Efficiency, efficiency, efficiency

The Gershon Review: public service efficiency

and the management of change
 Efficiency, Efficiency, Efficiency
The Gershon Review: Public Service Efficiency and
the Management of Change

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David Coats is Associate Director – Policy at The Work Foundation. He would like to
thank his colleagues Alexandra Jones and Louise Horner for their valuable
comments on the text.

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 Contents
Executive Summary

1 Introduction

2 The Target for Efficiency Savings

3 The Gershon Recommendations

4 The Vision Thing

5 “Public Value” rather than modernisation and reform? Towards a conception of

citizenship

6 Implementation Problems

7 Measurement Problems

8 What is to be Done

9 Conclusion

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The Gershon Review: Public Service Efficiency and
the Management of Change

Executive Summary
• The next spending round will be tighter than its predecessor and this places a
premium on making better use of the resources available. Delivering 2.5%
efficiency savings in each year of the spending review period has been
identified as essential in delivering additional resources to the front line.

• This is a sensible approach given the fiscal constraints, but delivering the
Gershon objectives will require improvements in public service procurement
capacity and careful handling of industrial relations issues. It is not that the
Gershon objectives are undeliverable or illegitimate but that capacity
constraints exist that have to be addressed.

• The efficiency programme will lead to significant reductions in staffing and the
Lyons review will require the relocation of some public services outside
London. Taken together with the merger of the Inland Revenue and Customs
and Excise this is the most significant restructuring of public services for a
generation.

• Successful implementation of the efficiency programme demands effective

leadership from both government and public service managers. It is essential
for the government to be clear about their vision for public services otherwise
it will be difficult to exercise effective leadership.

• There is some confusion in government policy about the extent to which

“choice” is the driver of service improvement. Clearly choice is not possible in
many public services and it is not therefore clear where the incentive to
improve will come from.

• Clarity of vision demands a different approach and “public value” may be a

useful instrument in reconceptualising the discussion about public service
improvement and efficiency. Public value demands that government and
managers be clear about how public action delivers value for society in the
long and the short term. It is rooted in a belief that the state has a role to play
and that citizenship and accountability make public services distinctive.

• There are some significant practical problems in the path of the efficiency
objective that need to be cleared if public services are to deliver the
improvements desired by the Chancellor. In particular:

- Increasing “choice” may require surplus capacity in public services, which

is not necessarily consistent with the drive for efficiency. This tension
needs to be resolved in both the vision for public services and the
practical implementation of policies.
- Procurement skills are too weak
- HR policies and strategies are often not aligned with organisational goals
and many operational managers have poor HR skills.
- Unless handled carefully there could be significant industrial relations
problems in the future.

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 - Much more attention needs to be given to motivating the employees who
remain following a redundancy programme. This embraces questions of
public sector pay and the creation of greater opportunities for promotion or
career development.
- More attention needs to be given to the different roles of central and local
government.

• While there is real scope for efficiency improvement the extent of the possible
gains must be assessed with some care. Big improvements in productivity
followed the privatisations of the 1980s and 1990s and at first sight one might
argue that similar efficiency gains might be found in public services today. But
there are real questions whether the situations are comparable and
measuring productivity in public services is problematic.

• Successful delivery of the efficiency programme demands that further

consideration is given to:

- A clearer articulation of the vision for public services.

- A better alignment between organisational goals and operational
policies and strategies.
- Building management capacity – particularly in the fields of
procurement and HR.
- Forging a more constructive relationship with public service unions.
- Developing a new “implicit contract” between public service employers
and workers.
- Providing all employees with appropriate skills to improve public
services and manage costs
- Developing more sophisticated measures of public service productivity
and performance.

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 The Gershon Review: Public Service Efficiency and
the Management of Change

1 Introduction
The Chancellor announced in his pre-budget report that he had asked Sir Peter
Gershon to review the scope for efficiency savings across the public services. This
was partly a response to growing public concern that the increase in resources for
public services over the last five years had been “wasted” and partly a response to
an increasingly tight fiscal position over the next spending review period.

Room for manoeuvre in the future is constrained by the Chancellor’s two fiscal rules:

• The “golden rule” that demands government borrowing can only be used to
fund public investment (rather than current spending) over the course of the
economic cycle; and
• The sustainable debt rule which requires that government debt be held at a
sustainable and prudent level – effectively at less than 40 per cent of GDP
over the course of the economic cycle.

Budget 04 reflected these constraints, emphasising restricted funding for

departments over the next spending review period (SR04), from 2005-06 to 2007-08
and explaining that all public services would need to make better use of the
resources available in order to sustain progress and make further improvements in
service quality. In principle the approach is eminently reasonable. Who after all could
possibly identify themselves as an advocate of waste and inefficiency?
Nevertheless, there are some difficult challenges here for all public services that will
require clarity of vision and effective leadership.

The big question of course is what might happen if the planned efficiency savings fail
to materialise. Essentially there are two options. Either the Chancellor can raise
taxes or he can cut services to ensure that spending remains within the overall fiscal
envelope - further increases in borrowing are excluded by the golden rule. Both
these options are politically unpalatable and it is reasonable to assume that every
effort will be made to deliver the planned efficiency savings.

However, while it is right to seek the most efficient use of resources in a tighter fiscal
environment, it has to be understood that improvements in efficiency demand
improvements in managerial skills. At present there must be some doubt whether
the capacity exists to deliver more efficient procurement. There is also strong
evidence that HR skills are weak across the public sector at a time when the
successful management of employee relations is critical for service improvement and
efficiency1. The government and HMT in particular must be alert to these constraints
and must recognise the need for urgent action to plug these skills gaps.

