Session 2010-11
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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 610-i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Public Accounts Committee

Central Government’S Use of Consultants AND INTERIMS

Wednesday 17 November 2010

Sir Gus O’Donnell KCB and Ian Watmore

Evidence heard in Public Questions 1 - 137

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Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 17 November 2010

Members present:

Rt Hon Margaret Hodge (Chair)

Richard Bacon

Stephen Barclay

Stella Creasy

Matthew Hancock

Chris Heaton-Harris

Joseph Johnson

Mrs Anne McGuire

Austin Mitchell

Nick Smith

Ian Swales

Amyas Morse, Comptroller and Auditor General, gave evidence. Robert Prideaux, Director of Parliamentary Relations, Keith Davies, Director and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Central government’s use of consultants and interims (HC 488)

________________

Examination of Witnesses

Witnesses: Sir Gus O’Donnell KCB, Cabinet Secretary and Permanent Secretary of the Cabinet Office, and Ian Watmore, Chief Operating Officer, Efficiency and Reform Group, Cabinet Office, gave evidence.

Q1 Chair: Right, welcome. We’re going to start because we’re likely to be interrupted by a vote in the middle. Thank you both very much indeed for attending. It’s the first time we’ve seen you at our hearings, so welcome. I hope that we can engage in some constructive debate over the coming Parliament with you. I’m going to come in first. If you look at the various figures within this Report, and the table that you’ve let us have today, we see that the previous Government started to bring spend down on consultants, and we see that the present Government is actually going quite deeply into cutting the expenditure of consultants. I think the thing I’d ask of you, Gus, is that if you look at the overall picture, most of the consultancy spend-two thirds of it-goes on project management and ICT expenditure. You’ve got half a million people working in the Civil Service, yet despite endless Reports over the years-I think Richard’s Reports go back to ’94 but the ones I looked at were 2002 and 2006-all of them put in a recommendation that you should try and grow the capacity within the Civil Service of two absolutely key sets of skills-in ICT and in project management. You failed to do so across the piece, and I suppose really we need to know why, and what are you doing about it?

Gus O'Donnell: Sure. First of all, I’m delighted to be here; it’s interesting to be in front of an allelected Committee. That’s the first time that’s happened, so congratulations to all of you.

Q2 Mr Bacon: Wait until we have elected Cabinet Secretaries.

Gus O'Donnell: Now look, you can go too far with these things. We are, thanks to you and the washup legislation, selected by fair and open competition.

Let me just say, there’s a lot in this Report that we agree with. As you say, it follows a line of Reports, so the 2006 Report is important, and you’re right: the figures for the share of our consultancy spend which is our programme project management plus IT is about 60%; it’s gone up slightly. It’s interesting when you look at our spend compared to benchmarks. I’ve tried to say, "Are we spending a lot on consultancy? What would you expect?" If you took our share of consultancy spend as a share of what we spend on goods and services, it’s around 4%. What’s the private sector comparator to that? That was my question, and the answer was about 15%.

Q3 Chair: I’m going to interrupt you there, because a further, shocking figure is figure 5 on page 15, which shows consultancy spend as a percentage of total staff costs. Even if you knock Treasury out of it, because of the credit crunch and the specific circumstances surrounding that, at the Department for Transport the spend on consultancy represents 70% of its staff costs. At the Department for Education it is over 50%; at DECC it is 40%; and at the Home Office it is 40%. So for every £10 spent even in the Home Office on staffing, £4 is spent on consultants. It’s crazy. When I looked at that, I thought it was a crazy comparator.

Gus O'Donnell: Well, let me say that what I would regard as the relevant deflator for how much you should spend on consultants is how much work you are doing. So, in the Home Office, if you take that number, look at what they were doing. They were doing ID cards, they were doing eBorders, the Interception Modernisation Programme, Cyclamen-you name it. There are very, very strong IT projects that they’re spending lots of money on. So like I say, as a proportion of what they’re spending in total, it’s quite small relative to the private sector.

Q4 Chair: But that brings you back to the question: why haven’t you grown your project management and IT?

Gus O'Donnell: Indeed, let’s go back to why we haven’t grown it, which I think is a perfectly valid question, and a question I asked some time ago. We set in place various means to do this. We set up a special fast stream for finance. We’ve got various IT and business; the first time around, when Ian was working as CIO, he did a lot of work to start those off. We’ve got procurement specialisms, and we’ve got commercial specialisms; we’re starting to do all those things. These are elements of our fast stream input; people can get seconded into specialisms in particular areas. The problem is that as we grow them through, it is going to take quite a long time to get to fill the senior gaps, so it is going to take a while for the "grow your own" strategy to work. In terms of getting people in, I think one of the other factors that we’ve got to be clear about is salaries. We are probably at a competitive disadvantage for more senior, more experienced, IT programme and project management skills. That’s a reality.

Q5 Chair: You take your time. That’s why I come back to the 2006 PAC Report, where it says for the last three years "the most frequently purchased consultancy was IT and project management skills"; it was then accounting for 54% of Government total expenditure, now it’s over 60%. It says: "Consistently relying on consultants for basic skills is expensive and repeated use suggests poor value for money", et cetera. I’m sure the 2002 report said the same thing. If you had at that point, across Government, implemented the recommendations of PAC, you might have been in a different place today, and that was four years ago.

Gus O'Donnell: I don’t think so. Take a classic example: ID cards. Let’s say we gear up and we have all the people that we need to do that project, and then it’s cancelled. Think of the costs for us. I think there are cases where it’s quite right for us to buy in experienced skills in specific areas for projects that will have a particular start and finish date. I would say for us the right use of consultants is where there’s a skills gap, where we’re buying in some experience from outside. I think, actually, if you’ve got somebody that has set up a biometric database lots of different times for different people, we’re only going to do that once. Do we want to go through that training period if somebody else has done that? So I think there are lots of perfectly valid reasons why we might want to get people in, have them for a while and then go. If you think that number is going to change, I don’t think it is. I actually think we’ll grow our own, but we will still be in the situation where we will need consultants to come in for fixed particular projects, with specialist skills that we will want for a time, and then have them leave.

Q6 Chair: I don’t think anybody would deny that. I’ve got to come back on that again, because project management is pretty generic. Therefore I can’t see why, since the ‘94 Report, you haven’t grown the project management. Over 20% of the spend goes on project management; that’s pretty generic. On ICT, of course, if somebody’s designed software for a particular scheme, it would be sensible to use that again, but we might actually improve our management of ICT projects and our purchase of ICT contracts if we had better inhouse skills. So I buy the argument a tiny bit, but I don’t buy it to the extent of your dependence on consultants for those areas.

Gus O'Donnell: Okay, well, in response to the 2006 Report there was the CVP programme that OGC put in. Sorry, lots of initials: that is the Consultancy Value Programme. One of the ideas that came out of that was that we should have these master classes, in terms of training people up on programme and project management and ways of using consultants. One of the conclusions that the Home Office, DWP, and HMRC all reached was to have these programmes led by a member of the Civil Service-not led by outside consultants, which had happened before-so they acquired the skills and learnt how to manage consultants. So there was a lot of learning of how to manage programmes and projects. It’s still the case that when you come to big, new programmes and projects, we want to buy in skills. Sometimes we’ll buy them in through consultants, sometimes we’ll buy them in through the private sector. The Olympics, which is one that you’ll know quite a lot about, Chair, brought in people from the outside on very high salaries to run programmes and projects that are massively important and are going extremely well.

