A reduction of more than 25 per cent in government spending over the next four years is a huge challenge, and for some public bodies this will become even harder when the comprehensive spending review (CSR) is published and the full details of the cuts are known, says Chris Rainbird, a director at advisers Grant Thornton

No one should be under the illusion that the decrease in government expenditure will be short-lived. The coalition government is under-taking a fundamental, long-term review and rebalancing of its spending, which will have far-reaching consequences for local government.

While councils will seek to avoid profound cuts to frontline services, there has been a guillotine blade hanging over the head of local government spending from before the election, and it is the authorities that have developed cost reduction strategies that will be in the healthiest position to minimise the pain when the blade falls.

The challenge for local government is to operate more commercially – identifying opportunities to reduce costs, increasing income and improving operational efficiency. This will enable the delivery of core services at lower cost and avoid a large scale "slash and burn" of services which extends beyond non-essential, non-core activities into those services that are more highly valued by the public. Such opportunities include:
• Partnering for services, whether through strategic partnerships, outsourcing, shared services, commissioning the third sector, joint ventures or a combination of these
• Commercialisation, for example by increasing externally generated income or transferring trading operations into arms-length, tax-efficient commercial entities
• Contract reviews to identify ways of reducing contract costs, for example by reducing demand (where there are volume-based payments), by renegotiating contract terms, or by reducing and restructuring service requirements when contracts are due for renewal, extension or when break points occur
• Stronger asset management, including greater "sweating" of assets (learning from the experience of regulated utilities), disposing of surplus or non-core assets, and realising untapped value that exists in council property and other non-property assets (eg advertising space)
• Operational efficiency improvements, which may involve redesigning service delivery, business process transformation and workforce transformation, to deliver the same outcomes for less cost
• Service reduction, the cutting of non-core/non-essential services to maximise available budget for core services more highly valued by the community.

The potential for savings is significant, but the distance travelled to date is relatively short compared to both the scale of the opportunities and the cuts that are likely to be required in October. Some local authorities may be further down the road than others in implementing partnering arrangements of various kinds, but in general local government still has much to do to prepare and implement the cost reduction strategies that will be required to deliver the CSR.

The pressure is intense and time and money is needed to formulate and implement strategies to cut costs, but both of these are in short supply. Local authorities will need to act quickly to cut non-core/non-essential services or expenditure in order to buy time and money to develop and implement the cost-reduction strategies that will ensure the affordability, viability and sustainability of core services.

Developing and implementing a cost reduction strategy is not straightforward. While the first challenge of identifying opportunities can be quickly accomplished, the long-term implications need to be carefully evaluated to ensure that they will result in real, sustainable cash savings. For example, cutting, reducing or redesigning a service may provide immediate savings – but will it have financial implications for other services?

In addition, strategic partnerships, out-sourcing and shared service arrangements are unlikely to deliver significant savings in their own right. Meaningful savings will only occur if councils embrace new methods of service delivery at both the strategic partner level and within the council. This may include standardisation, commercialisation, business process transformation and workforce transformation. Strong, committed leadership is therefore critical in establishing the cost-reduction strategy and driving its successful implementation.

The vision for the future is a leaner, more commercial and responsive local government sector. Today's challenge is for local authorities to reshape service delivery so that they are more commercial, sustainable entities in the long term. While cuts in services are inevitable, it is self-evident that it is better for councils to take control of their own destiny now than to wait for the guillotine blade to fall.

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