The Gershon proposals must also be seen in the context of the Lyons and O’Donnell
reviews. Lyons is recommending the relocation of around 27,000 civil servants from
London to the regions and O’ Donnell has recommended that the Inland Revenue
and Customs and Excise should be merged. Both recommendations have been

1
For an account of the potential employee relations problems see Living on the Frontline,
TWF/PCS (2004)

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accepted by the Chancellor. Taken together these three reviews amount to the most
thoroughgoing restructuring of public services for a generation. Inevitably there will
be some uncertainty amongst public servants about their futures and managing the
transition will pose huge challenges for public service managers. The remainder of
this report outlines the scale of the task facing the government and charts a course
that will enable the potential challenges to be navigated with success.

2 The Target for Efficiency Savings

The Treasury has recognised that an exclusive focus on efficiency could prove
damaging to the achievement of other public service objectives – which is why the
Budget specifies a year-on-year efficiency target of 2.5% for all public services. This
commitment must be read alongside the decisions to hold administrative budgets for
the Inland Revenue/Customs and Excise, the DWP and HMT constant in nominal
terms for 2005-06 and 2006-07, which of course represents a real terms cut.
Furthermore, the administration costs for all government departments will be capped
at or below the nominal 2005-06 level for the remainder of the SR04 period.

There is a serious question whether the application of a blanket target of this kind is
the most effective way to deliver public service efficiency. Some departments may
find the target relatively easy to meet and could perhaps deliver more, while others
will find the target challenging. Recent experience of public procurement, for
example the “smart procurement” initiative in the Ministry of Defence, suggests that
efficiency savings are sometimes a long time coming and may not be delivered at all.

Public service managers may react to the demand for greater efficiency by reviewing
processes, the use of technology, the design of jobs and working practices. In other
words, they may adopt a strategic approach and consider how, over the period of
SR04, they can deliver more using the same level of resources, with the efficiency
goal integrated into policies for the recruitment, retention and motivation of public
servants.

For this reason some trade unions initially saw Gershon as an opportunity rather than
a threat, with possibilities being presented that the quality of public service
employment could be raised alongside service improvement and better value for
money. However, by the time of the Budget union opinion had shifted and most
responses were negative.

The principal reason for this is that the agenda seems to have narrowed to an almost
exclusive focus on efficiency – despite HMT’s protestations to the contrary. The
biggest risk is that public service managers will be under such pressure that they
have no time for strategic thinking and treat the demand for greater efficiency as yet
another cuts exercise. But as past experience teaches us, simply top slicing 2.5 per
cent from budgets can lead to crude decisions that eventually have an adverse effect
on service quality.

In practice some managers may take the view that the 2.5 per cent target is wholly
arbitrary and fails to take account of the diversity of public service experience. They
could decide that they have no alternative but to use arbitrary methods to deliver the
Treasury’s requirements. Paradoxically, the consequence could be less efficient tax
collection, less effective enforcement by Customs and Excise and poorer services for
citizens as “back office” activities are slimmed down to support the “front line”.
“Administration costs” can easily be characterised as “inefficient and wasteful
bureaucracy”, yet efficient administration supports the frontline. Populist rhetoric may

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secure electoral support but it can result in bad decisions with adverse
consequences for service delivery and the recruitment, retention and motivation of
public servants.

3 The Gershon Recommendations

The initial findings of the Gershon review, reported in Budget 04, suggested that
significant savings are to be found in the following areas:

• Procurement: There should be better use of shared purchasing

arrangements, increased use of electronic purchasing (including on-line
auctions) and more effective supplier management.
• The corporate back office: Savings should be sought in IT, finance and HR
through the development of shared services, the adoption of best practice
and the simplification of processes and procedures.
• Transactional services: Changes to the methods for tax collection and
benefit distribution, particularly through the use of the web and customer
contact centres could generate major reductions in costs.

Once again, all of this seems unexceptionable. Indeed, one might almost say that
efficient procurement, streamlined back offices and modern transactional services
ought already to be at the heart of the public management agenda. If they are not, or
have not been then it is legitimate to ask why?

Part of the answer may lie in the incentives that currently shape the behaviour of
public service managers. What is measured, monitored and rewarded has a
powerful impact on managerial decision making as well as style and culture. Under
the Conservative government the focus was on reducing costs, and under Labour
cost management remained important but resources increased significantly. This
famine to feast experience meant that some departments had difficulty in spending
the capital budgets they had been allocated by HM Treasury. But at no point in
recent history have managers been confronted with an absolute imperative to control
costs and deliver service improvement. A focus on efficiency and service quality will
require a different skill set and different managerial incentives.

Budget 04 sets out the government’s initial response to the Gershon

recommendations and indicates that some decisions have already been taken:

• DWP – reducing headcount by 40,0000 full time equivalent posts by 2008.

Savings will be reinvested in front-line activities like work-focused interviews.
• Single tax department to be created by merging the Inland Revenue/Customs
and Excise, leading to a net reduction of 40,500 jobs by 2008.
• DfES – reducing headcount by 31% by 2008, a net reduction of 1460 jobs.
• DoH - reducing headcount by 38% or 1400 jobs by 2008.

HMT suggest that “normal staff turnover” should be used to manage these headcount
reductions. Nevertheless, there will inevitably be some redundancies – of which
more is said below.

4 The Vision Thing

Successful implementation of the Gershon proposals depends on clarity of purpose.
In other words, the government must know what it wants from public services, must
communicate this vision with enthusiasm to all public service employees and must
maintain public support for their programme. There are serious questions about
clarity of purpose and communication with the workforce, which may imperil public

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support for modernisation and reform and may lead to some difficulties in making
progress towards the efficiency objectives.

This may seem like a rather odd point to make when the government has adopted
four straightforward principles of public service reform that are intended to underpin
the process of improvement and modernisation:

• National standards and accountability

• Devolution to the front line
• Further flexibility to make public services more responsive to citizens
• Choice and contestability

In theory each of these principles has equal weight, but as will become clear, it often
seems that the final principle trumps all the others. On the other hand, the Prime
Minister and the Chancellor appear to have adopted slightly different approaches,
with the Prime Minister emphasising choice and the Chancellor preferring the more
neutral expression “personalisation”.

