Strong Medicine: Are Public Sector Institutions Willing and Able to Swallow This Bitter Pill?

By Greg Baxter, Hugo Trépant and Stewart Hobbs

As the global financial system continues to slide, a prolonged period of enforced austerity looms for all aspects of the British economy. Austerity raises difficult and painful choices for the private sector, but microeconomic necessity will drive swift structural solutions. Unfortunately, the public sector half of the economy will likely take longer to get ‘match fit’ for the austerity game.

We advise leading public servants to heed three important aspects of today’s situation:

1) The severity of the situation for public finances cannot be overestimated, not simply because of the Treasury’s current indebtedness, but because of the fundamental importance of the real world obligations that the government has to society. Senior leaders must create headroom if they are to deliver against these obligations.

2) Few of the efforts within current Departmental responses to the Comprehensive Spending Review are anything more than incremental relative to this challenge. Instead, step changes are needed.

3) Successful delivery of step changes requires fundamental behaviour changes at all levels of public service. Fundamental change is a bitter pill to swallow, but can work best as a response that takes into account the inherent features of the Civil Service. Leaders who adopt a well rounded response will regain the initiative over the many unwelcome external forces that assail their service delivery ambitions.

None of this diagnosis will surprise experienced civil servants, but the difficulty of successful delivery may well resonate strongly. Now is a time for public service leadership to be demonstrated as vigorously as that recently applied by the government to the other half of the economy. Senior Civil Servants will need to impose their own agenda of step changes and act decisively to deliver their desired outcomes.

Severe challenges
Most assessments of the situation in which central government finds itself have focussed on its heavy financial burden. In essence public sector net debt has risen rapidly from a low of 32% in 2001 towards the Treasury’s self-imposed sustainable investment ceiling of 40%. Various economists estimate a figure closer to 50% following the recently announced rescue package, and a long debate will no doubt ensue about how to classify ‘temporary public ownership’ of financial institutions around this and other estimates. Whatever the final figures and whatever the hopes for downstream profits from investments in financial institutions, the government will be reluctant to raise taxes or cut benefits, and will first place a massive burden on Departmental expenditure.

Although intense financial pressure may be unavoidable, it will be most unwelcome to the many teams of civil servants who have been preparing responses to other pressing challenges, amongst which:

  • Tackling serious crime and public disorder
  • Protecting all citizens from terrorism
  • Adapting energy usage to avert calamitous climate change
  • Providing an ageing population with adequate pensions and healthcare
  • Responding to reasonable expectations of customer service
  • Maintaining a vibrant military capability in response to multiple threats overseas
  • Supporting measures to eradicate poverty in the developing world
  • Providing high quality education, opportunities and jobs
  • Delivering a successful Olympic games

Any normal person valiantly striving for success on these critical objectives would baulk at interference in their day-to-day work. However, now more than ever, the public requires of its civil servants that they do not flinch from the difficult task of fundamental change with the goal of lower cost public services. Structural improvements in public sector delivery would benefit any of the political parties, and offers the best medium term prospect for successful delivery of the ambitious agenda listed above.

Incremental plans
According to the Treasury, the 2007 Comprehensive Spending Review (CSR07) sought to increase public spending by 2% a year in real terms, while reducing cash expenditure by 3% a year across central and local government, and reducing Departmental administration costs by 5% year on year. Alas, the 2% increase of £2 billion pales when compared to current financial bail-outs.

Through today’s lenses, the CSR07 changes are therefore merely incremental, but try telling that to the cohorts of planners and project managers who have devised complex ways to achieve 5% year-on-year reductions in administration costs. In fact, many of the required CSR07 changes are only now approaching fruition, and many people are wedded to the plans that underpin them.

Today’s situation asks public servants to strike a difficult balance between rapid onset of benefits and long term durability. Creating a rapid step change that lasts has tripped up many public sector transformation efforts, as the next section shows, but it would be worse to fail to leave the starting blocks. We may find ourselves within year one of a three year spending round but that must not prevent us from aggressively rewriting 09/10 and 10/11 plans. Nimble footwork at this early stage can give leaders the vital room to manoeuvre. Without such headroom they will become firmly boxed into a corner at a time when the public most needs government support.

The necessary ‘step changes’ are fundamental shifts in the portfolio of capabilities that a Department can deploy. Step change will include the difficult decision to close down a capability and the courageous decision to transform one. Importantly, step changes amount to nothing unless they are seen through to completion.