Q7 Chair: Are you happy with the extent of the expenditure on both project management and ICT? Are you happy with that?

Gus O'Donnell: The trouble is I can’t wave a wand; if I get someone in the fast stream, it’s going to take 10 years to bring them through. So this is a process that’s going to get better every year, but it’s going to take a while. You can’t grow people from completely new overnight; it does take some time.

Q8 Chair: Looking at the figures that you’ve laid on 10/11-I accept they’re not NAO figures; they’re your departmental figures, so they haven’t been audited-clearly, overall there’s a reduction in consultants by 46%, but it looks completely hit and miss. So DfT, who are one of the biggest spenders on consultants, have hardly any change, but the Department of Health has cut it by 95%. Is this all part of a plan, or is it a bit stop-go? Is it brutish and unintelligent? Are you, at the heart of it, making sure that there is an intelligent way forward, or are we going to come back in two years’ time and find the consultancy bill has gone up again?

Gus O'Donnell: No, there is a very clear approvals process. What changed with the election was the desire of the incoming Government to actually be much more centralist, to actually take control of these things right from the centre and to look at all the existing projects. You get the variety across the different Departments because in some cases they’ve just decided to stop things; they’re not doing things any more.

Q9 Chair: The Department of Health is embarking on the most radical reform ever known in the NHS. That is not required because of public expenditure cuts; they are just doing this as a reform. Despite what you’ve said about the importance of these big changes and the need to employ consultants, they have suddenly decided completely to slash their consultancy rates.

Gus O'Donnell: I think you’ll find that, on a lot of the previous things that were going on-nothing to do with the future reforms-they’ve stopped a lot of past programmes. One thing that’s close to our home in the Cabinet Office is we’ve stopped a lot of expenditure on marketing and advertising. Paid-for advertising has gone. COI’s income is down quite dramatically. So a number of things have stopped. In terms of the reforms, those are being led from within the Department, not by consultants.

Q10 Ian Swales: That would be the IT project, presumably? In the Department of Health?

Gus O'Donnell: A lot of IT projects.

Ian Swales: Well, I would guess so.

Gus O'Donnell: Yes, you don’t get those sorts of changes-as you say, it is around about a half-by just improving efficiency; this is stopping things.

Q11 Chair: But the Department for Transport, nothing? They spent a bloody fortune.

Gus O'Donnell: Indeed. Ian has been involved in a process of looking at it, and the centre has been incredibly tough in asking Departments to come and explain the business cases for all of the things they are doing. In some cases, these are being allowed to carry on, and in some cases they’ve stopped. Sometimes this has been because the Department has said, postelection, "This is something we don’t want to do anymore," and in some cases at the centre we’ve asked, "Are you really sure it’s the best value for money?" and the centre has stopped things. Mostly, these have been things Departments have decided they don’t want to do because of different political priorities, postelection.

Q12 Stella Creasy: So what’s the Ministry of Justice got that’s so special, then? It seems to be the one that’s going in the opposite direction on that metric.

Gus O'Donnell: The metrics for MoJ are slightly different, because they’re affected by a machinery of Government change, if you go back far enough, when NOMS switches across, so that’s prisons. What will have happened with MoJ is that they will have looked at their programmes and the Secretary of State, Ken Clarke, will have said, "I think these are fine." They would have come through a central process, they’d have been looked at there and they would have been given a tick.

Chair: Nick?

Q13 Nick Smith: I’m a little bit afraid there’s been some stop-go here, by which I mean this: yesterday we had HMRC in here, and we were talking about the value of proactive campaigns on the tax collection. It seems that they’ve stopped proactive campaigns for a number of months because of a decision to stop hiring consultants to help take that forward. It just feels barmy, if you need people to take forward proactive money-gaining initiatives, to stop it like that. Why do you think that’s a stop-go thing?

Gus O'Donnell: It will be for every Department to consider the value-for-money case. There are some amazing things you can do in tax collection that don’t cost you anything. I think they will have looked at whether this makes sense, and they were allocated rather large amounts of money in the budget to look at ways of increasing revenue. So I think it’s for them to make a call; it’s their budget, they decide. As a nonministerial Department reporting up to the Chancellor, I’m sure the Chancellor will be very interested in getting in as much revenue as he can. I can’t believe he will have wanted to cut back on something that will cost him revenue. Not with the deficit where it is.

Q14 Nick Smith: The proactive campaign’s put off for a year because they couldn’t employ consultants for six months. It just felt odd. Can I go back to growing your own? I’m interested to hear about trying to get people on fast streams into IT, accountancy, and project management roles. Do you collect data on how many Civil Service staff have got professional qualifications for those specialisms? Have you got data on how they’ve improved over the years?

Gus O'Donnell: I’m sure we could give you them, but I don’t have them in front of me. Quite often, they’ve gone through these courses that are equivalent to accredited courses. Whether they get the professional accreditation or not I’m not sure. For example, if you look back on the Peter Gershon Report, which said that finance directors had to be professionally qualified, we then moved to a big increase, with all Departments having professionally qualified finance directors on their boards. Interestingly, if you go to the FTSE 100, how many of them have got professionally qualified finance directors? Half.

Q15 Nick Smith: And we’ve had a terrible collapse in the banking sector in recent years, haven’t we?

Gus O'Donnell: Yes, well, I’m thinking about the FTSE 100. It goes wider than banks.

Q16 Joseph Johnson: I just didn’t want to let this idea that Government spending on consultancy is falling go completely unchallenged.

Gus O'Donnell: I didn’t say it was. Well, I think the point was about ’10-11.

Q17 Joseph Johnson: Yes, and also the general direction of travel, from £904 million in 2006-07 to £789 million in ’09-10, and the overall idea that we’ve seen a 46% reduction in the first half of this year versus the first half of last year. I guess what’s really concerning me is the possibility suggested in the NAO Report that actually what we’re seeing is, to a very great extent, the shunting around of cost, partly to interims-that cost line-and also to this enormous number, the £700 million, that the Department’s arm’s length bodies are spending on consultants. That is almost as much as the core Department bodies are spending on consultants. It appears to me to be a complete black hole; we do not have any hard data on this number. We have no number to which to compare it for prior years.

Gus O'Donnell: Remember, I think the clue’s in the name-arm’s length bodies. The whole point about those bodies is that they were set up by Government to be more independent, and to go their own way much more. Admittedly, post-election, we’ve had a review where we’ve looked at all of these, and this is something I’ve felt we should have done for some time. We’ve looked at whether they should be inside or not. The Public Bodies Bill is the legislative vehicle for that, but it does ask the question: "Is this something you really want at arm’s length?" If you want to put it at arm’s length, it seems to me it’s going to be independent. The question, really, that we need to come to is whether we going to mandate it to do these things at all, or are we just going to say, "This is an independent body, like the BBC or whatever?"