Here is an example of the Prime Minister’s approach to the question:

It is only by truly transferring power to the public through choice, through

personalising services, that we can create the drivers for continuous
improvement in all our services.2

The Chancellor has taken a rather different view and has sought to set boundaries
for the appropriateness of consumer choice, particularly in health care:

Take the asymmetry between the consumer as patient – who may, for
example, be unknowingly ill, poorly informed of available treatments, reliant
on others to understand the diagnosis, uncertain about the effectiveness of
different medical interventions and thus is not sovereign – and the producer.
With the consumer unable – as in a conventional market – to seek out the
best product at the lowest price, and information gaps that cannot – even in
the long term – be satisfactorily bridged, the results of a market failure for the
patient can be long-term, catastrophic and irreversible. So even if there are
risks of state failure, there is a clear market failure.3

The most progress on choice has been made in education, and the Prime Minister
has given a high priority to choice in healthcare in the future. However, as many
parents know, school choice does not necessarily means that their child will actually
go to the school that they would choose first4. The principal reason for this is that
capacity is limited and not every child in a locality can go to the best school in that
locality. Indeed, in many cases it is schools that select pupils rather than parents
who select schools.

The problem is that to deliver choice as defined by the Prime Minister demands
surplus capacity – yet overcapacity of this kind is associated with waste and
inefficiency. Spending limits for health are already specified up to 2007-08 with

2
Rt Hon Tony Blair MP, We should not shy away from radical reform, Guardian public
services summit, 29 January 2004.
3
Rt Hon Gordon Brown MP, A modern agenda for prosperity and social reform, SMF Lecture,
February 2003
4
See Crouch, Commercialisation or Citizenship: Education policy and the future of public
services, Fabian Society (2002)

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growth fixed at 7.2 per cent per year in real terms. These large increases in
spending will inevitably produce additional capacity, but it is unlikely that they will
produce sufficient surplus capacity to make full choice a reality unless more
resources can be found from elsewhere. Similarly, the Chancellor’s emphasis on
“personalisation” of services, with better access and longer opening times may lead
to increases in demand which will in turn put pressure on budgets. One might
conclude therefore that the government’s vision is inconsistent in that choice and
personalisation can run counter to the demand for efficiency.

There is a wide range of services where choice for the citizen is not, cannot and
should not be a practical option. Government would probably not find it acceptable
for citizens to be able to choose whether they pay their taxes via the Inland Revenue
or payyourtax.com, just as it is impractical to give individual households a choice of
street cleaning options. Equally, it is difficult to see how customers can have “choice”
in planning decisions. Local authorities have clear policies and developers are not
going to be given a “choice” between more or less restrictive planning regimes. Of
course, the government might say that this is simply commonsense and that nobody
believes that choice is appropriate here. On the other hand, if choice is not to be the
force for improvement in these services then what is?

Whilst debates continue about the detail of the choice agenda, there are also
arguments that the more general emphasis on markets and contestability might have
an adverse impact on the public service ethos. In this context it is important to
distinguish between “intrinsic” and “commercial” motivations5. “Intrinsic” motivations
relate to the desire to do a good job and maintain professional standards or ethical
behaviour, with an emphasis on values like trust and respect. “Commercial”
motivations on the other hand are those that help to get things done in private
markets – like the desire to make a return to shareholders or maximise individual
reward.

There are clearly situations where one motivation is more appropriate than another,
and this distinction can be blurred by the “choice and contestability” rhetoric. For
example, patients would be legitimately concerned if clinicians were motivated only
by considerations of profit or pay, and parents would worry if teachers were
principally focused on maximising the returns to the shareholders of Educo plc. It is
essential to be clear that markets are good servants and at the same time
understand that they do not exhaust the full range of human values and aspirations.
Defining the limits to markets and developing a notion of citizenship are both
essential in conceptualising the public realm. At best one can say that this is work in
progress and success for the government depends on answering these questions
with a higher degree of precision.

Not only are there concerns about the impact that “choice” will have on the public
service ethos, but also about whether it is consistent with notions of citizenship,
universality and equity. The most frequently expressed concern is that the affluent
will exercise choice, with the less well off left with low quality “residual” services6.

Put crudely the argument between No10 and the Treasury might be characterised as
follows. In No10’s view the reform side of the investment and reform equation has
proceeded too slowly. The middle classes are becoming frustrated with the pace of
change and in due course will be unwilling to back a government that aims to fund
public services through taxation. Choice and contestability are essential instruments

5
Turner, Just Capital (2001)
6
Crouch, op cit

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in accelerating the pace of change and in maintaining public confidence. On the
other hand HMT argue that investment has delivered significant service
improvement. Progress can be made with a steady hand on the tiller, a devolution of
decision making, more sophisticated targets that create scope for local discretion and
a laser like focus on efficiency. The argument continues and the final destination of
government policy is uncertain.

Perhaps the biggest problem remains that neither the Chancellor nor the Prime
Minister has given any explicit recognition to the tensions between choice or
personalisation and efficiency. Nor have they given a clear account of how the other
principles of public service reform are to be weighed in the balance. Making
progress during SR04 depends on a high degree of honesty about the fiscal
constraints and a determined effort to be clear about how the government believes
the trade off should be made between “choice” and efficiency.

The lack of clarity in government policy and rhetoric so far has created two potential
difficulties. First, public servants often feel subject to initiative overload, involved
against their will in a permanent revolution, subject to an increasing range of
performance targets, tightly drafted public service agreements and bureaucratic
constraints that get in the way of effective service delivery7. They know that change
is unrelenting but may be sceptical about the need for change or may doubt the
capacity of public service managers to deliver change successfully.

