Is Zonal Pay Right For The NHS?

The Department of Health has submitted its evidence to the NHS Pay Review Body, making the case for a “market-facing” pay structure. In practice, NHS staff (other than doctors) working in the North and South West of England plus the Midlands – including nurses and midwives, scientists, therapists, ambulance staff and other support staff – would receive lower pay than those in the South East.

As with other public sector bodies, the Government wants to move away from centralised solutions and allow pay to more closely reflect the levels of pay in local labour markets. This mirrors proposals made by HM Treasury for pay in the Civil Service.

To manage the transition, it seems likely that a framework of regional or zonal pay arrangements might be introduced which, over time, would allow national pay rates to be suppressed while allowing a “pay premium” to open up in areas where there are higher living cost and more difficulties recruiting and retaining staff.

Attractor has already written about NHS pay strategy and how it needs to adapt to changing circumstances.

The Rationale

From its review of evidence, the Government has concluded NHS organisations are “overpaying” for required level of skills in some areas – particularly the North of England while it is “underpaying” in London and the South East. The Department of Health highlights the fact private sector employers use more significant geographical differentials to address recruitment and retention problems across the country and expresses concern that areas “underpaying” experience higher levels of staff shortage, turnover and agency usage.

The Department of Health relies upon work by Professor Alison Wolf in “More than we bargained for“, suggesting where the NHS offer attractive rates of pay than private sector employers, industry and commerce struggles to compete for staff. It believes national wage bargaining creates pressures for inflated private sector pay in particular regions and holds back economic development.

While this might seem to be a logical conclusion there is little evidence from the UK which has been shown to support the idea public sector pay is an important factor in the economy as a whole – compared to industrial decline or workforce skill and education generally for example. It has been more clearly shown (in Professor Wolf’s work) that higher union membership and national pay bargaining reduce the flexibility of local employers – thought whether NHS organisations are in a position to use such flexibility is debatable.

It does make sense that stability in the workforce can have a beneficial impact on the quality of care though Professor Wolf highlights the impact of cost of living and deprivation on both health outcomes and the ability of organisations to recruit and retain skilled staff.

In the context of this complex picture, and accepting that pay is only one factor influencing recruitment and retention, with non-pay issues and specific local circumstances playing a role, the DH  considers addressing pay differences in high-cost areas will have a beneficial impact on staffing.

So how does it propose to address the issue?

The Solutions

Recognising the strengths and weaknesses of centralised and decentralised approaches to pay determination, the DH wants to use both together, with central control over the national pay scales and regional variations combined with the freedom for NHS organisations to respond to local pressures. It recognises the value of retaining the single national pay scales, stating the evidence for special treatment for particular staff groups is weak. It suggests the national AfC pay rates are set, in future, at the minimum level necessary to obtain and retain high quality staff in low pay areas.

The DH has asked the Pay Review Body to consider the creation of number of new zones for the application of High Cost Area Supplements (HCAS). The submission proposes a mechanism through which the new zones would be determined. It describes (in detail) the staff Market Forces Factor (sMFF) – a complex element of NHS costing mathematics which is used to determine funding arrangements under the Payment By Results regime. The way the mechanism works – to smooth out financial differentials over the UK geography – is pretty complex, which has the disadvantage of being practically impossible to explain or justify in any non-accounting forum.

While this mechanism describes cost differentials, the DH recognises the challenge of creating meaningful pay boundaries and suggests introducing a couple of new zones initially would allow the system to be developed and the case for further changes to be assessed. Looking at the data used in the submission, it seems likely the new zones might cover South Central and South East Coast (which had a sMFF more than 5% above average).

The DH paper does explore the impact of boundary-drawing in issues of pay zones and the introduction of additional map-lines will increase the number of organisations with people working on both sides of a given pay-demarcation line and some national organisations with people working in multiple zones … all of which makes life more challenging and can impede local decision-making. As NHS organisations in London have merged, more of them have been in this position and have had to handle staffing mobility issues linked to sitting astride a “pay fence”.

In addition to new HCAS arrangements, the DH wants to see an increasing use of pay flexibility with local Recruitment and Retention Premia (RRPs) as a means for organisations to tackle specific staffing challenges. While the need for national RRPs has been diminishing, the scope for these would be retained. Time will tell whether local RRPs begin to be used more widely.

In a strange “aside” the Government has suggested executive managers working in new bodies established to deliver NHS reforms might need to be exempted from its national approach so they organisations can recruit the best candidates into the roles. While the need for high-calibre leaders and staff to transform delivery isn’t doubted, this item of “special pleading” just seems to have no foundation. These high-calibre leaders will be employed in one of other of the pay areas after all and no justification is given for stepping outside a new national framework that appears to give plenty of scope for flexibility.

Suitability for the NHS

On balance, the DH proposals look reasonably sound – though they will not be universally popular. The basic principles of additional payments being made through High Cost Area Supplements and Recruitment and Retention Premia have already been successfully introduced into the NHS and accepted by the workforce and their representatives. The idea of introducing new HCAS zones and potentially increasing the value of these compared to the national scales will be popular with some. It is also clear the strategy being outlined is evolutionary rather than revolutionary – with a realistic sense that pay differentials will be seriously constrained by broad pay restraint.

