The financial pressure on the public sector over the next three to five years will be unprecedented, with annual cuts of £80bn a year likely.
Conventional cost management techniques which involve incremental thinking are unlikely to be effective in this context.
At the onset of the private sector recession, I argued that to survive and be successful, private sector organisations needed to manage costs in a challenging but also in a strategic way.
The same message should be made now in the context of public sector cuts.
In the theory of strategic cost management, costs must never be managed in isolation, and the aim should be to target long-term effectiveness and efficiency, not merely short-term and often non-sustainable benefits.
Cuts should not undermine the strategy, unless that strategy needs changing anyway.
In the private sector, savings of up to 20% can often be made through innovative thinking about the cost and the value drivers in the business.
But this requires radical rethinking about the "structural" cost drivers, ie the design of the organisation, the focus and prioritisation of the businesses it is in, and its mindset and assumptions.
Without such radical thinking, which entails fundamental long-term change, cuts of this order will be damaging, unproductive and not sustainable.
To manage public sector costs strategically one needs to:
• define how the current deployment of resources adds value, to which stakeholders, and where value is diluted or even being destroyed (the "value audit")
• diagnose areas of current inefficiency in the acquisition and deployment of current resource; to do this, time travel (imaginatively) to the future to assess future organisational demands and what future value will be added by public sector services, using some "scenario story telling"
• in this imaginary time travel, try to visualise the target future unit costs that one might strive to achieve with truly radical thinking: this entails coming up with a "cunning plan", based on redesigning from sctach the organisation, the value it adds, and its processes, skills and mindset
• prioritise these ideas, flesh out implementation strategies and estimate the cost of breakthrough projects, as well as overcoming stakeholder resistance; the aim is to work out the value of a services against the cost of change
In conclusion, the public sector will need to get far more astute and sophisticated in getting the best value out of increasingly scarce resources and this will require quite a fresh, value–led and strategic approach to cost management.
Dr Tony Grundy is director of Cambridge Corporate Development, and visiting lecturer in strategy and corporate finance at Henley Business School
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