The suggestion that further reform is needed because services are falling short of
public expectations compounds the problem by endorsing the view that public
services are inefficient and dysfunctional. Not surprisingly this has an adverse effect
on public service morale. Lower pay levels in the public sector are rarely identified
by employees as the reason for looking for a job elsewhere, whereas workload, work
intensification and “red tape” are the principal reasons given for leaving8. If the
government is serious about efficiency and service improvement then this situation
must change. Otherwise the government will face an uphill struggle against a body
of demotivated public servants, resistant to change and increasingly suspicious about
the trajectory of public service reform.

Second, there is some evidence to suggest that the electorate are willing to discount
the language of choice as nothing more than a presentational device. This is a
dangerous phenomenon when public trust in politicians is falling and it could
reinforce the sense of disconnection between politicians and citizens. Although this
is principally a problem for the government, the risks are equally acute for the
Conservative party whose use of the language of choice is, if anything, more
developed.

5 “Public Value” rather than modernisation and reform? Towards a

conception of citizenship
So if the government lacks a clear vision is there an alternative available that might
offer greater certainty? In other words, can the government find a narrative that goes
beyond the current thinking around choice, contestability and efficiency, resolving
some of the tensions and identifying a source of service improvement where “choice”

7
See for example, Recruitment and Retention: A public service workforce for the twenty-first
century, Audit Commission (2001)
8
Ibid

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is inappropriate? One possible approach to thinking afresh about these issues is the
notion of “public value”9.

For these purposes success in public services is defined as increasing their value to
the public in both the short and the long run – just as private sector businesses
maximise value for shareholders. Of course in some circumstances this might mean
increasing efficiency, effectiveness or fairness in the delivery of existing programmes.
At other times it may mean taking initiatives that respond to new challenges and new
political circumstances. The principal political challenge is to convince the electorate
that government policies are indeed effective in creating “public value”. There is an
added advantage here in that public managers are invited to be reflective about their
organisational goals and more innovative in considering how they can maximise
value. The purpose is to establish a managerial mindset where risk taking and
innovation are highly prized alternatives to predictability and bureaucracy.

“Public value” is a concept developed in the USA as an antidote to the view that
government is inherently inefficient and at best a necessary evil. This critique of
public action is less developed in the UK but is still popular on the centre-right. In
essence the public value narrative runs as follows. Government shields the country
from foreign enemies, keeps the streets safe and clean, educates the children and
insulates citizens from many man-made and natural disasters10. To this extent it is
clear that government creates value for society. However, the argument goes further
and responds directly to the anti-government case in the following terms:

[I]t is not enough to say that public managers create results that are
valued; they must be able to show that the results obtained are worth
the cost of private consumption and unrestrained liberty forgone in
producing the desirable results. Only then can we be sure that public
value has been created11.

Although “public value” was initially developed as a criterion for managerial success,
it is clear that it may have wider political application and can usefully shape thinking
about how public services might be redesigned to meet today’s needs. A further
advantage of course is that “public value” does not come with the negative
associations that have adhered to “modernisation”, “reform” and “efficiency” over
recent years. One might say then that it allows for a more sophisticated dialogue
with both public service employees and citizens.

It is difficult for employees and their representatives to argue that they are opposed
to the pursuit of public value. Why would anyone want to work for an organisation
that was failing to achieve its core purpose? To that extent public value is a useful
device in creating the sense of shared endeavour that is critical to organisational
success. Government, public service unions and employers all want public services
to be successful, yet today they find it hard to have a constructive discussion about
the best way forward. Forging a new language to reconceptualise the problems of
public service improvement would be a big step in the right direction.

Politicians, in line with their electoral mandates, have to specify service objectives,
but the question then for public managers is: given these objectives, how can we
make this service the best that it can be, using the resources that the politicians have
made available? Adopting this approach requires managers to identify the drivers of

9
Moore, Creating Public Value (1995)
10
Ibid p.29
11
Ibid, p.31

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change and improvement where “choice” is not appropriate. It is consistent with the
devolution of responsibility to the lowest possible level – because these are the
people most likely to know “what works” – and the establishment of clear lines of
accountability, since managers have to account to their political masters and citizens
for the actions they have taken. It also demands a keen awareness of citizen
expectations and helps to reconcile some of the tensions between “choice” and
“efficiency”. It is difficult to construct a case that public value is being created if value
for money is being sacrificed.

Public value might help in tackling the target culture too since it focuses the minds of
public service managers on how they can deliver long-term service improvement for
citizens. It is often said that the process of measuring, monitoring, inspection and
audit has developed so that many things are subject to targets that have little
relationship to outcomes. So far service users have had only a limited role in the
selection of targets and in principle a service could be meeting targets very
effectively but still fall well short of citizen expectations. Public value helps by fixing a
criterion for assessing the relevance of any target: to what extent does hitting a
particular measure genuinely contribute to the creation of public value?

The Treasury is alert to the problem and in November 2003 published a new guide to
the selection of targets12. This makes clear that stakeholders should be involved in
the process and that agencies ought to have the following pieces of knowledge at
their disposal:

• Who their “customers” are;

• What is important to them;
• Their needs – what do they want and expect?
• What drives a positive or negative customer experience?

Of course, this is still expressed in “consumerist” language, which easily leads to the
cast of mind that public services are identical to services available in private markets.
It emphasises further the fuzziness in the government’s definition of the public realm
even though it represents a welcome retreat from indiscriminate target setting and
central control.

Yet once again, “public value” creates a conceptual framework for thinking about
these issues that enables us to identify what is distinctive about public services.

[W]e should evaluate the efforts of public sector managers not in the
economic marketplace of individual consumers but in the political
marketplace of citizens and the collective decisions of representative
democratic institutions13.

In other words, citizens are more than consumers. They have rights to hold
politicians and policy makers to account under a regime that is at least as rigorous as
the supposed “consumer sovereignty” of the private marketplace. A disgruntled
group of customers cannot throw out the board of Marks and Spencer or Tesco if
they are dissatisfied with the service they have received (although they can choose
to shop elsewhere), but they can throw out the controlling group on the local council if
the bins are not emptied or if unpopular planning decisions have been made – and
they can throw out national government at a general election.

