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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 520-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE Treasury Committee
EVALUATING THE EFFICIENCY PROGRAMME
Wednesday 13 May 2009 DR MARTIN READ, MR JOHN HAWKSWORTH, MR JON SIBSON, DR JENNIFER LAW and MR PETER LOCKHART Evidence heard in Public Questions 1 - 75
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Treasury Committee (Treasury Sub-Committee) on Wednesday 13 May 2009 Members present Mr Michael Fallon, in the Chair Nick Ainger Mr Graham Brady Ms Sally Keeble Mr Andrew Love Mr George Mudie John Thurso Mr Mark Todd Sir Peter Viggers ________________ Memorandum submitted by PCS Examination of Witnesses Witnesses: Dr Martin Read, former Chief Executive of Logica and co-author of the Operational Efficiency Programme final report, Mr John Hawksworth, Head of Macroeconomics, and Mr Jon Sibson, Government and Public Sector leader, PricewaterhouseCoopers, Dr Jennifer Law, Principal Lecturer, Faculty of Humanities and Social Sciences, University of Glamorgan, and Mr Peter Lockhart, Senior National Officer, PCS Union, gave evidence. Q1 Chairman: Can I welcome you all to this first session of our inquiry into evaluating the Efficiency Programme. Could I ask you formally to identify yourselves for the shorthand writer, please, perhaps beginning with Mr Lockhart? Mr Lockhart: My name is Peter Lockhart. I am from the PCS (Public and Commercial Services) Union. I am one of their Senior National Officers. Dr Read: I am Martin Read. I led one of the work strands on the Operational Efficiency Programme and my background is in business. Mr Hawksworth: I am John Hawksworth. I am Head of Macroeconomics at PricewaterhouseCoopers and I write regular reports on the public finances. Mr Sibson: My name is Jon Sibson; I am a partner of PricewaterhouseCoopers and I am the Government and Public Sector leader for the practice. Dr Law: My name is Dr Jennifer Law. I lecture in public services at the University of Glamorgan and my area of expertise is performance management and accountability. Q2 Chairman: Thank you, and thank you for sending the evidence you have sent it, which is extremely useful to us in this short inquiry. Two procedural points. We are expecting divisions in the House very shortly and throughout the afternoon. If that happens, we will simply adjourn for ten minutes - it is not a reflection on the quality of your answers - and we will resume as quickly as we can. Secondly, please do not feel that all five of you have to answer each question. We have got quite a bit to get through, so if you can rotate the answers it would be appreciated. Perhaps I could begin with a general point. Is the announcement in the Budget that there could be another nine billion pounds of additional savings on top of the original target really realistic? Dr Read: I led one of the strands, and there were several, but certainly in the back office and IT I believe there is significant scope for savings over a period of time. The amounts that we quoted for back office and IT I am pretty confident are in the right ball park. Q3 Chairman: It does beg the question of what the Gershon exercise over all these years has been doing if suddenly the Government can turn round and say there is another nine billion out there to be saved. What had been going on before? Dr Read: I think there is a really important point here which it is important to note. All my experience of business has been about operational efficiencies. It is not something you do once, it actually is part of the DNA of the system and the constant striving to do better. You never reach the promised land, all you do is reach the next stage and you look again and you see what else can be done. I am not an expert on Gershon, but I would stress the point that this is actually a journey, a process, something that needs to be gone into. The culture of running organisations is not something you do and maybe you did right, maybe you did wrong: you learn from what you did and you move on. Mr Sibson: PricewaterhouseCoopers had our own independent go at the same agenda that was set to Martin Read and his colleagues and the Operational Efficiency Programme, and we came up, certainly in the area of back office and IT and property, with very similar savings projections that the OEP team did. We think that further efficiency savings are achievable but they require a different approach than in the past. I do not think they will be achievable by a series of tactical efficiency savings organisation by organisation; I think they will require some simplification and standardisation of processes and also co-operation between organisations within government as well as efficiency savings within each organisation. Q4 Chairman: Dr Law, perhaps I could ask you: what is the difference between an efficiency saving and a value for money target? Dr Law: Efficiency is commonly defined as the ratio of inputs to outputs, and one of the things that was really important that the National Audit Office outlined in their 2007 Progress Report was that lots of departments were making savings, and so on, but what they needed to do was to make sure that they were still continuing to provide the same quality of output. Unless they could demonstrate that, then they simply could not demonstrate efficiency. I get a quite strong sense that departments make quite significant moves towards ensuring that that measure is there and that they are more accurately reporting the quality. Chairman: We will adjourn for exactly ten minutes until 2.42. Thank you. The Committee suspended from 2.32 p.m. to 2.42 p.m. for a division in the House Q5 Chairman: Let us resume. We may have another division, but we will try to make a bit more progress. Who has not had a turn? Mr Hawksworth and Mr Lockhart, you may be able to wrap the answers to previous questions into this one. Looking at the Chancellor's Department, Revenue and Customs and the other departments of the Treasury, how do they compare generally across the public sector with other bits of Whitehall? Mr Lockhart: I can only speak with a degree of assurance on HMRC and the members I represent, the 80,000 members in HMRC. At the risk of not answering the question you have asked me, I did want to say, you asked a lead question about the realism of the nine billion pounds. I do feel quite strongly that we need to point out that the billions that have so far been brought out in inefficiencies have resulted immediately in job cuts from members. We are reminded by Gershon's initial report when he said that if you go beyond the recommendations, as he mooted, it would cut the Civil Service to its core, the very fabric of the Civil Service. When we see in HMRC that 18,000 jobs have so far been cut in the period since 2004, we cannot say with any assurance that further cuts, as they equate to job cuts, will be of benefit to the public service sector whilst they are delivering. In that respect HMRC are no different proportionally, in relation to your question, to other areas of Whitehall. Each department has taken a hit, but we would argue there is a degree of arbitrariness about the way that those efficiencies impact on departments and the way that they take their cut of that particular slice of the pain, as it were. Q6 Chairman: Mr Hawksworth, is there any sense that the Treasury have perhaps been harder on its own departments than elsewhere in Whitehall or, indeed, have been softer on them? Mr Hawksworth: I think they have set reasonably tough targets for themselves proportionately, but, obviously, they are a small part of overall government in terms of spending. I think, for example, of the 35 billion in the current spending review that we are talking about, less than 800 million is coming from the Chancellor's departments. That is just a reflection of their relative size, it is not a reflection of the fact that the targets are not tough, but, ultimately, it is the big areas. I am a banker/economist, so when you are trying to close fiscal gaps of the