It might be relatively easy to sell these changes to a large proportion of the NHS workforce. It is likely however the unions will seek to protect the value of national pay scales – though they may accept the need and some benefit in protecting staff working in expensive areas from more general pay restraint at a time of austerity. Already, Christina McAnea, head of health at trade union Unison, has suggested the proposals will cause skills shortages in poorer areas with difficulties in NHS recruitment for nurses, midwives and specialised staff.

However, its unclear if the new pay zones would reflect the fact there may be locations, typically the inner cities, where the NHS struggles to attract and retain staff providing care in deprived areas (an issue identified in Professor Wolf’s study). These pressures would not be addressed by simply paying more to those in the South East.

At present there appears to be a lack of evidence that pay is the most important factor driving behaviour linked to staff turnover and recruitment challenges. The government says there are other factors which are also important. It is practically impossible to determine whether job applicants are as motivated by available levels of pay (at the same grade) within local or national labour markets as they are by the number and range of job opportunities within the larger cities and with larger more diverse organisations.

Another stream of thought behind the proposals is to maintain and strengthen the case for local pay flexibility. Attractor has considered the issues around local pay in the NHS before and there must be strong doubts as to the ability of NHS organisation to build and maintain the capability and capacity to successfully deliver “pay devolution”. NHS employers will need to decide how local freedoms can be used to attract staff without sparking competitive pay spiraling. The proposed approach will probably see calls for additional cross-sector support and coordination, either within an emerging new health economy or, possibly more realistically, from NHS Employers and the NHS Confederation.

In terms of the emerging diversity of suppliers and the desire to ensure competition between organisations is based on service quality rather than price, the proposals do seem to protect the possibility of cooperative and collaborative working arrangements both nationally and across regions. The NHS unions should take some comfort from the fact the approach being taken mitigates against a “race to the bottom”, with NHS organisations cutting costs by reducing pay levels.

Generally, NHS organisations have demonstrated limited appetite for going their own way. As more a diverse population of management teams, with increasing numbers of private sector, mutual and charitable organisations begin to run NHS services, this might change – though there seems to be little in the DH proposals that is likely to encourage any change that basic position.

Are Patterns Too Intricate To Fathom?

In 2009, Attractor wrote about the challenge of delivering a sophisticated vision of integrated service management within NHS organisations using the Electronic Staff Record (ESR).

At the time, we highlighted the increasingly smart ways ESR could be used to influence and improve the way organisational management was shaped and delivered. Overall the ORACLE platform has the potential to become an immensely powerful corporate information tool.

Rethinking working practices and business processes involves significant detail and substantial complexity. It’s possible many organisations could find the patterns of interaction and exchange too intricate to tackle.

Just recently, Attractor was invited to join a planned discussion between NHS organisations exploring issues in delivering “integrated identity management” – the model adopted by the NHS to meet the requirements of both the NHS Employment Check Standards and  Registration Authorities and Smartcards for access to patient records.

Integration work started in 2010-11 yet many teams are still working towards the ideal of improved information governance and patient confidentiality together with reduced  administration costs of managing employee identity. So why is this type of challenge so hard?

Barriers to Change

Thinking and acting strategically and developing integrated visions has certainly become harder in last two years. The NHS is experiencing turbulence at national and local level around the National Programme for IT and the shape and nature of NHS services. Many corporate teams will have seen changes to operational boundaries, the number and types of front-line teams they are supporting and, in many cases, a reduction in resources and capacity available to support the business. Innovation and strategy-setting can be pretty hard in that type of environment. But there is far more to it than this.At the meeting, nobody focused attention on these issues as hinder or preventing change. As with all IT systems, there were features of the solutions which  users disliked or resented difficulties on the ground. Mainly, the barriers preventing the HR and IT departments from delivering on objectives of the project were classic organisational change issues -

• Without help, we find it hard to think “around and outside” of our own frames of reference and paradigms – the models we use to navigate the world. This limits the ability of teams to see all sides, understand the real causes of problems – and the nature of possible solutions,
• When there is significant pressure to delivery results quickly, there is often insufficient time to consider change issues effectively – time for generating creative and imaginative solutions gets squeezed out,
• Too much information (particularly where it’s incomplete, unfamiliar and contradictory) rapidly causes overload and uncertainty. We can’t distinguish what is important and relevant and often make misjudged decisions or (perhaps worse) fear to take decisions at all for fear of mistake or failure,
• It is quite natural for teams to be “defensive” about their current working practices. Proposals for change can be perceived as a threat to value or status. In many cases, potentially successful solutions are disruptive for existing teams in relation to boundaries, responsibilities, skills and routines.

Taking all these barriers into account, it’s often the case that novel ideas tend to get rejected and familiar paths are adopted because they feel “safer” – even when they are not, in practice, safer or effective. If these issues cannot be successfully addressed, the organisations will find it extremely difficult to develop and agree integrated business processes which meet the needs of the national standard while reflecting local situations, context and concerns.

The opportunity to take part in an “internal discussion” was very valuable and highlighted the point the heart of the challenge for gaining benefits from any enterprise-wide solution, is the need to combat the natural tendency for people to think and work in local silos (and at times to act defensively and politically) rather than understanding and responding to the needs of an organisation as a whole.

Wider Implications

Attractor has already highlighted the fact integrated corporate workforce management arrangements requires effective collaboration across functional and operational boundaries. Returning to the areas of “integrated working” which Attractor identified in 2009, there were five levels of sophistication described. At each level, new change challenges emerge – in functional responsibilities, ways of working and business process to enable an organisation to deliver better outcomes.