Strong medicine required
Despite the dedication and talent of senior civil servants, central government does not have a strong track record of responding to strong medicine. One example of these difficulties can be seen in the frustration of government at its inability to drive step change performance improvements, at the turn of the millennium, in response to centrally imposed performance targets. Another more specific example would be the well publicised failures of the Child Support Agency; launched in 1992 with substantial Ministerial pressure to implement a rapid ‘big bang’ solution, based on an analogous agency in Florida. Blighted by poor leadership and unclear objectives, the agency failed again in 2003 due to an unrealistic and poorly executed turnaround programme, and still required £320m in 2006 to tackle a backlog of 250,000 cases and 500 IT defects.

Several inherent features of the public sector tend to thwart successful step change:

  • The policy objectives upon which every transformation depends for its long-term direction are judged most critically for their short-term political benefits. In this instance the incentives of politicians depart radically from those of the tax payer – particularly as any closely fought election approaches
  • The government is obliged to treat all citizens fairly, and this requirement for a universal approach has often starved challenging transformations of pragmatic, light touch approaches to prioritise changes or segment customers for improved delivery. A good counter example arose when HMRC radically improved processing times for both staff and one segment of customers with its short-form tax returns. Such discrimination between HMRC customers would have been unacceptable several years ago, and indicates an important avenue for step change improvements in productivity within other areas of government
  • The larger and more complex the institution the harder it tends to be to manage intelligently. Yet political fears compel leaders to keep thorny issues under close control, thus driving centralisation and its associated bureaucracy. Examples of such centralisation occur as fearful governments pull resources towards Whitehall, or as anxious Senior Civil Servants aggregate IT improvements into vast change programmes
  • Two fundamental elements of the Civil Service’s offering to its staff are career stability and breadth of experience. Transformation is often the antithesis of the career stability that has enshrined complex HR procedures and constraints into all people related changes, and has retained too many inward looking, low quality middle managers. Perversely, the opposite is true within the upper echelons of the Civil Service where the broad generalist model and short-term political pressure (to announce another successful initiative) dramatically shorten time in any particular role; For example, how can you lead a major, multi-year transformation if your incentives are entirely focussed on the mere two years that you may hold the role – and thus not contingent on seeing any change from policy conception to delivery?
  • In the 90s, aggressive outsourcing of IT capabilities stripped the government of its own IT experts. In addition, the (correct) requirement to foster competition between IT suppliers locked Departments into multiple contract ‘silos’ run by different providers. Step changes will likely require Departments to revisit embedded contractual arrangements from a position of relatively low expertise. We do not advocate a wholesale reintegration of IT supply, but rather a significant increase in the oversight capability by which government manages its suppliers

To face up to its own responsibility for fundamental change, the public sector will need to consciously address each of the above points throughout the life of every transformation effort. Each individual point has its own solution, about which much ‘best practice’ advice can be shared, but the collective responsibility to deliver successful outcomes in the face of massive external demands will first and foremost require exceptional leadership.

Exceptional leadership is required to give the Civil Service the will and the ability to take this medicine proactively, and in support of the broader economic downturn and ambitious public service goals to which government aspires. Strong leadership will reveal itself through timely and appropriate ‘step change’ interventions that build headroom well beyond existing CSR07 plans. The opposite approach, that of diligent adherence to existing plans, would act as a brake on progress in a time that requires far sighted and nimble delivery of outcomes.

Civil servants must not look solely to politicians for their inspiration, and the knowledge that an election looms within 18 months can be no excuse. From the outside, the inherent features of the public sector are difficult to understand and navigate, whereas changes led from within stand a fighting chance of answering the inherent challenges listed above. In this regard, we challenge Senior Civil Servants to counter each of the inherent features of the public sector listed in the section above, instead seeking:

  • Medium-term policy to delivery horizons that stretch far beyond the media cycle
  • Appropriate usage of customer insight to streamline business processes
  • Smart division of labour as a counter to excessive centralisation
  • Redefined people management approaches for both senior and junior civil servants
  • Active management of IT infrastructure and suppliers

Only the best and the strongest public servants can drive through a medium term transformation agenda in the face of political pressure for continued short term victories in the media. Successful application of this prescription requires investment in strong leaders, supported by relevant expertise, who both understand and challenge those barriers to change that permeate the public sector. Recruitment from the glut of unemployed bankers would be the wrong answer.

Senior public servants should act decisively and nimbly during this difficult time. They have long history of responding to politically imposed change, but at a time of tight cost management this raises the spectre of ‘salami slicing’ across all capabilities in a Department’s portfolio. Now more than ever, leadership will manifest itself in those who are able to impose change on their own terms.