The challenges facing HR professionals in the public sector have, perhaps, never been greater as organisations continue their drive for reduced costs and increased efficiencies. The desire to protect front-line services has focused attention on workforce numbers and costs, along with other savings strategies in support functions and areas such as property and ICT. The scale and pace of change, combined with an increasingly difficult employee relations climate resulting from the continuing pay freeze, job insecurity and proposed pension changes, requires innovative and imaginative thinking as organisations seek to manage more immediate imperatives, while planning for the longer term.

How are organisations responding to these challenges? The recent report from the Local Government Association (LGA) and Audit Commission, Work in progress: Meeting local needs with lower workforce costs, describes the range of strategies adopted by councils in England, looking at those that will deliver more immediate savings, as well as changes that will take more time. Drawing on a variety of data sources and accompanied by further supporting information, guidance and tools, it provides an interesting and informative reference for local government employers, describing a number of different approaches to reducing pay bill costs, while at the same time seeking to maintain service delivery and avoid or minimise compulsory redundancies. It also makes a number of recommendations to assist councils in their local decision-making and help achieve the best possible outcomes.

Although, as the report recognises, individual approaches will vary according to the particular local context, a number of common themes emerge in terms of the effective management of organisational and workforce change. Deborah Moon, HR Consultant, considers the report and some of the key issues arising from it.

The financial/economic context

The report describes the financial challenge faced by local government in terms of the overall scale of funding reductions and how savings requirements may be met. It also looks at the size, composition and cost of the local government workforce, including the different elements which make up the total pay bill. It considers recent trends in workforce costs and numbers, looking at the position in local government as compared to the wider public sector and how expenditure on staff varies across different services, eg between corporate functions and direct services, as well as how this may be affected by contracting-out/outsourcing.

The statistics provided in the report concerning the “shrinking” local government workforce, with the decline in numbers predicted to continue in 2012, have been underlined by figures from the Office for National Statistics showing that local government is bearing the brunt of public sector job losses. Concerns have also been expressed about the perceived “unfair split” in terms of local and national government spending reductions.

The report reflects on the context in which local government pay is determined, which, for most councils, is still within the overall framework of the National Joint Council (NJC) agreement but with local flexibility over the design of individual pay and grading structures. There are, of course, a number of councils, particularly in the south/south east, who have moved away from the national agreement and who apply local pay and conditions.

Basic pay rates may be enhanced through the use of market supplements for particular roles according to specific market conditions and recruitment and retention needs. While there is variation between pay rates both within and between regions, the report finds that these are not significant other than for London and the south east. It also identifies the need for employers to develop a better understanding of how their pay rates compare with other organisations operating in similar labour markets and the importance of benchmarking data to inform and support this process. To assist in supporting and improving practice in this area, the LGA has produced a guide to pay benchmarking, setting out the stages of and processes for undertaking this type of exercise.

The role of national pay bargaining within the public sector and the desirability of achieving more local/regional variation in pay rates has been on the Government’s agenda for some time and was raised again by the Chancellor in his 2011 Autumn Statement, in which reference was made to the difference in practice, as compared to the private sector. The Government stated its intention to ask the Independent Review Bodies to consider how public sector pay can be made more responsive to local labour markets, as well as considering how more local, market-facing pay could be introduced within Civil Service departments. As with other similar issues, eg public sector pensions, it is important to remember the diversity of employers and employment arrangements that apply within the “public sector” and recognise the variation in practice which already exists, ensuring any such debate takes place in an informed and considered way. As indicated above, within local government there is already a considerable level of discretion with regard to pay and conditions, even within the national framework agreement, and councils will, no doubt, wish to ensure they are maximising this flexibility when reviewing workforce costs.

The report also identifies the impact that addressing equal pay concerns can have on both capital and revenue budgets. Many councils have been faced with significant cost pressures arising from the implementation of new pay and grading structures and from equal pay claims. While the incidence of equal pay cases within local government has, perhaps, declined more recently, a number still continue to hit the headlines, eg the case of Birmingham City Council v Abdulla and others, which concerns the rights of employees to bring an equal pay claim in the High Court (where there is a six-year time limit) rather than through an employment tribunal (where there is a six-month time limit).

