Ex-head of the Office of Government Commerce, Sir Peter Gershon made this speech at the IDeA's Efficiency Matters Conference reviewing the current state of play in the drive to greater public sector efficiency

I was asked to undertake the Efficiency Review by the Prime Minister and the Chancellor back in the Summer of 2003, through to the present day. A quote from Milton Friedman, “The Government’s solution to a problem is usually as bad as the problem it is attempting to solve”. Sometimes when I read what is written in associating my name and efficiency, some of the terrible things that are written, I am very mindful of the Friedman quote.

Milton Friedman also came out with another wonderful quotation, “Any Government is capable of taking perfectly good paper, covering it in perfectly good ink and making the whole combination worthless.” Which is why if you read my review it is quite short just in case the whole combination was indeed worthless.

When we talk about efficiency, it is important to understand the context of the whole efficiency agenda.

Firstly, public expectations of outcomes and quality of public services continue to rise. The public have got used to services delivered by the private sector for example, which are now 24/7. And the public now say why can’t we get the same availability of services or access to public sector organisations on the same basis. Or raise expectations, for example in areas such as education, health and public safety.

Secondly, I would like to talk about the quality of services, I see service quality as having five components the:

• availability of those services
• degree of satisfaction of the use of those services
• importance of them
• fairness of provision
• cost of provision
• And the third context is around and continues to be around reducing public tolerance of inefficiency. Partly because the media is getting ever sharper at latching onto areas of inefficiency by public sector bodies and making the public more aware of them.

All of these elements are contributing to the context in which public sector bodies are now having to operate.

I have identified four drivers of public sector efficiency and I continue to hold that view:

Firstly, the outlook for public finances. Certainly when I undertook my review the prospect of an election looming was that the ability to increase tax revenues through raising taxes was not an option. The Chancellor was very close to his limits imposed by his goals abroad and so borrowing was not an option. So if you need to find more money to plough back into investing in public services there is only one other place to look and that is to squeeze money out of existing levels of expenditure i.e. efficiency.

The second driver, therefore, is political imperatives. Now it was clearly this Government’s imperative and why I undertook the review, that the money freed up by the efficiency review should be ploughed back into improving the quality of public services.

And if you look at the statements that have been made recently by the Government, I think it remains the political imperative so that in the forthcoming Comprehensive Spending Review 2007, the objective remains the same: to continue to find the opportunity to improve public sector efficiency in order to free up money to reinvest in improving the quality of public services.

The third point is the first of a number of occasions in which I am going to touch on something that John has already picked upon, what is the desired level of integration of efficiency with the delivery of key outcomes and high quality services.

If there is no integration or little integration then you are likely to have a scenario in which there is a slash and burn approach to efficiency or classic salami slicing across different budgets. If there is a high level of integration, we can begin to think much more seriously about how efficiency and the service transformation agenda can be combined and that can create a scenario in which people are incentivised to consider quite radical things, such as the re-engineering of key business processes.

There is a fourth driver, without which whatever the aspirations of politicians to improve public sector efficiency, if this is not in place, in my view, there is no connection of the agenda with what actually happens in practice and that is system capacity. Now this includes a whole raft of things: like how do we measure efficiency?

When I undertook the review there was no intelligible definition of what efficiency in the public sector meant. I could go to colleagues in the Treasury who’d give me very erudite definitions of what efficiency meant, which were highly intelligible if you were a professional economist, but in my view, if you were a normal human being, trying to do a decent days work in the public sector, they were completely useless. So my colleagues and I came up with some workable definitions.

Then there was the whole issue of how do you measure efficiency. There has actually been reasonable progress made through the efforts of the Audit Commission, the NAO and the OGC efficiency team.

A successful path we also addressed was topics like leadership. And I think one of the things that certainly helped take efficiency forward in Central Government is that the Prime Minister and the Chancellor have retained a serious interest in the whole agenda and the conclusion of my Review. They continue to receive in 6 monthly interviews, traffic light reports on progress of each department against their efficiency targets. And no department likes to be assessed as Red.

We have also seen significant effort across the whole public sector to improve skills. Including a credit for the Regional Centres of Excellence looking at procurement in schools, in police, in the fire service, reinforcement of existing regional consortia that already existed in local government. The appointment of professional finance directors in nearly all central government departments now, the NAO toolkit and schemes like the IDeA peer review process. All examples of how skills are being put in place to increase the capacity of the system to take the efficiency agenda forward.

I was able to identify that there were a number of key sources of public sector efficiency gains in the Spending Review covering 2005/06 and 2007/08. And they were firstly procurement.

The public sector as a whole spends £125 billion a year buying things. Some £11-12 billion on commodity items, £30 billion on construction, £11 billion on social care, £5 billion on environmental services and £13 billion on social housing – these are huge sums.

