Job cuts, budgets and challenges in the public sector: the 2012 survey

Author: Noelle Murphy

The public sector is in the middle of its third year of cost cutting and job losses. We find out how these challenges are being met by HR.

Key points

The public sector is facing unprecedented challenges in cutting costs while maintaining operations. We surveyed 78 HR practitioners in public sector organisations, employing almost 500,000 public sector workers, to discover just how they are coping.

In this article, we report on: cuts to wage bills; compulsory versus voluntary redundancies; outsourcing; shared services; closure of sites or offices; and plans for 2012. We also asked our respondents to tell us how they felt cuts had affected both staff and services.

This survey is a repeat of our 2011 research, and our findings show that there has been no let-up in the pressures faced by HR practitioners to cut costs - primarily through job losses, although also as a result of redundancy programmes and early retirement.

Cutting the wage bill through redundancies

Nine respondents in 10 (91%) sought to cut wage bills in 2011. This is roughly a 10 percentage point increase on figures from our survey in (81.5%), which reflected cuts made during 2010.

During 2011, those who provided us with figures said that they had to cut their wage bills by a median (midpoint in the range) of 7%, and an average of 9.4%. The lower quartile stood at 5% and the upper quartile at 10%.

For 2012, almost nine respondents in 10 (87.2%) expect to make further cuts to their wage bills - by an average of 7.6% and a median of 5%. The upper quartile stands at 10% and the lower quartile at 5%.

Our research first started recording cuts in the public sector in 2010, but our findings this year show little or no sign of any significant let-up. Rather, this sector is moving into its third year of persistent cuts.

Voluntary versus compulsory redundancies

Eight public sector organisations in 10 (80.3%) used voluntary redundancies to reduce their wage bills in 2011, compared with six in 10 in 2010. Among those that provided us with figures, the number of employees made voluntarily redundant stands at an average of 86 and a median of 40.

Last year, our respondents forecast that the median number of employees likely to leave the organisation over the next year due to voluntary redundancy was 21. While our sample is not matched, it is still of note that the actual median number of employees who left the organisation through voluntary redundancy is almost double that, at 40.

Seeking volunteers for redundancy is more likely to fit with the industrial relations climate within public sector organisations, given the prevalence of unions. However, our findings suggest an increase in the number of compulsory redundancy programmes - most likely because cost savings have not been attained through volunteer programmes, or a strategic decision was taken to close a site or cease a service, where redeployment was not achieved.

In 2011, nearly six employers in 10 (57.7%) made employees compulsory redundant. This indicates a growing trend compared with our findings last year - where four in 10 (38.7%) used compulsory redundancies. Among those who provided figures for 2011, the average number of employees leaving due to compulsory redundancy was 57 and the median was 28. This compares with a median forecast of 20.

We have also seen a significant change in the ratio between voluntary and compulsory job losses as a result of redundancy. In 2011, we found that for every one employee made compulsorily redundant, eight had accepted voluntary redundancy. However, this year, for every one job lost to compulsory redundancy, two employees volunteered.

There are likely to be several reasons for this. First, the job market is as tight as it has been in more than a decade, making it more difficult to find another job. As a result, people are less likely to make themselves voluntarily redundant. Also, many organisations may have already been through one or more voluntary redundancy programmes, so those who were more comfortable choosing to leave the organisation through this route will already have done so.

Redundancy compensation

When it comes to voluntary redundancy programmes, this year we find that the same proportion of employers - two-thirds (63.2%) - offer enhanced terms to employees taking voluntary redundancy as last year. But there has been a significant drop in the number of organisations offering contractually enhanced redundancy compensation. Last year, the majority offered more than the statutory compensation to all employees - this year just six in 10 did so. One organisation in four offered statutory redundancy compensation to employees.

Redundancies forecast

Redundancies are set to remain on the agenda during 2012. Three-quarters (74.2%) of our respondents expect to offer voluntary redundancies and more than half (56.1%) expect to make employees redundant on a compulsory basis.

We also asked respondents to forecast the number of redundancies that they anticipated in 2012. For voluntary redundancies, respondents predict an average of 109 redundancies and a median of 50. The lower quartile is 20 and the upper is 120. For compulsory redundancies, the average forecast is 83 and the median is the same as those forecast for voluntary redundancies - 50.

Reasons for cutting wage bills

When we surveyed the public sector in 2010, four respondents in 10 had not had their budget cut but were making savings in expectation of future cuts. However, during 2011 more than four in five (83.1%) had to cut costs because of a decreased budget (see chart 1).

The majority of our respondents do not expect the cuts to cease this year. Almost three-quarters (73.2%) are implementing further cost-cutting measures because they are expecting their budget to decrease further in the future.

Efficiency is a key word among our respondents, and around three in five (66.7%) are looking at cutting costs because of ongoing efficiency programmes.