12
Setting Key Targets for Executive Agencies: A Guide, HMT, Cabinet Office, NAO (2003)
13
Moore, op cit, p.31

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This is not to say of course that public services have always met the standards
required by this notion of citizenship. In far too many cases people have been faced
with bureaucracy, poor delivery and services designed in the interests of the
producers rather than users. But the goal must be to establish a culture where public
services have higher standards than the private sector, where citizens can expect
more than good “customer care” and where it is clear who is accountable and what
can be done about service failure, in other words where it is clear precisely how
public value is created and sustained. “Choice” and “contestability” cannot guarantee
that health professionals will treat patients with respect or that their condition,
treatment and progress towards recovery will be explained clearly. Far better
perhaps to rely on the “intrinsic” motivations referred to above, and use commitment
to certain professional standards and values to generate a change in the culture.
Indeed, this is essential in explaining why public services are different from the range
of consumer services available in the private marketplace. It is not simply the
absence of commercial motivations, but the emphasis on values like trust and
respect for individuals that makes public services different.

This line of thought can be developed further to say that political debate is principally
a competition between different conceptions of citizenship. What range of services
ought the state to provide to give all citizens the means to “the good life”? How much
should be collectively provided through taxation and how much should be left to
individuals? What do citizens need to play a full part in society, to have access to the
“great goods” that enable them to flourish as human beings? This goes beyond a
simple definition of the appropriate extent of public provision and is rooted in a
particular notion of the good life. Put simply these “great goods” include: physical
security, respect and self-respect, private and public relationships with others and
access to “the satisfactions of culture, including religion and diversion”14. All of these
“great goods” depend on decent health through life and a reasonable expectation of
longevity. Yet it has also been clear since the mid / late nineteenth century that the
market, left to itself, will not provide decent housing for all, or universal healthcare, or
equal access to quality education or an effective police service.

The disagreement is therefore between those who believe that the state has a central
role to play and those who believe that markets are best, albeit that a degree of light
touch regulation may be required to take the rough edges off unconstrained market
outcomes. One of the government’s fundamental difficulties is that they have failed to
establish a distinctive position on the state/market continuum. To treat the provision
of public services as just another form of consumption is to drain the public realm of
meaning – and therefore seems to run counter to the government’s wider purposes.
It surrenders the terrain that makes public services distinctive and fails to give
sufficient weight to political accountability. The government place great weight on
their commitment to the public realm, but have had difficulty in giving real substance
to their rhetoric.

A sceptic might say however that this is all far too philosophical – what possible
relevance can it have to the pursuit of 2.5% efficiency savings in SR04? The best
response is that delivery of the target will only be achieved if the government has a
clear sense of purpose, if there is a well-articulated vision for the public services that
can be understood by all public service workers. Managers need this clarity of vision
from the government if they are to exercise effective leadership.

Clarity of vision is essential too in identifying organisational goals to ensure that

strategy and HR policies are properly aligned. Other employees need to understand

14
Honderich, After the Terror (2003)

14
how their work contributes to organisational goals and must see that they are
properly valued and rewarded. This means that trade unions need to be engaged as
effective partners in delivery of public service improvement. They must be involved
at an early in the process, properly informed and consulted and given the opportunity
to influence the course of events15.

If the government fails to articulate this clear sense of purpose with a commitment to
shared objectives there is a risk of poor managerial decision making, worsening
industrial relations and increasing employee disengagement. This is how the vision
for public services is linked to the delivery of public services and the achievement of
the efficiency objectives.

6 Implementation Problems
There are four major practical problems with the implementation of the Gershon
recommendations all of which relate directly to the preceding discussion:

• The ability of public service managers to deliver the target

• The industrial relations consequences of managing the transition to a culture
of “more outputs for the same input” – including handling the likely headcount
reductions
• Motivating the employees who remain once the process has been completed.
• Ensuring an appropriate balance between central and local decision-making.
In other words, is the government willing to relinquish a degree of central
control?

Managerial capacity: Achieving the efficiency goals requires a body of public service
managers able to make well-informed procurement decisions and good judgements
about the restructuring of back offices and transactional services. Taking
procurement as an example, while it is true to say that progress has been made,
there can be little doubt that “procurement expertise has not been well represented in
[central government] departments and has not usually been a competency required
of senior managers”16. The OGC have also found that only half of all central
government departments maintain a database of suppliers and only a quarter assess
the extent of suppliers’ dependency on them. A cause for greater concern is the
relatively weak skill base across central government – less than a quarter of
procurement staff in departments and fifteen per cent in agencies have proper
procurement qualifications. There is also evidence to show that the majority of
improvements in procurement have come from a relatively small number of large
departments17. Even though there is no authoritative study on procurement skills in
the NHS and local government, it would be reasonable to assume that the same
problems are to be found there.

One might say therefore that the Gershon recommendations on procurement depend
on some rather heroic assumptions about the speed at which this skill base can be
developed. Plugging this gap successfully demands a significant investment in the
training and development of procurement staff at a time of tightening budgets. While
the objective of improving procurement is self-evidently reasonable there must be a
serious question whether the proposed improvements can be delivered in the short-
term. What is needed here is a medium term programme to improve procurement
15
See An Audit of Trade Union and Employee Involvement in Public Service Reform, The
Work Foundation/OPSR (forthcoming)
16
Improving Procurement: Progress by the OGC in improving departments’ capability to
procure cost effectively, TSO (2004)
17
Ibid

15
capacity, a programme that the OGC is developing but which will only deliver
significant improvements beyond the SR04 period.

Similar considerations apply to the use of information technology to improve the

efficiency of “back office” functions. The public sector does not have an encouraging
track record in the procurement and use of IT. Once again large skill gaps may need
to be filled before the Gershon efficiency gains can be fully realised.