Q18 Joseph Johnson: I understand that, but the question is: are we just simply moving the costs of consultants from Departments, where there’s some accountability and visibility, to arm’s-length bodies where that doesn’t happen?

Gus O'Donnell: No, there are two reasons why I can say that’s not happening. The spending review is quite clear; virtually every Department’s got to reduce their admin costs by a third. That’s money, right-overall money. The budget deficit has to come down, and that’s public spending including its widest possible form, so you can’t hide it one way or another. The numbers have to come down, and that’s what we’re all working towards delivering.

Ian Watmore: Can I just come in on that? We haven’t fully audited the numbers, but the numbers are likeforlike comparison; they’re not being hidden somewhere else. There was an article in The Times only this week, with the consulting industry talking about revenues for Government having fallen off the edge of a cliff. So the evidence is that since the election the spend on consultancy by central Government Departments is massively down.

Q19 Joseph Johnson: Right, but what about the arm’s length bodies? In this Report, we only have mentioned a £700 million number, which is an estimate of what the arm’s length bodies are spending at the moment. I’d like to see numbers for prior years so we can actually tell whether we are seeing a decrease or not.

Ian Watmore: All I’m telling you is that the number we gave you yesterday was a likeforlike comparison with the previous year on central Government, so it is a real reduction. Arm’s length bodies are changing as well as we get more control over them inside the Departments. That is the direction of travel this Government signalled, and we are now managing the spend much more aggressively on a whole range of topics in the arm’s length bodies. We will collect those figures as well, and when we have them, we’ll share them with the Committee.

Q20 Mr Bacon: Sir Gus, can I give you an example of one of the problems which Mr Johnson may be worried about? It is interims in arm’s length bodies such as the Rural Payments Agency. That has a chief executive, and the cost of his salary, including benefits in kind, is now £155,000 to £160,000. That, by the way, is quite a lot more than his predecessor, who I remember was being paid £113,000 at the time when he came before this Committee, so it’s already £40,000 more. Despite being paid a quite handsome public sector salary to be the chief executive, he’s hired in an interim, who is listed in the Report on accounts as the chief operating officer, who’s been there since 2008, according to this annual Report, which was only published in July. So he’s been there over two years. His name is Steve Pearce, and he’s employed on an interim basis. In the year ending 31 March 2010, payments totalling £320,224 including VAT were made to third parties-I think that means to a company he owns-in respect of his services. What I’m interested in knowing is: how much of that is going on? Can you answer that question?

Gus O'Donnell: How much use of interims?

Q21 Mr Bacon: How much of this type of thing is going on?

Gus O'Donnell: You’ve got the numbers for overall interims.

Q22 Mr Bacon: I’ve got it for the Rural Payments Agency. I can read the annual report of the Rural Payments Agency, but what I’m really asking is: do you, as a Government, have this information for the Government as a whole? If you were to take all the executive agencies and nondepartmental public bodies, and you were to add up the top management level, where you’ve got a chief operating officer who is an interim and who has been there for two years, and then do that across the piece, and then the same for lower down, what would be the number? Can you give us that number?

Gus O'Donnell: The number for interims as a whole, as a proportion of the total pay bill, is around 2%.

Mr Bacon: As a proportion of the total pay bill?

Q23 Chair: But three Departments didn’t know how many interims they had. Twelve Departments didn’t know the seniority of their interims, and the figure in the Report that you signed off suggests that there’s no certainty about the figure we’ve got of over £200 million being spent on interims in ’09-10; it was a guesstimate, wasn’t it?

Stephen Barclay: The Departments weren’t governing it until 2009.

Gus O'Donnell: The way pay bills work in different Departments was slightly different, so they didn’t have the same category. So it is quite hard to get an answer to a consistent definition. One of the things we’ve changed, through much more centralisation and much more mandation, is to get the same definitions across Departments now.

Q24 Chair: But to take Jo’s point, the Report doesn’t tell us how much has gone from consultants to interims. We can’t really be certain we know that.

Gus O'Donnell: No.

Ian Watmore: I will check the figures when I get back, but I’m reasonably confident that the interim figures in arm’s length bodies and the rest of Government have not risen. So there has not been a shift of spend from one category to another.

Q25 Chair: But do you know?

Stella Creasy: The available data suggest that spending may be increasing.

Ian Watmore: Since the election, if your concern is whether we have moved one block of costs out of consultancy for central Government and moved it somewhere else, I’m 90% certain that the answer is no.

Q26 Joseph Johnson: But for the last period of time that these figures relate to?

Ian Watmore: Well, I think the question you asked was about the 40% reduction since the election, and that is what I was answering. The 40% reduction since the election is a real reduction in expenditure on consulting across Government.

Gus O'Donnell: And on contractors, interims and agency, it’s over 40%.

Chair: Stephen, do you want to come in?

Q27 Stephen Barclay: I just want to come to the oversight that you have as a whole, Sir Gus. The key finding for me is in paragraph 16, which says "the Government is not achieving value for money from its use of consultants and interims". That’s the key finding of the NAO Report. Do you not accept that finding?

Gus O'Donnell: That’s based on some numbers about spend. Value for money is about inputs and outputs, so you’ve got a value: what’s the value of the outputs?

Q28 Stephen Barclay: A lot of Departments aren’t actually measuring the outputs, Sir Gus. That’s one of the other findings of the report.

Gus O'Donnell: Let me read this out to you: "obtaining an accurate estimate of the benefits of using consultants is difficult because of the sheer range of work that consultants do and therefore the ability to have useful measures for all types of projects. Furthermore, it is hard to attribute cause and effect even where performance has improved, as in many instances consultants’ work is within the context of wider departmental projects or programmes". That’s the NAO Report from 2006. Look, if you could tell me how to value the outputs, that would be fantastic. I absolutely have no idea how you measure accurately the extra input. If you allow me to do two projects, one with consultants, one without, I could compare them doing the same thing at the same time, but we don’t ever do that. I’m afraid no one will be able to answer that accurately when they come back here next year, in five years, or in 10 years. You will not get an accurate answer to that question.

It must be wrong to estimate value for money on the basis of input only. What’s happening during those three years is the big increase in the number of projects, so consultancy spend as a share of what the Government was actually doing, because of the extra number of projects that were going on, has declined. That’s maybe an indicator of higher productivity. When you come to look at the next year, if you use the analysis that’s in this Report, you’ll find a massive jump in productivity, because all you’re measuring is the inputs. The inputs have gone down massively, so you’ll say therefore there’s been this enormous increase in productivity. That would be as wrong as estimating it on the basis that the inputs haven’t changed, so somehow nothing’s changed. What I’m saying is there is a fundamental problem here, and you’re not going to be able to get around it.

Ian Watmore: I would add that in the period of the last Government, the percentage of spend on consultancy, as well as-[Interruption.] Do you want to go and do your vote?

Chair: You’re going to hate us.

Ian Watmore: No, no. We would never hate you.

Chair: Sorry, we’re going to go and vote, and then we’ll come back. How long do we have? Quarter of an hour. If you can all come back faster, we can get on with it.

