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A perfect storm?

Monday January 18th, 2010

By Paul Connolly, Director of Policy and Strategy, Serco Consulting

Paul Connolly looks at the pros and cons of using collaboration in achieving efficiency.

The ‘cut’ is out of the bag. Prime Minister Gordon Brown used the c-word repeatedly in his recent keynote TUC address, defining a new political battleground for public spending: not whether the axe will fall, but where and how deeply. 

All parties will want to depict themselves as being both fiscally responsible and the protectors of public services. They will stress that they want to streamline government while protecting, even enhancing, ‘the front line’. Spend reductions as far as possible will come from increased productivity, competitive sourcing, lower energy usage, and the closure of low-priority programmes. 

This is the language of efficiency. It is the ‘more for less’ mantra – better service outcomes at lower cost – that has characterised government investment strategies since the Gershon Review. Yet the current fiscal challenge is a systemic shock, unprecedented in scale. Treasury projections are for overall spending growth of only 0.7 per cent from 2011-12. That is lower than during Mrs Thatcher’s famously challenging first term in the early 1980s. How will we cope?

Let us be clear: most people will not tolerate falling service standards. Those who advocate fiscal retrenchment as an inherent good, even if it entails piling popular services on the bonfire, will find few cheerleaders among voters. We are conditioned to expect service improvement as a right. We are constantly asked how services could be improved – in surveys, on feedback forms, in some cases when we serve on local service panels. Politically driven reform agendas, from the Citizens’ Charter and best value to transformational government and service personalisation, presuppose continuous service improvement. This conditioning will be difficult, if not impossible, to undo.

A high-pressure warm front of increased service expectations collides with a low-pressure cold front of drastic spending reduction. The result: a perfect storm.

These extreme weather conditions will impact local government particularly badly. Some councils already struggle to make ends meet. Even in the comparative buoyancy of recent years, many council services were squeezed as the lion’s share of spending increases went to health and education.  Councils are already one of the most practised parts of the public sector in trying to deliver more for less. But things are set to get much worse. And councils deliver some of the most ‘in your face’ public services, from cleaning our streets, collecting rubbish, providing meals on wheels, and deciding whether or not we can build a conservatory. Naturally, we care deeply about these things and want to see standards rise. Councils will thus need a new slogan: even more for even less.

The pain will not be evenly distributed either. Councils vary in size. While in Wales and Scotland, all councils are ‘unitary’ – providing all council services for their area – many parts of England are ‘two tier’, with county councils providing large services, including children’s services and adult social care, and an array of small districts providing many others. While large councils – big unitaries and counties – may withstand cost pressures, small unitaries and especially districts will struggle. Ask councils collectively to save 15 per cent over three years and a £2 billion metropolitan unitary will find it difficult enough. A £15 million district will struggle to do so without cutting frontline activities.

Does this mean we should reorganise local government? The 2006 Local Government White Paper kicked off the last major reorganisation. Two routes to efficiency were set out; creating unitaries and collaboration.

The unitary gauntlet was mostly taken up by county councils, some of whom bid to absorb the districts in their area, arguing that this would at a stroke reduce the number of managers and politicians needed to run services. The collaboration and shared services agenda is a more complex response to the same issues. Most in-house and contracted service provision in local government is ‘exclusive’ to one council. This limits the scope for realising economies of scale. By sharing back-office or even frontline capacity, councils can secure those economies. There are many examples. Recently, I advised two district councils, Redditch and Bromsgrove, on plans to integrate services and management capacity. Their aim is to make their resources go further, sharing capacity and creating a single management team, thereby reducing overheads and helping to protect frontline services. 

However, there are paradoxes and problems in these approaches. Most shared services collaborations in local government are between small numbers of players. Yet the fiscal challenge is very great. Economies of scale are self-evidently greater with more participants, especially for bulk or repeatable processes. Yet local government is understandably wary of more widespread service integration because of localism and sovereignty. The 2006 White Paper did not just talk about structural efficiency. It called on councils to do more to respond to community aspirations, exhorting authorities to lead in ‘place shaping’, to do even more to meet citizens’ needs and ‘personalise’ services. Since then, this localist dynamic has intensified. All the political parties want local people to have more say over services and are considering giving councils more freedom from central government control to enable them to respond to local needs and aspirations. 

Supporters of this approach sometimes argue that big collaborations or the creation of large unitaries takes decision-making away from localities and is at odds with localism. The approach, they suggest, is also inefficient. Failing to get things right first time is a major source of public service cost overruns, a problem compounded if decision-making is made more remote from citizens’ demands and interests. 

The evidence is mixed. Some large unitaries have introduced local committees and forums to balance local place shaping with scale. Collaborating and service-sharing authorities have started to explore how integrating management teams and service capacity can be squared with sustaining participants’ separate sovereign agendas. For example, local authorities A and B decide to pool their licensing functions, developing common systems for processing applications and using the same officers to advise members on decision-making. But while authority A wants a basic service with a single licensing committee, authority B is committed to an enhanced service with local licensing panels and personal visits to applicants by officers. This is perfectly possible, provided the pooled arrangement is commissioned differently by both authorities. A and B gain an inherent efficiency from sharing processes and capacity, but B pays more as, in effect, it chooses to buy more services from the pool. 

However, commissioning arrangements can become more complicated with more participants. This has tempted some third-party service providers to offer collaborators a single ‘vanilla flavoured’ approach to services. This may be acceptable in an ‘invisible’ back-office function, but is unlikely to work for frontline services, where councils’ desire to exercise their sovereign will is most intense. 

So the fiscal challenge implies larger collaborations and economies of scale, while the localism dynamic suggests that small is beautiful. Our storm becomes, if anything, more perfect. What can be done? 

In Los Angeles in the 1950s, a number of small communities, later called the Lakewood Councils, campaigned to separate from the LA County Authority. They faced scepticism. Could small councils really be efficient? Eventually, they seceded on condition they did not produce services themselves. They had tax-raising powers and made decisions affecting their communities, but commissioned services from elsewhere. They were successful and more efficient than Los Angeles, even though most used LA to provide services. As they could buy services from any source, they drove tough bargains, encouraging LA’s gigantic operations – far larger than any UK equivalent – to deliver economies of scale. In effect, they got better value for their residents than LA provided for its own.

The Lakewood example worked partly because of scale economies in service production, but also because of the efficiency that comes from being small.  Without service delivery responsibility, the Lakewood councils focused on what their communities wanted and commissioned accordingly. This strengthened the prospects of getting things right first time.

Adapting the Lakewood example could lead us away from the pain of unpopular reorganisations of local authority boundaries, and instead towards a revolution in how services are produced. Service companies could emerge, publicly or privately run, serving large clusters of authorities, even entire regions. These would have sufficient size to secure economies. But they could not exploit monopoly positions, since they would be commissioned by councils with the right to switch suppliers, potentially to innovative or niche local SMEs and voluntary organisations. Contestability would push the service companies to deliver scale economies and create adaptable service menus, supplying different authorities with different service formats. This might square the localism/efficiency circle and help councils get even more for even less.

Further information

For further information, please visit: www.serco.com/consulting

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