I took the view that through smart procurement, bringing in more professional expertise to bare in areas of inefficiencies in the past, for example, the procurement of social care.

Two techniques, such as appropriate aggregation of demand, there were significant benefits to be gained in the area of procurement.

I estimate that the potential savings across the whole public sector, which contributed to the overall total of £21 billion, about £6 billion should come from procurement. But I believe the progress to date would indicate that the final number in 07/08 will be in excess of £6 billion.

I am conscious that there are a number of things that I have read, where I have been portrayed as saying aggregation is the answer to everything, I do not actually believe this. But I do believe that where there are clear economies of scale to be gained and relatively few suppliers in a market, the reality is that it is only by aggregating demand, that the public sector stand any chance of embarking on effective negotiation with relatively powerful suppliers. Probably the most extreme example of that is Microsoft.

But on the other hand, where markets are very very fragmented, aggregation may not be the right thing to do.

The second area is the back office. Across the public sector, we estimated in the Review that somewhere in the order of £28 million is being spent on back office activities.

There were significant savings to be made in a variety of approaches, through simplification of processes in the back office, through standardisation of processes, through the sharing of back office services between different public sector bodies and outsourcing.

I was concerned in the immediate aftermath of my review and I remain concerned that actually in the public sector as a whole too little effort was being applied to simplification and standardisation and sharing, and there was too much emphasis, fuelled of course by the private sector, on the opportunities for outsourcing.

I still believe in many public sector organisations there are huge gains to be made just by looking at existing processes and seeing what can be done to simplify them before getting into anything sophisticated like outsourcing.

The simplification of delivery chains, was to try to answer what is a very simple question, but actually is a very difficult question to answer. If you take a £1 as it leaves the Treasury and you follow it all the way down a particular delivery chain until it gets to a frontline organisation that might be able to do something useful with that money, how much of that pound actually ends up in the pockets of that delivery organisation after it’s wend its way through central government departments, agencies, NDPBs all sorts of other intermediate layers. What in the private sector would be called the yield or the overhead on the system.

The answer of course is not a very powerful one. If you actually look at the system from your perspective and look upwards rather than downwards, what you see is horrible it’s complex, a nightmare to deal with in many cases.

We had a reasonably well-run hospital, which had been subject to in a year, 30 different inspections by different bodies that thought they had the right to turn up whenever they wanted to inspect the hospital. This is crazy.

Subsequent to this, there was the Hansen review, which was looking at what can be done to simplify regulation on the private sector.

Then there was productive time. This started on a very simple basis; I wanted to find out how good the public sector was at managing absenteeism. So far in the public sector there had been significant investments made in IT, in best practice and workforce modernisation and to see to what extent the benefits of those investments were actually being planned for the future.

And finally, transactional services between the public sector and citizens and business and again to try and understand the extent to which the significant investment that has been made and continues to be made in the e-government agenda was actually being translated into real benefits.

Although it was quite clear across the public sector that there was a significant increase of e-government services coming on stream, in many cases little thought had been given by the management of public sector organisations as to how greater use of these modern channels could actually be brought about. We were creating a new channel, which was being only partially utilised. It was impossible to dismantle some or all of the costs associated with more labour intensive traditional ways of delivering transactional services.

I felt that there was insufficient attention being given by the management of public sector bodies as to how you could bring about greater use of these e-government based services. And that considering the extent to which greater use can be brought about by encouragement, greater advertising and promotional services, through some forms of incentivisation and to what extent there should actually be mandation. Now, there are some examples now of mandation, for example PAYE returns this will be mandatory by about 2010/11 for all employers.

I am advised that when it comes to services that are delivered to the citizen attention will have to be paid to how those services are delivered to those citizens on the wrong side of the digital divide and are either not sufficiently IT literate or do not have access to the ability to interface with the state electronically.

If you look at the progress reports that the Government is issuing and the latest one was in July 2006, some £9.8 billion of savings had been achieved as at March 2006, that is 12 months into the SRO4 period. Over half of the 84,000 reduction in civil servants that I recommended has been achieved and there have been some really good success stories.

Some progress is being made, and local government has made a very valuable contribution to the gains that have been achieved to date.

But what of the future, well I think if I was a betting man, I would be quite willing now to place a lot of money actually that the £21 billion I recommended for the achievement of the target in 07/08 will actually be achieved.

But what about beyond the SR04 period, the next spending review due to be announced in the summer 07. The White Paper which came out July 2006, gives some signals about the future, there had been some early settlements for 2007, including the Treasury, the Department of Work and Pensions and Revenues and Customs. The settlements for these departments was a minus 5% real settlement per annum from April 2008, which compares to a minus 2 ½% per annum settlement in the current spending review period.

The White Paper also signalled that across the whole of the public sector, Government believed that efficiency savings of at least 2 ½% per annum could be found in the    SR04-SR07 Period. It also gave out a strong signal about the anticipated levels of settlements of pay in the public sector, and that has been reinforced more recently by the Chancellor’s statement about what he expects the level of settlement to be in the NHS.