order of 3% of GDP, as we have argued, and that is 43 billion, you are going to look to the bigger departments as being the key ones doing that: so you are talking about Health, you are talking about DCSF, you are talking about the Ministry of Defence and areas like that ultimately. HMRC and its key role in closing the fiscal gap is more on the tax side than anything on the spending side, and obviously the Treasury's key role was in trying to take a plan, which I think is realistic and achievable, to achieve at least nine billion but actually to make sure it is delivered. That is its key role rather than, if you like, anything it will do. That is my perspective as a macroeconomist anyway. Q7 Ms Keeble: I wanted to ask a bit more about the report dealing with DECC which PwC produced. You spelt out two particular options: one is a real-term reduction of public spending of 1.4% a year that is unprecedented in its consequences, and the other is a freeze in public spending and tax increases. Which of those two would you recommend to government? What would the results look like in terms of the public: loss of hospitals, cuts in public spending? Mr Hawksworth: I think, ultimately, as we say in the report, that is a political decision more than an economic decision. Q8 Ms Keeble: Yes, but what would you advise? What does it look like? Mr Hawksworth: Certainly, if you look at the option where you try to do everything on the spending side and, as you say, a reduction of 1.4% per annum in real terms, that is unprecedented going back to the period when data exists in a comparable form. Q9 Ms Keeble: What does it look like? One point four per cent does not sound like a lot, but what does it actually look like in terms of loss of hospitals, and so on? Mr Hawksworth: I think, in relation to the report, you can illustrate what that would actually require. It might require, firstly, health and education budgets to be frozen in real terms, whereas they have been going up very significantly. It might require all other departments to be cut by more than 6% a year. The reason for that is that, obviously, debt interest is going to be going up very sharply, so within that minus 1.4% a large chunk of spending is going to be going up quite sharply and, obviously, a lot of social security benefits are either things which are effectively fixed, like pensions benefits - the companies that we chose that you would not want to have chosen in the short-term - or live in a sensitive economic cycle. Q10 Ms Keeble: So the real-term cut in services might look at something like 5% then, if you take into account increased interest charges, debt and increasing social security. Mr Hawksworth: I think the total departmental expenditure limit in that scenario might decline by more than 3% a year in real terms. So over three years you are talking about a 10% cut in all types of spending. In practice that would amount to, I think, an unprecedented squeeze on the public sector. That option was put for illustration. I think, realistically, you cannot do it all on the spending side, it has to be a combination of tax and spending, but the precise combination is, obviously, a political decision. Q11 Ms Keeble: You also mention efficiency savings, which you identify, of £37 billion. How robust are those figures? The eight billion I think we have dealt with on IT, but where did the other figures come from? How robust are they? Mr Sibson: I think the first thing to say (and I guess that the OEP team from the Treasury would say the same) is that they are indicative because a lot of the baseline data is hard to get hold of. On the back office and IT costs, which, as you pointed out, we were pretty similar to the OEP team's projection on, actually we supplemented the evidence used by the Treasury by our own benchmarking processes. For the savings on the operation of property, that was pretty judgmental, but again, I see, interestingly we have come up with precisely the same number as the OEP team. The area where we have come up with a different number from the OEP team is on procurement, because we are measuring a slightly different thing. They came up with, from memory, projected savings of about six billion pounds. We came up with a range of between nine and 23 billion, and the top end of that range, of course, is a far larger number than the OEP. The thing is, we were looking at a slightly different thing. They were looking specifically at savings from collaboration of procurement practices between different public buyers: we were also taking account of the management of demand within individual buying organisations. Q12 Ms Keeble: Thinking about how that might look to the public, in my own area we have got a county council on one side of the road, a borough council on the other, both with head offices, both with personnel functions, both with IT functions. Combining those, although it might look very logical, has so far defied anyone to be able to achieve. If we want to achieve these kinds of savings instead of the ones that John Hawksworth was talking about, how far do politicians have to take some fairly tough decisions and phase down what has so far been insuperable political flack? Mr Sibson: I think you make a very fair point. I think to achieve the kind of radical savings that are talked about in the OEP, you need to simplify and to standardise processes, and certainly in locally delivered services you will need collaboration between different organisations within a particular area across organisational boundaries, and that, I think, requires huge political will. If I may say so, although big savings have been made as a result of the Gershon process, I am not really sure that this has ever been a matter of very evident collective ministerial will right at the top of the agenda and, I think, for the next tranche of savings to come out of the OEP process, one of the preconditions for that will be sustained very visible ministerial political commitment. Q13 Ms Keeble: One of the other issues is that public services have, in particular, to look at the needs of the most disadvantaged. Mr Sibson: Sure. Q14 Ms Keeble: If you make these kinds of cuts, savings, whatever you want to call them, you have to check what the impacts are. Mr Sibson: Yes. Q15 Ms Keeble: Would these cuts be regressive or would it be possible to find ways to mitigate the impact on the poorest and most hard to reach? Mr Sibson: Stepping back a bit, I think if you look at the fiscal pressures which will be coming our collective way as a result of the kind of analysis that my colleague John Hawksworth and others have done, there will be pressure on public spending and, if that pressure is to be deflected from the front line, which will be your very legitimate concern about your constituents, then that pressure needs to be absorbed in the back office. So I think the way out of mitigating the impact on the disadvantaged is precisely to get very tough and very determined about the efficiency agenda. Q16 Ms Keeble: But you would have to build those requirements into the new service design to make sure that you maintained services for the most hard to reach? Mr Sibson: And certainly you can organise your shared back office in such a way that you do not harm employment in areas of otherwise high unemployment. All those things can be done. Dr Law: I was just thinking, the issue here is not just what the targets are but the delivery of those and that those require cultural change. People were talking about the idea of efficiency reviews driving cultural change and the continual search for efficiency. I think there is a question around the implementation of all of this. One of the strategies for obtaining efficiencies has been procurement, and certainly the OEP team were looking at collaborative procurement, but if you look at some of these broader ideas about procurement that the Office of Government Commerce identify, it was quite interesting that they did a procurement capability review of the Treasury and, indeed, found the Treasury's own procurement function to