Administration and effectiveness of HM Revenue and Customs - Treasury Contents

Written evidence submitted by Professor John Seddon


HMRC's failure should be a lesson in how not to conduct public-service reform.

HMRC is the flagship of UK public-sector reform. Its astonishingly bad results should be read as urgent warning signals—which unfortunately they are not, since to do so would be to fatally undermine the current narrative or set of beliefs/ideologies of the "reformers". The shortcomings are the consequence of poor organisation design, which, in turn, is based on flawed but conventional thinking. HMRC should give pause to all who believe in industrialising the public sector; it is a profound source of knowledge about what not to do.


1.1  I, John Seddon, am managing director of Vanguard Consulting. Vanguard's purpose is to help service organisations change from a conventional "command-and-control" design to a systems design. I have received academic awards for original work on the design and management of service organisations.

1.2  This evidence is provided at the request of the Committee, as I have "written about failure demand in the context of HMRC" (from your invitation to submit evidence).

1.3  I have had no opportunity to study HMRC on the inside; my evidence is based on what I have learned from public—academic research, newspapers, presentations by HMRC staff, announcements and articles by HMRC leaders—and private sources, essentially moles. The evidence also draws on my knowledge of service organisations.

1.4  I regard HMRC as an indictment of current approaches to public-sector service reform.


2.1  It has emerged that 1.4 million people have unwittingly paid too little tax through the PAYE system, while 4.5 million have paid too much; another 17.9 million might have paid the wrong amount, but HMRC is not sure. This amounts to 23.8 million people whose tax affairs are uncertain, a sizeable proportion if not the majority of people who pay tax via PAYE. Apparently people on PAYE nowadays move jobs more often, and many more people have more than one job. The problem has occurred over the last two years. It is a signal that HMRC's "reformed" service is failing to absorb the variety of "customer" (taxpayers and their agents) demands.

2.2  More broadly, the Committee has reported that HMRC is failing to collect £28 billion in owed taxes. Of relevance here is that this failure has become worse, twice as bad, over the last three years, ie in a period when performance might have been expected to be on an improvement track.

2.3  Failure demand

2.3.1  I define "failure demand" as "demand caused by a failure to do something or do something right for the customer" (Seddon 2003). It is a phenomenon I first observed in the mid-1980s and is critical to understanding and improving service organisations. All my sources indicate that HMRC does not study demand—a cardinal omission.

2.3.2  Accountants have established web sites to complain about the increasing number of transactions it is taking to resolve clients' tax affairs, imposing extra costs which they believe should be met by HMRC. Customer blogs and HMRC's failure to pick up high volumes of calls to call centres are likewise indicative of high levels of failure demand, which will cause increasing costs and reflect poor-quality services for users.

2.3.3  The only study of failure demand attributable, in part, to HMRC has been published by Advice UK ("It's the System, Stupid"). Its report showed that as much as 40% of demand into advice centres is caused by the failure of HMRC and DWP to provide the primary service to citizens. The knowable cost is estimated at £500 million per annum; the unknowable indirect and knock-on costs will be considerably higher.

2.3.4  One example of these knock-on effects: A charity provides volunteers to resolve problems arising from the increasing difficulty getting adequate service from HMRC. The charity helps about 20,000 people a year. It estimates that 95% of this work would not occur if HMRC provided a service that worked.

2.3.5  Although all of the above illustrate palpable failure demand, HMRC management appears to have no knowledge of the phenomenon and its extent and causes. (It should not be assumed that reference to "avoidable contact" is the same as understanding and removing failure demand.)

2.4  Morale

2.4.1  Finally, morale among HMRC personnel is reported to be shockingly bad, along with sickness and absence. Instead of understanding that these are symptoms, HMRC management commissioned something called a "cultural inventory"—a waste of time and money—the results of which pointed to middle management as the problem. Any action among management will be counterproductive. Low morale is always a signal of poor job design and a malfunctioning system.


3.1  HMRC's failures are systemic. That term is often used to infer that no one is to blame, but not here. The blame lies squarely with management as custodians of the system. It may be argued that final responsibility lies in the Treasury, as HMRC managers do the Treasury's bidding.