The process of “capitalisation” can assist councils in meeting and managing such costs and the Government has recently announced that it has given permission to a further 12 councils to utilise this approach.

Reducing costs through workforce savings

The report then goes on to consider how councils can reduce costs without the need for radical organisational change or large-scale redundancies, examining a range of common savings measures which may be utilised, and illustrated by a number of case study examples. These include:

  • freezing recruitment/vacancy management — the report recognises that the effectiveness of this can be affected by declining staff turnover rates but also identifies other measures which may be adopted including not renewing fixed-term contracts, the use of early retirement, and support for external job searches and the consideration of self-employment (the Local Government Workforce Survey 2010/11 reported a median annual turnover rate for all respondent councils of 12.3%, with a median annual vacancy rate of 2%)

  • reducing additional payments — the national conditions of service (the Green Book) provides the scope for local flexibility in a range of premium and unsocial hours working payments and many councils, including those who are outside the national agreement, have been reviewing these provisions and other terms and conditions. Although the report recognises such changes may not lead to substantial savings for all councils, they can provide another means of avoiding redundancies. Actions considered or taken include:

    • the removal of market supplements, bonuses and honoraria

    • reductions in the eligibility for/level of overtime and other premium payments

    • changes to car allowances and mileage rates and the introduction of car parking charges for staff.

  • part-time and other flexible working — the report identifies the increasing proportion of the part-time workforce and reflects on how this, and other flexible working arrangements, perhaps on a short-term or time-limited basis, can provide an alternative to redundancy. Indeed, as the report recognises, this was a strategy adopted by a number of companies in the private sector as a way of managing the impact of the economic downturn on their business. For example, the Flexible Futures scheme adopted by the accountancy firm KPMG, designed to provide greater flexibility in the management of staff costs while retaining talent for the future and which proved to be an effective and successful approach. Utilising the provisions within the Local Government Pension Scheme regarding flexible retirement may also provide another option for councils to consider

  • agency workers and other procured professional services — the report identifies the increase in spending on agency workers and procured professional services during the period 2004/05 to 2009/10 and the different amounts spent by councils as a proportion of their total staff spend. While agency workers can provide employers with the flexibility to respond to service pressures and substantive labour shortages, there is a danger that organisations can become over-reliant on such arrangements and that expenditure levels can spiral out of control. The report identifies the importance of and potential benefits arising from robust contract management arrangements, with clear criteria determining the circumstances in which agency workers may be utilised, supported by better data to monitor and manage costs. Councils will, no doubt, have been assessing the implications arising from the Agency Workers Regulations, reviewing their use of agency workers in the light of these and working with their agency providers to explore the different ways in which its impact may be minimised. Some councils also operate in-house/internal agency schemes as an alternative to using external providers and it will be important to manage any such arrangements in a way which maximises potential efficiencies and cost control

  • managing sickness absence — the drive to reduce sickness absence levels in the public sector and achieve more effective management in this area has been a continuing theme for a number of years, with commentators often highlighting the differences in absence rates between the public and private sector to illustrate this point. The Local Government Workforce Survey 2010/11 reported the median level of sickness absence in councils in England at 8.6 days per full-time employee, with a median of 3.7% of their total contracted hours lost to sickness absence. The survey identifies the main cause of sickness absence as stress, depression, anxiety, mental health and fatigue, followed by muscular skeletal problems.

    As the report indicates, more effective absence management can result in significant financial benefits, once again highlighting the need for robust workforce information to support and enable early identification and interventions and greater management control. The increasing incidence of people experiencing mental health problems has also prompted calls for employers generally to develop a better understanding and awareness of such issues, ensuring they have appropriate processes in place, creating an environment where people feel confident to talk about this and equipping managers with the necessary skills to identify where problems may be occurring and how these can best be managed.