One of the areas that is impacted by each of these “steps” is the way ESR work structures – the organisations and positions (posts) are mapped and described for various purposes. As the level of sophistication increases, the rationale for more individual posts (less use of “bucket positions”) gains more power. Redesigning and adjusting the hierarchy at each stage would be a major work item and some organisations have already moved to a “one position per employee” situation. But there are other, far more complex issues to be addressed -

• Level 1 – Payroll and Finance Record – Using ESR only within Payroll and Finance simply needs the teams to agree and map data management definitions and processes for the payroll and ledger. As a core systems requirement, this is relatively routine and straightforward.
• Level 2 – Employee Record - With Recruitment, HR Operations, Finance and Payroll teams using ESR, there are more processes to integrate and define, additional areas of data quality (e.g. positions and equalities) to manage and prioritise. New perspectives present increasing pressures and and different priorities to resolve in the solutions.
• Level 3 – Workforce Record - Bringing Learning and Development on board needs competence and assessments with streamlined processes supporting their use. Engaging the learning specialists and front-line teams here is really demanding.
• Level 4 – Master System Access Record – HR and IT now have to integrate their processes so accurate staffing records benefit the front-line teams – with Smartcards providing controlled data access for clinical records, front-line teams rely on streamlined integrated identity management to keep staffing information up to date very close to real time..
• Level 5 – Workforce Governance Record – ESR is widely used by corporate functions (and managers via self service tools) to control data access and maintain strong governance over professional registrations and competences for all areas of risk. At this level, engaging front-line managers is key as corporate teams are supporting “ownership and control” by operational leaders and accurate workforce and financial management information is simply a by-product of embedded, effective business processes.

Addressing the Barriers

Where Trusts are looking to deliver all the potential benefits of the solutions available within the organisation, they need to invest the effort required to facilitate, support and reinforce change, ensuring their teams have access to the right kind of support – helping them to consider the opportunities, benefits, risks and control measures of creating and sustaining new ways of working. With the right approach, each organisation can take measured and controlled steps towards significantly improved service outcomes.

By engaging teams and supporting change, leaders can deliver service improvements that are meaningful for local stakeholders and designed to work effectively for local operational needs. At the same time, it is possible to reduce costs (or avoid additional cost pressures) by ensuring people are making good use of available tools, focused on value-adding activities and reducing wasteful effort.

Leaders have to remember it is people, rather than systems, that deliver change and benefits. They have to weigh the benefits of integration and streamlining from enterprise-wide systems against other factors such as “ease of use” for local users or other benefits provided by local solutions. Whereever a major system-deployment project is chosen, it is vital to ensure realistic support change plans are in place to deliver anticipated benefits.

Where is the value?

Recently, the National Audit Office (NAO) criticised a number of government shared services projects for not delivering sufficient value. It says the planned benefits from the implementation of shared services have not been realised.

In their judgement, equal or greater benefits could have been achieved by other means or with lower investment.

The major arguments for implementing shared services rest upon reducing resources needed to support business processes. These benefits are supposed to be delivered through “economies of scale” – using fewer managers, IT systems, buildings by aggregating larger volumes of work in a smaller number of locations – and by introducing more effective process design – through greater specialisation and standardisation.

Typically, a shared service project aims to simplify, standardise and centralise services. For many corporate functions the new service is based on an enterprise-wide application suite supporting large numbers of customers using common and highly automated processes..

Shared services case studies often report significant benefits but not everyone agrees the front office vs back office functional split (a general feature of shared service operations) is an effective way of working. In particular, those involved in process design work highlight how process-design failures can increase rather than decrease service costs. In services, say LEAN experts, economy comes from flow rather than scale.

It has also been noted that many of the organisations preaching the benefits of shared services are, in fact, those which stand to gain most from their implementation.

The NAO has reviewed the shared services agenda previously but time this looked at five service centres supporting organisations with 230,000 employees. With 2,700 people employed in the centre, a ratio of 1:87 had been achieved on average (the normal target is 1:100 though the most efficient centre in cost terms (Department of Work and Pensions), had delivered a ratio of 1:120. The five centres had cost over £1.4 billion to establish, an overspend of £0.5 billion. While the original target was to save £159 million to the end of 2010-11, only one centre could demonstrate a break-even on its investment and the two centres still tracking benefits reported net costs of £255 million.

Why were the results not as effective as the optimistic assumptions?

Criticisms By The National Audit Office

Unlike the criticisms arising from LEAN and other process-improvement practitioners, the NAO have suggested the failings of government projects arise from poor project delivery combined with a lack of zeal in the thoroughness with delivering the core principles of shared service operations. The following areas of criticism were levelled at the government projects -

Simplification - The NAO suggest that few government customers have made efforts to streamline or reduce customisation of their business processes before transferring functions to new centres. This cannot be unexpected, until organisations move to a shared service, typically there is neither the understanding nor capacity to manage the change in business processes which might work after a transfer.

Standardisation - While greater standardisation might reduce costs, service providers have given poor attention to helping customers appreciate the cost of non-standard process or non-compliance and clients have done little to adopt common approaches and shared service centres are often working on multiple customised processes for their clients. Operating divergent business process increases cost and reduces capacity to handle fluctuations in demand through flexible skilling and staffing practices. Minimal process standardisation and definition also leads to lower capacity to compare financial and operational performance.

