3.9 Five departments made the cost reductions required in 2010-11 solely through cutting administration costs and through the impact of the Government spending moratoria. The Departments of Health and Education did not need to cut other costs except in capital programmes. The remaining departments cut some programme costs to stay within 2010-11 budgets, mainly by reducing grants to local bodies. While this was successful in keeping departments within 2010‑11 budgets, over the period to 2014-15
departments need to develop concrete plans to operate with lower costs.
3 .10 For costs under departments' direct control, the structural changes they must make to secure cost reductions depend on them successfully implementing and managing an organisational transformation programme. Departments should develop plans from a sound basis, using robust information, with good governance arrangements to monitor progress and, if necessary, take corrective action. We discuss strategies for managing costs where spending is mainly devolved in paragraphs 3.18 to 3.21 below.
3 .11 Of the departments we have examined, HM Revenue & Customs, the Department for Work and Pensions and the Ministry of Defence were aiming to secure the bulk of cost reductions from within their organisations. HM Revenue & Customs has established comprehensive governance arrangements to reduce costs, with a central team and programme management infrastructure.d The Department for Work and Pensions put in place a transformation programme board in May 2011 to oversee the redesign of its corporate centre and broader cultural change. However, it cannot finalise plans beyond 2011‑12 as they depend on the future business model after the introduction of Universal Credit.f The Ministry of Defence has developed detailed plans and processes for reducing civilian and military headcount before the detail of a new operating model has been determined.h
3 .12 Where departments do have change programmes with effective governance in place, this has allowed them to communicate their plans to their staff. We identified strong leadership as a key factor in the success of the Foreign and Commonwealth Office's cost reduction efforts.i The Department for Work and Pensions' finance team have provided 'What the Future Holds' updates and interactive briefings for staff.f Central government action has underlined departments' individual efforts to incentivise staff. The Government rewrote the Civil Service Code in 2010 to emphasise the importance of using public money and resources properly.
3 .13 We reported more widely on financial management capability across government in March 2011.j Departments have well‑established systems for setting budgets for the year and tracking spending to monitor whether business areas keep within those budgets. Departments focus less on longer‑term financial planning and financial management information is not always clearly linked with performance reporting. However, all the departments we examined are working to improve their financial management.
3 .14 When they identify and prioritise cost reductions, organisations need to understand the scope for improving efficiency and the consequences of cost reductions. They must therefore have a detailed knowledge of where costs are being incurred, the factors driving costs and the value of activities. Most departments have good basic information about costs and can track the progress of cost reductions. However, there are only a few examples of systems, such as the appraisal system by the Department for Transport for capital projects, that can relate costs to levels of activity or outcomes.b The Department for Work and Pensions has developed an activity‑based costing model to cost activities and processes, but has not used it to routinely drive performance improvements.f The Department for Education has used a model to measure school efficiency for some years, but has not used it as a decision‑making tool for cutting costs.k
3 .15 Departments may not hold information linking costs to outputs and impacts but we have found that many arm's‑length bodies do hold and use this information. For example, the Centre for Environment, Fisheries and Aquaculture Services within the Department for Environment, Food and Rural Affairs held sufficiently detailed information to be able to challenge its project managers to reduce costs without affecting services. The resulting savings identified from some 200 projects made up 30 per cent of the Agency's efforts to meet their efficiency savings target.l
3 .16 We have seen few examples of using sensitivity analysis to forecast the impact of changes in spending. For the Strategic Defence and Security Review, the armed forces conducted scenario modelling to assess the impact of various options to reduce headcount. The Ministry of Defence also undertook financial modelling to forecast the likely costs and savings of civilian and military headcount reduction. The outputs are sensitive to the assumptions made and the Ministry will need to make adjustments as it implements reductions.h The Ministry of Justice has also developed workflow models to help improve its medium‑term operational and financial planning. These have enabled the Ministry to forecast the impact of events such as the summer 2011 riots on the justice system. The models allow the Ministry to see how its savings plans bridge the gap between previous spending levels and its new, lower, target spending levels.m
3 .17 The Spending Review and departmental business plans do not allow us to identify the balance of cost savings between efficiency measures and service reductions, or evaluate the resulting impact. Departments' quarterly data summaries include impact indicators but as indicated in paragraphs 2.23 to 2.24, departments need to more closely align input and impact indicators before they can be used to measure changes in efficiency or the impact of cost reductions on services.