be less than ideal - not that it did not have some good elements to it, but that it was less than ideal - that there was not someone senior enough in relation to procurement, that there were not strong enough approaches to managing suppliers. The supply relationship/management was an area where there were causes for concern. It is interesting to see that procurement is identified as a strategy to enhance efficiency, yet there are also questions about savings identified in the procurement plan and it was not actually identified clearly what those savings would be. Dr Read: Can I make one point on the ground that you have covered? I think it is important to make the point that spending less does not necessarily mean that you do not do things as well. In fact, it can be quite the contrary. One of the things we looked at was a number of issues where public sector organisations had got best-in-practice examples of doing things well. They not only saved money but, because they standardised and simplified, they had actually been able to produce better results in terms of outputs than they had before. Q17 Ms Keeble: Can you give an example? Dr Read: I will give you three examples: the Prison Service. Not very long ago each Prison Service, effectively had its own HR system and payroll system; it had its own accounting system. They have now put in a back office system which deals with 128 prisons. Unsurprisingly, the HR system for one prison is not so very different from another one; so it was a good example of where shared services ought to deliver a result. So you go through a process of, "What is it that we really need to support front line services?", you have a process of standardisation and simplification, you move on to one shared service centre, you not only get the benefit of lower costs (and in this case there was about a 30% reduction in running costs) but, because you have got common standardised simplified processes, you are actually delivering a better service. You can see that with what has happened in DWP with some of the work they have done around their IT subcontracting and also what they have done around their short-service centres. I just want to stress the point that, coming at this in a proper disciplined way, it is possible both to save money and to deliver a better output. Chairman: Thank you. We are going to turn to the specific issue that Mr Lockhart raised about HMRC and staffing now, but that should not preclude the other four of you from coming in as well. Q18 Sir Peter Viggers: Mr Hawksworth, just following your earlier questioning: Dealing with Debt - this publication - when was it finalised for publication? Mr Hawksworth: I think, in terms of the numbers, effectively it was completed in February and then it was published in early March. Q19 Sir Peter Viggers: So it pre-dates the Budget? Mr Hawksworth: It pre-dates the Budget, yes. Q20 Sir Peter Viggers: And it points out that the Government finances are under severe strain, heading for record levels, and it goes on to say that the current Government has a responsibility to outline a recovery plan now to put public finances back on a sustainable basis in the medium term. Do you think they have done that? Mr Hawksworth: I think that they have gone part of the way in the Budget to do so. Certainly they have recognised the scale of the problem, and it is quite interesting. When we talk about the fiscal gap, that is shorthand for the cyclically adjusted current Budget balance, which is an awful piece of jargon. We estimated that would be 3% of GDP in 2013/2014. The Government's new estimate is 3.2%. They have effectively come into line, broadly speaking, with our line of thinking as to the size of the problem; so at least they have recognised in a more realistic way the size of the problem. I think they have begun to put in place the measures, but, obviously, they are saying they are only going to close that gap in four further years after 2013/2014, they have not yet specified what measures will be taken in those four further years, and I guess there is also an issue as to whether the market will wait another four years for the fiscal gap to be closed. So I think they have certainly gone some of the way. I guess also one would have to say that, in terms of the measures announced so far, there is quite an emphasis on reducing capital spending as a way of getting down the short-term budget deficit, but that does not actually help to close the fiscal gap in the longer term; that is a short-term expedient. It is a good first step, but there is more to be done, would be my summary. Q21 Sir Peter Viggers: Of course they have made assumptions on the tax take, assuming a recovery in the economy. Mr Hawksworth: Yes, although, to be fair, I think they have been quite cautious about the starting point in terms of the initial budget deficit in the current financial year of 12.4% of GDP. That was ahead of our estimate, or that of most other people like the IMF and the IFS, and so on. So I think they have built in an element of caution for the starting point, even though subsequently, perhaps, they are then assuming quite a strong recovery; but actually we have seen in past cycles that often public finances are more cyclical than many people expect, and so, just as you get a bigger deficit and a downturn, tax revenues are quite elastic with respect to economic growth, and so, although their growth forecasts look a bit optimistic, I am not sure that their public borrowing forecasts are necessarily optimistic. I think they are a bit more realistic than their growth forecasts. Q22 Sir Peter Viggers: Turning to morale issues, Mr Lockhart, according to the most recent staff survey by HMRC itself, only 16% of staff are strongly satisfied with the department. How does this compare with the messages you are receiving from your members? Mr Lockhart: I do not want to be the harbinger of doom, but I think you are right, that HMRC's own surveys do the job for us, I think they adequately convey what our members are telling us, and the reason members are fed up is because there are simply fewer of them to do the same jobs expected of them. My colleagues make the more erudite points, but for us it comes down simply to the fact of how do you measure these efficiencies? How can it be that we see members in HMRC in the debt collection department being let go so that there are 500 hundred fewer debt collectors in HMRC than there were a year ago? We note, and we cannot help noting, that the debt balance has gone up by billions and billions of pounds in that same period. We do not want to be overly simplistic about that correlation, but it does seem sometimes that the only measure of efficiency is how much are the departments spending on their pay bill, how many people are they deploying to certain areas, but it seems to us to be a rather crude measure and does not take into account always where there are, to our mind, clear shortfalls. Q23 Sir Peter Viggers: Most managers across the piece would expect morale to suffer a bit when changes are introduced and then later, of course, morale recovers when people realise that the changes are working. Is that happening in HMRC? Mr Lockhart: HMRC, as we know, came into being formally in 2005 and we are now, as we also know, in 2009, and you have rightly referred to the latest staff survey, and I think the latest staff survey indicates that it is morale by that measure. We accept that it is not the only measure, but morale is worse than it ever was back in 2005, and that is the simple crude statistic. We fully accept there is a period of transition, a period of change, and that is unsettling, but the people in PCS have had to deal with the almost constant axe hanging over them that their office may close at some point in the future: no job is safe in HMRC. They are harangued by members of the public who say, "You are not doing a good job", in simple terms, and that clearly has an impact on the way the staff feel about doing their work and, on that basis, there is not a great deal of evidence to indicate