Sitting suspended for a Division in the House.

On resuming-

Chair: : Okay, we’re going to re-go . The ones that aren’t here will probably kill us . Right, Stephen, please continue.

Q29 Stephen Barclay: Can I just go back to your previous answer? I may be misunderstanding, but when I was saying, "This report says you haven’t got value for money", you seemed to be saying, "That’s wrong because we can’t measure the output or the performance of consultants." Was that what you were saying?

Gus O’Donnell: I was saying I think it’s always going to be very hard to make very firm statements on value for money because you can measure the inputs very accurately but you can’t measure the outputs, so it’s quite hard. What we know has been going on here is that the consultancy spend is much the same-I’m not kind of saying it’s gone down much-until this year, and during that period, we seem to be doing quite a lot more. If we had any way of accurately estimating that, we might be able to suggest that value for money had been improved, but I’m not even going that far. I’m saying that that seems to me my a priori view, but I can’t partial out the impact of consultants on particular projects. If you can, I’d be delighted.

Q30 Stephen Barclay: I expect most commercial organisations paying for consultants do expect to measure the output of what they’ve delivered.

Chair: £1 billion is a lot of money.

Gus O’Donnell: Well, would you like to have someone who worked for one of those consultants tell you precisely what they did do? Ian worked for Accenture.

Q31 Stephen Barclay: I wasn’t talking about the consultants themselves; I was talking about the people paying for them, that’s all.

Ian Watmore: In any business, people who recruit in a consultancy team interspersed with their own team recognise that the output of that is what they measure. Then what you distinguish between is what was done by the inhouse team or the team you brought in; that is a very fine judgment. What people do is try and do it with inhouse teams if they can, and if they can’t, they bring in the externals. Some of these programmes are incredibly complicated and difficult, and actually most of the areas that I think we know of in recent years have gone very well.

Q32 Stephen Barclay: Well, I’ll give you a specific from my own professional experience. You’ve set up the FSA-the Financial Services Authority. It had a big exercise some years ago, based on a Professor Sparrow, a retired policeman who became a Harvard professor. The whole exercise was on performance measurement, and it was measuring these sorts of things. But can I come back you your other point?

Gus O’Donnell: And did they partial out the consultants, versus the rest?

Q33 Stephen Barclay: It was looking at both the performance measurements for staff and for consultants, yes. You also say, "It’s difficult, in terms of the impacts", but we’ve got Departments here that are hiring consultants without even checking whether they’ve got available staff with the skills.

Gus O’Donnell: No, I think that the problem is, like I say, that you’ve got specialisms that are difficult. As you say, we do have shortages in IT, but as the Chairman has rightly pointed out, the bigger gap is on programme and project management. These are very marketable skills, and-I know this-these are very valuable people in Departments. If you go to HR and say, "Look, I need some more PPM people," it’ll be hard to get them out of their existing places because they’re probably, as part of a shortage skill, very heavily used where they are. So we do need more of these people; we do need to train more and grow more. I completely accept that.

Q34 Stephen Barclay: Talking of measurement, one of the things you yourselves were doing to measure was introducing key performance indicators.

Gus O’Donnell: Yes.

Q35 Stephen Barclay: But fewer than half of your Departments were reporting on your own performance indicators.

Gus O’Donnell: Again, even if we had perfect performance indicators, it comes back to that question about how you pay consultants. Now, you’d love to pay consultants related to their performance, their outputs. In the private sector, the vast majority of their payments are related to the input.

Q36 Stephen Barclay: I’m just trying to understand. You’ve put in place performance indicators, and your own Departments are ignoring you. Why was that?

Gus O’Donnell: When you say "we", who do you mean by "we" in this case?

Q37 Stephen Barclay: Well, you head up the Civil Service, but the OGC-

Gus O’Donnell: I wish I had the power to do that for all Departments.

Q38 Stephen Barclay: Well, I think we may well come on to that, because I think that’s one of the problems, actually-the fact that the Permanent Secretaries are probably their own fiefdoms. The OGC, on page 20, paragraph 2.3, says that it didn’t feel it had sufficient authority, so if they didn’t have sufficient authority and the key performance indicators they were putting in place to deal with the 2006 NAO Report were being ignored, who do they go to? Who in the Civil Service do they report to?

Gus O’Donnell: This is a question about the balance of centralisation versus independence for Departments. I think you’re absolutely right, this is the key. I think the experience we’re going through now, where we have gone the other way, as it were-we have centralised and we’ve mandated-is proving to be a really interesting experiment. So far, partly because of the work we did before, following up the 2006 Report, it has meant that we’re now in a situation where it became easier-with a change in the political world-to say, "Actually, we want to mandate all these things from the centre." But we’ve been able to do that very effectively.

Q39 Stephen Barclay: One phrase you used earlier was interesting. You said you "felt we should have done this for some time"; you were referring to gathering data on arm’s length bodies.

Gus O’Donnell: It wasn’t so much gathering data, sorry. It was-I’ve said it before at Select Committees-basically a function of history as to how independent a particular body was, and they’d been set up over decades. Some of these were staffed by civil servants, some by noncivil servants , and you couldn’t actually go through a principle and say why one Department was in this area or another. That is why, postelection, they’ve done this analysis of saying, you know, "Should this exist? Should it be inhouse?" And actually quite a number of them have been brought in, so you’ll see Civil Service numbers go up.

Q40 Stephen Barclay: Yes, but if you’re giving someone a budget, don’t you need to understand how that money’s being spent? Part of that is understanding how it’s been spent on consultants and interims. You weren’t gathering the data on interims until 2009. There’s a concern that you’re probably not gathering the data on professional services, where some of this may be squeezed to.

Gus O’Donnell: Can I just be clear about that? For arm’s length bodies, there is this very legitimate question of independence. Say we go to the BBC and say "Now tell us what you’re spending on consultants," they’d say, "Actually, no." There’s an interesting question there about precisely how much we can lay down for independent bodies.

Q41 Stephen Barclay: Sure, but if you’re giving an arm’s length body their whole budget, I don’t think it necessarily is at odds to understand how that money’s being spent.

Gus O’Donnell: Exactly, but the question is where do you put the line between mandating what that arm’s length body should do and giving them a degree of independence? Absolutely, that’s a perfectly valid discussion to have, but I think you need to have understood whether you want to completely control it or keep it at arm’s length.

Chair: Stephen, I’m going to come back to you, but Ian has been waiting ages. I promise I’ll come back to you.

Q42 Ian Swales: I’ll just build on this, really. On page 6, there’s a specific statement, "Departments do not adequately define the outputs and benefits that they want to achieve". So there is a clear comment about that, in terms of how consultants are engaged. It goes on to talk about the fact that, rather than a fixed price, they’re basically time and materials contracts. It says that "Time and materials contracts do not directly encourage a consultant to work efficiently". I’ve worked in the industry. I would argue that actually-and one might say this is cynical, but as I say, I’ve worked in the industry and consulted to Government Departments-there’s an incentive to work inefficiently. There’s an incentive to create complexity because, actually, your pay cheque gets bigger if you do that. I think there’s a basic issue about how you define what you want and how clear it is, and then how the consulting industry engages with that.