Centralisation - With more emphasis on building Shared Service Centres than delivering and tracking service benefits, this was one area where the programme had delivered significant investment based on optimistic assessments of the benefits that would be delivered. Furthermore, the shared service strategy had focussed too much on expansion to the detriment of service improvement. The NAO reported that one customer department had retained services that should have been transferred to the shared service centre.

Inefficient processes – Public sector shared service centres appear to make poor use of technology with lower levels of automation than proviate sector businesses, higher proportions of manual tasks or software packages such as Excel and Access. Furthermore, there is poor information about the time and cost involved in delivering transactions.

Poor Planning – Another criticism was that customers had been unable to forecast, manage or plan for the smooth delivery of their service needs. It was suggested this failure created “unnecessary” and sudden peaks in the Centre’s workload. This criticism seems a little odd given the fact smaller organisations are more likely to experience stronger fluctuations in workload – and once transferred to a central solution are likely to lose whatever capacity they have. Surely the purpose of moving to scale economies is to absorb peaks and troughs within larger resource pools. It might be considered that the shared service centres ought to be in a better position to review aggregate demand and plan for broader patterns of fluctuation across multiple clients.

Poor Performance Improvement – There was insufficient evidence of a focus on working with customers to monitor operational services, compare and improve performance or on professionalising services and spreading best practice.

NAO Recommendations

The National Audit Office has recommended -

• the Cabinet Office continues with it’s shared services strategy (though it reported this was ambitious and contains significant risk) with clear accountability for delivery but also considers lower risk solutions such as extending its timescales or establishing additional frameworks for back-office services.
• Authority is sought for the Cabinet Office to mandate the shared services strategy and its implementation “if there is an overall value-for-money case for the taxpayer“, probably reflecting the fact hard evidence of successful outcomes has proven hard to come by.
• more efforts are made by Cabinet Office to develop and provide reliable cost and performance benchmarks for both customers and shared service providers.
• Both customers and shared service providers have clear accountability for managing costs and benefits associated with shared services including the provision of a professional management function or intelligent client focus on service level agreements, standardising services, managing demand and improving service delivery.
• Shared service providers should look for opportunities to reduce cost of accommodation, staffing, process and technology.
• Bodies commissioning shared services and providers should should ensure the case for shared services is clearly evidenced – the benefits of shared service centres not being clearly demonstrated so far.

Will NHS Pay Structures Crack Under Pressure?

During a time of austerity, some organisations in the NHS are looking for increased flexibility in the terms and conditions of employment. These pressures arise because of concerns the national pay structures are driving up costs in a way that management cannot control.

To achieve the scale of savings (£20bn) the Government has targeted, there is no alternative to delivering some pretty fundamental and radical changes to the way current services are organised.

So will the NHS Pay Strategy crack under the weight of cost pressures?

The NHS is one of the most treasured national possessions in the UK. Yet it has been subject to continuing periods of turbulence and reorganisation over an extended period, a fact that has drawn comment before.

The need to deliver care in different ways, at home and in wider community settings has been talked about for a long time.

Whole-system service redesign is extremely difficult to deliver though there are examples of this kind of major re-thinking and re-engineering beginning to take place.

Many critics of the Government’s NHS reform suggest the reorganisation is simply preventing the serious work that needs to be done to reconfigure services. Others might suggest the reforms will create a huge stimulus. By moving planning and commissioning away from a top-down planning approach and closer to the patient, we might see, over time, very different demands for service delivery and organisation emerging.

In that context, those critics of the health bill calling for “service integration” need to be ensure they are thinking about the integrated needs of service users rather than “integrated planning” the NHS is familiar with. It’s in these areas area that local commissioning; market forces and increased competition would have huge impact.

If “Liberating the NHS” becomes a reality, the health and social care environment within which services are organised and delivered will be fundamentally different. With increased competition and the greater influence of “market forces” planning has to change. With services being operated by “any qualified provider” - perhaps delivering integrated services for particular care paths – the current framework of national pay bargaining and a “universal” pay structure could look highly irrelevant.

Rather than a regular pattern of acute, community, mental health and social services organisations repeated across the UK, the future NHS and social care environment might exhibit a highly varied population of more specialised organisations. With services and teams organised around the needs of particular client groups and care paths, the value of a single, comprehensive pay system might be questioned.

Reward structures and pay systems for future NHS organisations will have suit the realities of how employers respond to these broader changes -

• how they organise teams and roles, responsibilities and working patterns,
• what skills and experiences they value,
• how they form collaborative or competitive relationships with neighbouring organisations,
• how career opportunities, recruitment and retention challenges learning and development are managed by employers working in a more diverse health economy.

The challenge of redesigning services cannot be over-estimated. History clearly demonstrates the top-down approaches tried in the past, driven by strategic plans, integrated service planning, cost-improvement initiatives etc has failed to deliver the kind of radical, game-changing, redesign which is probably required.

NHS organisations could continue to use the existing reward structures to support a range of service redesign initiatives, making use of the flexibility in role design, broad pay banding with unified pay scales and transferable skills to support new patterns of service organisation and workforce management.