    The management of sickness absence in the public sector was also an issue considered in the recent Health at work report, with specific recommendations made to improve practice in this area, along with a suggested review of occupational sickness schemes

  • redeployment — redeploying “at risk” staff is a well-established mechanism within local government and the report provides a reminder of how this can help prevent or avoid redundancies and retain organisational skills and knowledge. The different ways this may be achieved is illustrated by a case study example, including the deployment of staff to cover temporary vacancies, project working, sickness and maternity absence, at the same time reducing the use of agency staff and other external contractors

  • sharing/pooling staff — the report identifies this as another potential means of helping keep staff in employment and assist in managing workload peaks and troughs, both within and across councils and with other local public service employers. The effective use of staff sharing/pooling and/or redeployment should also assist in the overall management and control of Agency Worker and other temporary staff costs. A particular development in recent years has been the adoption of shared senior management arrangements and the contribution this can make to reducing workforce costs is considered further in the next section below.

Organisational change and transformation

While the measures described above may be enough to achieve the required level of savings, at least in the short term, it is likely that longer-term requirements will necessitate more substantive organisational change and transformation and the adoption of alternative business and service delivery models. The next section of the report looks at some of the more fundamental changes councils are making, recognising that these can result in “up-front” costs, eg through redundancy payments, before longer-term savings are realised.

Such changes may affect the whole council or particular service areas/departments. They are likely to result in flatter management structures and rationalised management arrangements. The report looks at the factors affecting the number of management levels within an organisation and how many may provide an effective span of control.

It considers the “inevitability” of redundancies within local government, recognising that while there are different ways in which these may be managed and achieved, compulsory numbers are likely to increase in the future. It also considers the impact of redundancy costs on short-term savings, reflecting that many councils are reducing the level of severance payments, and how, in the same way as equal pay costs, the process of “capitalisation” is being used to help manage these.

The report also identifies the proportion of councils who have reduced senior and middle management costs, either by employing fewer staff or by paying them less. As well as contributing to overall savings targets, this can send an important message to the wider workforce, with a recognition of the need for pay restraint at all organisational levels, particularly important at a time when issues of fairness and equity in relation to executive remuneration has been a topic of much debate and where senior management pay levels are subject to increasing public scrutiny.

However, the report draws attention to the potential loss of organisational skills and knowledge through such “delayering”, the need for effective support measures for staff leaving the organisation and the impact on those who remain. Many councils will have put in place appropriate outplacement and other support measures, as well as considering the impact on their longer-term “talent pipeline” and how best to manage this.

Another approach to reducing senior management costs which has increased in recent years is the adoption of shared chief executives/management teams, particularly at district council level. Other initiatives may include shared/integrated services and/or joint activities, such as procurement, IT systems and services and recruitment processes. The report provides some statistics on, and examples of, the types and incidence of shared service activities. However, as it also recognises, there are significant implications and challenges arising from such arrangements, with a range of organisational, cultural and political factors needing to be considered and addressed. While such potential “barriers” have been overcome in many instances, there are also examples where these have proved insurmountable and potential shared management/service arrangements have not progressed or one party has withdrawn from them. Nonetheless, the imperative of cost savings and service efficiencies make a powerful case for, at the very least, exploring the potential for/extension of such joint/shared arrangements.

The report then goes on to look at the use of outsourcing, reflecting on the potential for development of different models alongside the more traditional client/contractor arrangements, including commissioning councils, employee ownership, mutuals, co-operatives, social enterprises and other partnerships. Creating greater diversity in public service provision has been an underpinning theme of the present Government, eg as reflected in the measures set out in its Open Public Services White Paper, published last year. This included the potential for the establishment of public service mutuals and social enterprises with new rights given to staff to set up such arrangements and bid to take over the services they deliver. To support such developments, the Local Government Group produced a practical guide Social enterprise, mutual, co-operative and collective ownership models, focusing on the main employment issues for councils and how to respond to employee requests to deliver local services, as well as signposting to other resources/information sources relating to this issue.

