This summary is based upon the January 11, 1996 presentation of Mr. Jeremy Cowper on Next Steps before National Performance Review (NPR) and the Office of Management and Budget (OMB) staff. It is supplemented in this summary by a June 1995 OECD report on the same subject, Assessing Financial Management Reforms Country Annex and articles from the British press. Fuller evaluations of Next Steps, provided through Jonathan Breul and available from Scott Quehl, OMB at (202) 395-9128, include Setting Up Next Steps (1991), Next Steps: Moving On (1994), and Improving Management in Government: A Report to the Prime Minister.
CONTEXT FOR NEXT STEPS. The Thatcher government launched Next Steps in February 1988. The reforms have been shaped by the government's desire to:

The Driving Vision. Government should be engaged only when private arrangements are unsuitable. When a governmental role is justified, it should operate when possible along commercial lines. Managers should know in advance the performance expected of them, and that results would be assessed in terms of agreed targets. To meet their new responsibilities, managers would be free to decide whom to hire and how much to pay them. They would also have broad discretion to spend on particular items within agreed budgets.

Next Steps serves as only one of a number of government reform initiatives. In 1979, the government undertook the privatization of many nationalized industries and agency Efficiency Scrutinies. The Financial Management Initiative (FMI) began in 1982 (see End Note), and its Competing for Quality and Citizen's Charter initiatives in 1991.

LAUNCH OF NEXT STEPS. The Government moved reform management from the Treasury, whose commitment to the FMI reform had been half-hearted, to a Next Steps Team working within the cabinet-level Office of Public Service, directed by the Deputy Prime Minister. Studies found that departments also suffered from ministerial overload, encumbered by a Civil Service too big and diverse to manage as a single entity, and insufficiently focussed on results. Taking advantage of the Deputy Prime Minister's official stature, the Office of Public Service planned a revolution by evolution. Instead of battling departments head-on through top-to-bottom restructuring, departments' service delivery functions were broken into discrete management units, becoming performance based, unifunctional agencies. The remaining departments, headed by politically appointed ministers, became responsible for

Establishment of Unifunctional, Performance-Based Agencies. Included in the establishment of agencies were the following processes:

Selection of Agencies. Before agency status was considered, a Prior Options Review (similar to the decision tree established by Vice President Gore for REGO II), examined each major function, asking:

  1. Does the function need to be performed?
  2. If necessary, should the function be privatized or financed publicly?
  3. If the function should be public, can the work be contracted out?
  4. If the government should provide and finance the function, should it be entrusted to an executive agency that has the independence and capacity to operate effectively?

The new agencies were not automatically composed of old bureaus broken away from their parent departments. To allow sharper focus upon priorities and performance, each new agency formed around a particular function and its attendant managerial, financial and operational activities. Agencies were set up to have full cost income and expenditure accounts. Those agencies whose function could be self-financing and oriented to direct client service, such as the Passport Office, would operate equivalent to Franchise Funds.

Agency Management and Oversight. The CEO is personally responsible to the relevant minister for agency performance. A percentage of the CEO's salary is linked to achievement of targets. Each agency selects a CEO through open competition unless the prime minister authorizes an internal candidate. About two-thirds of the CEOs are recruited via open competition; one-third have come from outside the civil service. For some agencies, financial and marketing managers are also selected competitively. Advisory Boards, established between each department and its agencies and staffed by representatives from each plus a number of outsiders, advise the CEO, monitor agency activities, and setting performance targets.

The roles of ministers and CEOs are complementary but distinct. Ministers set frameworks, finalize the CEO's appointment, negotiate and delegate authority, approve plans, budgets and targets, and monitor and appraise performance. The CEO appoints agency senior staff, manages day-to-day operations, proposes plans, budgets and targets, uses resources, and reports on performance. Based upon the recommendations of the 1991 Fraser Report, an individual, called the Fraser Figure, coordinates department-agency activities and arbitrates disputes.

Framework Document. Agencies negotiate framework documents with their parent department, reviewed at three- to five-year intervals or during major shifts in a policy environment. The Treasury participates in the negotiation to ensure that the parties meet the government's financial control. While there is not a model document, the frameworks share common features, in terms of setting forth:

The greatest value in the framework documents may be their negotiation. Drafting a framework forces the candidate agency to reflect upon what it does and how it can be transformed into an agency accountable for performance. Strategic plans, annual business plans, and annual performance and financial reporting are intended to encourage agencies to prepare for the changes it expects to implement over the medium term and organize work to accomplish the planned changes.

Performance Targets. Negotiated between ministers and agency CEOs, the targets concentrate on efficiency and outputs -- matters within the direct control of the agencies -- rather than outcomes and results. Target types include measures of task response, unit costs, customer satisfaction, efficiency savings, and productivity. To facilitate accountability, a small number of key targets by which an agency is judged are preferred to a large number of measures representing the various things it does. Internal targets are spelled out in business plans, which serve as the basis for assessing results in the annual report and review.