So there are pretty strong signals about the next spending review, I think this is going to be at least as tough as the SR04 settlement, therefore, the pressure on efficiency is going to increase not abate.

So where might future efficiency gains come from?

Well, firstly public procurement, there are very, very substantial gains to be made in the whole area of public procurement and that in some areas the service has barely been scratched during SR04.

I know that very few councils achieved the higher value for money scores in the Audit Commissions 2005 report on CPAs in single tier and county councils. Procurement remains a very profitable scene for public sector organisations.

Despite the fact that there have been some very well-publicised successes in the use of electronic auctions, the fact remains that across the public sector the use of electronic auctions is pathetic.

In some areas, I believe there has to be greater collaboration. I look at environmental services, I could not find a single person in the public sector, who could tell me what the structure of the supply market looked like for environmental services. How many companies there were, were they increasing or reducing, or was business equally spread?

So I went to one of the suppliers in the market and asked them, and they said would you like me to email it to you or send it through the post and you can have it tomorrow morning. It actually told me that over a five-year period the number of suppliers was reducing. How can the public sector procure efficiently without that information? It is just about smart procurement.

Secondly, shared services. Now there have been some excellent examples of shared services and improvement of the back office, but the fact remains that sharing is not the norm, either in central government, or in the wider public sector.

I believe there remains a significant opportunity to reduce the cost and enhance the quality of many transactional services. In this area of service, it is possible to do both service transformation to get better quality services and to reduce cost through things like process reengineering.

Fourthly productive time, I continue to see statistics that suggest that in public sector organisations, absenteeism is significantly higher than in profitable private sector organisations and some parts of the public sector there continue to be very high levels of staff turnover.

I continue to believe that there is huge scope to simplify delivery chains if only central government would grasp the nettle and take a more holistic view about some of these chains and understand the issue about how much of that £1 is lost between the Treasury and the frontline organisations that can do something useful with it.

I will now look at the more generic source of future efficiency gains and that is to continue with the long-term trend to separate the commissioning and the provision of frontline and back-office services. I believe that this facilitates the ability to consider the further relocation of public sector activities in pursuit of the Lyons agenda, to move central government activities out of London into the regions.

It enables contestability between the existing provider and other potential providers.

It offers scope to increase partnering with both the private and not-for-profit sector. I continue to be disappointed about the progress that has been made about trying to create a better framework on which there can be long-term contracting between the public sector and the voluntary and community sector.

I find it almost unbelievable that people are willing to enter into seven-to-ten year contracts with Capita for the provision of back-office services but continue to drip-feed the local hospice on a month-to-month basis for the provision of vital social care. Why the back office is more important than frontline services in that context I do not understand.

Finally, we create the opportunity, I believe, to consider the more radical process of re-engineering.

But this is not without a challenge. The interests of different stakeholders have to be reconciled: politicians, commissioners, providers, users, trade unions. There are organisational challenges, too few public sector organisations think of efficiency as a programme rather than a collection of discreet projects and organise management facilities to drive a programme.

And there are also leadership issues. Why is it that the organisations that make the most progress or who have captured a successful approach to efficiency have that combination of a very strong political leader and a very strong chief executive both of whom have a shared agenda? When that combination exists, it seems to me public sector organisations can move mountains. When only half that combination exists, then efficiency is likely to become an issue of compliance.

There are cultural issues as well. Some public sector organisations still have a very traditional approach to their employees.

There continues to be the challenge of insufficient skills in the public sector particularly in areas such as procurement and commercial skills.

And there is still, in some parts of the sector, an enormous and dangerous dependence on the use of external consultants.

It is also important that there is integration of wider policy agendas, this is done in a joined-up way. If I take the field of procurement there are many different agendas, which are trying to ride on the back of procurement – the innovation agenda, the green agenda, adult literacy, SMEs, BMEs. Each of these agendas is perfectly valid and legitimate for Government to wish to pursue. My criticism is that by and large they emanate from different government departments they are not joined up so, therefore, you get very patchy implementation of them across the sector.

Why is it in the public sector, in local government, you can find outstanding examples of best practice and yet at the same time if you look at the time it takes for that best practice to spread to just 50% of the applicable organisations, that diffusion time can be very very long? This is a big challenge because if you look at the best in any particular part of the UK, there is outstanding best practice, the problem is not with the best the problem is with the tail.

Did the Gershon Review make a difference? I think the answer is probably yes, I think the efficiency agenda continues to be taken pretty seriously. I think it has fundamentally helped because the prospect of increasing taxes is very difficult for the Government. The prospect of borrowing more money was very difficult for the Government.

What do I think want comes next?  I am reminded of a quote from Mark Twain “Beware making predictions, especially about the future”.