Gus O’Donnell: Sure, let me take that on square. We’ll both do this. The percentage number: 64% is done on inputs for the public sector, and it is 55% for the private sector, so for both it’s a majority.

Q43 Joseph Johnson: It says 70% in the report.

Gus O’Donnell: 70%? No, no. On precisely why the private sector does it that way, I’ll turn to Ian, because he’s actually done this.

Ian Watmore: Well, it’s the age old debate, isn’t it? If you do a ratecard based job and you put a cap on the amount of money that can be spent, then you get that effort out of the company. If you put a fixed price on, you get whatever effort it takes to do the job, and all the best, profitable jobs I ever did were the ones that were of the second type, not the first, because you can argue you’ve been incentivised to put as little effort in as possible, for the constant price that you’ve agreed. So it’s not black and white here, and what I think you need to do with any professional services organisation-whether it’s consultancy, lawyers, accountants, investment bankers that you engage and so on-is get a blend in the deal that you do between the rate card that you charge, what some people colloquially call "the turningup fee", and the value that is delivered, if you can measure that, in what you might call the result element of the job. If you can do those two things, then you get the right combination of the performance and in my experience, those are the best sorts of jobs for both the client and the consulting firm.

Q44 Ian Swales: So how do you react specifically to the comment that Departments do not adequately define the outputs and benefits they want to achieve?

Ian Watmore: I think there are types of jobs-relatively short, sharp jobs-where it’s quicker and easier for everybody to pay the rate card.

Q45 Chair: Give us an example, a sort of generic one.

Ian Watmore: Oh, I don’t know. If you’re going to do a twomonth strategy project that’s going to investigate something and write a report for your Minister.

Q46 Chair: A strategy job is just the sort of thing that should be inhouse. For heaven’s sake, if civil servants can’t write strategies, I don’t know what they can do.

Ian Watmore: If you’re going to do that sort of strategy project, I would argue the best strategies done by any company, and by any Government Department, are where you staff the project probably about 60% with your inhouse people and probably about 40% with people who bring you external challenges, ideas and knowledge. They are the best sorts of projects. If we’re going to do that, it’s quicker and simpler to do the two-month ratecard contract for both sides. If you’re going to do something more complicated-

Q47 Chair: There’s a lot of people coming in, but if you really believe that-

Ian Watmore: Well, you asked me the question, I’m giving you the answer.

Q48 Chair: Ian, if you really believe that, then the present Government’s cut on consultancy spend is wrong. If you really believe the best strategy is 60% in, 40% out, or whatever ratio you feel-

Ian Watmore: I said that for a particular type of project, but it can vary. What I think we are seeing in the reduction that has happened since the election is two things. The most overwhelming thing is that the number of projects and programmes that have been cancelled by this Government, compared with what was going on previously, is massive. There are an awful lot of things that have just been stopped, or they have been asked to finish the piece of work they were doing and put it on the shelf, in case it comes back in a future period. So the volume of work of that type has reduced massively. As a result, as those pieces of work have come to an end, the consulting assignments have not been renewed, and therefore, in the words of the consulting industry, revenues are falling off the edge of a cliff. Now, that might reverse if and when this Government introduces newer programmes; at the moment, it’s both controlling the money and formulating its policy views. My sense is that this year will be not just very low on consultancy spend, but very low on a whole load of other spends that are connected with programmes and implementation, and that will probably rise again as the Parliament goes on, when the new programmes go from policy through to strategy through to implementation.

Q49 Stella Creasy: So does that mean that you think that we’ve got the right advisors helping the Government right now with the changes they’re trying to do right now? Because from what you’re saying, actually there’s a value in bringing external consultants in to bring those different ideas.

Ian Watmore: I think there is a difference between policy formulation that Minsters will want to make; I think in general, Ministers have come into Government with fairly strong views on the policies they want. They have gathered around the policy officials in the Departments and broadly speaking, those people are working together to create the policy agenda. At the same time, of the programmes and projects that were going on under the previous Government, some are still going on; hence transport’s number is broadly constant, because the Government came in and broadly accepted the programmes that the previous Government had launched under transport. In other areas, they have cancelled the programmes-ID cards and other things. I think there will come a point where those policy initiatives start to turn into: "What is the strategy for implementation? How do we design those changes? How do we implement them?" And that’s where I think we will see a resurgence of the need for skilled contractors.

Gus O’Donnell: Just to give you one example, think about universal credit and DWP. We are at the policy stage and the legislative stage, but there is going to be an implementation stage. You mentioned health, Chair, and somebody talked about stop-go. It may look a bit like stop-go from the future, because we will have just stopped a lot of things. We’ll come back to it and we’ll start thinking about implementation, and then expenditure may increase again. So that’s what it will look like; that would be my prediction.

Q50 Mr Bacon: Can I just stop you there? Are you saying the thinking about implementation comes later?

Gus O’Donnell: No, no.

Ian Watmore: No we’re not saying that at all.

Q51 Chair: But it is an interesting comment you’ve made that at the implementation phase, you will see a resurgence of consultancy spend.

Gus O’Donnell: It’s quite possible.

Ian Watmore: Yes. If I may just continue, we do have this period while there is a reduction. Some of the things we’re trying to do now will improve the future situation. So, for example, we are getting better data across not just the central Government Departments but all the arms length bodies, so we have a stronger baseline against which to measure. The second thing we’re trying to do is identify good people with the right skills and where they are, so that when new major projects come through to the major projects authority, we’ll be able to identify who is the best leader in Government to do the job, not the best leader in that Department to do the job, and they’re often not the same thing. The third thing that a lot of Departments are doing, and I’m certainly doing at the centre, is trying to get the resources of the Department deployed more flexibly. One of the problems of the structure of the past-why your Report talks about Government Departments finding it difficult to access skills-is because it’s been a very much aligned structure, linked to a policy area. A lot of Government Departments now are creating these flexible policy pools and that makes it easier to deploy people to where the issue is going to be in the future, not where it was in the past. All of those things, I’m hoping, will give us a better chance of reaching the new implementation phase without needing to go outside as much and getting maximum use of the people we do have internally.

Chair: I’ve got a whole queue of people, so could you keep your questions quite brief? Jo.

Q52 Joseph Johnson: Just before we move off contracting altogether, in the NAO Report, it says that 70% of contracts are still based on time and materials. You benchmarked that to 55% in the private sector, so there is a 15 percentage point gap, which is quite substantial. What plans do you have to reduce that gap, going forward? And the supplementary question is: fewer than 1% of contracts, an astonishingly low proportion, include an incentivebased mechanism. What is the private sector benchmark for that, please?

Ian Watmore: I don’t have the private sector benchmark for that figure; we can try and get some figures to you from research afterwards. I just don’t know that answer. What I do know is that when you start to do incentivebased payments on the type of assignment that we’re talking about here, they themselves get very controversial. I won’t use a Government example, but in companies, you might link it to sales growth. Sales suddenly rocket and people start to say, "That was due to us," and others say, "No, that was due to the economy picking up, or consumers." So you start to get difficulties in linking to direct reward. Companies that have tried that often go back to the idea that I talked about earlier, which is a rate card for the basic contract, with some form of performance-related-

Q53 Joseph Johnson: What about the direction of travel? Are you going to bridge that 15 percentage point gap? Where does that 55% number come from, anyway?