There is also a question about the extent to which value for money improvements are
to be found in the HR function at a time when decisions on headcount reductions are
likely to emphasise the importance of HR and place a heavier burden on the
management of employee relations. Similarly, slimming down HR will mean that
operational managers have to take responsibility for wider range of functions. Once
again, this demands a proper assessment of the managerial skill base and the need
for investment in training and development so that operational managers are properly
equipped to handle HR issues.

As with procurement, this represents a significant challenge for public services.

Recent research suggests that there is inadequate HR capacity across much of local
government, with only 58 of 150 authorities assessed having effective people
management policies and strategies linked to organisational objectives18. This is a
significant constraint since delivery of the efficiency objectives will depend on
managing people effectively as part of a wider change management programme.

In other words, public service organisations will need a comprehensive strategy to

link organisational goals to training and development and HR policies. They will
need to plug skills gaps in procurement, people management and change
management. This is a substantial undertaking and it will take time to achieve; yet
time is one thing that public services do not have. The pressure is for immediate
improvement over the SR04 period and managers will be under great pressure to
make rapid decisions. The risk of poorly configured and badly implemented cuts
exercises should not be underestimated. This is a potential threat to the achievement
of the government’s service improvement objectives.

Industrial relations: These pressures may create some major challenges for public
sector industrial relations in the immediate future. There has been an apparent
upsurge in industrial militancy across the civil service, with strikes so far this year in
the DWP, the Child Support Agency and the Courts Service. In 2002 local
government witnessed the first national strike for twenty years and, while the causes
of the dispute were supposed to be tackled through the Local Government Pay
Commission, there is no sign of a comprehensive new local government settlement
to match Agenda for Change in the NHS. The last two years have also been
characterised by continued disagreements about the modernisation and reform of the
fire service.

This is not an auspicious point from which to embark on a major efficiency drive and
the government may have worsened the situation somewhat by “surprising” the
unions with the scale of the job losses announced in the Budget.

But going beyond these immediate problems there is a wider question about the
public service employment contract. Just what is the nature of the implicit agreement
today between public service employers and workers? In the past this was an easy
question to answer. Public service employment was characterised by a higher

18
Managing People, Audit Commission (2003)

16
degree of employment security than the private sector, somewhat lower wages and
generally superior occupational pension provision. Employment security is now seen
to be under threat from efficiency and the extension of contestability, pay is to be
increasingly linked to individual performance and final salary pensions may be
replaced over time by defined contribution arrangements for new employees. The
proposal to raise the public service pension age, which looks like a modest reform to
workers in the private sector, is seen as a harbinger of a wider erosion of pension
provision, further undermining the implicit contract between public service employers
and workers.

Unions have also expressed concern about the impact of relocation, suggesting that
the workers most likely to be affected in London will be those from ethnic minorities.
Moving a function from London to the regions might, it is said, lead to a much less
diverse public service workforce.

All of these factors are important in shaping the industrial relations environment and
need to be handled sensitively. The government has embarked on the process of
forging a new relationship with the unions through the Public Services Forum, trying
to create a genuine sense of shared purpose. But the Forum is not an appropriate
vehicle for handling difficult industrial disputes, and the sense of shared endeavour
could be undermined by a rising tide of industrial action.

Motivating the workforce: Perhaps the biggest challenge for public service
employers is to motivate those employees remaining following the planned staffing
reductions. This means that the government cannot avoid considering how to rebuild
the implicit contract between public service organisations and the workforce. The
government needs a public service employee relations agenda that is consistent with
this goal.

Some questions that need to be answered include:

• How can public service employees be given a sense of pride in their work?
• What is it about working in public services that engenders a sense of self-
respect and a belief that individuals will be respected by their colleagues and
their managers?
• How can public services accommodate the desire for people to “get on” at
work? In other words, what opportunities should be available for training,
development and promotion?

These are all questions that public service employers might address in partnership
with public service unions. Agenda for Change in the NHS is a useful model. It has
simplified the pay system hugely and, assuming the unions accept it, will create real
opportunities for career progression, particularly for lower paid staff, as well as
tackling the gender pay gap. Unfortunately, experience elsewhere is not so
encouraging and the agenda over the next year may be dominated by discussions
about staffing reductions or the need to relate pay more closely to individual
performance.

Despite the difficulties, there are some real opportunities here to address the
problems documented in the Audit Commission’s report on recruitment and retention.
Furthermore, there is a possibility to develop a more sophisticated policy for public
sector pay that links pay systems to the delivery of organisational objectives,
including the recruitment, retention and motivation of high quality staff. This means
that the government must move on from a focus on narrow measures of individual

17
performance and consider the motivational effects of the intrinsic rewards that will
result from answering the above questions successfully.

Central/local tensions: Central government has direct control over the NHS and the
civil service, but much of public spending is controlled by local government who will
also be subject to the Gershon objectives. So far this relationship has not been well
articulated. In practice local government will be faced with a somewhat lower
spending allocation with almost complete discretion over how these tighter budgets
are to be managed. This may pose some problems for the centre in that the
changing political complexion of local government now means that key decision
makers may no longer share the government’s objectives.

There is also a tension between the centrally driven efficiency objectives and the
desire to create scope for more local decision-making – not just in local government
but across all public services. The question then is whether the government is willing
to take the key national strategic decisions and then leave practical implementation
to the front line? While HMT have said that they are developing a new approach to
public service agreements that allows for more local discretion, there will continue to
be careful monitoring by the centre of whether the 2.5% target is being met. Whether
this will constitute a genuine devolution of resources and decision making to the front
line remains an open question.

7 Measurement Problems
In our response to Budget 04, The Work Foundation noted that significant increases
in productivity followed the privatisations of the 1980s and early 1990s. Productivity
gains in gas, electricity and steel ranged from 70% to 102% and BT saw increases of
180%. Companies such as Rolls Royce and BAA gained 100% and 114%
respectively. The employment impact varied from a job reduction of 75% in the case
of British Steel and a job increase of 15% in the case of BAA.

