The price of change

One of the things I like to include in my lectures is a set of questions that a public manager should ask their accountant/financial advisor to make sure that they are getting as full a picture as possible. I don't even think the public manager has to understand the questions (although, of course it is better if they do) but they should ask them anyway because they might find out something that they really need to know. A couple of examples of the questions: "what are the assumptions you've made?" and "have you done any sensitivity analysis?" This story suggests to me another question, one that Government ministers ought to have asked before announcing the closure of any organization: "what are the transaction costs?"

Transaction costs are the costs of making the change. It seems that the upfront cost of abolishing quangos is likely to exceed the first year savings. If a company were going to do a large-scale restructuring it might pay out a lot in redundancy costs and so on but swallow them in the name of future profitability. The cashflow might be a problem but if the plan for profitability is a good one the company could probably borrow the money. And there's the rub for George Osborne. What he wants is to reduce the country's deficit. Borrowing some extra money this year (and next?) to pay for the closure of all the quangos, restructure the NHS, etc is going to look like an own goal. There's no easy way out of the conundrum because the way to find the cash to pay the transaction costs would be to make yet more cuts but if he does that there'll be yet more transaction costs to pay!

As an aside, local councils have often found themselves in this position when they've had budget cuts to make and there is a procedure (under section 16 of Local Government Act 2003 if you really want to know) where they can request permission from the government to charge redundancy costs to their balance sheets, effectively putting off when they have to charge the cost against their annual budgets. I suspect lots of councils will be seeking this relief to prevent the cuts they have to make being even bigger. No such luck for George, though!

Pickles 'reconsidering pledge for councils to choose auditors'

Pickles ‘reconsidering pledge for councils to choose auditors’

By Jaimie Kaffash

8 October 2010

The government is reconsidering its commitment to allow councils to choose their own auditors, Public Accounts Committee chair Margaret Hodge has told Public Finance.

Hodge said she had concerns about councils being able to ‘hire and fire their own auditors’ following the abolition of the Audit Commission, which she put to Local Government Secretary Eric Pickles.

But, after meeting him, she was assured ‘there was a clear understanding’ from Pickles over these concerns, she told PF. ‘He is clearly making some modifications to ensure various principles are upheld, such as the Scarman principle – which states you shouldn’t hire and fire your own auditors. I think he is thinking about how he limits the freedom he was talking about, so that’s good.’

Hodge met with Pickles after he announced in Parliament last month that the National Audit Office would take over the Audit Commission’s value-for-money work. Hodge said in Parliament that Pickles had no right to make this decision without consulting the PAC, which the NAO reports to.

The PAC would be ‘prepared for the NAO to take on the value-for-money work’, she said, but added: ‘We wanted to make sure the NAO and the PAC didn’t lose the focus of our core business.

‘We wouldn’t expect the NAO to get involved in appointing auditors and we wouldn’t expect the PAC to be involved if another Doncaster emerged on the horizon,’ Hodge said, referring to an Audit Commission inspection, published earlier this year, which found that the Yorkshire council was not being properly run. ‘[Pickles] understood that.’

The PAC chair also said she was ‘sceptical’ about whether the abolition of the commission would save money.

A spokesman for the Department for Communities and Local Government told PF that the policy to allow councils to choose their own auditors remained unchanged.

via publicfinance.co.uk

Payment by results

I came across this paper the other day, where three partners in KPMG are calling for the vast majority of public services to be be financed on the basis of results. They say that this will ease the problems of inefficiency in the UK's public services. Perhaps it would...but I'm sceptical about that.

I can see two immediate problems. The first is knowing what results to pay for. It sounds easy, doesn't it but if payments are to be attached to achieving results it is critical that the correct results are used. in business generating sales leads to profits so it makes sense to incentivize managers to hit sales targets. Except sometimes it all goes horribly wrong such as when the banks created a global recession. The existing systems of performance indicators in the public sector don't have payments attached to them (in general) and yet things still go wrong such as this story about people losing their sight because of the Bristol Eye Hospital chasing performance targets. The adage hitting the target and missing the point never seemed more apt.

Second, let us say that the right results are identified for a specific public service. How is the cost going to be capped? Payment by results gives an incentive to achieve more results but the country's situation requires lower spending, which probably means less results.

I appreciate that the authors want to stimulate debate but the cynic in me wonders how the government would set up the monitoring and financial systems to implement a payment by results regime. Would they turn to management consultants?

