National Audit Office says well done, but worries about the next wave of savings

The UK's National Audit Office ( NAO) issued a report on UK central government cost reduction last week.

It was generally positive about what has been achieved, but of course the NAO are philosophically incapable of being too complimentary about anyone! So they pointed out (quite rightly, joking aside) that the challenges are going to get greater for Departments over the next few years. They also highlighted that generally there is no way of measuring whether cost reduction to date has impacted services:

Some departments and arm’s-length bodies have systems that relate costs to activity levels and outcomes, but there is no consistent way of identifying whether specific savings measures have improved efficiency or affected services.

Matters get a little scary however when we look into the future. The “real-terms fall in spending within departments’ control from 2009-10 to 2010-11” was 2.3%.

Then, excluding the ring fenced departments, a 19% fall in spending is required between now and 2014-15. NAO have some concerns about that happening.

Departments need to make more fundamental changes to achieve sustainable reductions of the scale demanded by the Spending Review. Short‑term measures, though successful to date, will not be sufficient. Departments will need to have a clear vision of how they and their delivery partners will operate with a permanently lower cost base. They need a clear map of the changes needed to move to this model, and rigorous processes for realising the resulting savings.

The NAO suggest there is little sign of clear strategic plans for the future in some departments – you get the sense that cost reduction to date has been largely based on top-slicing and demand management rather than a fundamental review of goals, objectives and activities. Departments are simply doing  less, and not spending on consultants, IT or advertising and so on. And the NAO wonders about the sustainability of the major reduction in capital spending we’ve seen. So arguably, much of the effort has been focused on tactical cost-cutting and expenditure delay, not re-engineering or transformation.

From our reviews to date, departments have not yet developed new lower-cost operating models. Departments cannot achieve long-term value for money until they identify and implement new ways of securing their objectives with a permanently lower cost base.

Now given the urgency to make savings, that is probably an understandable approach to the first year of savings delivery. But to make the further savings that are required, departments should be taking a more thoughtful approach. I have my doubts about the capability of some of them to do that, but we’ll see.

I’m also surprised and a little disappointed that NAO has not commented on the Cabinet Office’s savings methodology as far as I can see, particularly as that is a favourite topic of mine. But their analysis of the £3.75 billion savings claimed by CO gets to a figure of over £3.5 billion, so it largely vindicates the CO’s measurement approach – well done Carl Meevezen!

It would also have been interesting to see NAO get into the £800 million Francis Maude has claimed from the negotiations with top suppliers, but NAO don’t do any real analysis of this either. Although they verify that departments have spent less, it is not tracked back to individual suppliers or those cost-reduction negotiations. We’ll have to wait until another day for that!

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