More recently, the Government has been promoting the concept of “socially responsible capitalism”, with the Deputy Prime Minister advocating a “John Lewis economy” model as a way of unlocking growth and boosting productivity, through increasing share ownership and giving employees a stake in their company. The Prime Minister has also spoken of his desire to encourage the creation of more employee and customer owned co-operatives to help build a “fairer economy”, indicating the intention to streamline legislation governing such arrangements through a Co-operatives Bill to be put to Parliament before the next election.

The extent to which these types of approaches may develop in the public sector is, perhaps, still unclear. While there are a number of examples of such initiatives, it is interesting to note that the Local Government Workforce Survey for 2010/11 indicated that, out of 187 councils, only 3% (five councils) had received requests to set up an employee-led organisation, of which four had supported these requests. Nine per cent of councils expected to actively promote employee-led organisations in the next financial year, with 56% stating they would not and the remainder being unsure. Perhaps it is still too early to reach any clear conclusions on this issue, with a need for further time to build staff confidence in and understanding of this issue, and with appropriate support and encouragement provided by employers.

While the outsourcing/contracting-out of services can deliver a range of potential benefits, organisations must be satisfied that the relevant conditions to achieve the desired objectives are met and that it has the necessary skills and resources to manage these effectively. There is also a need for each partner to develop an understanding of their respective cultures and behaviours, build trust and confidence and invest time in managing the relationship. As this section of the report concludes, there is no one “right” solution and decisions must be taken in the context of local needs and circumstances.

A challenging future

As the report recognises, although finding savings may be the immediate priority, councils should not lose sight of the longer term, with a need to ensure the retention and development of a skilled and committed workforce, maintain employee morale and motivation, manage the relationship with the trade unions and consider the impact on the overall employment package of changes to/reductions in pay, terms and conditions. The hope that private sector jobs growth would help offset losses in the public sector has not, as yet, been realised, and rising unemployment remains at record levels. However, once the economy starts to improve, there is a danger that shorter-term efficiency measures will create longer-term and systemic recruitment and retention problems, with the sector unable to attract the type and level of talent essential to the development and implementation of new service arrangements and ways of working.

Future changes in the nature, structure and size of councils are reflected in the report, with examples given of the predicted outlook within three different types of authority. As the report recognises, such changes will require difficult decisions to be made and managing and maintaining positive workforce relations is likely to prove challenging. Once again, it identifies the importance of better data, both to manage costs and to ensure the employment offering is appropriately positioned in relation to the broader labour market. It then considers a number of different aspects of this.

  • Total rewards — there has been an increasing interest in a total rewards approach to employee remuneration in recent years and a number of different models have been developed and adopted by employers in all sectors. Recognising that pay is not the only motivator, the report suggests the use of total reward statements by councils to ensure that the full range of benefits, both financial and non-financial, are identified and promoted to staff. The use of a total rewards approach can help employers maximise the potential value of the employment package, particularly at a time of pay freezes and reductions in other terms and conditions. For example, employers can often negotiate better deals across a range of benefits which employees would not be able to access individually and which can help save them money in the purchase of goods and services. However, as reflected in the CIPD’s Employee attitudes to pay annual survey report 2011, there may be a limit on the extent to which this remains a sustainable strategy, suggesting that the total reward approach may be starting to “show strain” and commenting that “flexible working doesn’t help pay off the mortgage”. In the current economic and employment climate, this is something that individual employers will need to be mindful of and sensitive to

  • Skills development/investment — the organisational changes outlined in the report will place new demands on staff and are likely to require different skill sets if they are to succeed. The report identifies the need to protect training and development budgets (often one of the first to “take a hit” when savings are being made) in order to ensure councils have the skills and capacity to meet current and future needs