3.2  HMRC has, over the last few years, been an experiment in service industrialisation. Industrialisation is believed to generate economies of scale. In fact the reverse is the case. Industrialisation increases costs. For a more complete argument see: "Why do we believe in economies of scale?" This can be downloaded from:

3.3  Two of the features in HMRC:

—  3.3.1  Activity (the calls workers take and the folders they work on) is assumed to equate to cost, so all workers' activity is monitored and managed. Close monitoring and lack of autonomy are the primary cause of low morale. It is simple to establish the counterintuitive truth that 95% of the variation in workers' performance is due to the system—the way work is designed and managed. Working on the "5%", the people, is not only a cause of demoralisation, it is to ignore the enormous potential for improvement in attending to the system.

—  3.3.2  The assumption behind standardisation is that it will reduce costs. This is false. Management is concerned with reducing transaction costs—the cost of a telephone call or other discrete process—but the true costs of service are end-to-end from the taxpayer's or agent's point of view. Standardising work simply prevents the system from absorbing variety. It increases the volume of transactions (causes failure demand) and thus drives overall costs up.

3.4  The ideas of work standardisation and activity management have been reinforced through HMRC's so-called "lean" PaceSetter programme. This travesty of "lean" has made the mistake of treating both organisational problems and the tools developed in the Toyota System as universal, thus ensuring that the real lessons are lost in translation. Rather than become an economic exemplar (as Toyota did), HMRC performance has worsened. For the full argument about the folly of "lean" see "Re-thinking lean service". It can be downloaded from:

3.5  It is a travesty, for example, that under the guise of lean, HMRC employees are encouraged to problem-solve management's wrong problems; why they haven't met today's targets. Employee initiative is directed away from where it could be of enormous benefit.

3.6  HMRC's enormous investment in IT systems will only exacerbate the situation. IT is notoriously bad at absorbing variety. The costs of the new IT will continue to rise as more effort is poured into attempts to solve the wrong problems.


4.1  HMRC is an important lesson in the failures of service industrialisation. Unfortunately, just as HMRC managers ignore the signals, successive ministers and HMRC leaders have done the same. The reason is identical: the signals don't fit the narrative. The narrative of reform that ministers adhere to is economies of scale. But economy of scale is a simplistic and dangerous myth. Economy comes from flow—minimising end-to-end time and effort—not scale, as was originally demonstrated by Toyota and is now being confirmed in a number of forward-looking public- and private-sector organisations throughout the country. See for example: "Managing for the Better" a review of a The Vanguard "Leaders Summit" by Simon Caulkin. Download from .

4.2  Call centres, back offices, shared services, standardisation, specialisation, transaction-cost management, people management, IT-dominated processes—all these features of today's scale approach to service reform can be shown to drive overall costs up. Evidence to support that claim does not need to be disputed, however: it is simply excluded from the narrative.


5.1  A thorough understanding of "customer" demand would enable HMRC managers to design a service that would reliably and economically absorb the variety of ("value") demand. This in turn would remove most or all the failure demand, with consequent dramatic impact on effective capacity. Advice UK, already mentioned, is an encouraging example of the principles at work in this sector (there are many examples in other sectors, including the private). It should be noted that Advice UK's results have been achieved despite the lack of cooperation from government agencies—with positive engagement they would be even better. These designs increase the amount of expertise provided at the point of transaction (while reducing costs), which in turn means better service and happier workers.

5.2  Examples from housing benefits services show how service can be improved as costs fall. As well as delivering all benefits in a matter of days, local authority exemplars provide a "complete" service to their clients, attending to their broader individual needs. The implications of such examples are profound. They demonstrate, as just one instance, how using these proven principles a single universal credit could be delivered locally, at much lower costs, today. But the exclusive belief in scale means we will wait for an industrialised design (one UK call centre and web-based service) that is to be delivered in seven years and is doomed to fail.


6.1  The Committee should:

—  6.1.1  Forcefully encourage HMRC senior managers to study the extent of and causes of failure demand. It is a vital re-educational step.

—  6.1.2  Demand evidence from those in the Treasury and elsewhere who promote the unquestioned belief in economies of scale (when Geoff Mulgan worked at Number 10 he commissioned such a study, unpublished, which failed to find the anticipated benefits).

—  6.1.3  Conduct a complete review of the true costs of service provision by HMRC as a lesson to others.

—  6.1.4  Call for a halt to further scale initiatives pending rigorous examination of the alternatives.

January 2011

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Prepared 30 July 2011