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

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)


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.

Strategy, Politics and Competitiveness: the Decline of Europe – Best Blogs Series

English: The Institute for Innovation and Comp...

English: The Institute for Innovation and Competitiveness aim to promote innovation and competitiveness in Europe. Français : L’institut pour l’innovation et la compétitivité a pour but de promouvoir l’innovation et la compétitivité en Europe (Photo credit: Wikipedia)

As a regular blogger, I have an unusual vantage on what’s happening in the World, especially in Europe. In the last two years, I have traveled extensively in Asia and seen how Asia’s millennials are better prepared than most of Europe’s millennials, ignoring the children of the privileged and wealthy, of course.

On a daily basis, I compare the media output from China, Russia, Europe and North America.

Let me share some of my observations.

These days, China, Russia and Japan, have strong leaders, with vision and clearly focused on strategic priorities. They are delivering enormous strategic change, improving the competitiveness of their economies.

Meanwhile, the UK, Germany, France and the US are being led by political-fixers. These political fixers focus on short-term political advantage and subordinate strategy. Politics at national, European and local level is about compromise and fire-fighting. Muddled economic thinking in Europe has led to excessive use of austerity, rather than addressing the strategic and structural challenges.

Because of the short-sightedness of political leaders in Germany, France and the UK, Europe is in decline, with enormous numbers of young people, millennials, out of work and probably facing the social exclusion of a life without work.

As an expert in strategy and delivering radical change, I see enormous waste and absence of focus. Politicians and bureaucrats at European, national and local level, are content on

English: Mao of Europe. The continental bounda...

English: Mao of Europe. The continental boundary to Asia as indicated is the standard convention following the Caucasus crest, the Urals River and the Urals Mountains to the Sea of Kara العربية: الخريطة الهجائية لأوروبا (Photo credit: Wikipedia)

feathering their own nests.

Recently, I have been blogging about the absence of an effective European policy on energy that addresses strategic challenges. I have also cited that the way that the EC paternalistically doles out funds to the likes of Cyprus is dysfunctional, politically driven, without a strategic reference point.

Any thoughts on reversing Europe’s decline?