Tough times demand tough choices

Simon Tennant and Karen Cherrett

PA Consulting Group

Public Sector Executive
1 February 2009

In these tough economic times, the public sector cannot continue to be seen playing at the fringes of cost reduction – it must rise to the challenge of cost saving potential.

Successive rounds of public spending reviews have significantly reduced available budgets and further reductions are expected in forthcoming public spending reviews to ensure the public sector borrowing requirement is brought back to acceptable levels of well under £50billion.

Realistically, there are only two possible options - continue to make ‘cuts across the board’ (and risk impacting front line service delivery) or reduce ‘cost through collaboration’ – which has to be the more palatable option.

The reported success against the Gershon efficiency targets indicates that most organisations have comfortably been able to meet their targeted savings. However, of the £23billion reported efficiencies, only £1billion is related to corporate services, leading the National Audit Office to suggest that “there is substantial untapped potential for securing savings through shared services and other means.”1 The Treasury agrees, demanding 5% annual real reductions in administration budgets through the CSR07 value for money programme.

Those brave enough to take a long term view of cost-sharing are already making substantial inroads, the Anglia Revenues & Benefits Partnership, the BBC, Transport for London, the British Council and the Prison Service to name but a few are all known to have made successful progress with sharing services and related costs.

In a depressed economy, do the challenges seem insurmountable?
Why is it that a majority of public organisations remain fixated on the difficulty of the issues rather than rise to the scale of the challenge?

Empirically, we know that a typical payback for shared services implementation averages four years whilst a PSR period is only three years.

We also know from working with both public and private sector clients that cost sharing is not easy but worth it in the end. Is this discouraging public sector organisations from taking the plunge?

Other industries such as financial services and airlines have been collaborating for years to share facilities such as mortgage processing and ticket reservation.

Private sector companies have proactively sought opportunities to collaborate, turning a borderline or negative business case for a single company shared service into a positive reason for sharing costs.

Rather than viewing them as insurmountable, let’s address in bite sized portions the four typical barriers to establishing cost-sharing: performance management, regulatory issues, structures for decision making, capacity and style of leadership.

Performance management

Most public sector organisations work to singular objectives which implicitly underpins the delivery of collective   outcomes ie. public bodies delivering better services to a geographic catchment area. However, sharing delivery resource sexplicitly requires a degree of maturity and transparency to navigate previously uncharted resource planning and connectivity between organisations.

The sharing of the resulting benefits can also be an obstacle in itself. If two organisations - one highly efficient and the other inefficient - agree to collaborate in the provision of back office payments who gets what share of the benefits?  The inefficient one (which is able to gain larger savings) or the efficient one (which provided the proficiency platform)? It is a tricky conundrum. In times of plenty, it is easy to be generous with resources and support poorer partners.

In tougher times, public sector organisations have demonstrated that they are better at shifting responsibilities through internal charging or devolving powers to other agencies rather than sharing costs at the source. In times as uncertain as those we are experiencing, there is no room for such a sleight of hand.

The issue is about protecting the very nature of public service - more than protecting any single organisation - and this requires evolution.  Wasteful duplication within and between public sector bodies needs to be eradicated. Each organisation has to have the surety in its spend, if it is to have the confidence to act flexibly and shift expenditure successfully between agencies and budgets. Central government needs to facilitate this process and provide a framework of flexibility such that managers of different agencies can focus on collective delivery rather than individual responsibility.

The NHS and Xansa (now Steria) joint venture is now supporting the back office operations of over 100 NHS organisations of all types, allowing a greater focus on front line operations. This provides a strong example of what works well and should be applied throughout the public sector - from education through to diplomatic and security services.
 
Regulatory issues

Historically, when and where organisations have demonstrated a will to share, regulations have not always supported their cause.

Under EU VAT rules, buying services rather than providing them in-house can incur a VAT charge that seriously reduces the attractiveness of shared services. While this is not an issue for government departments and local authorities, it has a major impact on non-departmental public bodies and the education sector who would incur VAT as an irrecoverable cost of buying in shared services from a sister organisation.

We accept Rob Hann’s recent comments and conclude that the practical and regulatory impediments of sharing seem enormous. 

Navigating the choppy waters of EU rules and avoiding the risk of challenge are cited as reasons to stop sharing before it has started.

However, we question whether this is more founded on the risk averse nature of many public sector organisations and is in fact masking their true willingness to explore sharing. Organisations such as Cambridgeshire and Northamptonshire County Councils which are committed to sharing have heard the same regulatory precautions but nonetheless have taken a riskmanaged approach, deciding instead to get on with harnessing the benefits.

It is true that clarity and consistency of advice and greater access to support for smaller agencies would be beneficial but the fact is that a true willingness and commitment to share can overcome the seemingly insurmountable.

Structures for decision-making
Sharing has the potential to force a marriage of organisations which otherwise would have little or no allegiance.

Successful sharing relies on a mutual interest between the collaborating organisations. The focus should therefore be on developing a business case in support of that common interest, exploring both lateral and/or vertical sharing.

For example, across local government good progress has been made in Surrey, Glasgow and elsewhere despite issues around political alignment, historical and demographic divergence. It remains to be seen if the next evolution of LAA and CAA will be to remove the hierarchical link between accountability and responsibility and instead see more opportunities to share.

In sharing, the right framework of governance and decision-making needs to be considered. It can be said that the development of governance models for shared delivery is an area where there has been too much help and support.
The plethora of information available has become a feeding ground for advisors rather than a self-selection process.

The complexity of balancing sharing with regulatory compliance is distracting attention from the grander prize of cost sharing by imposing prohibitive start-up costs.  Far be it from us to suggest advisors don’t earn their money but a simpler governance framework could make that money more productive.

Capacity and style of leadership

A number of local authorities are sharing key personnel, executive professionals and chief executive officers in the belief that they can hire more experienced talent by pooling salary costs. The public sector – and commercial sector – has traditionally operated a framework where, through promotion and time-serving, leadership success is based on expanding control remits and scale of organisation.

Yet, effective collaboration requires a style of leadership based on the confidence in delivery by others - in other words, facilitating the right decisions by the right people to deliver the right solutions, rather than exercising control in making decisions. While executive sharing in local government is becoming a reality, it must be asked if this is just a convenient use of spend or a real step in looking across two organisations and seeing how they can align themselves to protect against a future forced marriage. The answer will be down to those at the helm.

So what is the answer?

It is clear that doing nothing is not an option – without costsharing the future of public service delivery is uncertain.  A choice of cut over collaborate may have been an option in the past but it is not a sustainable one. Public services have to look beyond the need for efficiency towards a broader future of collaborative delivery. Experience across public and private sectors has shown, time and again, that sharing costs is one of the most effective routes to achieving this goal.

By consolidating support activities whether in-house or outsourced, onshore or offshore an organisation can simultaneously achieve a permanent reduction in its cost base, greater standardisation, higher quality and improved accessibility of services and enhanced compliance with policies and regulations.

The sharing agenda may be less easy to achieve in the short term but PA Consulting Group views the long term gains as a common sense solution – and the more sustainable response. 

References
1. Value For Money in public sector  corporate services, National Audit Office 2007
2. Shared service centres: delivering the promise – pan European research into HR and finance shared services. 2007 PA Consulting Group publication.

SImon Tennant is a member of PA's management group and Karen Cherrett is a managing consultant at PA.