As new kinds of organisation begin to find their feet, the time will naturally come when the Agenda for Change orthodoxy will challenge. Until then, our “traditional” NHS organisations might best spend their efforts and attention on delivering significant change with the systems they have and allow some time to work out how the pay strategy should develop for the future.

Photo : Images of Money, Flickr

Public services are facing intense financial pressures and with a significant savings target, the NHS is no different from other sectors. While the £20bn savings target has been “ring-fenced” for reinvestment within the health service, delivering that level of efficiency (around 19% of the NHS budget for 2011) will be very challenging.

While the Government has promised to retain the funds released by productivity gains within the NHS, delivering more activity with the same funding will create huge pressures for services and staff.

With the workforce forming the largest proportion of expenditure, the pay bill is a key focus for cost control. There are four important areas where the NHS could concentrate its attention in efforts to reduce the staffing cost of service delivery -

• reducing management costs and overheads,
• exercising pay restraint,
• changing the reward structure to reduce employment costs,
• re-engineering care delivery models to reduce waste.

Selling a reduction in overheads to the population is relatively easy and arguing for a control in public sector pay costs has also been a popular message at a time when people across the economy are suffering financial hardship.

These two have the clearest political support in the wider population at a time of austerity and look like the most straightforward to address – though the Government’s experience with the health bill might suggest otherwise.

What do we know about those changes and how they are likely to impact on NHS costs over the next few years?

Reducing Management Costs

In principle, structural reform seems easy to contemplate, plan and implement but in practice deciding what kind of change is required and building consensus to deliver change is hard. One of the clearly stated objectives for the changes to NHS planning, commissioning and management structures was to reduce the proportion of NHS expenditure spent on overheads. The Government asked the NHS to reduce management costs by £850m from the summer of 2010.

Getting the health bill onto the statute books has been immensely difficult, and surely it can’t have helped to have been implementing changes across the NHS even before legislation was complete. Rob Worth’s commentary on the changes management and the NHS reform agenda suggests lessons change leaders can learn from the government’s efforts in this area -

1. Ensure there is a genuine need for change,
2. Ensure you explain why the changes proposed will meet the need,
3. Support for change needs to be explained to those affected, in ways that they see that there will be benefits,
4. You need to anticipate that there will be some that reject any change and be ready to answer their objections,
5. Only start making changes when sufficient people are in agreement to carry the changes through to completion.

Rob is almost certainly right to suggest moving forward is necessary to avoid chaos. As the new structures which will shape, commission and monitor health and social care have become more clear, it’s less certain the new arrangements will, eventually, be any less expensive than the previous structures, though efforts at devolution are probably to be welcomed.

With debate still continuing about the extent to which the NHS and social care should be integrated, devolved or face competition even assuming the structural changes introduced by the health bill continue to materialise, only time will tell whether those changes have detracted from or stimulated important service change.

Pay Restraint

When the 2008 financial crash turned into a massive economic slowdown and global recession, much of the private sector used pay restraint – low pay increases or pay cuts – to survive the downturn. By keeping pay increases lower than inflation, the private sector was able to protect, to some extent, the number of people employed and the long-term viability of their businesses. As the private sector edges gradually towards a recovery, it is likely that pay might start to increase again, boosting the economic recovery.

In this early part of the downturn, public sector workers were still benefitting from earlier pay deals and some talked about tensions of pay apartheid as private businesses placed pressure on pay while public servants experienced pay increases.

From 2011 onwards, the public sector has implemented a broad pay freeze for employees who are earning more than £21,000. The Chancellor of the Exchequer suggested the two-year public sector pay freeze from 2011/12 would save £3.3 billion a year by 2014-15. In November 2011 a further two years of  pay restraint with an average increase of 1% to the pay bill was announced by the Government.

The Government’s pay restraint does not mean public servants are seeing no increases at all. Many of them are on the lower rungs of their pay scales, below the standard rate paid to an experience jobholder. As such, they continue to benefit from an incremental rise as they catch up with those with longer service. The value of these incremental increases across the whole public sector is worth about 1.7% for employees. NHS Employers suggested that incremental pay rises in 2011 would increase pay by around 2% and the uplift for staff earning less than £21,000 would cost a further 0.4%.

Reports suggesting the pay freeze is having a limited impact fail to appreciate the way incremental pay systems (relatively uncommon outside the public sector) work but still suggest private sector pay increases are now running ahead of public sector pay.

Changing the Reward Structure

In September 2011, NHS Employers submitted evidence to the NHS pay review body suggesting NHS organisations wanted to have more local flexibility in the national agreements. There were a number of areas where it was considered there was room for improvement in cost control through re-negotiated terms, including incremental pay progression, sick pay and enhancements for unsocial hours, performance or productivity links to incremental pay progression. It reported there were local discussions taking place about areas of flexibility though unions have been relatively quick to draw to a close the door on the potential for pay negotiations at local level.

With the current national pay bargaining structures introduced eight years ago, NHS Employers will, no doubt, continue discussions with unions about changes and increased flexibility in employment terms that make them more affordable. However, making progress in this area is likely to be very difficult at a time when there is broad pay restraint, increases in pension contributions combined with huge uncertainty, turmoil and disruption across organisations with the resulting impact on job prospects.

