by Paul Pugh

Public sector restructuring deserves due care and attention

Sep 16, 2010
GovernmentIT LeadershipIT Strategy

Even before the election, the main political parties had indicated a desire­ to continue squeezing the last drops of real or perceived efficiency from the public purse. The recent National Audit Office (NAO) report, Reorganising Central Government, estimated that 51 recent government reorganisations cost more than £780m in total. Technology was one of most significant expenses alongside people and prop­erty, but the most disturbing conclusion was the apparent lack of ‘value for money’­ returned on the investment.

This desire for greater efficiency has seen the crashing together of big departments, generally for the right philosophical reasons but often without a strong business case or clear objectives. To gain real savings, the technology, people and property elements need careful structuring.

The NAO paper prompted consultancy firm Xantus to commission a report by called Public Sector M&A. In it, there is an indication that the public sector can learn key lessons from private-sector mergers. There is a caveat here: only about 30 per cent of private sector­ mergers actually succeed, while not every public-sector restructuring fails.

The most significant lesson is in due diligence, a process that should be undertaken before any decision is made to merge departments or organisations. Many organis­ations do not have a holistic view of their assets and how they fit together. Due diligence, particularly for IT and infrastructure, provides an understanding of the organisational landscape from a service, financial and technical point of view.

With an accurate view of the configuration of systems, assets, technology, book value and so on, the right decisions can be made from the very start. This may even include the decision not to merge at all.

The most successful examples of mergers have seen the IT and organisational landscape being treated as a green field, with an eye on the future and not using history as an excuse for compromise. Compromise does not work.

Ofcom is a prime example of a well-planned, clear-vision restructuring success. In fact, in 2006, the NAO praised the process that formed the communications watchdog from five different, independent regulators. The whole project was approached as a blank sheet of paper, with the intention of creating an entirely new entity. Had the merger followed the traditional path of fusing, in this case, five pre-existing bodies into an amorphous mass, the outcome may have been very different.

Equally, there are lessons from less successful mergers. HMRC was subjected to a Cabinet Office review after seven­ years of underperformance following the merger between the Inland Revenue and Customs and Excise.

Where compromise has led, ‘implementation by committee’ has inevitably followed. A number of public-sector examples have seen mergers based on the ‘best of both worlds’ approach, trying to bring departments together as a single organisation. In every case, the outcome has been an organisation which, even after merger, appeared as separate entities with two cost bases, separate processes and IT solutions with little benefit from economy of scale.

The decision to merge has to be bold. This includes deciding on the ‘flavour’ of IT and sticking to it, but not being dictated to by the technology itself. More important is the service proposition and the way services are delivered to the organisation.

Due diligence often highlights poorly managed or broken contracts. A high percentage of assets have frequently gone beyond­ their anticipated lives, applications and software are embedded, and the fear of required change has led to IT paralysis. When the time comes for merger, the challenge is no longer one of remediation but of complete restructure. Third parties are naturally­ happy to charge for this, ­removing much of the merger’s cost bene­fit. However, there is also an opportunity for organisations to reassess and, where necessary, realign their contracts.

Where substantial investment is involved, CIOs should be getting tangible return on investment, ensuring costs are transparent and organisations get what they pay for and pay for what they get. For example, many providers are charging for allocated resources, rather than actual usage.­ By demanding a management-only system from providers, there is a genuine opportunity to drive down cost.

In essence, decisions need to be based on strong due diligence and these decisions need to be bold when taken. Decide the IT systems to use, the departmental structures needed, and the cost savings to target. Planning must be careful and the implications clearly understood, but action should be quick, decisive and fearless.

About the author

Paul Pugh is public sector associate director at Xantus Consulting