Ian Watmore: If that is the 15%-

Q54 Joseph Johnson: Well, this is the number that Sir Gus gave-55%.

Ian Watmore: When we look at it more closely with the association-

Q55 Joseph Johnson: Is it a hard number or a guess?

Ian Watmore: if the two numbers are directly comparable, then yes, we will-

Q56 Joseph Johnson: Sir Gus made the comparison.

Ian Watmore: I have made the point several times that we want to do this sort of work. Obviously we don’t want to use the external resources if we don’t have to, but when we do, what we would ideally like is a mix of ratecard consulting and performancerelated contracts. That’s what we’ll be trying to implement.

Q57 Austin Mitchell: Well, I bet the consultants are going to be delighted that there’s going to be a resurgence of consultancy spending. It makes all that money that’s stuffed into the coffers of the Conservative party look worth while at the end of the day.

Chair: As an ex-consultant, some of it came into the Labour party as well.

Austin Mitchell: They didn’t consult me on that. Sir Gus mentioned the ID card scheme twice, I think. Now here is a scheme that is a godsend for consultants. You have consultants to recommend it, and you have consultants to say what it should do, then you have consultants to say what should be on the card, and then you have consultants to say how it’s going to be operated and printed. The Government was telling us, as kind of Back-Bench sheep, that this would cost two and thruppence, but LSE estimated at the time that the highest possible estimate was £19 billion. Now, could you give us some idea-because it’s a consultancy bonanza, isn’t it?-how much it did actually cost, this monumental white elephant that we created? How much of that was consultancy fees?

Ian Watmore: It was brought in by a succession of previous Home Secretaries.

Gus O’Donnell: In terms of the consultancy cost-

Q58 Austin Mitchell: I mean, give us a note. I’m not bothered.

Gus O’Donnell: No, I can give you a ballpark figure. In the early years it was around £70 million a year. In the most recent year in my memory, it was about £30 million on consultants for that contract.

Q59 Austin Mitchell: My second question arises again from a point that Sir Gus made. This shows how I listen, from time to time. You’ve said that the Civil Service suffered from a disadvantage in top management, in the sense that there was a skills gap. This is in terms of whether to use consultants or not and the ability of the Department to do it. Why is that? I mean, is it because you’re not paying them enough, because they’re being poached, or because the consultancy houses can offer them a cash bonanza? Why is there a skills gap?

Gus O’Donnell: Pay. Simple. The bottom line is pay.

Ian Watmore: Can I develop this? The reasons why people are in the consultancies in the first place are flexibility of work, primarily. People like joining those companies as graduates, because they get to see the whole of the commercial and governmental spectrum. Secondly, there is the enormous training that they get in core skills and competencies that we’re talking about here. Thirdly, there is very rapid advancement up the career path and high pay. Those are the three things that attract thousands of graduates every year-and they still are coming out of the universities. That’s what we invest in, in those businesses. In Government, we get some of the highest calibre graduates joining the Government-500 or 600 a year.

Q60 Austin Mitchell: Still? Are you still competitive with the big accountancy houses, the masters of the universe?

Ian Watmore: They join us because they love the public sector and the public service; they like the investment in training they’re going to get in areas of policy and legislation, and professional skills like economics and so on. They don’t like the pay, but at that age they’re prepared to consider that it’s actually better than what they were on as a student, and they think, "We’ll sort it out later in life." We get people of very similar calibres joining both of those businesses.

Q61 Austin Mitchell: And pay them less.

Ian Watmore: Over a career, we do pay them less; I’m absolutely certain of that. But at a key point in time, the group that join the Civil Service will be world-class at certain skills such as policy analysis and policy making, and at a different time, many of the consultancy firms will have produced their own version of project management or IT. A lot of the business problems of Government require a fusion of those two things, and that is why we go to the market to get those skills.

Gus O’Donnell: The correct answer to your question about whether we are competitive is that, on our fast stream recruitment, The Times-sorry to drop a newspaper in there-does a survey of graduates across the top 100 employers. The Civil Service is number three, but we are not the third best payer by a long way.

Q62 Austin Mitchell: Who are the first two?

Gus O’Donnell: The first two are members of the top four in accountancy. I’m not going to give their names; why should they get publicity? We are very competitive. If you think about it, we’ve got 450 entrants to our fast stream; we had 30,000 registered to want to try and come into that. So we are getting really good people, don’t get me wrong. And we keep them. There is an issue about pay, particularly at very senior levels, where the fact is I have to negotiate big pay reductions to get people in from the private sector. I’m doing it more and more successfully, so I’m really pleased about that.

Chair: Can I make a plea to you both? I’ve got a list of people to get in, so if we can keep questions short and answers short, I think people will feel that they’ve had a go at it. Nick, very quickly.

Q63 Nick Smith: Thanks, Chair. Two quick points from me. I want to push you a bit more on this "grow your own" strategy that you’ve got. Can you provide us with some data or a table on how many civil servants are members of a project management professional organisation, so that we can see over time whether or not the strategy’s working and whether or not we can have confidence that you’re going to have those numbers for the future? Let’s see if what you say you’re doing is being implemented.

Gus O’Donnell: It’s a mix of buying people in to cover the short term thing, and trying to grow our own through assignments.

Q64 Nick Smith: Give us your best endeavours; a back-of-the-envelope, best appreciation of how you think you’ve done in the last few years and where you’re going to go in the future on that. And I want to come back to this business about the implementation phase. With the pressure to reduce Civil Service headcount, how are you going to stop Departments from making people redundant and then either replacing them with new consultants or bringing them back as consultants on higher rates of pay?

Gus O’Donnell: Right. The answer to your question is a very clear one: there isn’t a headcount target. As for what there is, and what we’ve all got, as accounting officer for the Cabinet Office, I’ve got a third cut in my budget. So it’s a number, right? So if I were to not employ a civil servant and employed a more expensive consultant, that’d be bad news for me, with my budget restriction. So actually, I think headcount targets did create some distortions; there’s no question about that. I have always been in favour of targeting budgets. You know, if you want to save money, just reduce the amount of money, and then let the Department get on with it. That’s what happened when, in about 2007, we were given a target. We dropped the headcount targets and we moved to a 5% real reduction in admin costs. That was the new deal, and that’s what we’ve got now. I think that’s the right way for us to manage this.

Q65 Nick Smith: You don’t think we’ll get any "revolving door" re-employment of contractors in the future?

Ian Watmore: As a technical point, in anybody’s redundancy, we’re writing in the inability to re-hire them.

Q66 Chair: Not when they retire. After early retirement, they come back.

Ian Watmore: We’ve got a new scheme in place, and we’re putting the rehiring back on as a control.

Q67 Chair: They do come back after early retirement. I know too many cases.

Ian Watmore: Historically, yes, but not going forward. That’s my point.

Q68 Chair: So you shoved part of the costs onto the pension budget, and then you have a lesser cost on your staffing budget?