The Government has also recently asked the independent NHS Pay Review Body (NHSPRB) to consider how NHS pay could be made more responsive to local labour markets and NHS employers have canvassed opinion from NHS organisations about this. The Government has said -

“The Pay Review Body considerations will include:

• the extent to which the Agenda for Change pay system already recognises the impact of local differences in pay through recruitment and retention premia and High Cost Area Supplements and whether these could be used more effectively
• the way in which the Department of Health uses the Market Forces Factor in financial allocations and whether these might be used to support more market facing pay
• the need to recognise the implications of market- facing pay for the different staff groups within Agenda for Change at a local level, including any implications for equal pay
• the impact of “cliff edges” in pay between different local labour markets and how these might be managed
• to consider what information may be needed in the future in order to make recommendations on local labour markets.”

Medical and dental roles are excluded from this review, as they are considered to operate in a national labour market but who in many respects are no different from other clinical team members. This seems like a political distinction rather than one about employment markets.

At present it’s hard to imagine the NHS moving to a regional pay framework, or to see any significant advantage this might provide for NHS organisations of the future (see below). It will be interesting to see the results of feedback from employers. Will they have evidence of local labour market differences other than anecdotal examples of local employment factors? Even where there are local labour market pressures, how are these effecting recruitment of the core clinical or other teams that are needed to deliver healthcare?

It’s possible that adjustments and increased flexibility in High Cost Area Supplements – perhaps linked to regional market factors – might support local clusters of NHS organisations to work together on pay issues. In the past however there has been little effective collaborative work on pay either before or after Agenda for Change was introduced.

Any changes to Agenda for Change that might be successfully negotiated nationally or locally seem likely to have pretty marginal savings for NHS organisations. It’s possible to imagine delivery far greater impact through local work on productivity and service re-design – which the Agenda for Change was designed to support by removing pay distinctions between staff groups which were treated separately under the historical Whitley Council arrangements.

In combination of the Government’s reform of NHS pensions, broad and continuing pay restraint strategies will be having a much bigger impact on pay costs than any attempts to modify the Agenda for Change pay system.

Recently, it was revealed that the head of the Student Loans Company was earning money through personal service company, a report was ordered into how many people, across Government, were in similar situation.

It seems the report ordered by Danny Alexander and parallel journalistic investigations have revealed there are of many cases where senior roles have been filled on a long term basis by people who chose to be rewarded through personal service companies, thereby reducing their tax bill.

While the practice of working through personal service companies is not illegal and suits many independent contractors, the use of such mechanisms is generally unsuitable in the kind of situations being uncovered by recent investigations.

Comments from parts of government, reported in the Guardian, highlight the messy situation organisations have placed themselves in, where the distinctions being drawn between “civil servants”, “non-payroll workers” and payments to “companies” are quite hard to explain to the average man in the street.

When the Government called for transparency in public sector pay arrangements, it probably did not have this kind of scrutiny in mind. When it has been looking to reduce tax evasion, to find such cases at the heart of public administration is embarrassing.

Corrective Action

The immediate reaction from government departments has been to change the payment mechanism so that individuals’ work is rewarded through the payroll – which is likely to increase the tax being paid by individuals (and employers). A spokesman for the Department for Business, Innovation and Skills has confirmed David Bott - earning £235,000 a year as an “innovation director” at the Technology Strategy Board – will now have national insurance and income tax deducted from his earnings at source.

It is quite likely this corrective action will be followed by other government bodies for those working as senior executive roles. Even if this were not the case, it would probably be predictable to see HMRC challenge circumstances that looked dubious. In addition, as part of the wider review commissioned by the Chief Secretary to the Treasury, public sector organisations will be reviewing all appointments of contractors to ensure they are appropriately structured.

Market Forces

The First Division Association (FDA), the union representing senior civil servants as called for greater transparency in pay. Jonathan Baume, the FDA’s General Secretary, has suggested market forces had driven up the earnings for people in top positions – beyond the level that could be supported by civil service pay arrangements and various deals were done to attract private sector candidates. Mr Baume thinks pay will need to increase -

Attractor has been suggesting for a long time that pay levels for jobs is generally adjusted over time, by employers, to match the going rate for people with the required skills. When the public sector is facing serious financial pressures and Ministers have been decrying excessive pay for senior roles in the public sector, the suggestion that pay rates would be increased seems unrealistic.

The routine practice of contrasting pay for senior roles in the public sector with the earnings of the Prime Minister seems to be slowly diminishing, though some journalists have returned to this comparison. At the same time however, is has been reported that Gordon Brown has earned £1.4m since leaving No. 10 Downing Street and Tony Blair earns around £12m per year. This seems to put a UK Prime Minister in the same earnings bracket at one of the bankers who have been pilloried for exploiting taxpayers. It needs to be remembered however that both Gordon Brown and Tony Blair donate significant proportions of their earnings to charitable causes.

In healthcare and other public services some are considering linking pay progression more closely with individual performance rather than reflecting “time served”.

If pay can be linked to effort and achievement, this would provide an incentive for improved service delivery as well as better control of costs.

Public services rarely pay large bonuses; it neither easily fits the organisational culture, nor the motivations of many employees (or managers). However at a time when public services are under enormous financial pressure, we hear regular calls to find ways to get more from less. Performance-related pay could support this.

Attractor reported, in an earlier article, the conclusions reached by Hay Group that there was no reason to apply performance-related pay and  bonuses to public sector organisations, despite the challenges identified by detractors.

It seems, for some reason, politicians and the public find it hard to reconcile themselves to the idea public servants might need motivating in the same way as those working for profit-making organisations.

