Getting out of Labour’s economic mess

New Labour has made a horrible mess of the economy.  We all know that.   But curiously the very scale of the mess they’ve made offers hope for the future and a way out of the financial crisis if we have the courage to think differently, be radical and rectify some long-standing problems at the heart of government.  Let me explain. 

My starting point is Psion, a smallish manufacturer of hand-held computers which has had an eventful two years since a new management team took over in April 2008.   After a year or so studying the problem the new team cut the Company’s cost base by 41% and simplified operating structures to purge bad habits and duplications that had been accumulating since the dot.com bubble era according to the April issue of Accountancy magazine.   Now the business is at last able to start thinking of the future in a positive way and has started investing in the future.

So what?  Smallish companies get into difficulties and then sort themselves out and move forward – or don’t and fail – all the time.  Indeed they do; it’s not that unusual, even in much larger companies than Psion as I know from personal experience.  But if Psion, operating in the private sector and having to earn its living in competitive markets, could fall into bad habits on such a large-scale in less than 10 years how many bad habits has Her Majesty’s Government accumulated?   Public sector employment is currently around 6.1 million (pdf) in an organisation that is vastly more complicated and diverse than Psion and has had far longer to get bad habits – it’s an open question how much real reform there has been since the Northcote-Trevelyan Report of 1854 which led to the formation of the modern Civil Service.  Although there have been some reforms – for instance Thatcher introduced, and New Labour elaborated, a complex network of targets – they have not made the public sector more efficient or more accountable.   Targets do neither as the government ought to by now have worked out. 

A reasonable inference is that inefficiency and waste in the public sector have reached mind-boggling proportions – a conclusion that abundant anecdotal evidence supports and which the public clearly believe based on their contact with the government and its many agencies and outposts.   From a managerial point of view waste and inefficiency amount to a huge national overhead, consuming scare resources but delivering nothing beneficial in return.  No company can long survive carrying a deadweight of fat and neither can a nation, particularly in the modern globalised world.  However, to judge from the political debate of recent weeks no-one in the Westminster Village has much idea what might be done about it.   The continuing default assumption is therefore that cost saving = service cuts even though this is a nonsense.  Thus the debate is conducted in terms of whole departments or particular programmes, e.g. the NHS and Education are to be ‘ring-fenced’ or Trident will go.   There is no case whatsoever for ring-fencing any department although some identifiable programmes could usefully be cut yielding savings of perhaps £15bn depending on which are cut.  But for me that misses the larger point.  Most of the waste is deeply embedded in the working habits of a public sector organisation that has gone too long without a managerial spring-clean and big savings should (and could) come from programmes which no-one proposes cutting – Education included.

Assume by way of thought experiment that much of the waste could be eliminated over a period of years.  How important would that be?  Government spending comes to around £620bn with a forecast deficit of £167bn – hence the oft-quoted statistic that it is having to borrow one pound in every four spent – so, if the savings were, say, 20% (just half those of Psion) then the saving would be £124bn almost closing the gap; if savings reached 30% the deficit would turn into a modest surplus.  Moreover, the same accumulated bad habits that lead to waste make an organisation sluggish, unresponsive to its clients and generally unfit for purpose – which was the description famously applied by John Reid to the Home Office in 2006 but which is equally true of much of the rest of government.  So cutting waste will create an efficiency dividend in addition to cost savings.

Clearly, arguing by analogy with corporate experience is risky but as it turns out we don’t have to.  As long ago as the early 70s Leslie Chapman, then a senior civil servant, demonstrated that it was possible to save a typical 33% (his account of this is documented in his book “Your Disobedient Servant”), yet his reforming ideas were sidelined and never implemented.  More recently Prof John Seddon has shown that it is possible to achieve savings of 20-40% and simultaneously improve service delivery by abandoning the government’s target-driven approach in favour of a systems-based one (as explained in his book “Systems Thinking in the Public Sector”).   The difficulty appears to be that in best – or worst – “Yes Minister” tradition the senior civil service doesn’t want to know.  A perverse reward system has become established whereby inertia and complacency are rewarded and lack of clear accountability is endemic (if anything goes wrong it’s usually found to be a systemic failure with no individual to blame).  Top grades enjoy immense prestige and excellent salaries; on retirement they can look forward to a gong and an index-linked pension.  Why would they want to change a system that is obviously working so well for themselves?  It all reminds me of an oil major I used to work for where everyone paid lip-service to the importance of cost savings but actually achieved higher pay and status by running an ever-larger department, not by doing a good job.  Naturally the firm remained accident-prone and the headcount remained stubbornly resistant to top-down attempts by the Board to trim it until the reward system was changed.

So, I persist in my unfashionable belief that government spending could be pruned right back if there was the will to do so.  There are obvious problems with this approach, but they can be managed. 

First, any significant cost savings will inevitably result in large reductions in staffing; if these were directly in proportion to costs then a 20% saving implies a 1.2 million fall in headcount.  Therefore what is needed is not savage cuts but careful cuts which is a completely different proposition since government is not ultimately just another company.  For one thing it is very big, for another the people leaving would need jobs to go to or the costs would just come back to the government as unemployment benefit but mostly because the human cost would be unacceptable unless alternative jobs were created in parallel.  The implication is that cost savings would have to be done at a limited rate – spread over perhaps five years in the first instance, with as much of the headcount reduction as possible done by natural wastage.   Moreover, there would have to be a far more effective system for retraining those laid-off than currently exists.  (In fact, a better training/retraining system is something we need anyway because economic change is running at an unprecedented rate but that’s another story.)

In fact, I suspect that Labour dare not allow itself to consider the possibilities of cost savings largely because of their inability to see where alternative jobs could be created.  They have been using the public sector to soak up and hide the unemployment resulting from their failed economic strategy.

The second issue arising from cost savings is the macroeconomic one.  For the moment it is probably true that the economy needs government support to prevent a deeper collapse.  I see it as a tug-of-war; several of the team have slipped and gone down and we need the big man at the back to dig in deep and hold the line until they can get back on their feet.    However, it would take a year or so to tee-up any substantial cost savings programme and then because of the human dimension, as outlined above, cuts should be phased over several years so this will not be a constraint.

So my thesis is this: we need to slim down the public sector by an order of magnitude more than any politicians are advocating, this can be done by changing the reward structure for top staff but it should be done gradually over several years and in parallel with a re-engineered approach to training and retraining.   The initial benefits of a coherent and credible plan would start to accrue almost immediately and within about five years we would have a far stronger and more dynamic economy.

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