How can councils put the right processes in place to achieve financial sustainability?

Many local authorities are facing significant and sustained financial pressures. With a number of local authorities filing or planning to file for Section 141 notices, future financial sustainability is at the forefront of most local authorities’ agenda. Our latest Time to Talk event focused on practical ways councils can start the journey towards becoming more financially sustainable.

At KPMG, we have helped numerous local authority clients gain control of their spending in the short to medium term while ensuring that longer-term service strategies are maintained. We help our clients compile effective business cases for improvements, identify and develop additional income generation opportunities, and reduce staffing costs.

KPMG’s approach to the issue of financial sustainability for local authorities unfolds across four connected phases:

1. Grip: this phase focuses on understanding your costs and developing a strategy for immediate cost reduction options. For councils thinking about filing their own Section 141 notices, this approach enables you to anticipate views commissioners may have on spending controls and to implement some of these over the short to medium term.
2. Rapid: this phase focuses on identifying medium term cost-saving and/or income-generating opportunities.
3. Optimise: this phase focuses on transformation within specific services or functions, which may have the biggest demand/cost pressures. Some examples of services we have helped clients optimise are social care, customer contact, back-office optimisations in HR, finance and technology.
4. Connected: this longer-term phase focuses on taking a whole council approach to transformation. Thinking about the interdependencies between council services, and becoming more efficient through joined-up digital services and effective use of data. 

We notice that our clients are in different places when it comes to which of the above phases may be most appropriate for them; some councils are able to balance their books for now, but predict a cliff-edge in the next few years, while others need to reduce spending now. We can support by using one of the approach phases, or a mixture of the phases that fits your individual challenges. A critical factor being ensuring connectivity of spending controls – to make informed decisions and understand any implications from a reduction in one area, that may impact another service area, and whether the overall position is beneficial to the council.

Third party spend review
The first lever which can help identify shorter-term savings is cost optimisation through a third party spend review. We find that our clients’ procurement processes focus too much on compliance, and not enough on maximising value. Some ways in which you can gain more value out of your contracts relatively quickly are:

• Reviewing third party spend and associated contracts relating to ICT, Temporary Labour/Agency Staff, Public Health, Social Care, Transport and FM services. 
• Entering strategic partnerships with large companies which provide several of the services you need, negotiating bulk-buying discounts as a result. 
• Joint buying with neighbouring local authorities or other public sector bodies – partnering can give you an increased negotiating power when it comes to pricing. 
• Supplier relationships and ongoing contract management – challenging discrepancies in invoices, ensuring outcomes and Service Level Agreements are achieved, and having an ongoing constructive relationship with your suppliers can minimise ‘value leakage’ following a contract award. 

Demand management
The second lever is demand management. In order to do this effectively, we recommend our clients start with a focus on their data landscape – understanding your demand in detail will enable you to identify where you can reduce demand and accordingly deliver targeted interventions to reduce this demand. To do this will potentially require and invest to save cost/benefit analysis.

The key starting point for using your data better is to consolidate your disparate sources of data into a single view of a customer/citizen. Having a single ‘version of truth’ and accurate data about your demand enables you to start using a more preventative approach.

Another key area to investigate is the demands on your customer contact centre and ‘front door’. The key questions to ask are: ‘What needs do the people approaching the council have, and how can we meet them differently?’ An illustrative example here is the emerging use of AI chatbots to deal with information-seeking citizen contact; saving the high-cost human interaction for more complex queries. While this is a good idea, we caution our clients of the need to have a rationalised and effective IT infrastructure enabling good data flow in order to use AI effectively, which often requires some investment before savings can be made.

Workforce capacity
A third lever is workforce capacity and conducting an activity analysis can also be a fruitful way to manage demand. An activity analysis looks at what staff members’ time is being spent on, benchmarking this to comparable organisations, and revealing whether there are areas of inefficiency, low resource utilisation or duplication. Those findings can lead to informed decisions on releasing workforce capacity and budget setting by realigning resources subject to functional groupings and organisational requirements.

Income generation opportunities
A fourth lever is looking for income generation opportunities available to you. Fees and charges are an obvious place to start – local authorities have charged for advertising space, commercial and/or bulk waste collection, additional services in libraries, hiring of facilities and a wide range of activities in leisure centres In addition, Councils are continually demonstrating initiative and resourcefulness to address social, economic and environmental challenges and have had to become more commercially astute, exploring alternative service delivery models - commercial trading companies, community interest companies and commercial partnerships. For example councils might trade in markets which they currently operate using available internal expertise offering services to other public sector bodies but others have also seen and addressed gaps in the market (e.g. translation services, ground maintenance and domestic cleaning contracts).

Debt management
A fifth lever is focussed around debt. In terms of monies owed to the Council, improved practices around debt collection for adult social care, council tax and rent arrears, using a data led approach on separating out those that ‘can’t’ and ‘won’t’ pay are essential and modifying debt collection approaches as a result, are key to councils recovering monies owed to them.

Local authorities’ assets can make a positive contribution to achieving financial sustainability. We recommend four key steps to this.

1. Understand the risk profile of all deals you are considering, in detail. This can ensure the Authority is not exposed to unnecessary or excessive risk in event of shortfalls or losses.
2. Embed collaboration across directorates on asset planning and capital strategy. Having a joined-up long-term view will point out duplication, surplus assets, and opportunities to rationalise estate.
3. Re-focus and unify your long-term asset plan. Conducting a detailed analysis of assets and their use and condition enables you to understand which assets to retain and which can be disposed of. Optimising asset strategy can make a contribution to debt reduction.
4. Create the right conditions for third parties to invest alongside Councils for example by providing comfort on demand / volume. One example is temporary accommodation, where Councils are spending increasing sums on short term accommodation. Partnership models can enable private developers to invest in providing temporary accommodation to reduce the cost of this provision.

We appreciate there are limitations in implementing the options for cost controls we outlined above. The cost of living pressures mean it is getting increasingly difficult to find services people are willing to pay for while demand for council services is higher than ever; policy and regulations significantly limit the innovation available to councils; and the statutory duties to provide in-demand, low supply services such as children’s placements often leave local authorities at the mercy of suppliers. Through our Time to Talk events, we are supporting both our clients and interested local government contacts by sharing some of our knowledge and experience. We are always happy to have further conversations on how any of the above might apply to your local authority.