that that will be resolved in the near future. Q24 Sir Peter Viggers: Do you see management undertaking training or dialogue to seek to improve the situation? Mr Lockhart: In fairness, HMRC have introduced a new tier of management in the last year, including a new chief executive officer and a new chair in fact, and we reserve judgment, as you would expect, about their performance and the way they intend to turn things round at HMRC. To some extent we have received the right soundings from those individuals. We certainly feel that we are more engaged in the process with senior management to improve staff morale, for one thing, but the real issue is about how we get through this period where it appears that the cuts that are being proposed are arbitrary and lead to a decreased level of public service. That is really the issue that we all grapple with. Q25 Nick Ainger: Mr Lockhart, in your memorandum you state, "We remain convinced that the job cuts are counter-productive, as many of the jobs being cut bring in far more than is being spent on staffing costs." In other words, there is no value for money here. Far from it, it is actually a negative. What evidence have you got for that? Mr Lockhart: Operationally, if I talk about one area that I have touched on around debt, the way the department have decided to support the collection of debt is through the creation of a risk and intelligence team, and they, in turn, provide information to local compliance officers who then, in turn, talk to their debt collector colleagues about how that debt might be collected. In each of those areas the numbers of staff have gone down, have decreased, the presence of each of those local compliance officers has decreased in local communities, but the debt that remains uncollected, i.e. the debt that HMRC knows has been assessed as being due. It now stands at £25.8 billion: so that is an increase in the last year of just under four billion pounds. Q26 Nick Ainger: Can I stop you there and query that figure. That figure does not appear in your memorandum. Is this an update? Mr Lockhart: It is an updated figure. Q27 Nick Ainger: I think it is the January figure that is quoted in your memorandum. Mr Lockhart: The updated figure, as we have it, is 25.8 billion. We accept that some of those are planned debts, as it were, that work is going on to collect that, and we understand the way that the P35 system works. Nevertheless, there is a huge amount of debt there, but by having people, in simple terms, to collect that, you could bring that money in and it could be more usefully deployed. Q28 Nick Ainger: In your discussions with HMRC management, presumably these points are being made: because at the end of the day that is the job of HMRC. Their vision statement, I am sure, refers to the fact that they are there to collect taxes. You appear to have got evidence to show that, in fact, their main raison d'etre is not being met because of these staff cuts. What does management say to that? If you have got evidence that says the situation is getting worse, we are actually collecting less than we were in the past and we have got this serious problem with the public finances anyway, what do they say to that? Mr Lockhart: The department, again, to be fair, are looking at new systems to ensure that their IT networks can communicate with one another, that they make sure of the accuracy of their own figures, but what is not being addressed is the impact on staff cuts in the crucial areas and the way that specifically impacts, for instance, on the collection of debt. We have not even talked about the size of the tax gap, which is a movable feast in many senses, but that in itself is a huge figure - up to 100 billion by some estimates - so there is a drive to say that the department can do a lot more with less. There is a premise that they can do a lot more but, on the basis of the figures that we have, there does not seem to be that clear evidence that moneys are being collected in any greatly improved way. Q29 Nick Ainger: Your memorandum also says that you have seen an internal HMRC document which states that they do not have the resource to pursue debts under the amount of £10,000. Have you got a copy of that document? Mr Lockhart: We can provide a copy to the committee. Q30 Nick Ainger: I think that would be very helpful. Bearing in mind the announcements that have been made in the Budget of further reductions, making the total cuts in HMRC up to 25,000 from the original 16,000, and your evidence to us today, how can you see HMRC meeting its new value for money target? Mr Lockhart: On the basis of the experience we have had so far, we are struggling to understand how the department will continue to make further cuts and deliver their targets. It just seems to us that there is now an opportunity for at least a period of reflection to have a look at the impact so far and to really truly assess what cuts have meant to service. I think, wherever we turn in HMRC, it is difficult to see that having fewer staff has truly proved to be the way to improve the service, and certainly stripping tax offices out of local communities, I think, has a knock-on to the way that we, tax professionals, members of the public view the level of service that has been offered. They have set on a course of action like the proverbial tanker that I think is pretty unstoppable but is not necessarily workable, and I think now is an ample opportunity to have a look at where they have got to. Q31 Nick Ainger: I wonder if anyone else would want to comment on this value for money aspect. If there is evidence that the tax take is falling, or is at least static, what measure should be put in place by HMRC to ensure that they are delivering value for money? Has anybody got a general comment on that? Dr Read: The brief for the bit of the Operational Efficiency Programme I did was around back office operations and IT, but I think what one is trying to get here is a better result, and it is the best business result that one is looking for, so in anything that one does in balancing staff and efficiency and cost aspects one has got to look at the effectiveness of doing the actual service as well. Dr Law: It is not really an efficiency gain if the output is not of the same quality. The other thing to look at, of course, is customer satisfaction, which there is increasing bits of evidence around. So, yes, they need to be collecting the right amount, but they also need to be keeping their customers happy, and there is increasing evidence about some customers remaining happy, other segments of the customer base being less happy. I think it is important to consider that as well. Q32 John Thurso: I would like to continue on that theme of customer service and how this is impacting on taxpayers and their advisers. Can I come back to you, Mr Lockhart, first of all? The President of the Association of Revenue and Customs, Terry Cook, is on record as saying that there is no dead wood left and further cuts threaten our capability to deliver, which is very much the evidence that you have been giving. Is it your contention that any further cuts can really only be achieved by a reduction in service? Mr Lockhart: That is quite simply our contention. Our more generous offer is: let us at least establish what the impact has so far been before we go headlong in pressing ahead with what seem to us to be, as I say, fairly arbitrary figures plucked out of the air - five billion, nine billion - and let us reduce the service by that amount. The biggest cost is paying the wages of the members that deliver the service, so let us assess the damage or what results, positively or otherwise, come out of that and cut staff. There does not seem to be a sense that has really happened. Q33 John Thurso: Mr Hawksworth, can I come to you? If you look at any efficiency programme in any business, you are basically looking at, broadly, one of a combination of three things: either re-engineering a process so that it becomes more efficient, procuring the elements of the process so that they