With national debt threatening the prosperity of future generations, Christopher Blackstone advocates applying private sector style restructuring initiatives
When this article is published, before the TOC Europe event in sunny Valencia, the result of the UK general election will have determined which politicians will have the unenviable task of tackling the country’s debt problems. I specifically refer to debt rather than budget deficit since it is the former that will hamper the development of future generations. The politicians prefer to confuse the electorate with the latter with such nostrums as "We will half the deficit within the lifetime of the next parliament" which is simply the borrowing requirement. Over the same period the consequential debt will double and still be rising with the costs of servicing this crowding out investment and economic growth; add in the "off balance sheet" items for public sector pensions and PFI and the debt is doubled again.
I have yet to hear a politician honestly state how many decades it will be before the country starts to pay off the loans; we have only just finished paying off the loans to fund the Second World War! This is assuming that there are still markets for this debt and that of many other members of the earlier "wealthy" economies.
Japan has already built up debts of nigh 200% of GDP, mainly funded up to now by a domestic personal saving ethic, but that is changing due to demographics, a situation applicable to the UK and other major economies in Western Europe and Russia. The present UK debt is held roughly one third each by foreign investors, banks and financial institutions, and pension funds. There is a mighty long way to go!
My career has been principally concerned with cost reduction in corporate organisations. This has mainly been in capital investment and productivity in successful organisations but also in rapid cost removal from underperforming and failing entities. The single most important element that applies to all these businesses is cash. Cash really is the difference between success and failure, and those, even in good times, who are dependent on short-term borrowing will experience unpredictable times. It is this cost reduction experience which leaves me bemused by the narrow political arguments concerning the detail of Òeliminating wasteÓ and making "efficiency savings". Every few years a commercial organisation can take out at least 10% of cost without harming the service provision; it is akin to going to the barber regularly for a trim since human activity naturally creates cushions and comfort zones in which to operate!
But there is an absolutely fundamental rule in undertaking this pruning. The CEO and board must never get drawn into the detailed process. Rather they must instruct the departmental managers to take out a certain percent of cost without lost of service provision and then advise how it is to be achieved. The managers must be informed that if they do not meet the objectives, they will be looking for another job.
This procedure concentrates minds wonderfully and it works! If the directors get involved in the detailed process, the chances are that they will face an avalanche of reasons why present expenditure is insufficient; there have never been enough supplies in the vending machines or soap in the toilets and so on! That methodology is what the politicians and the interrogating journalists fail to comprehend, but successful industrialists certainly do.
Another myth regularly propagated is that the private sector organisations have more ready opportunity to achieve savings through capital investment while the public sector less so since it is more labour intensive. This is arrant nonsense and quoted figures of 25% productivity gains in the former and 3% reductions in the latter since 1997 are evidence in part of this even if the genesis and logic of such statistics may be deemed questionable.
I have often been accused of eliminating employment through automation when the reality is that the opposite is true even in the developing world. Improved efficiency leads to growth not only in the organisation itself but also in the local economies. Of course, some activities, like the care of the elderly, will always be labour intensive but, ironically, the more humans involved, the more the accretion of ÒfatÓ and poor organisation/management. Sometimes very radical treatment is required with immediate effect, rather like very hard pruning of a garden shrub; I was once involved with the removal of a complete level of management and what a rejuvenation this gave to the whole company!
Fundamental questions which should be regularly asked in an organisation are frequently dismissed as being simplistic. Two examples are: "Is the business in the right location?" and "What are the objectives of operations management?"
For the first, there should be a review on whether the location is best to serve customers, at an appropriate rentable value for the type of business, and for the availability of suitable employees at competitive rates for the type of business. I recall a metal forming business in Slough that was paying four times the property rental and 50% higher unit employee costs than in a more appropriate location in Birmingham. For the second, I have defined two parts, namely the Customer Service Objective and the Resource Utilisation Objective. To some extent these two objectives are in conflict, since it is not normally possible to maximise performance on all aspects of both. The combination of the two objectives must be to (1) maximise efficiency, (2) minimise cost for service defined, and (3) optimise the level of working capital. I have so often found that consideration of these issues is quite simply the difference between success and failure.
Restructuring is an essential act of survival in the commercial world. So it should be in the public sector to avoid our descendents being crippled by the debt of the excesses of the present generations. It can be done!
