auditor General, we took evidence from the BBC and the BBC Trust about the implementation of the efficiency programme and plans to make future savings. We were pleased to hear the BBC acknowledging that scrutiny from this Committee and the National Audit Office has driven it to be more outward-looking in challenging what its services should cost.