Linking Performance and Reward Successfully

Political pressures are probably the least challenging aspect facing public sector organisations considering performance–related pay. A public sector organisation choosing a performance pay strategy has a significant number of hurdles to navigate –

• Assuring employees and their union representatives the management team are approaching the subject sensibly and sensitively,
• Creating a framework for performance management which suits the business environment and the culture of managers and teams in the organisation,
• Identifying the most appropriate links between a performance management framework and the pay system,
• Addressing the significant culture change needed to help public servants make a performance management system work for them and their clients.
• Deploying and supporting the use of performance management tools across the organisation to make performance management effective for people, teams, the customers and taxpayers.

There are supporters and detractors of performance pay in public services. No performance management arrangements can make a broken system work effectively.

But sensible use of targets and sound management practices can encourage people to focus on the medium and long term performance of organisations, teams and individuals.

Reward Politics

Politicians seem nervous of performance pay and bonuses right now. There is concern to ensure taxpayers’ money isn’t waste. But backing away from a “bonus culture” in public service might discourage moves to link pay and performance. Nobody wants to reward failure, but this should not be confused with solid progress towards stretching, long-term targets.

But it’s important to recognise public opinion and sensible performance management are difficult bedfellows. Performance measures may be objective or subjective, but they are often detailed and rarely suitable for news headlines. Judging the contribution of people to public service through news “sound bites” is practically impossible.

Perhaps this is one of the reasons why shareholders generally don’t get involved in detailed pay decisions – they leave it to their agents to look after their long-term interests. Obviously the Government has to play the role of shareholders in taxpayer-owned institutions.

Rather than running scared of debate, surely we should encourage and support effective management and leadership by those entrusted with the responsibility for doing this. If the organisation is not safe in the leadership team’s stewardship, individuals should be replaced.

Attractor took the chance to meet-up with an independent technology consultant recently and we shared our experiences of working with clients to deliver benefits using new tools and technology.

We had both worked to implement the Numara Fooprints solution (amongst other technologies) with client organisations and agreed there was potential for many organisations to use Service Desk technology to manage and improve service-delivery in areas other than IT . Our experience with client organisations revealed significant variation in the approaches taken to delivering benefits with new technology.

With different backgrounds (HR, Projects and Change vs Engineering, Service Delivery and IT) it was fascinating to find how much common language we had. It will be interesting to see if the relationship matures and develops.

Should Public Sector Organisations Invest In Sharing?

The Coalition Government has been increasing the pressure on all public service to save money and shared services are seen by many as an ideal solution to the challenge of efficiency in the back office.

For many years, there have predictions the UK’s public services would move swiftly towards shared services as a solution for quality and efficiency challenges.

Have we reached a point where the majority of public sector organisations will invest money and effort in adopting shared services?

It seems, as a result of the environment of austerity, public sector managers are finally contemplating moves they have resisted for a long time. The number of actively engaged providers has been increasing and shared service landscape is changing.

From the latter part of 2011, it has become evident the shared services market is both maturing and becoming increasingly competitive – even though the Coalition Government has taken care not to endorse shared services as an appropriate solution for all organisations.

Looking at the government’s rhetoric, people could be forgiven for thinking government would be pushing extremely strongly on a programme of diversification and de-centralisation rather than centralising and sharing.

The government appears caught between it’s pressing need for increasing efficiency (and a belief operating at scale delivers this) and the instinct to devolve power and allow decision-making at lower levels. In a report covered in Outsource magazine in September 2011, Colin Grace, a director of Praktis Solutions advocated a more concerted effort towards delivering a small number of sector-wide shared service operations suggesting the Cabinet Office could provide stronger financial incentives. However the time for “mandated solutions” may have passed and, in the context of many high-profile projects demonstrating mied results, it’s more likely the government will “light the path” and allow local decision-makers to draw their conclusions – leading to a more “market-based approach”.

The Guardian have been highlighting the number of shared service project being agreed and the Local Government Network has produced a map of the shared services solutions for local government (here presented on Picture This – Richard Overy’s infographic website but also available on the LGA site). In this context, the emerging trend looks pretty conclusive.

Scope of Shared Services

One notable feature of the spread of “shared services” is the expansion to cover “front of house” and customer facing services rather than just the “back office” – a move which expands the potential market by about twenty times as the corporate back offices commonly represent around 5-6% of total revenue for public sector organisations. In local government, sharing services across political boundaries is, increasingly seen as practical option and in principle is easier to deliver than the kind of reorganisation and mergers which are standard in NHS service-redesign.

NHS Shared Business Services

NHS Shared Business Service (SBS), a joint venture between Steria and the Department of Health has been very proactive in it’s niche market – attempting to significantly grow the client base at a critical period of market transition. In addition to securing a partnership with the NHS North West Collaborative Commercial Agency, SBS has gained an important contract extension for 10 Trusts in the Isle of Wight and Hampshire. Finally, SBS has benefitted from the Coalition Government’s ambition to move all Department of Health Arms Length Bodies to shared services solutions. With SBS available as a common provider, all the ALBs are being strongly encouraged to move services to this organisation.