Ian Watmore: I’m only saying what we’re going to do, going forward.

Q69 Mrs McGuire: Could I ask you, Sir Gus, how many civil servants you actually have under your jurisdiction? I’m not just talking about the Cabinet Office, but across Whitehall.

Gus O’Donnell: The whole lot? Well, the Chair referred to half a million. It’s somewhat less than that; the numbers come out every time. The thing I keep trying to get across to people is that actually the numbers have been going down, mostly. Ever since I was Cabinet Secretary, this has been a trend downwards. It blipped up when, during a recession, we hired a lot more people on fixedterm contracts for Jobcentre Plus. You’ll see, from the employment figures coming down, that the Civil Service is already starting to fall in size again after that period. So I’d guess about 450,000 would be slightly more accurate than 500,000, but it depends if you do it on full-time equivalents or not.

Q70 Mrs McGuire: Okay. According to previous comments you’ve made, you’re still able to recruit the brightest and the best; you’ve got 30,000 for a limited number of vacancies every year?

Gus O’Donnell: In terms of our fast stream, yes, and I would say, on the direct entrance scheme, the quality there is fantastic as well.

Mrs McGuire: Good.

Ian Watmore: I personally presented to 200 of them last week, and they were absolutely razor sharp people, and it was a real pleasure.

Q71 Mrs McGuire: Right. An NAO Report recommendation on page 9 says: "As a minimum, Departments need to be sure there are no available inhouse staff before deciding to hire consultants or interims…They should identify core skills gaps and decide the most costeffective resource options including when to train or recruit staff". Among that multitude of civil servants you have, including some of the brightest and the best, did you have nobody who could head up, or be a deputy in, your digital strategy unit in the Cabinet Office?

Gus O’Donnell: When you’re looking at very specific skills, you will want to look for the best possible person. Quite often when it’s something innovative, like digital, you might want to, as we do quite a lot, open your recruitment processes and look outside. If you look at our senior Civil Service, the proportion that we’re hiring in from outside has increased quite dramatically, as we’ve wanted to get the best people at all possible levels. So we don’t just do it at the beginning. We open up our processes to fair and open competition.

Q72 Mrs McGuire: So that job was put out to open advert?

Gus O’Donnell: I don’t know about that specific job, sorry.

Q73 Mrs McGuire: What about Rishi Saha? Was that an open advert?

Gus O’Donnell: That was done through the process whereby we can bring someone in under a shortterm contract. There’s an allowance under the rules to do that.

Q74 Mrs McGuire: Right, so the Cabinet Office fulfils my image that they still think that digital communications is something new, when the rest of the world has being doing digital communications for a significant amount of time. So you’re saying you had nobody in the Civil Service that could’ve fulfilled that role, and you didn’t put it out to open advert?

Gus O’Donnell: What I’m saying is that we can fill a number of roles-and we do, particularly around times of changes in Administration-with people coming in from outside.

Q75 Mrs McGuire: Right. Of those 500,000 civil servants, including the brightest and the best, did you have anybody that could headup the implementation unit in the Cabinet Office?

Ian Watmore: These are not consultants, so this has got nothing to do with consultancy.

Q76 Mrs McGuire: Right, tell me what they are. Are they interim contracts?

Gus O’Donnell: No, they’re civil servants . They’re fixedterm appointments in the Civil Service, which wouldn’t show up in your interims. They’re standard Civil Service contracts for the short term.

Q77 Mrs McGuire: Were they advertised?

Gus O’Donnell: No, they were brought in through that process. We’ve answered these questions before at some length.

Q78 Mrs McGuire: Could you tell me, therefore, to keep in line with your perception of what you’re here to discuss, is the brand strategy unit an interim project, or is it something that is going to survive for a significant number of years?

Ian Watmore: The strategy unit, did you say?

Mrs McGuire: Sorry, the behavioural insight strategy team. I don’t even know what it means, actually.

Gus O’Donnell: I can tell you about that, since I chair the behavioural insight group.

Ian Watmore: Nudge. If you want a short answer, it’s nudge.

Q79 Mrs McGuire: How long do you nudge somebody for ? I suppose that’s what I’m really asking.

Gus O’Donnell: I hope for a long time. If you wanted to talk about a really, really important area, this is a really important area. When you talked about tax, there are some fascinating areas where behaviour change people have created ways of influencing the degree of cheating there is on tax forms. If you use behavioural insight methods, you could save millions, possibly tens and hundreds of millions. They can do that in things like organ donation. If we can use some of the latest techniques in behaviour change, we can make dramatic differences, so it is really important that we get really good people in for that; they are quite rare at the moment.

Q80 Mrs McGuire: But was the job advertised?

Gus O’Donnell: That was, again, a shortterm contract for someone who’s-

Q81 Mrs McGuire: It ’s a short term contract ?

Ian Watmore: We have a secondment from the Institute for Government for that role and the rest of the team is staffed by strategy unit personnel, who are permanent civil servants.

Gus O’Donnell: This is David Halpern I think we’re talking about.

Q82 Mrs McGuire: Right . I’ll finish , Chair, on this one. Two of the most spectacular appointments to the Cabinet Office to do with photography have left the Cabinet Office. Were they short term contracts? Were they interims? Were they consultants?

Gus O’Donnell: Shortterm contracts.

Q83 Mrs McGuire: They were short term contracts . D id you expect that short term contract to finish yesterday?

Gus O’Donnell: That was a decision made by the Prime Minster to stop having those. I stress that we’ve had photographers and people making web films working in the Cabinet Office under previous Prime Ministers, so these are not different jobs.

Q84 Mrs McGuire: Sorry, let me finish this. Given that it was a shortterm contract, do you now feel embarrassed by the fact that on 10 November-yes, the service is not new-you said that Government should provide a more costeffective and efficient way to fulfil this activity, rather than relying on freelance contractors? Are you now back to relying on freelance contractors, even though, on 10 October, you said you had the most effective way of delivering that service?

Gus O’Donnell: What we need to do is find ways to do this from the centre which can work across all Departments. That’s what we’ll be looking to do-to come up with a cost-effective solution. These individuals will now be working for the Conservative party, so they will not be doing Government work.

Q85 Stella Creasy: Can I stop you there? This is a very relevant point. You wrote to a Labour MP to say that to do that would be inappropriate. What’s changed in the last couple of days?

Gus O’Donnell: What I said was inappropriate would be for them to be working for the Conservative party and doing the Government job of putting photos on Government websites, that sort of thing. So they are not doing that job; they have gone back to working for Conservative Central Office. As a previous speaker was saying, we need to-

Mrs McGuire: It was I who had the floor , actually.

Matthew Hancock: She is PPS to the Leader of the Opposition , so you probably know her now .

Gus O’Donnell: We now need to sort out how to fulfil the Government requirement and, as I say, we need to do that in a very cost-effective way.

Q86 Stella Creasy: So will there be a shortlist for that, and will there be an appointment process for that?

Gus O’Donnell: We’ll do it in the most cost-effective way, and we’ll do it with civil servants, so we’ll do it through standard Civil Service procedures.

