Public Sector Catch 22: Cost-Cutting Vs. Cost Reduction – Best Blogs Series

Catch-22

Catch-22 (Photo credit: Wikipedia)

English: Police enter a Vodafone shop in Glasg...

English: Police enter a Vodafone shop in Glasgow while ‘UK Uncut’ protestors picket the doorways with messages sympathetic to the June 30 protest. (Photo credit: Wikipedia)

This is my third blog which looks at the critical choices being faced in the Public Sector both at the National and Local Level. The first two articles were: UK Local Authorities and Shared Services: Cost-Cutting – Myth or Reality?, and Public Sector Performance: Catch 22 type Dilemmas.

This is now the first blog of four and will address the following key themes:

1. Cost Cutting Vs. Cost Reduction (Blog 1)
2. Business Transformation (Blog 2)
3. The Role of IT in Business Transformation (Blog 3)
4. Strategy and Politics (Blog 4)

COST CUTTING VS. COST REDUCTION

The Coalition Government‘s response to the financial crisis seems to have been to trigger a “Public Sector Cash Crisis”, rationing available cash for Central and Local Government, and precipitating a National Turnaround – the turnaround point was recently picked up by John Redwood, Conservative MP.  There are two problems: (1) Is this the right approach strategically?; and (2) Do we have good turnaround managers in place at both the national and local levels? Also this week we see that the OECD thinks the UK has been a bit light on growth stimulation measures.

Last week, I introduced my simple Four-State Cost Reduction Model, and shall use it again to illustrate the argument. Hyperlink to see the Four-state model. We shall focus on the Cost-Cutting/Product Pruning segment, the “Dog segment”,  in crisis, with poor Market-Orientation.

Triggered by the global financial crisis, UK Plc has lost the confidence of its stakeholders, including customers, employees, and creditors. Personally, I believe that Prime Minister George Brown got it right in the UK’s response to the global banking crisis – his decisive action in relation to the banking crisis will be judged by future historians. Unfortunately, the broader economic landscape showed years of over-indulgence and sadly a cancer had set in under the previous Labour Government. Money was used unwisely and balance sheet management was weak – this has all made the current financial crisis more acute and focussed on survival (avoiding a Greek/Irish type crisis). Ignoring the question of strategy for now, I believe that the rate of Cost-Cutting that the UK Government is following is likely to prove to be too aggressive – it’s like radical cancer surgery close to a vital organ.

The Coalition Government seems to believe that they are following a national turnaround strategy. Unfortunately, there seems to be an over-arching absence of a cohesive strategy. At national level, Central Government has agreed a three-year cash envelope but are seriously light on detailed planning, with bottom-up costings and independent risk assessment. At local level, matters are even worse, with knee-jerk reactions to cash ceilings  – the result in many poorer Local Authorities is cuts in services. Hastily prepared strategic reviews of defence and health are facing three-sixty degree challenges but even these strategic reviews do not dovetail with an over-arching plan. Perhaps, the Coalition Government can learn from post-war France or the current Chinese Government?

Cost-Cutting and Product Pruning are the traditional Western Private Sector reactions to years of poor performance and loss of confidence from stakeholders. Traditional Turnaround Managers are blunt, focussed and thick-skinned. They systematically go about scrapping marginal products and services, often based upon hunch and intuition, rather than good costing data. This typically leads to reducing headcount and selling or sweating assets. “Asset-strippers” abounded in the buoyant post-war years, when traditional businesses lost their way – frequently the cause was poorly judged acquisitions, without proper transition management,  and financed by too much debt. The Turnaround Manager applies a tourniquet to the cash, with strict control over procurement and cash management. It is neither elegant nor rocket-science. At best, it is short-term, shock medicine.

Much of my early career was involved with turnarounds, in both financial and general management. It never ceased to amaze me that the word “turnaround” was always synonymous with short-term “cost-cutting” and had little to do with enduring “cost-reduction” . Some years later, this pre-ocupation with “enduring cost-reduction” became a subject for my doctoral thesis and subsequently led to my book sponsored by the Institute of Chartered Accounts in England and Wales.

Unfortunately, “Product Pruning” is not enough for the long-term cost-reduction. I remember when I was Finance Director at Stoves a successful manufacturing turnaround exemplar, just outside Liverpool, UK. The Chief Executive and the Chairman had a very strong vision and a strategy. Whilst they needed to do a turnaround in the early years, they had a Radical Innovation strategy. They totally revolutionised their products, services, manufacturing and supply chain. The Chief Executive knew his industry intimately and had a strong record of turnaround management in his corporate career.

There are probably two routes to enduring corporate or organizational renewal: (1) new products or services, in response to strong Market-Orientation; or (2) re-engineering existing products and processes, based upon Business Excellence, creating value-added activities and new core competencies.

Unfortunately, Cost Cutting and Product (Service) Pruning is not enough. It’s an inherently internalized and non-strategic response, which is unlikely to be successful in the medium/longer-term. For example, Shared Services initiatives that are not properly sponsored, with vision and execution, are likely to fail, and become outsourced in a further period of distress.  It’s a vicious down-ward spiral – this is invariably because of the absence of effective leadership and a cohesive business strategy.

I supported Alistair Darling‘s plan for a national medicine that was less drastic with a slower recovery period – this is the approach being followed by the Democratic Government in the US – it’s like using chemotherapy instead of radically invasive surgery for treatment of cancer.

Risks are probably being needlessly compounded by the Coalition Government ignoring professional turnaround managers, transition specialists and transformation experts from the wider supply chain, in favour of risk-averse and re-cycled Public Sector managers. It’s not the fault of hard-working Public Sector managers, they are doing their best but they are out of their comfort zone, often with the wrong professional competencies for turnaround and business transformation. The Cabinet Office are responsible for compounding risks, by restrictions on deployment of consultants and interim managers – a business case is now required showing the necessary financial return from deploying consultants and interims – sadly, the consultants and interims are often needed to prepare a robust business case – more Catch 22.

Opinion – Income inequality: poverty falling faster than ever but the 1% are racing ahead | News | The Guardian – John Gelmini

Dr Alf raises an interesting point via this Guardian article but this trend is now unstoppable.

The wealthy often have London property and other assets which shoot up in value, so are making money all the time even whilst sleeping. They have disposable income, so that they can make further investments and they can use a 5 flags strategy to nullify any tax liability.

The poor have debts and no disposable income, even if they are working (GE produced figures in 2007 which showed that 80% of people in the UK had less than £500 gbp in their bank accounts at any one time, hardly enough for a cheap holiday let alone an investment).

16% of the UK population cannot get access to finance on standard terms, so they are unable to realistically finance a business.

The wealthy have access to cheap money and the powerful connections necessary for putting lucrative deals together, whereas the poor have no such access.

The same goes for the children of the rich who through schooling, university, internships and lodge memberships from an early age are put into the frame for success.

For the great unwashed who do not know how this works and lack the drive to figure a way out of their financial prison there is little in the way of meaningful advice let alone practical help.

The public school and Oxbridge educated apparatchiks at the Guardian should save their mock surprise and stop pretending that they care about the poor. So far their record in terms of tax avoidance through Guardian Media Services and their record of non egalitarianism in that they usually hire from groups of left-wing champagne socialists, like themselves demonstrates their utter hypocrisy at every level.

John Gelmini

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