are less costly, or reducing the outcome so that it is not such a costly process to deliver. In your memorandum you suggest at one point that it is time to have a zero-based look, which goes to zero-based budgeting, which basically is a re-definition of the whole thing and building up. Do you believe that HMRC needs to undertake that level of in-depth analysis - perhaps this is to Mr Sibson - in order to actually effectively answer the question Mr Lockhart has asked as to what is actually happening rather than lots of big numbers being banded around by ministers? Mr Sibson: Again, going back to the earlier part of your question, your three ingredients of how you can save money, I would agree that it is really the first two that should be the priority - that is to say looking at the process and looking at the cost of the input - and between those two I think the big scope for gains lies in the first all those two: looking at the process in particular within government, standardising and simplifying. I think Martin Read's example of about 126 prisoners with their own HR department and now one HR department for the Prison Service is a very telling one, and I think it is an absolutely typical one. I think you would find many other Prison Service type examples across the public sector. Coming on to your point about zero-based budgeting, I do not think I would particularly want to apply this comment to HMRC but more generally to make the point that, I think, if you look at the fiscal pressures that we will be under as a country, then I think the kind over efficiency measures that are outlined in the OEP Programme's final report will help mitigate those pressures and, hence, deflect the pressure from the front line: because I think, inevitably, we are going to be under pressure to make further savings. If those are to be made in an organised way rather than the most politically convenient ways, then it will require zero-based budgeting, or whatever you call it, going back to basics and finding out what we are trying to do with every pound of public expenditure, and I think a very big item on the agenda for anyone managing public expenditure over the next few years will be to introduce a disciplined rational process to do exactly that. Dr Read: One of the recommendations of the back office and IT review was exactly that; that within two years each department should have actually carried out a fundamental review of what it is doing and the systems and processes it needs to support that. Q34 John Thurso: The back office one is the easier one and the obvious one in any business, and the more technology develops the easier it becomes. Dr Law, I am actually more interested in the impact on the customer, and I have previously asked people from HMRC when they have been in front of us how they measure that. I define the customer as the person going into the office; not the mutual customers within government but the actual taxpayer and their advisers. Have they got robust systems for actually measuring that the service delivered at least remains consistent with what they have had in the past? Have they got ways in which they can reliably measure that? Dr Law: They are getting better at it. They are making some increased moves to measure customer satisfaction in ways which make sense to the customer. So they are getting better at that. They have got a series of research reports available on their website, not especially clearly, and the interesting thing from that is that you can take different customers, or different types of customer of HMRC and compare their satisfaction in different sorts of ways, and what you get is quite clear differences between different groups. So some customers are satisfied; others less so. Q35 John Thurso: You know as well as I do that, if you do a customer satisfaction survey, if you get the questions right you get the answers you want. If you actually want to know really what is happening so you can manage your business more effectively and if you go down something that is ISO 9000, or whatever, you actually come up with a very different way of doing it. Are they really committed to it, or are they just trying to tick the box? Dr Law: I think they are increasingly answering the right questions, that they are looking at drivers of customer satisfaction, which is something which has been going on across a whole range of government departments. There is much more awareness of what are the sort of things that drive customer satisfaction - is it being able to contact somebody easily, is it getting the right answer, is it getting accurate information, and so on. I think government in general, and this department as well, is much more aware of the drivers of customer satisfaction, there has been a huge amount of work done on that, and they are about to have a customer satisfaction survey, which we have a baseline figure for now, which will be reporting in autumn 2009. They have got a target of plus three on the baseline. It is unclear to me why plus three. Why not plus five? Why not plus two? It is unclear that they have compared with past performance. So they have a baseline, but I am not sure what the performance was the year before that. Q36 John Thurso: To be clear on that, the point is the baseline could have been taken at the nadir of the service, well below what people used to get? Dr Law: Absolutely. Q37 John Thurso: So anything going up looks quite good, but in fact it is still well below where it was five years ago? Dr Law: That is right, and that is why it is good not just to have targets from the baseline but also to look at past performance - is our target a sensible one, is it challenging - because you could just create it. Q38 Mr Todd: Mr Lockhart, the reality process that HMRC are using for their savings programme: if they are reducing the floor occupancy of a building and giving up leases, in current market circumstances that is likely to yield a significant penalty, and any savings that may be generated from relocating to another office are likely to be delivered only over a very long period of time if the lease is quite long. Are you finding examples of that? Mr Lockhart: Yes. One thing, in fact, that this committee, I think, asked HMRC for was some transparency about savings that were being made through the giving up of offices. Again, it comes down to how you measure what you have saved and what you have lost and how you offset those things, but by our calculations in some of the offices you have got a bunch of people in there who simply cannot move anywhere else. If the option is you are going to have to pay those people off to move from the office and you counter that against the cost of flogging off the said office, it is going to take you between 12 and 20 years to recoup that. Q39 Mr Todd: I do not want to detain us on this, but could you prepare for the committee a note of some of the local examples of that kind, because I am sure we are going to be able to ask a little more information from HMRC on exactly those sorts of things. Mr Lockhart: I am more than happy to do that if that would be helpful. Q40 Mr Brady: Mr Sibson, the OEP estimate that 15 billion of annual efficiency savings can be found from back office, IT, collaborative procurement, asset management, and so on, property, local incentives and empowerment: how credible is that? Mr Sibson: We think it is pretty credible. We published, I believe, in either December or January, I cannot remember which, our own attempt at the OEP's final report. We took the agenda which the Government set out in July 2008, and we had our own answer of those questions. As I said in answer to an earlier question from Ms Keeble, for the back office, IT and property we came up with very similar numbers, and in some cases we produced additional evidence from our own propriety benchmarking data. I would be happy to send the committee a note on that and a copy of our response, if that would be helpful. Q41 Mr Brady: Thank you. One of the criticisms that is often made of these kinds of projected efficiency