Why the government’s cost estimates for delivering its NHS reforms are wrong

by Paul Crowe

The Lib Dems are tabling hostile amendments in the Lords, the former chief executive of the NHS has broken ranks to voice his disapproval and the BMA is balloting on industrial action.

Just another day in the progress of the health bill.

As the lords set to work on the bill later today, the focus will be on amendments on competition in the health sector.  But as the debate progresses they would also do well to focus on a number which has escaped proper scrutiny:- £1.3bn.

That’s what the NHS reorganisation is going to cost, according to the government.

The figure is contained in a report whose very title seems to discourage interest: Co-ordinating document for the Impact Assessments and Equality Analysis. This gives the detail of the projected costs. It’s a classic of its type: sober, measured and with an authoritative tone.

And hopelessly wrong. The £1.3bn identified will be almost certainly just the start of the spending.

To anyone with even passing experience in managing large-scale reorganisations, the department of health’s assessment should flash more warning lights than the police switchboard on riot night.

The £1.3bn figure is made up of redundancy costs of £1bn for 17,000 staff and £300m of what the department calls “one-off transition costs…around IT and property”.

In return, the government expects to make a £1.5bn saving each year after the change is implemented, giving a net saving of £3.2bn over the course of this parliament. Impressive.

Or it would be impressive were it realistic.

Few disagree on the need for reform in public services, particularly in economic times such as these. And change, when implemented in the right way can achieve the savings needed and improve care in line with the traditions of the NHS.

But looking at the scale of what the department of health is attempting and comparing it to recent corporate reorganisations, three problems are soon apparent.

First, the savings are aggressive given the costs; second, the costs identified don’t appear to be complete; and third the timetable for achieving savings is optimistic to say the least.

In terms of savings, experience in the private sector gives an indication of the level of benefits that can be achieved for a given level of expenditure.

The largest commercial reorganisation in Britain in the past few years has been the integration of the Halifax and Bank of Scotland into Lloyds Banking Group. It was completed late last year on schedule costing £3.6bn, generating £2bn savings per year and is widely seen as a benchmark for successful restructuring.

For Lloyds, the annual savings following implementation were 56% of the cost of making the change. In comparison the government seems to think it will be able to achieve 116% of the costs of the reorganisation in the first year after completion.

No-one would claim that big companies like Lloyds are perfect, but it’s a leap to believe that the same executive team at the department of health responsible for the NHS IT project can deliver this organisational change more than twice as efficiently as the private sector.

The second problem is cost. The department’s cost assessment appears to have two gaping holes, the cost of preparing staff, and the IT.

Whilst redundancy costs are included in the report, there is no mention of any spending on the people who remain in the organisation. Properly preparing the staff who will actually make the new system work is the critical success factor for landing a reorganisation like this.

If these people are unsure, disengaged or downright opposed, the programme will struggle to deliver.

In 2008, Mckinsey’s – the government’s favourite strategy consultants – found in a survey that 70% of corporate reorganisations fail, principally because of the human element.

Typically, between 10 and 15% of the total project budget for these types of programme is allocated to getting the staff ready for the change. In a situation like this where almost all staff, at all levels are united against the reforms, it should be much, much higher.

Should be. It’s not, because the department of health does not seem to have allocated a single penny to preparing staff to deliver this change.

But, if missing out several hundred million pounds of change management costs weren’t bad enough, there’s a magical little line in the department’s assessment which covers a host of potentially worse financial sins.

“…this document does not include central IT costs for reasons of commercial confidentiality.”

Read it again, and think on it for moment.

In all the figures that ministers quote on the costs of change, none include the big IT expenditure. There is no way such a large re-organisation will have only a limited impact on IT.

How many hundreds of millions of pounds, if not billions of pounds, this will cost is unclear. But one thing is certain: on any IT project, changing the specification of what the systems are meant to do, so late in the day will cost a lot, cause extra delays in delivery and add several new levels of complexity to the final IT system.

Not including central IT costs in what should be a full disclosure document is like removing capital spending from any discussion of the deficit.  Savings claims without including IT costs cannot be considered realistic.

The third improbable within the government’s delivery assessment is the timetable. According to the department for health, the programme will have been successfully implemented without hitch by 2014/15 and started generating the full £1.5bn annual savings in that year.

This seems fast. The bill hasn’t even passed into law yet and is already year behind schedule. Factoring in the levels of delay suffered by the majority of reorganisation programmes, the timetable seems seriously optimistic.

When deadlines lack credibility at the start, it is almost impossible to get the buy-in needed at the various levels within the organisation to make the programme a success.

It’s the time of year for corporate results and the impacts of late-running restructuring programmes litter the business press.

In just the past week Panasonic, Telefonica, Logica, Credit Suisse, Vedanta, JC Penney and Proctor and Gamble have reported reduced profits because of delays to their restructuring programmes. And they are just the tip of the iceberg.

Delayed delivery of the NHS reorganisation would have a profound impact on the government’s rationale for attempting it in the first place.

Their logic has been that the net saving of £3.2bn in the health budget will enable funds that were going to be spent on administration to go on healthcare, protecting the NHS budget from cuts.

If the programme is 1-2 years late, there will be no net savings, just extra cost and a further real terms cut to frontline health services of £1-2bn.

It’s a sorry tale: benefits pitched too high, costs too low with a deeply optimistic delivery goal. Even if the country were united in support of the reforms instead of opposition, this type of planning would do much to undermine a successful implementation.

In future years, the NHS reorganisation might be taught to business students, but it will be as a case study on how government gets these big projects catastrophically wrong.

Paul Crowe is an entrepreneur. He runs a business that was recently placed amongst the top 40 fastest growing British private companies in the Sunday Times Fast Track 100

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One Response to “Why the government’s cost estimates for delivering its NHS reforms are wrong”

  1. Bobos says:

    Thank you for an incisive analysis of the next big financial farrago to affect the Public Services. I am sure we will be reading about it for years in Private Eye if the Bill goes through.
    But this is merely an aside in the opposition to the Bill. What voters are really afraid of is suspecting that their Doctor’s clinical judgement will be tainted by the pecuniary interests of the GP Commissioning Group. This takes us all back to the days before the National Health Service.
    Where will the voters’ admiration and trust of their Doctors go when they are offered the chance to ‘jump a queue’ in return for a payment to the Practice?

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