Outsourcing to reduce the wage bill

Outsourcing is growing within the public sector. During 2011, almost one respondent in five (18.4%) has introduced or expanded its existing outsourcing programme in order to cut costs (see chart 2). In 2010, the same question elicited a positive response from just over one respondent in 10. Outsourcing - contracting out of a business, commonly one previously performed in-house, to a third party or external provider - is often introduced to cut costs. Organisations pass on the cost of all overheads or ongoing costs to a third party, which removes costs from the books. However, whether or not it actually saves costs in the longer term is of some debate.

Areas that respondents expect to outsource in 2012 include:

• catering;
• cleaning;
• training;
• elements of HR;
• marketing;
• payroll; and
• security.

Outsourcing is set to increase during 2012. Almost four respondents in 10 (37.9%) anticipate using outsourcing to cut costs during the year.

Increase in use of shared services

The use of shared services - the consolidation of dispersed business processes into a standalone structure, to reduce duplication and costs - in the public sector has grown over the past few years.

In 2011, almost one public sector respondent in three (32.4%) either expanded or introduced shared services to cut its wage bill (see chart 3). Shared services are set to increase in usage - more than two in five (42.4%) expect to use this approach to cut costs during 2012.

Areas where shared services were introduced

Many of our respondents told us that there were plans to introduced shared services around HR over the coming 12 months. Other areas that are expected to be outsourced include:

• finance/payroll;
• information and communications technology;
• legal services; and
• customer services.

Individual organisations also mentioned outsourcing environmental health, CCTV, health and safety, and libraries. One organisation told us that it was planning to set up a local authority company to deliver waste recycling and grounds maintenance with a neighbouring council.

Services no longer provided

We can also see that some organisations had to cease providing one or more service during 2011 in order to cut wage bills. More than one in three (33.8%) have taken the decision to stop providing a service because of cost cutting. Looking ahead, there seems to be a further reduction in services - roughly the same number of employers (34.8%) expect to have to cut services to make savings in 2012.

Examples of services that are no longer provided include:

• nursery;
• youth services;
• mobile library services;
• home support (adult social care);
• adult education courses offered;
• occupational health; and
• IVF.

Other cost-cutting measures taken in 2011

Almost four public sector organisations in ten (38%) closed offices, and the same proportion relocated staff, in 2011 to cut costs.

Recruitment freezes remain firmly in place - just one organisation does not have a freeze on recruitment in place (see chart 4). There is no sign of this changing anytime soon - almost nine in 10 (86.4%) expect a recruitment freeze to be in place throughout 2012. One respondent in three (33.3%) closed offices in 2010 to reduce its wage bill in 2010, while three in 10 (30.7%) relocated staff or offices during the same period. Alongside this, all our respondents, bar one, had a recruitment freeze in place in 2010 (see chart 4).

Respondents have also cut the use of agency or contract staff - almost nine in 10 (85.9%) have taken this step. It is likely that the Agency Workers Directive has also led to this reduction.

Pay freezes are in place at almost nine organisations in 10 (85.9%), while six organisations have taken the step of cutting salaries. In 2012, almost three-quarters (72.7%) expect pay freezes to continue, while four organisations plan to cut salaries during the year.

Results of cost-cutting measures

More than half (57.7%) of our respondents managed to cut their wage bills by the expected percentage in 2011, and two in three (62.8%) believe that overall costs have improved.

However, these cost cutting exercises are taking their toll on employees: almost three-quarters (74.4%) of our respondents believe that staff morale has worsened during 2011, and four in ten (42.3%) believe that industrial relations have worsened.

One in five (19.2%) believes that productivity has suffered and three in 10 (28.2%) believe that skill levels throughout the organisation have dropped.

When it comes to HR's role in the change programmes, one employer in seven (14.1%) feels that HR is not adequately involved in managing redundancies within their organisation. One in 10 (11.5%) also believes that HR has not received the necessary support from senior management during recent cost cutting.

Challenges for 2012

One of the major challenges respondents tell us that they are facing is the issue of employee morale. Several respondents referred to the fact that public opinion is not sympathetic to the plight of the public sector, or the strike action that was taken during 2011, which is having a marked effect on employee morale that has already taken a knock as a result of relentless cuts.

Respondents are also keenly aware that employees are expected to provide the same level and quality of services or functions with lower budgets.

The HR function is also feeling the strain, and respondents tell us that it will be a major challenge to continue to offer quality services within the business when its budget has been cut and jobs have been lost.

Our research

This report is based on original research by Noelle Murphy, Katey Ward and Ed Cronin, conducted in January 2012. The research obtained information from 78 HR practitioners within the public sector, covering 439,919 employees.

Broken down by workforce size, the employers comprise: 68% that employ more than 1,000 employees; 30% between 250 and 999 employees, and the remaining 2% fewer than 250 employees. By subsector, 49% operate in local government; 15% in education; 12% in health and safety; and the remaining 5% in central or devolved government.