Delegation within New Agencies. The framework document deals with relations between the agency and its department, not relations between agency headquarters and the field offices which actually deliver the services. Yet many larger agencies are promoting the cascading of delegation, including the government's equivalent of the IRS (Inland Revenue), which has devolved management responsibilities to its 29 executive offices, and its equivalent of the Social Security Administration (Benefits Agency), which issued in 1994 a Financial Management and Accountability framework for its 159 district offices.

NEXT STEPS REPORTING REQUIREMENTS. Each agency reports to its department, which, in turn, reports to Treasury. Strategic plans, customer attitude, agency operations and output measures are supposed to be evaluated by the parent department every three to five years. Reports on agency financial condition and performance target achievement are submitted annually and assessed in a process called the Next Steps Review. The performance data are not subject to independent audit, but financial statements are audited. The agency CEO answers to Parliament on matters concerning the agency's operation, although the minister is held ultimately responsible to answering to the legislature; the CEO is responsible, the minister is accountable.

RESULTS TO DATE. The evidence points to progress in efficiency beyond performance targets, mostly due to new managerial talent, clearer direction, and framework documents and performance measures. New agencies exude a sense of energy, bringing in new upper and middle-level mangers who, while frequently griping about interference from lingering departmental micromanagement, want to be in control of their agencies' performance. The very fact that they complain about rule-bound constraints is an indication that attitudes have changed.

Negative results have stemmed from the lack of clarity between the roles of departments and agencies and foot dragging on the part of central control agencies -- Treasury and Central Personnel -- responsible for delegating resource allocation authority. Since the beginning of Next Steps, there has been substantial tension resulting from ministers asserting their strategic ownership responsibilities and CEOs exercising their "empowerment." The Advisory Boards constructively engender stakeholder buy-in and review of performance targets, but tend to be unbalanced in their advisory or monitoring responsibilities, emphasizing one over the other. The two-faced, Janus-esque Fraser Figures do not seem to be working well, rarely representing the views of the departments and agencies in a balance way, and too understaffed to coordinate activities. With a handful of staff, the Fraser figures may be better play the role of management consultant.

Policy Planning. Constraints to agency abilities to redirect objectives and activities limit plans' application. Moreover, a dispute surrounding the firing of the CEO of the Prisons Agency by the equivalent of the Attourney General shows that when a department's strategy for policy interventions shifts in the political breeze instead of following the strategic plan, the result can be contradictory guidance to the agency, muddying the basis of judging agency performance in damaging ways. In this case, the department's original policy framework consisted of "getting tough with criminals," in part by reducing resources for prisoner quality of life. But after a bloody prison riot, which was attributed to poor living conditions in the prisons, the Attourney General fired the agency CEO on the grounds of poor prison management. The CEO has used the original departmental policy guidance established within the framework to discredit the Attourney General.

Performance Targets and Measures. Agencies have generally met the standards set for them. In 1992-93, Next Step agencies met 77% of key performance targets; in 1993-94, they met 80 percent. Performance targets have narrowed agency focus to matters of internal management. This has been constructive in terms of transparent determination of whether agencies have met their goals or fallen short. The Director of a child welfare agency, for example, was replaced when performance indicators showed that the time necessary to clear cases and the failure rate in providing financial assistance far exceeded benchmarked standards.

However, there is a common problem of establishing performance targets which reflect core agency activities -- they are frequently oriented to what agencies can measure, not to what is most important. And focus upon narrow, internally focussed measures has distracted attention from agency progress in achieving policy objectives. Negotiations of performance measures could clarify the relationship between departments and agencies: departments could measure broader policy outcomes, while agencies measure outputs.

Delegation of Financial and Personnel Responsibilities. The delegation of financial and personnel responsibilities has been among the most controversial features of the framework documents. Many departments have been unwilling to take the leap. Treasury and others object that blanket delegation is imprudent before agencies demonstrate their managerial competence. As a compromise in one case, the department delegates financial authority to the agency CEO in terms of threshold amounts under which he may act without obtaining prior approval of the department. The document also lists more than a dozen services which may not by undertaken nor contracted out without prior departmental approval.

Reporting Requirements. While performance reporting has been effective, the financial reports have made only modest contributions to the improvement in agency performance, largely because line managers have not been given the flexibility to act on this information to full advantage.

Reduction in Size of Civil Service. The civil service numbers about 500,000, compared to 700,000 in 1979. However, a large percentage of the staff reductions have been propelled by the denationalization of enterprises.

Number of Agencies Established. By the end of 1995, 106 executive agencies had been established, employing two-thirds of the civil service (353,000). Another 64 agencies remain in candidate status, covering 100,000 more employees. These agencies should be fully established by 1996. The agencies vary in size from 67,000 to 30.

