5 To achieve large scale sustainable cost reductions it is important to have a clear plan of how an organisation will work in the future given its vision and objectives. This is known as a target operating model. The plan should be refined regularly as analysis of information develops. By analysing the cost and value of activities and comparing these to the model, an organisation can then start to prioritise resource allocation.
6 As early as 2009, the Department recognised the need to rethink how it would deliver its objectives more cost-effectively, in the longer term. Before the spending review, the Department embarked on a number of initiatives aimed at making sustainable savings. It also undertook projects to examine how it could do things 'fundamentally differently' in specific areas. These initiatives were not generally expected to produce short-term savings but this early thinking helped to identify some areas for reducing budgets during the spending review.
7 The Department did not have a target operating model at the time of the spending review. This was because key elements of the above initiatives were not due to report until after the spending review and were aimed at influencing spending beyond 2014-15. Nor were these initiatives a holistic examination of the whole department and how it delivered its objectives. This meant that the Department did not have a long-term plan against which to make shorter-term decisions for the spending review period up to 2014-15. The Department used the spending review to identify areas where it needed to consider further reforms, announcing a strategic review of the Highways Agency, and has now started work to develop a more comprehensive approach to longer-term planning.
8 The spending review required the Department to find savings that could be delivered by 2014-15. In preparation, the Department conducted a case-by-case review of the impact of short-term cost reduction options, informed by its high-level objectives at the time. We found evidence that the Department used these to guide decisions on where to make cuts or where to protect spending, for example, protecting road maintenance, or highlighting the effect of capital and resource spending cuts on reducing carbon emissions.
9 The Department felt constrained in altering some areas of spending. A key decision was to exclude from consideration £10.7 billion expenditure (28 per cent of the Department's budget) on the Network Rail grant over 2011-12 to 2013-14, with the exception of negotiating a £150 million rebate. This grant is determined for a five-year period, running up to 2013-14. While it can theoretically be reopened, this is a lengthy process with no guarantee of reducing the Department's spending. This and other constraints limited the scope for judgements on the balance between different modes of transport. Instead, the Department committed to making savings of £298 million from the Network Rail grant in 2014-15 and is developing its proposals on delivering a sustainable railway. Excluding the Network Rail grant did not require compensating savings in other areas of the transport budget.