Suffolk County Council update

I read here that Suffolk has approved the proposal to move to a model where all services are commissioned from third parties. The article identifies other councils who are considering adopting similar models. I agree with the comments in the article by Martin Taylor, chief executive of the Royal Society of Arts: "Success is all about the quality of the commissioning process. Probably the biggest weakness of contracting out is the quality of commissioning," and, "Suffolk needs to invest more in bureaucrats to have good quality commissioning."

Ignorance is bliss

Experience has taught me that the more one knows about a public service the harder it is to make decisions. This is because, I think, all decisions result in winners and losers and these have to be assessed, balanced out and justified. To be a lawful decision they have to be reasonable, too.

If one is ignorant of the consequences of a decision it makes the whole thing much simpler. I imagine Eric Pickles was happy to sign the decision to abolish the regional development agencies; it was an exercise in ministerial authority to do something he stated he would do when in opposition. I guess it would have been a much tougher decision for him if he'd known that the RDAs have outstanding liabilities of £1.5 billion and counting. It looks like Pickles's own department will have to pick up most of that, surely putting paid to some of the projects and programmes that Pickles would like to implement. And there is the possibility that the government will have to forego £1.9 billion of European Regional Development Fund money, too.

Unfortunately, we've seen the abolition of the Audit Commission is expected to cost £200 million meaning it will take four years for the claimed annual savings to recover the closure costs. The numbers are much smaller but the same pattern is repeated for the abolition of the Standards Board for England. Perhaps in the long term these are good value for money but if the aim was to reduce public spending in 2010 and 2011 they fail badly.

Politicians of all parties make bold statements in their campaigns that they are the people who can and will make the difficult decisions. Good. Let's hope that decisions about cuts following the spending review next month are difficult ones rather than simple decisions made in ignorance of the consequences.

Pay now or pay later

I read today that Suffolk County Council is on the cusp of making a decision that will see it outsource almost all of its services. I have mixed feelings about this.

One the one hand, it is a project full of interesting challenges. If I remember when I was a finance director I can imagine the sorts of issues that I would be thinking about if the council I worked for had a similar plan. There are simply loads of challenges connected with getting the outsourcing strategy right. It sounds simple to say we are going to outsource everything but the council needs to think about how it will package services. It is important that each contract is as independent from all the others as possible because whenever one contractor depends on another contractor (who is not a sub-contractor) to perform something there is risk to the client (ie the Council) of problems. The more contracts  and the more inter-related they are the more problems are likely to occur.

On the face of it there is not much interdependence between a highways service and libraries but there are at least two issues. The services are not dependent on each other but what if the council wants to have a single website with its contractors maintaining information about the services they each provide. This would require the council to provide (either directly or through an ICT contract) a standard website which the other contractors can access and update. These services immediately become dependent on the in-house ICT team or the ICT contractor, as the case may be. Similar issues could occur if the council wants to use one-stop shops and/or contact centres where the public can access all council services. The alternative to this would be to require every contractor to have its own arrangements for public access which would be a return to the old departmentalism and, likely as not, more expensive because of the duplication.

The second packaging problem is that if the council awards contracts for whole services on a county-wide basis it will minimize the interdependence between contracts but will prevent small community-based organizations from being involved. To go for smaller contracts solves that problem but adds costs because economies of scale are lost, both for the contractors and for the council's contract management team.

The Council also needs to decide how long each contract will be for. If lots of contracts are awarded in 2011 and 2012 in order to achieve the goal it would not want to have to re-tender them all together in 7 or 10 years' time. It would be better to have different contract lengths so that the workload of re-tendering is spread out.

As I said, I have mixed feeling about this proposal. If I were in Suffolk I would be interested and excited about addressing the challenges above. My concern, borne of experience, is that even after 30 years of contracting out services councils do not have enough commercial, financial and legal skills to do the work. However many staff Suffolk has who work in procurement and contract management, and however great they are at their job, there will not be enough to take on the task that faces them if the council approve the plans tomorrow. The consequence of spreading your resources too thin is that the contracts that are awarded are not good enough and the council and citizens will have to live with their shortcomings for a decade or more. The outsourcing project needs to be populated with commercially-aware managers who have experience of outsourcing, not with staff seconded from each service who have never seen a contract before. This, inevitably will cost a lot of money in the short term. Will the council be willing to meet the cost of getting it right or pay the price in the long term for getting it wrong?