3 .18 For the majority of departments, the Spending Review implies that reductions will be needed in delivery partner bodies' spending as well as in the core department. These partners are usually autonomous bodies but can represent a significant proportion of a department's spending. Nine departments spend more than 50 per cent of their budget through arm's‑length or local bodies. We have observed three types of approach for managing cost reduction in devolved bodies (Figure 12 overleaf). There are some examples of across-the-board reductions in delivery body funding (which we have characterised as a 'rationing' role). However, the most common approach combines priority‑based changes to the funding allocated to delivery bodies ('purchaser' role) with an expectation that delivery bodies will manage their own costs down.
| Figure 12 Reducing costs in devolved bodies | | ||
| Main approaches | What it involves | What it requires | Current state and way forward |
| Rationing role | Share cuts evenly and expect devolved bodies to cut their own costs. | Excellent financial and change management in devolved bodies. Similar levels of cost‑effectiveness across funded bodies. | Some examples especially where allocation decisions are formula‑driven (e.g. Education)1 or themselves devolved. Scope to adopt when departments can be confident in capability of devolved bodies. |
| Purchaser role | Decide what funds to spend on devolved bodies in return for what activity levels. | Good understanding of value gained from funding levels and consequences of changing them. | Frequently adopted but understanding of costs and value is variable. Would be enhanced by awareness of unit costs and strategic overview of value delivered across areas the department funds. |
| Partner role | Work with bodies to identify where they can make efficiencies and support them in doing so. | Transparent cost and performance information. Willingness to treat devolved bodies as partners and share good practice. | Some examples of this approach emerging (transport,2 further education).3 Scope to use more widely where the department has a strong relationship with delivery bodies. |
| NOTES 1 Comptroller and Auditor General, Department for Education: Oversight of financial management in local authority 2 Comptroller and Auditor General, Department for Transport: Reducing costs in the Department for Transport, 3 Comptroller and Auditor General, Department for Business, Innovation and Skills: reducing bureaucracy in further Source: National Audit Office analysis | |||
3 .19 We would expect departments to use a combination of these approaches to allocate cost reductions based on an understanding of the risks and capabilities of each body. Most departments do not, at present, have the information to make these decisions even when their arm's‑length bodies do hold such information.
3.20 If departments select a mix of approaches without understanding delivery bodies, there are a number of risks to value for money:
● Where current levels of cost‑effectiveness vary, undifferentiated cuts will not address these variations.
● If departmental decisions on changing the allocation of funds are to result in improved value for money, they must be informed by high‑quality cost and performance data. We have found that departments' understanding of delivery bodies' performance varies.
● Delivery bodies' ability to manage their own costs down depends on their own management capability. Departments adopting this approach need effective monitoring and intervention mechanisms.
If departments reduce budgets without understanding the current cost‑effectiveness of an organisation, they are unlikely to be able to predict how far cost reductions will affect services.
3.21 To manage the risks to value for money across these approaches, departments need to share good quality data on costs and outcomes and use it to make decisions about cost reduction strategies. In the Spending Review timescale, departments made a pragmatic assessment of delivery bodies' capacity to absorb changes. We have seen departments making progress towards a considered approach to delegating cost reductions. The Department for Culture, Media and Sport used a combination of the approaches above to choose which budgets to reduce, and will now reduce the level of monitoring for some bodies based on a risk assessment. The Ministry of Justice now has governance arrangements based on a structured risk assessment of its sponsored bodies. The Department of Health assessed and approved all its strategic health authorities' plans, but assigned some a higher level of supervision. The Department also helped authorities to share good practice, pairing them so that those with less robust plans could learn from similar authorities.e