SBS offers Finance & Accounting, Payroll & HR, Family Health Services and Commercial Procurement Solutions for the NHS. It already has a significant number of NHS clients and was expected to be the mandated solution as part of a national shared services strategy. When the government reversed it’s position, it was forced to win contracts one at a time and its leadership have expressed concerns about the constraints which prevent it competing on a fair basis with other providers. By the end of 2011, with so many changes taking place across the NHS and with access to the ORACLE ESR platform used almost universally, SBS might now expect to continue pick up many contracts for the smaller organisations which might emerge in future, though it looks like SBS will face more competition in future.

Logica

In the latter part of 2011, Logica were awarded a new shared services framework covering payroll services, HR systems, HR outsourcing, outsourced training and integrated financial and accounting systems. This framework is very open, allowing central government, police, education, local authority, health, partially or fully funded public sector entity to adopt shared service solutions in these areas without a complicated procurement cycle.

Logica have been, for some time, one of the major shared service providers for central government departments and has expanded its customers to include local authorities   Like SBS for the NHS, it was originally expected that Logica would become the mandated solution for government departments until the government backed away from this strategy.

As with SBS, there is a standard contract with scope to agree individual solutions and service level requirements. It is interesting to note that while Logica’s services have used the SAP ERP platform, the expanded ambition is to make future services “technology agnostic” which opens up the option to bring aboard non-SAP operations. This opens up the possibility of gaining business in other public service sectors.

Capita

Capita have been, for many years, a major service supplier across the public sector and they were recently awarded a contract for the delivery of transactional HR services, including recruitment support plus payroll and pensions services to 10 NHS trusts in the North Mersey area of Liverpool. This “integrated service” was procured by NHS Trusts working collaboratively and involves 125 staff transferring from the NHS and retaining jobs in the local area. Capita took responsibility for services in January 2012. Under the agreement, other trusts from across the North West can procure their transactional HR and payroll functions from Capita.

Capita’s return to the NHS shows renewed confidence in the market and will probably draw lessons from its unsuccessful experiences with the NHS, when Capita had five NHS clients move away from their payroll service (transferring to McKesson) after a number of significant payment errors and operational problems including security breaches

Other solutions

As Attractor reported earlier, even with broad support for shared services in government, it seem will not mandate particular solutions and it’s strategy to allow other accredited in-house shared service providers seems a pragmatic approach. Nobody should assume  shared services are easy to design and deliver and even when the strategic decision has been made to move to this service model, there will be negative reactions and serious concerns expressed about each and every shared service solution.

The government’s accreditation mechanism provides an alternative route for organisations to share corporate services and the Department for Work and Pensions (DWP) has been awarded a contract by the Ministry of Defence.

From the emerging evidence, the market opportunities for large-scale shared services are there to be exploited though it will be impossible for a few large contractors to take all the business for a particular sector. Some would argue this is less than optimal in respect of delivering benefits but, in the long-run, a market-based approach should be a more healthy solution for clients than every client organisation facing a single monopoly provider.

The pressure of public scrutiny is increasing on senior, well-paid individuals in all areas of work after a Freedom of Information request. Concerns have arisen that senior public servants have been abusing their position by working in ways that are “tax efficient” and thereby inappropriate.

At a time when high pay in the private sector has been a matter of concern, it was pretty obvious that arrangements for senior positions in the public sector would soon come under increased scrutiny and calls for transparency.

With news emerging the Student Loan Company’s chief executive, Ed Lester had his salary paid through a personal service company (a legal framework with no direct employment relationship and tax advantages), the Coalition Government’s focus on reducing tax avoidance has been called into question.

Personal service companies are generally accepted as perfectly legal and legitimate mechanisms for many independent contractors to work with client organisations. This arrangement can be entirely legitimate and suit both parties, particularly where the contractor works independently with multiple clients and where permanent or direct employment is not appropriate. Such companies can be an effective way for contractors to work and have certain tax advantages.

Tax legislation generally prevents such arrangements being abused as, where HMRC takes the view the working relationship is one where direct employment is the “real” situation, the contractor would normally be liable for PAYE and National Insurance in the normal way.

This is managed through the application of IR35, introduced in 2000 with the aim of eliminating inappropriate tax avoidance behaviour and generate tax revenue.

Since the introduction of IR35, tax lawyers have expressed concern that HMRC have been “bashing” truly independent contractors and entrepreneurs with this legislation to raise revenue rather than tackling real tax evaders.

Initially at least, there has been no suggestion the particular case in question has been put in place illegally and no details about the tax treatment of the arrangement have been disclosed, though it has been suggested “tax authorities” had approved it. The SLC has apparently defended the arrangement, producing figures suggesting it was saving the organisation around £88k over two years by avoiding head hunters fees, and tax and national insurance contributions. Commentator have highlighted potential financial benefits of between £25k and £40k for Mr Lester.

Across the public sector, Attractor is aware there is, generally, a strong focus on ensuring appropriate treatment of employment and contractor relationships. Perhaps this is why the judgements made in this case have been called into question. From the details published, it seems the arrangement had been approved at a pretty high level and there may be some suspicion that pressure from politicians had swayed the decision.

With increased focus on the issue, Danny Alexander, the Chief Secretary to the Treasury has ordered an investigation to see if the practice is widespread across government. It will be interesting to see the results of the investigation and it’s certain there will be increased effort to ensure the tax treatment for all senior appointments has been as “clean” as possible.

This might require a change to payment mechanisms and employment relationships or, more simply, a quiet word in the ear of the taxman.