savings is that they are found from future programmes rather than from current programmes. How much of this relates to current activities actually being done more efficiently rather than future programmes being remodelled? Mr Sibson: On the approach that we looked at, it was by taking the current state of support services - so what is done today - and doing those as well but for less. We were not saying: there will be some new functions in future and let us see if we can do those less expensively than they might otherwise have been done. So I think it was actual, in your sense, rather than hypothetical. Dr Read: That was the fundamental approach that we took for the back office operations and IT part of the OEP. Q42 Mr Brady: None of it relates to future programmes? Dr Read: For clarity, we looked at the costs of running the operation today - in fact, actually because we were working on historical data, it was a bit back - and we looked at several different approaches to try and make a judgment on how much money could be saved on that operation, and that is how we came up with the savings. In very rough terms, at the end of three years we expect to be able to get the running costs down by something of the order of 20%. There is some other activity that has happened over the course of the last year or so which has already started to attack those numbers, and the Treasury did make some allowance in putting together its overall report - okay, that is historical numbers, some action has already been taken, therefore some of the "savings" are going to happen anyway - and that is why it was a smaller number than the totality of what we put in here. Q43 Mr Brady: Looking aside from the back office recommendations, which of your OEP recommendations do you think are the most important? Dr Read: I only did back office and IT. Q44 Mr Brady: Do you have a view on that? Dr Read: On the other ones? Q45 Mr Brady: Yes. Dr Read: Yes. From what I have seen, I would say that certainly we have got the rough order of magnitude about right, and I think these are deliverable savings, but there is one really important point which I think I would like you to take away from today about how I have felt as an outsider about reviewing this. I would like to make a couple of points which you might want to take on board. The first thing is we do not have, we just do not collect regularly and we do not review regularly the sorts of data which you would expect, if you were running a business, to be able to use as the basis for comparing trends, making comparisons, trying to judge where you come against other organisations and actually reviewing the importance of senior people. If there is one thing that will make a difference coming out of this OEP work, it is changing the culture, the DNA, of the way the public sector and the Government works, which is that operational efficiency is something that managers are there to do in a way, but they are there to do other stuff as well, and, if that is going to happen the information has to be available on a regular, consistent, auditable and transparent basis and somebody senior in the organisation - ministers, top civil servants - have to be asking the questions: why are you in the bottom quartile for delivering your HR services? What is it about your organisation that means it so is HR intensive? Should we not be looking at what is your plan for improving? By the way, when we have a discussion in six months' time, what do you think you will have achieved? All this is not just about cutting costs, as I said earlier on, it is about getting the same or better result with less through being smarter. In business you have to do that, it is a way of life, because at the end of the day you are being judged on profit number, but the effectiveness of the way that the public's spending is looked at and reviewed, if you could get that one big change coming out of this, I would have felt that the year that I had put into this would have been worthwhile. Q46 Mr Brady: To what extent are those senior people in the organisations in need of retraining themselves to change their mindset, or do we need different senior people in those organisations? Dr Read: In any organisation where you are on a change of culture, it is a mixture of things. It is about winning hearts and minds about why people understand it is important and it is about self-improvement; it is about getting help and advice from people who have done it in different walks of life; sometimes it is about bringing in a few outsiders who have got that experience; but if you go down those paths, the core team of what you have already got will understand, adapt and get motivated to pursue these things. I had a finance director once who said: "What interests my boss interests me greatly." I think the issue is ministers, senior Civil Service, need to get more interested in operational efficiency. Mr Sibson: Can I pick up very briefly Martin's point about hearts and minds? I absolutely agree that benchmarking comparable data is an important ingredient to making change. Another ingredient in this case is to set out a vision and objective of what good support services would look like, and I think the objective cannot simply be stated in terms of a financial number for savings, because nobody gets up in the morning to save a billion pounds; that is not what gets people out of bed. You can articulate a vision of what the essential back office should look like, what kind of support services people at the front line need: I think that would be motivation. I think that is not something I have yet seen in this body of work. We had a go at it in something we produced called Freeing the Front Line, but I think that and some ministerial endorsement of that would be very powerful. Q47 Mr Todd: Back office is bit of a pejorative term, is it not? Dr Read: Yes, it is. Q48 Mr Todd: A particular rather easy target as well, and rather poorly defined sometimes? Dr Read: I am not sure it is poorly defined, because I think the functions we all know and understand. We know that you always need an HR function; that someone has got to run the payroll, and so on and so forth; we know we need an accounting system. Q49 Mr Todd: If you do not have these, the front line does not work at all. Dr Read: Absolutely. I do agree with you. I think corporate services, maybe, rather than back office, but doing this stuff effectively is every bit as important to the front line. Q50 Mr Todd: Any reason why one cannot deliver front line services more efficiently? Dr Read: Of course. Q51 Mr Todd: Let us use some language here which makes it sound--- Dr Read: You have got a bound survey. This was a big scope thing, so you can only focus on one thing, but I think the lessons that are in here, most of them are directly relevant to what I would call transaction-based services, which is a lot of what the big departments do. Q52 Mr Todd: Is there anything we have learnt so far, from the exercise that has been done through the Gershon Review, of the methodologies that actually work in delivering savings with a retained quality or even an enhanced quality? There is no reason, as someone said, why you should not do it better. Dr Read: I am not an expert on what Gershon did and what came afterwards, but in terms of my business experience and general experience, this all comes back to, firstly, it is a clear vision and set of objectives about what you are trying to achieve; secondly, it is about communicating that effectively and getting your workforce on side. Q53 Mr Todd: Can I summarise that? Perhaps critical is high quality leadership of any of these exercises. Dr Read: No organisation is going to be effective without good leadership; so you are right. Q54 Mr Todd: Should not the leadership of these organisations have the capacity and ability to do the tasks that you are saying lie ahead of them? Dr Read: It is hard to talk in general terms. Q55 Mr Todd: Because it is a completely different skill. Dr Read: Yes. Let me make a number of points. I would emphasise again that one of