8 Departments need to make more fundamental changes to achieve sustainable reductions of the scale demanded by the Spending Review. Short‑term measures, though successful to date, will not be sufficient. Departments will need to have a clear vision of how they and their delivery partners will operate with a permanently lower cost base. They need a clear map of the changes needed to move to this model, and rigorous processes for realising the resulting savings.
9 Most departments have yet to develop a clear picture of their future state or a detailed plan based on a strategic view across the business. Most of the departments we examined have started to design new target operating models, and some have cost reduction strategies, although initial spending reductions were made before coordinated plans were in place. Where departments have developed change programmes, they also have good governance arrangements and systems to track progress in reducing costs.
10 Departments' financial data on basic spending patterns is sufficient to manage budgets in-year, but information about the consequences of changes in spending is less good. There are few examples of systems that link costs to performance. Without improvements in impact measurement, departments will not be able to track or manage the impact of cost reduction on service provision. Not understanding the factors driving cost and the consequences of spending cuts makes it difficult for departments to forecast future spending.
11 Cost reduction plans need to build in contingency. Our experience of previous savings programmes is that an average of 20 per cent of gross annual savings targeted are not realised. In managing within spending plans, departments have to manage a number of risks, including fluctuations in income (such as volatile rail revenues in the case of the Department for Transport). The plans we have examined do not have sufficient contingency to cover either the risk that savings are not realised or the impact of external uncertainties. Departments therefore depend on finding greater savings in future years to fill any gaps.
12 Departments do not always understand the cost drivers and cost value ratios of devolved bodies sufficiently to make good decisions about changes in funding. Nine departments spend more than 50 per cent of their budget through arm's‑length or devolved bodies. Departments that deliver through others need to have a coherent strategy to deliver their objectives at lower cost, which takes into account the value delivered by different funding streams. The departments we have looked at do not have full capability to do this. Generally their strategy combines cuts to lower priority funding with an expectation that delivery bodies will manage their own costs down. However, some are working towards increasing their understanding of these costs. By delegating cost reductions, departments place much reliance on financial and change management capability in the devolved bodies. Departments need to manage the resulting risks.