However, some caution must be exercised in predicting similar potential increases in

productivity through the implementation of the Gershon recommendations. First of
all, these industries were exposed to immediate international competition or were in
the process of being readied for market liberalisation. Many of these efficiency gains
followed the stripping out of swathes of activity and a retreat from competing in
certain markets – for example in high volume steel production. Second, these
productivity gains were achieved at a time when private sector productivity was rising
rapidly too, partly through a weakening of union power, but principally through the
removal of restrictive practices to respond to a more competitive environment and the
closure of many “uncompetitive” businesses. The situation in public services today is
not directly comparable.

It is also important to recall that there are significant problems with the measurement
of public service productivity19 - so even if improvements in efficiency are taking
place they may not be adequately accounted for. Once again, the Treasury is alert to
the problem and has asked Sir Tony Atkinson to explore the development of more
sophisticated measures of government output and performance.

19
Pritchard, Understanding government output and productivity, Economic Trends, July 2003

18
The most recent analysis20 suggests that government productivity fell between 1995-
2001 indicating that resources were being used less efficiently. But, there are a
several reasons why this might have been the case:

• Increases in spending may have been used to invest in activities that might
generate more output in the future.
• The increases in spending might contribute to things that are not measured in
the national accounts.
• The conventional output measures might not have measured all the outputs
being produced.
• The output measures may have failed to reflect all the quality improvements
made to respond to rising citizen expectations or more demanding service
standards.

Furthermore, successful public service delivery is more about outcomes than

outputs. Initiatives that contribute to better outcomes may not necessarily be
reflected in more output. For example, the government may adopt the objective of
reducing the incidence of fires and making them less destructive. This could be
achieved through: better fire fighting, fire inspections and other prevention activities,
a programme to encourage the installation of fire alarms and improved building
standards. Obviously all of these activities create public value, they all deliver the
desired outcome, but only the first two are focused on outputs.21

Much of the recent criticism of the government has also focused on falling labour
productivity. But in some cases a fall in labour productivity may be a desirable
outcome or even an explicit policy objective – more teachers with smaller classes for
example.

What is needed is a much better measure of overall public service performance. The
Atkinson review will be a major contribution to the process and the further
development of the notion of public value would assist in a more sophisticated
analysis. Insights from private sector experience are instructive here too. For
example, The Work Foundation’s Work and Enterprise Commission of Enquiry has
developed a high performance matrix for private sector organisations22. The central
finding is that the best performing companies in the UK do not focus on one objective
like improving productivity or maximising shareholder value but address a more
complex set of objectives in the following areas, all of which, if managed well, will
contribute to high performance:

• Customers and markets

• Shareholder value
• Stakeholder value
• Managing people
• Creativity and innovation

Difficult trade offs are required between each of the areas of the matrix, but the
neglect of any one of these areas is likely to result in worse overall performance.
Obviously, the matrix cannot be applied in an unrevised form to public service
organisations, but it ought to be possible to adapt the model to capture the notion of
public value and produced a more sophisticated measure of public service outcomes

20
Ibid
21
Ibid
22
The Missing Link: From Productivity to Performance, TWF (2003)

19
rather than a focus on pure output measures. Potentially, it should be possible to
embrace both productivity and citizen satisfaction in the model, alongside a
recognition that good governance in the public sector is distinctive from good
corporate governance.

8 What is to be done?
So much then for the diagnosis, but what ought the government to do? What
measures need to be taken to ensure that the efficiency and service improvement
objectives can be delivered? How should trade unions be engaged in the transitional
process? What needs to be done to reconstruct the implicit contract between public
service employers and workers?

The context for this part of the discussion is that the government is right to pursue the
efficiency goal, but certain conditions need to be met to improve the likelihood of
success. For the avoidance of doubt, the argument is not that the Gershon
objectives are unachievable or illegitimate, but that the government, and in particular
HMT, need to be alert to capacity constraints and potential industrial relations
problems.

Possible areas for further consideration include:

• The articulation of a clear vision for public services, rooted in the notion of
public value.
• A clear linkage between organisational goals (service improvement and
efficiency) and managerial skills/incentives, HR policies and strategy
(including pay) and change management strategy.
• Action to identify managerial and other skill gaps to improve capacity across
the public services.
• The development of a new relationship with trade unions based on more
effective information and consultation with a commitment to solve problems
together.
• A reconstruction of the “implicit contract” between public service employers
and workers with a focus on intrinsic rewards as well as pay.
• The development of more sophisticated measures of public service
productivity and performance.

The articulation of a clear vision for public services: Reference has already been
made to the notion of “public value” as a possible device to rethink the government’s
approach to public services. The aim must be to develop a vision that can secure the
commitment of the electorate and public service employees. Public value offers an
opportunity to develop a consistent narrative about public services going beyond the
language of “choice” and “personalisation”. It is designed to allow policy makers to
be explicit about how public action creates value and why it is worthwhile funding
public services through taxation.

Public value also gives policy makers a framework for rethinking the target culture. If
the aim is to deliver short and long-term value to the public then any target can be
assessed as relevant by the extent to which it is a useful measure of the creation of
public value.

A linkage between organisational goals and policies/strategy: At present there is

often a disconnection between organisational goals, operational policies or strategy
and organisational capacity. For example, the Audit Commission’s study reveals that
many local authorities have yet to develop HR policies that support organisational

20
objectives. Similarly, the OGC’s study shows that while considerable emphasis is
placed on smarter and more efficient procurement, there is a large skills deficit
amongst civil service procurement staff. Resolving these problems depends first on
a more effective operational planning process where strategy is aligned to the
achievement of organisational objectives. While some progress has been made,
much more could be done. The clarity of the government’s vision is essential in
setting the context within which public service managers work. They will be unable to
exercise effective leadership in the absence of this vision.