the things that I was taken with in doing this review is that I did see some really excellent examples of what I would consider best-in-class practice, and I do not believe they could have been achieved without real leadership. So there is nothing that tells me that this is something you cannot do in the public sector and only the private sector can do that. I just do not think that is right. I think it is also true that in a lot of other areas these sorts of efficiency questions and approach is not something that people are focused on very much, and I would come back to this point I made earlier on that what interests my boss interests me very greatly. If they are not being challenged or asked in these sorts of areas, they are going to spend their time worrying about the things that they are challenged or asked about. Q56 Mr Todd: If one is looking at political leadership, there is very little experience of any of this within the political leadership of any of the major parties. Mr Read: Again you are asking me to respond to something that I do not claim to be an expert on, but it would not be difficult to work that out. Q57 Mr Todd: It is not what they do, is it? Mr Sibson: No-one enters politics in order to save back-office costs. That is not the kind of thing that idealistic people enter politics for. Q58 Mr Todd: I am trying to coax out of you some of the challenges that lie ahead here, because I am going to ask you what you think the big challenges in this exercise are. I have given you a hint or two as to what I think some of them are. Dr Read: As a minister you do not have to be an expert on operational efficiency, but you have to care enough about it to have it on your agenda, to get your officials motivated, interested to attack the issue. Mr Sibson: The motivating factor for any minister to take an interest in all that now is just looking at a few of the graphs and charts in dealing with debt and other similar analyses, because unless we do something on this agenda, it is Ms Keeble's disadvantaged constituents who will bear the brunt. Q59 Mr Todd: In the PWC report you have commented on benchmarking and stated that the HR function might be 85% less efficient than in the private sector. Just to see if I can start an argument amongst the panel: based on your knowledge of analysis in this area, does that sound like a bit of a speculative punt or is it based on some hard analysis? Benchmarking is a pretty tight subject in which you work from fairly closely defined data, having had to do it myself a long time ago. Dr Law: It is something which is quite hard to do. I know that many public organisations some years ago spent a long time in meetings trying to decide what was counted and what accounted for the differences in their figures as compared to those of somebody else, so there are huge gains to be had from having accurate information and I think it is vital that organisations have that data. One word of caution: How much does it cost to collect it? I think it is really important to get that data - managers need to have it, it is vital, and they need to do systematic reviews - but it takes time and effort. Q60 Mr Todd: A headline grabbing figure or something that is based on some tough analysis. Mr Sibson: There is a lot of substance behind that number. I would be happy to send you a note about it. We bought an organisation called Saratoga a few years ago (and quite why it is called Saratoga I do not know) which has a huge volume of data, particularly about HR and finance, back-office headcount in relation to frontline headcount in the similar organisations, and that is the database we draw on in that particular case study. I would be happy to send you a note on that. Mr Todd: That would be helpful. Thank you. Q61 Mr Love: Dr Read, I think you mentioned a figure of 20% for the annual savings and back-office services. It is quite a good deal greater than previously estimated by the Cabinet Office. How confident are you that you can deliver these? Dr Read: I am not being asked to deliver them, I am asked to give you a view about its deliverability. I am pretty confident, and let me tell you why I am pretty confident about that. We looked at a number of different methodologies for trying to estimate this. One was based on benchmarking. There are, it should be said, a number of public sector organisations in the SIPFA benchmarking system. It is very easy to do, they are getting good data. Another was based on looking at private sector experience and another was looking at what was already happening in the public sector and taking that forward. They both gave the same answer. Twenty to 25% was the sort of broad picture in between. I have a lot of confidence that that number is achievable. Certainly from my business experience I would feel that in a business environment - and I know we are not in a business environment - you could probably save more than that. I do have a lot of confidence that it is possible to save it. If we are to save it, as I say, we need a different approach. That different approach is that we need to be able to collect information on a regular consistent auditable and transparent basis, and it has to be reviewed at a senior level, whereby people who are running organisations know they are going to be called to account for it. The bottom line is pay and promotion prospects depend on a number of things but one of the things is the ability to deliver efficiency savings. Q62 Mr Love: You mentioned one of the areas about collecting information, and I think everybody would agree with that, but the other area that has been mentioned constantly is about winning hearts and minds. Dr Read: Yes. Q63 Mr Love: Changing the culture. Dr Read: Yes. Q64 Mr Love: We have heard that morale is very low currently. Dr Read: Yes. Q65 Mr Love: With successive programmes it is quite hard to see how morale will be changed around. Do you think that will lead to delays, perhaps even significant delays, in achieving what efficiency savings may be there? Dr Read: Organisations perform best where there is a clear view of what an organisation is trying to do and people feel part of that process. I think the importance of winning hearts and minds on this matter, and we need to deliver it, is important, but that all comes back to leadership at the end of the day - leadership of the individual organisations. Q66 Mr Love: Let me ask you about that, because we have touched upon what politicians need to do in relation to this but of course there has been a lot of publicity about the fiscal gap that exists. We have talked about how this could be one mechanism for at least plugging some of that gap. Will there not be some scepticism amongst employees that this programme is a surrogate way to take some tough decisions and, therefore, it will be difficult for politicians, perhaps, to give the leadership, and certainly to give the leadership to change the culture in some of these public sector organisations when they feel they are at the harder end of some tough decisions that politicians have to take. Dr Read: I think ministers have to set the right overall objectives in individual departments. I think it is down to the leaders of those organisations to get the message across about why this matters. I do not despair over it. Lots of people in a private sector environment go into businesses that have failed, have problems, and they have to go through the same process of winning hearts and minds in difficult situations where money has to be saved. It happens. It can be done. That is what leadership is about. Q67 Mr Love: We have talked a lot about bringing together human resources or finance sections and things like that, and I am sure there is still more that can be saved. Are you confident that there are new efficiencies out there that can be discovered that will lead to the sort of dramatic improvement? Dr Read: Yes. Q68 Mr Love: Can you give us an example of somebody you have come across in the year you have been there who perhaps nobody else has thought about. Dr Read: There is the very