  • Rewarding performance — reference is made to the Hutton Report on pay in the public sector, in particular, that “reward should be proportional to the weight of each role and each individual’s performance; should be set according to a fair process; and should recognise that organisations’ success derives from the collective efforts of the whole workforce”. It contrasts this statement with the fact that incremental progression continues to remain “the norm” in local government, as evidenced by the Local Government Workforce Survey 2010/11, which found that, out of 188 councils, 72% used “time served” annual incremental pay progression for the majority of staff, with just under a fifth (18%) using performance-related pay (PRP) for the majority of staff. The report considers the resulting cost impact of “pay drift” on the overall wage bill and how incremental progression can add to workforce costs, even during times of a “pay freeze”. It considers the potential use of PRP to control workforce costs but also recognises the concerns that some councils have about such an approach. It states that “there is no conclusive research evidence that performance-related pay on its own provides a long-term incentive to improving performance”.

    Of course, there are many factors influencing employee performance and contribution and a number of different ways in which this may be recognised and rewarded. In addition to any pay/financial considerations, employers must not overlook the importance of ensuring an appropriate organisational culture, where corporate values and standards are clearly articulated and understood and are reflected through employment practices and management behaviours.

    Reference is also made to one of the more detailed case studies accompanying the report (Tunbridge Wells Borough Council) and the changes made to its local pay arrangements, including the use of a competency framework to assess staff contributions for pay purposes.

  • Benchmarking pay and rewards — the report looks at the role and purpose of pay benchmarking, including ensuring the use of appropriate comparator organisations, advocating its use by councils to achieve a better understanding of the forces driving pay in their areas and helping them assess whether they are paying above or below the market rate. It considers both the internal and external factors that influence wage rates and the “reward mix”, referring again to the further guidance on pay benchmarking from the LGA, mentioned previously in this article.

The report concludes by setting out the further help and guidance that is available to councils from the Audit Commission and LGA, including more detailed case studies relating to the following councils.

  • Sunderland City Council (restructuring and redeployment)

  • Devon County Council (delayering)

  • Cherwell District Council and South Northamptonshire Council (integrating management teams)

  • Tunbridge Wells Borough Council (rewarding performance)

  • Lambeth Council (reducing reliance on agency workers).

A common theme across all of these case studies, irrespective of the particular change, initiative or development, is the crucial importance of ensuring extensive staff engagement through regular and open communication, dialogue, and involvement, with transparency and openness an underpinning principle.

The importance and value of employer/employee communication to maintaining morale and motivation has recently been reinforced by the outcomes from the CIPD’s Employee attitudes to pay annual survey report 2011. It is concerning to note that, since the survey began in 2008, employees generally feel less valued, less proud of their employer and less motivated to perform well. They also feel their employer does not do a very good job of communicating with them. Within the public sector, employees are less likely to feel valued than those in the private sector and there is a higher level of dissatisfaction with employer communication.

Recognising the need to take account of the changing workplace context and increasing pressures to do “more with less”, the PPMA is currently involved in a project exploring the nature of the “employment deal” and how employers can seek to sustain and enhance employee engagement during these turbulent times. This considers the “inducements” offered by the employer and the “contributions” expected of the employee, with research undertaken within three local authorities identifying the key features which support job engagement and organisational commitment. A summary of this project is available on the PPMA website, with a fuller report to come and workshop planned as part of this year’s Annual Seminar.

Falling levels of pay and living standards, combined with fears regarding job security and the impact of organisational and workforce change undoubtedly create a challenging environment for public sector and local government employers. The Audit Commission/LGA report demonstrates the progress that has been made by councils, with a number of creative solutions adopted, but there is still much that remains to be done.

Work in progress: Meeting local needs with lower workforce costs available on either the LGA or Audit Commission website at: www.local.gov.uk; www.audit-commission.gov.uk

Employee attitudes to pay annual survey report 2011 available on the CIPD website at: www.cipd.co.uk

Employee Engagement and the Employment Deal available on the PPMA website at www.ppma.org.uk

Deborah Moon is a Consultant in Human Resources and is a regular contributor to Croner-i HR for Local Government. Croner-i HR for Local Government is an online employment law and practice reference source designed specifically for HR Managers and their teams in local government.

Last reviewed 3 February 2012