How better management can cut the deficit

My Cap X article

The public sector proceeds by running out of cash and then demanding more
More government spending is not the same as better public services
The UK’s lost public sector productivity could fill the Chancellor’s black hole
Here’s something people of all parties and of none ought to agree about. If we could raise public sector productivity we could have better service for less money. Could we also agree that the failure of the public sector to raise its productivity so far this century is something we should be able to change? The official forecasters pencil in good progress in raising productivity in the private sector, so shouldn’t the public sector be able to help out? As the public sector spends a fortune on bigger and better computers, shouldn’t there be some savings on the wages bill? If the public sector had managed just 1% annual growth in productivity, there would have been no black hole in the Chancellor’s figures. If we could get back up to 2019 levels of public sector productivity, there would have been no need for all those Budget tax rises.

Much of what the state does can be automated – tax collection and benefit payments already largely are. These big clerical factories can plan for fewer, better-paid people to manage the systems, deal with hard cases and talk to the public while much more of the work is done by the digital giants. The NHS is moving over to more being done online and via computer booking. Policing draws more on computers, mobile phone records and camera evidence to trace, track and arrest criminals.

Quality and efficiency are two sides of the same coin. Get things right first time and you can slim down the complaints department. You have more happy service users and less correspondence and fewer calls to handle. Get things right and you waste less of your supplies. Doing things well and providing a quality service is good for staff morale, encourages a can-do attitude and gives people a wish to avoid waste.

In the private sector, when I have been leading companies I have always put customers first. Without them you do not have a business. I have always stressed the importance of managing the cash. A profit is not a proper profit unless it is reflected in a bigger cash balance. The aim is to get enough revenue from satisfied customers to pay decent wages, meet the other costs and have some left over. You need the profit to invest in the future, to replace old plant and reward the shareholders who put the money up in the first place.

Good businesses generate cash, giving them options to renew and improve. If you can get productivity rising, you can reward people better and still have more left over to fund future plans. Failure to manage the cash leads to decline and bankruptcy, which can come swiftly if things have drifted.

In the public sector, I have always found there was plenty of cash if you knew where to look and intended to manage it. Most of the public sector always claims it has insufficient cash and always wants new money for new ideas without looking to see what could be shut down or reduced to pay for them. It is reluctant to go on the journey of continuous improvement. It proceeds by deliberately running out of cash and then demanding more, against threats to close or cut the most important things it does.

The good private sector manager, by contrast, is always on the road to better performance, accepts the need to cut or close marginal or poorly-performing activities and always has money for the core purposes and the key services. Any sign of cutting corners or spending too little on quality flows quickly into fewer sales and a bigger financial black hole.

In my new monograph for the Centre for Policy Studies, I set out some of the basics of how a manager improves productivity and quality. It does not need compulsory redundancies or big new investment programmes.

The first task of a public sector productivity programme today should be to get back up to 2019 levels. The public sector knows it could achieve that. And 2019 was before AI, so you do not need a big investment in new computing to do it.

What it does require is better management of staff. People are moved around too often in the public sector, so you do not get the benefit for long after they have worked out the best way to do a job. Rewards need to be better aligned with performance. Bonuses are paid too readily without requiring good results. How did the CEOs of the Post Office get bonuses for losing the state a fortune and locking up some of their best employees? How did bosses at HS2 get bonuses for massive delays and cost overruns on their railway line?

The public sector is also overstocked, and often writes off stock which goes to waste in some half-remembered warehouse. The property estate is rambling, and has not been modernised and downsized for the era of working from home. Much capital spend is one-off, overspecified and changed too often in the process of designing and building it.

The public sector needs to improve its customer or service-user focus. Public sector managers look upwards, knowing they rely on senior officials in the Treasury and Ministers to underwrite their mistakes and provide them with more money when the cash runs out. The habits of spending badly and in a rush before the year-end, parking money in reserves or unlikely capital spending to vire (i.e. transfer) it out when needed, are bad ideas.

Answering every question about what the government is doing to improve services with statements about increases in spending shows the wrong mindset. If I go into a shop to buy a shirt, I do not care how much it costs the shop to provide me with the service. Nor would I regard it as a good reply to be told that, although they don’t have the item in stock, they plan to spend £1 million in future to fix the problem. I would expect them to tell me how quickly they can get one and how it will be delivered to me. I want them to offer high-quality, low-cost retailing to keep their prices down.

The public sector often blames the user for not conforming to its bad service, whereas successful private sector businesses thrive on meeting customer requirements. The Christmas pudding maker does not tell you he cannot supply for Christmas because that’s when everyone wants one. The public sector rations road space to create traffic jams in an effort to stop people wanting to travel so much or at the times that fit their lives. It does not see high demand for certain routes to be an opportunity to provide more and better service.

Getting productivity back up in the public sector is the nearest to finding a magic money tree in the overrun public sector jungle. The sooner we find it, the sooner we can have tax levels that help growth, and a better balance between the public and private sectors.