Equally, there is a big question about managerial incentive structures here. What is
measured, monitored and rewarded ought to be relevant to the achievement of
organisational objectives. This means that managers should be rewarded for both
service improvement and efficiency. It also means that more attention should be
given to rewarding mangers for effectiveness in informing, consulting and involving
public service employees in the process of reform.

Building management and organisational capacity: Of course it is not sufficient to

have a clear vision, objectives, strategy and policy unless an organisation has the
capacity to implement these elements effectively. There is a strong case for saying
that all public services ought to incorporate a managerial skills audit in their plans for
the next three years – with a clear set of actions designed to plug managerial skills
gaps. This may look like an enormous undertaking, but some of the institutional
infrastructure is either already in place or is being developed – with the Centre for
Management and Policy Studies in central government, the IDeA in local government
and the reconfigured modernisation agency in the NHS.

Public managers will also need a keen appreciation of citizen expectations. This
means that public services must get closer to citizens and all employees must
understand what contribution they can make to deliver better public services. Another
priority must be to ensure that managers are properly equipped with the skills to
make these judgements – they need to be able to collect information about
perceptions of service delivery, reach some conclusions about necessary changes in
operational policy and make these changes a reality. Similarly, there is a need for all
public servants to have a similar appreciation of the need to treat service users with
respect – as more than just “consumers”. All employees, whether managers or
otherwise need a set of skills consistent with the delivery of these objectives.

The aim here is to improve the quality of management decisions by building the
capacity to manage and respond to change. If the programme is successful then the
outcome will be change that delivers sustainable service improvement rather than a
narrow focus on cutting 2.5% from operational budgets.

Forging a new relationship with the public service trade unions: It is a good general
principle that employers get the trade unions that they deserve. The apparent
increase in militancy across the public services might be attributed to union
leadership changes, but in a world of compulsory strike ballots and elections it is hard
to argue that there is no genuine discontent amongst public service workers. The
government needs to be alert to the underlying causes of increasing militancy and
must take measures to improve the industrial relations climate if service improvement
and efficiency are to be successfully achieved.

In practice this means that public service managers should involve unions at the
“glint in the eye” stage when a change programme is being developed and should
operate a “no surprises” policy. Of course this is easier said than done, particularly if
managers are on the receiving end of high volume trade union rhetoric.

21
Nevertheless, there is ample evidence to suggest that forging a high trust relationship
with a trade union delivers better organisational outcomes, a better industrial
relations climate and higher levels of job satisfaction.

The key is to develop a sense of shared endeavour and be willing to give unions real
influence over the process. This in turn demands a change in behaviour and culture
from trade unions. It simply is not acceptable to say “no” to any proposal for change
and defend an indefensible status quo. Better for all parties to ask themselves the
following question: how can we, working together, solve the problems confronting
both unions and public service employers, in other words how can we deliver public
value? This may seem like a naïve position given the recent pattern of events, but
unions are pragmatic enough to understand that if public services are not valued then
their members’ employment security is at risk. That ought to create sufficient
common ground to develop a more constructive relationship in the future. In practice
it means that unions should be at the heart of the relocation and redundancy
processes in the civil service and should be talking now to all public service
employers about the delivery of the Gershon objectives.

Building a new “implicit contract” with the public service workforce: Part of the
dialogue with the unions has to address the question of how public service workers
are to be motivated and rewarded in the future. Many elements of the historic
contract have been eroded over the last decade and this has been amply
documented in the Audit Commission’s work. Perhaps the starting point should be
the development of a systematic approach to public sector pay. So far the focus has
been on relating pay more closely to individual performance, but the evidence of an
impact on organisational performance is patchy and there is support for the view that
performance pay has had an adverse effect on motivation and commitment23. The
Treasury could be clearer in explaining what they believe public sector pay policy is
for and an assessment could be made of the extent to which current policy supports
organisational objectives – or the delivery of public value. Most importantly, both
unions and public service employers need to reach an understanding about what
makes public service employment worthwhile. How, to coin a phrase, can the public
services become “an employer of choice”? Agenda for Change in the NHS is a
useful working model that might be applied more widely.

Furthermore, it is important to consider how public service employees might be

enabled to “get on” at work. To what extent can public services provide a ladder of
opportunity for all workers? Once again, Agenda for Change and the NHS University
are major steps in the right direction, but progress elsewhere has been slow. A
similar approach was adopted by the Local Government Pay Commission, but the
implementation of their recommendations has been dashed on the rocks of “business
as usual” pay negotiations.

Develop a more sophisticated measure of public service productivity and

performance: The problems of measuring public service productivity are well known
and work is already under way to produce some more effective metrics. However,
even if these problems can be solved there is a wider question whether a productivity
measure is the best benchmark for public service performance. It fails to capture
notions like citizen satisfaction and is still too focused on outputs rather than
outcomes. That is why The Work Foundation has suggested the development of a
public service high performance index with a focus on the delivery of public value.

23
French and Marsden, What a Performance: Performance Related Pay in the Public
Services, CEP (1998) and Marsden, Renegotiating Performance: The Role of Performance
Pay in Negotiating the Effort Bargain, CEP (2003)

22
9 Conclusion
SR04 will demand some tough choices about public spending – the public finances
do not allow anything less. While it is right for the government to focus on service
improvement and efficiency these objectives are not unproblematic. Greater clarity in
the vision for public services is a prerequisite and HMT should recognise the big
constraints imposed by the limited managerial skill base. Furthermore, industrial
relations issues must be handled sensitively so that the programme is not deflected
by a rising tide of disputes with trade unions. It is essential that more attention be
given to the public service employment package. The stakes are high, particularly
because the government faces a more challenging political and economic
environment. Delivering the Gershon objectives is not an impossible undertaking but
it is challenging. Whether this challenge can be met will test the capabilities of
ministers, public service employers and trade unions.

23