simple example of the prisons I gave you, and you will find many other examples like that, where it is a relatively standard set of procedures that is undertaken in a large number of organisations where it could be put in one place and get the same benefits that the Prison Service got. Q69 Mr Love: I do apologise, I have not read the PWC document, but I heard quoted from it: "We need to re-engineer public services." There is the obvious example of bringing human resources capacity for a service like prisons, and I am sure for lots of other public services, but which are the new areas that we are going to look to that will help us through re-engineering? Dr Read: I think there is a mass of relatively mundane sounding things. In a sense Martin Read's example about the Prison Service and its HR functions is a relatively mundane example, and there are many, many such examples. You would be surprised how many different ways there are of paying a bill in the public sector. You would think there would be a fairly standard process, but there are many different ways in which it is done and that absence of standardisation adds to processing costs added to IT costs and all sorts of things. I will give you a relatively trivial example which affects our own business, PWC's own business. Each year we bid for lots of work from government and we often have to go through a pre-qualification process - which is fair enough. As part of that pre-qualification process, we have to demonstrate our financial standing, that we are robust and will not collapse halfway through the contract - again, fair enough. But we do this dozens and dozens and dozens of times each year. This morning I was signing off on a pre-qualification submission. That could be done once a year - or twice a year if you really want. That is another mundane example, and there are many, many of them. Q70 Mr Love: I could go on to local government and housing benefit administration as being one of the real culture problems, but I would like to come on to Mr Lockhart, because I look on you, if I can put it this way, on the top table as the sceptic on some of the issues that we have been discussing. I think you would probably accept that some of the areas we have talked about are ones where efficiency gains can be made. How do we convince the employees of all of these public services that this is not just in the interests of politicians or senor managers but in the interests of people working in the service itself? Mr Lockhart: I think there are a number of strands - but we do not have all day. I think leadership of any sort, political or otherwise, demands, amongst other things, proper explanations and a clear rationale for why any decision is taken and why a route is embarked upon. It is difficult to see that there is certain poring over certain efficiencies. One area of efficiency we might suggest is you are all aware that there are 200-plus sets of pay bargaining negotiations that go on every single year across all the sets of departments. The tangible result of that is that over a short period of time, for people employed by the Crown, by the same employer, there are huge pay differentials. Nobody really looks at that. There are some things that seem to be political decisions. It comes down to the arbitrariness of the figures, plucked out of the air, and then departments go away and bid for their chunk of what they are prepared to do to contribute to them. If you are going to win hearts and minds, it is about a proper explanation of why these things are done. Q71 Mr Love: I think everybody would agree that one of the major areas where we can discover new ideas of how to improve the efficiency of service is from the people working in the service themselves. They will come forward if they are convinced it is in their interests and in the interests of the service. How do we engender that positive value in employees to come forward and suggest major changes? Mr Lockhart: You are right, it is about a mutual trust relationship. I think a lot of that mutual trust has been lost. With respect, HMRC missed an opportunity when they sought to implement a system called Lean Processing, and Lean in its purest form is about allowing the people who do the job to dictate the way the job is done. The way that it was rolled out in HMRC was precisely the opposite. It was about command and control. It was about managers telling individuals who had done the job for years precisely how they should do it, setting, again, arbitrary targets. Q72 Mr Love: Dr Read, did you look at Lean? Did you think it had been mishandled? Dr Read: I did not look specifically in the Treasury on this programme. Q73 Chairman: We have ministers coming in front of us in two or three weeks. Could I ask each of you, finally, what you would like us to ask those ministers who are in charge of this particular area. Dr Law, what would you ask the minister? Dr Law: I would ask them whether they felt that they had really secured efficiency and how confident they were of that, not just in terms of the input side of the equation but the output side of it. That is the issue we have been drawing on a bit here, not just that there is a drive to cut costs but that it is partly around service improvement. I think that staff would be engaged quite significantly if they felt that a lot of it was around service improvement. Indeed, there are many cases across the public sector where staff are at the forefront of designing processes themselves or having innovative ideas themselves about how to make services better, and sometimes for less cost. It is not that they cannot get an idea around innovation for less cost. They can. They are entirely able to do that. Q74 Chairman: Perhaps one answer from PWC. Mr Sibson: I think simply how they would demonstrate consistent ministerial commitment to this programme. Dr Read: You should be encouraging them to put operational efficiency on the agenda, to cross-question and to encourage their departments to embrace it and make it part of their life, and to do this consistently. This is not something that is a one-off thing. It has to be regular and it has to be something that goes on and on and becomes part of life. Q75 Chairman: Mr Lockhart? Mr Lockhart: I would be interested to know the ministers' response to the questions you have put to us here today. We would be truly interested in how the targets, the monetary savings have been alighted upon and how they have been calculated. I agree with colleagues who talk about factoring in operational efficiency to the mix of measuring the effectiveness of those co-called efficiency savings. We would ask you to ask the minister whether there is now scope to review the programme of efficiencies as they have so far been rolled out and whether now is the right time for pause for reflection. Mr Hawksworth: If I might add one different point, ultimately these efficiency improvements are going to take seven or eight years, according to the Government, to reduce the budget deficit. That is going to involve reductions in headcount. You cannot get round that. What is the Government going to do to ensure that people who no longer have jobs in the public sector are employable in the private sector? What sort of retraining programmes or programmes? It is one thing to achieve efficiency in the public sector, but if those people just cannot get jobs in the private sector, it will not be efficient for the country as a whole. One of the messages from things like privatisation of the utilities was that those people who lost their jobs never got back into the labour force. It did not improve our GDP growth, even though the efficiency of those companies was improved. I think it is absolutely critical that there is support for people who over the next eight years will have to transition from the public to the private sector, because there just will not be the jobs in the public sector that there have been during the boom years recently. Chairman: Thank you all very much. You have got our inquiry off to a very good start. Thank you. |