3.3 As part of their 2010 Spending Review submissions, departments were asked to set out savings under two broad categories:
● the possible savings from improving efficiency, getting better value for money from public spending and stopping low value programmes; and
● more fundamental savings from changing or reducing the role of the state.
The Spending Review announced savings in internal efficiency and cuts in administration and back‑office costs across nearly all departments. Most departments also identified reductions in activity and ended projects and functions, or made plans to increase revenues from service users. For example, the Department for Culture, Media and Sport cancelled seven projects with a value of £73 million.a While a fifth of the cost reductions in the Department for Transport come from efficiencies, over half represent cuts or deferrals to planned outputs (from a sample of 73 per cent of the Department's budget).b
3.4 This approach was not surprising in the short timescale available for planning in 2010. However, the Public Accounts Committee has stated that it expects departments to improve value for money by delivering existing services in radically more efficient ways,c and they should not simply look to cut spending by cutting front-line services. Over time, departments need to develop plans based on an understanding of the costs and value delivered if they are to reduce costs while maintaining value for money.
3.5 Before attempting to deliver substantial cost reductions, an organisation should create a target operating model which is a vision of how it can work differently to deliver its objectives at a sustainable lower cost. This vision can be defined in broad terms initially but then refined as analysis develops, and supported by a clear plan to migrate from the current state to the new operating model.
3.6 Most departments have an overall vision for cost reduction but have yet to design a robust target operating model or detailed plan. Some departments have plans in place but they need to do more to develop their overall strategy. HM Revenue & Customs,d the Department of Healthe and the Department for Transportb anticipated the budget reductions and began planning their strategy as early as 2009.
3.7 Other departments successfully achieved short‑term cost reduction using a series of independent initiatives. To meet 2010‑11 targets, many departments reduced the budgets of their operational units or arm's‑length bodies and then allowed them to design and implement their own cost reduction initiatives within those reduced budgets. For instance, Jobcentre Plus, carried out modelling to plan cost reduction and design its own future state in summer 2010.f There is evidence, though, of departments designing more holistic approaches. The Department for Work and Pensions started an organisational design review in April 2010, which we concluded could provide the basis for a target operating model.f
3.8 In managing within spending plans, departments have to manage a number of risks, such as fluctuations in income, some of which are outside their control. For instance, the Department for Transport is exposed to unpredictability in rail revenues.b Cost increases in the Ministry of Defence's major projects were affected by macro-economic factors, such as exchange rate variations, as well as decisions to delay spending.g Our experience of previous savings programmes is that some 20 per cent of forecast annual savings are not realised. The plans we have examined incorporate elements of contingency. For example, HM Revenue & Customs' plans include contingency for under-recovering income,d Jobcentre Plus reduced projected headcount savings by 20 per cent to counter optimism bias,f and Strategic Health Authorities identified 5 per cent more savings than required.e However, contingencies are not consistently built into plans or are insufficient to cover key risks. In practice, departments are relying on being able to identify further savings initiatives in later years should current plans fail to deliver.
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12 Full references are set out in an endnote to this report. Further cross-references to the reports in this part refer to the endnote.