WHAT'S NEXT. The steps to continue Next Steps include promoting five key elements: market testing and contracting out, reforming the Civil Service, restructuring departments, redefining the role of the Treasury, and establishing accrual-based accounting and budgeting.

Market Testing and Contracting Out. Market testing is the procedure for determining whether or not it is feasible and efficient to contract out particular services. Departments are required to review their activities and identify those that may be suitable for a market test. Activities selected by the market test should be put to tender for both public and private sector bidders. But because the Thatcher-Major governments originally made the strategic decision to contract out in the first place, this process was perceived as merely a means for downsizing. As of March 1994, almost 15,000 positions had been eliminated due to outsourcing. The government's current position, however, emphasizes affordable, effective service as the primary goal of contracting out, not staff reductions, and is intended to put public and private bidders on a level playing field.

Civil Service. Managers complain more about personnel system rigidities than financial constraints, but traditions of uniformity and standardization has made it hard to give managers the freedom to employ and pay staff flexibly. The Major government has adopted the formula of unified, but not uniform; agency employees stay in the Civil Service, but agencies with differing circumstances can make different arrangements, such as:

Restructuring Departments. With operational responsibilities stripped away and central management of employee compensation being devolved to agencies, the time appears right to push departmental realignment and downsizing. Smaller departments will simply have fewer resources to meddle in agency affairs, focussing instead upon strategic management decisions and enforcing accountability frameworks. Fundamental Expenditure Reviews (FERs) could serve as an important tool for downsizing and realignment. A FER would not take any element of a department's work arrangements for granted, but would consider how the department would be organized to fulfill its strategic responsibilities. Each department will undertake its own FER, prodded by cuts in departmental operating costs. As they lose resources, departments will have to ask what is worth doing and what should be divested or delegated.

Redefine the Role of the Treasury. For over a decade, Treasury played the role of nay-sayer without knowing what would work or how it would fit in the new paradigm. Assuming that departments could not be trusted to manage their own finances and that failure to control expenditure details would weaken government-wide financial control, Treasury had been heavily involved in examining the finances, personnel operations, and sending inputs of departments. In 1994, Treasury undertook an FER, to define a clear mission and set of objectives, coupled with a streamlined structure to mirror those objectives. The "new" Treasury is loosening its grip on the particulars of departmental policy-making, better enabling it to focus on strategic issues and reform promotion. Promotion functions include issuing guidance on:

  1. delegating budgeting to departments, and
  2. performance measures, financial management improvements, account structures, annual reporting, and the establishment of Next Steps agencies.

To strike the balance between giving Treasury enough levers to exercise its responsibilities and optiminizing departmental and agency flexibility, the government is considering the use of framework agreements between Treasury and each department.

Introduce Accrual Accounting and Budgeting. The final item on the current reform agenda is a shift from cash to accrual accounting. Public expenditure totals would be expressed on an accruals basis, but Treasury and Parliament would still exercise control over cash, reflecting the government's responsibility to manage its own cash flow and borrowing. Cash control would be exercised at a less detailed level. For capital expenditure, rather than having a separate capital budget, the accruals basis would allocate the cost of capital over the life of acquired assets, while the operating budget would be charged an amount representing the cost of capital. The accruals should be applied to budgeting as well. Accrual budgeting would facilitate the full costing of resources consumed and the development of unit cost measures of outputs, integration of capital.

END NOTE. Next Steps serves as only one of a number of government reform initiatives. In 1979, the government undertook the privatization of many nationalized industries and agency Efficiency Scrutinies. The Financial Management Initiative (FMI) began in 1982, and its Competing for Quality and Citizen's Charter initiatives in 1991.

Efficiency Scrutinies. The Efficiency Scrutinies focussed upon improving public management through agency-by-agency efficiency studies, intending to use better work methods to yield savings. The typical Scrutiny lasted 90 days, limited itself to a single organization, and did not produce recommendations that could be applied government-wide. It focussed upon operational efficiency, not effectiveness.

FMI. Seeking deeper and broader changes, the government launched the Financial Management Initiative (FMI) in 1982. Through FMI, the government intended to develop in each department an organization and a system in which all managers had:

FMI helped to upgrade accounting systems and performance and output measurements, but these enhancements yielded little change in the behavior of line managers. While a central management unit was established in the Treasury Department to offer advice to departments and monitor progress, the unit lacked the leverage to influence

The impediment presented by the dead hand of Treasury, the government's chief central control organization in the reform process, is clear: dead, because Treasury could not influence department's to implement the reforms, and hand, because Treasury insisted that because of its responsibility for controlling the level of public expenditure, it could not relax budgetary and personnel controls in favor of delegation to line managers until department had demonstrated stronger competence in handling enlarged responsibilities.

While somewhat beneficial, modified procedures and improved information paled before the far-reaching institutional changes necessary to uproot centralized, rule-bound management.

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