Q87 Stella Creasy: So why did you make a decision in this instance to appoint on a fixedterm contract? One the things that concerns me is the movement between interim contracts, fixedterm contracts and consultants, and this feels like exactly that kind of situation.

Gus O’Donnell: We’ve used shortterm appointments through all parties, across all changes of Administration. This is quite common. It happens at various different levels, occasionally with diary secretaries, and at various points. We do this for a very small number of posts.

Q88 Stella Creasy: But will there be an appointments process and what will that be?

Gus O’Donnell: It will be a Civil Service process.

Q89 Stella Creasy: So you’re saying that there will be an open competition, and a shortlist, and that that will be vetted?

Gus O’Donnell: There will be a Civil Service process. We have lots of processes where we move people from A to B. Within the Cabinet Office, we have to live with a reduction in our budget of a third. We will be thinking about how we best meet these requirements within our resources.

Q90 Stella Creasy: Is that a process that you are going to apply to all of these contracts, because there’s quite a number of people in the same situation, aren’t there?

Gus O’Donnell: No, no. The Prime Minister made a specific decision on those two posts.

Q91 Chris Heaton-Harris: I hate to make it political, or indeed to talk about the Report, but I was just wondering, in 2000-

Mrs McGuire: Chair, I actually identified a paragraph in the Report on page 9, and I read it out, and that’s what I linked my questions to.

Chris Heaton-Harris: Well, you did very well, because it is a massive extrapolation from where we were to where we are. In 2009, the last Government established a framework agreement to pay for £4 billion-worth of public sector consultants over the next three years. Was that a reasonable level of spend to be predicting, and did that raise any concerns at your level?

Gus O’Donnell: By definition, you want a framework contract to be quite big and it’s a call-off; you’re sorting out something that can be used for various future circumstances.

Ian Watmore: As matter of accuracy, when you let one of these framework contracts, you make no commitment to spend a penny. What you are doing is you are enabling Government Departments to go to the market underneath that framework contract and run a competition, amongst whichever companies are on it, to choose the best for a piece of work. The reason these framework contracts came in was because, under European law, the normal recruitment process would be very lengthy and very costly for small work. So the history in all countries in Europe has been to let these framework contracts; they make zero commitment to spend at the point, but they enable Departments to then say "Right, I’ve got a piece of work. I’d like companies A, B and C, to tender underneath the framework contract." So when the framework contracts are let, you make a guesstimate as to what might come out of the volume of that, but it makes no commitment at the point of letting.

Q92 Chris Heaton-Harris: What sort of signal do you think that sent to people within the organisation already, as to what you viewed their capabilities to be?

Gus O’Donnell: It’s just giving yourself the option of using external consultants if you wish.

Ian Watmore: Right across Government, and one of the recommendations in previous eras has been to try to streamline procurement, doing it once on behalf of Government rather than each Department doing it itself. This is an example of that.

Q93 Chair: The thing I found quite shocking on that point was that at paragraph 2.36 on page 29, you say, "Departments and the Cabinet Office have concerns over the legality of using information on the past performance of suppliers to inform future decisions on the appointment of consultants". So you’ve got this sort of framework which you can draw down, so you can avoid having to go back to Ministers and Secretaries of State for permission. Then you’ve got this. If somebody performed badly, you can’t look at it to decide whether or not to employ them again.

Ian Watmore: Well, it’s one of the joys of the European law that we operate under.

Q94 Chair: I can’t believe it. It’s just against common sense.

Ian Watmore: Well, it’s always been true. It’s the contracting equivalent of not taking previous behaviour into account when somebody’s in front of the judge.

Austin Mitchell: Can’t you give them the nudge treatment?

Q95 Chair: You could choose not to put them on your list of tenderers.

Ian Watmore: I’d say Mr Mitchell’s got it right; we could use the nudge unit, and we could create a wink unit. The reality is that one of the things we are doing in going forward is to create the view of a company right across Government. It’s not been done properly before-you might argue it should have been-but in the past it was Departments’ relationships with individual companies that were sacrosanct. We’ve taken that to another level; we now have what we call these Crown supplier meetings on each of the major companies with whom the Government does business. Since we’ve been doing that, this year alone we have saved £800 million on contracts that had already been let by applying that process. It is understood by those companies that we now have a better view of their performance right across the spectrum, and if they don’t perform, either commercially or on the ground, then they will expect to get less business going forward. If they wanted to challenge us under the European law, that would be difficult for us to defend, which is what the legal opinion is. However, we believe that the relationship we’ve established with these suppliers is such that we will have that and will be able to take into account in the future.

Amyas Morse: You will be evaluate high performers, will you?

Gus O’Donnell: Well-

Amyas Morse : Sorry, I was just asking Ian, since he was speaking; excuse me, Sir Gus.

Ian Watmore: I’m very happy to talk about that.

Q96 Chris Heaton-Harris: If you can’t prove output and can’t measure output-

Gus O’Donnell: Let me give you one specific example. One of the things I led a review on, where I was really keen on improving consultants, was their compliance with our data security rules. Now, I think if they do badly on that, then that’s something we absolutely can measure very, very clearly. When they drop down on our really key standards, which are imposed in our OGC contracts across our contractors, that is very, very important.

Amyas Morse: But Ian and I both know-and I’m sure others do-that there are well-established methodologies for measuring consultants’ value contributed. In fact consultants get money for advising on how to do it. It may be complicated when you’ve got them mixed, and I understood the nuance of the answer, but actually just for the Committee’s information, it’s not impossible to measure what value. You weren’t suggesting that, were you?

Ian Watmore: No, I wouldn’t suggest anything’s impossible in this field. It’s a matter of management judgment when you come to apply it. What I was saying, however, was about taking a whole-of-Government view on company performance; consultancy’s only a small section of that. I’m talking about big suppliers of all types of services.

Q97 Matthew Hancock: You said that that saved £800 million. Would that have saved a similar amount of money, had it been introduced a couple of years previously?

Ian Watmore: It’s a moot point, I would say. The climate in which we were doing these negotiations was harsh. As I said to them when I addressed the companies, "You’ve spent the whole summer telling me something must be done about the state of public finances; well, now’s your chance to do that something." That may not have applied two or three years ago.

Q98 Matthew Hancock: Sir Gus, you mentioned a decade, in terms of the time needed to bring on new skills and new specialities. Is it true that this is a programme that’s been going on for a decade?

Gus O’Donnell: That’s a very good point. I’m not entirely sure when some of these started, but it’s been going on for five or six years, I would say.

Ian Watmore: I can give you one of them. I arrived in 2004 with the issue of trying to build some of the IT skills, which we launched in 2005. I was quite interested to see that this Report talks about the fall-off in IT spend that’s happening. I’m not going to create causal linkage directly without having looked at it, but it does feel to me that the capability that we have in the Government now in IT from top to bottom is much stronger that it was five or six years ago.

Q99 Matthew Hancock: You talked about how you lost good people in project management, and there were shortages within project management; couldn’t you foresee that, given the relative pay structures, and therefore try to introduce more project management at a junior level?

Gus O’Donnell: We are trying to get more on the project management side. I think our problem is we’re not succeeding as fast as I would like because, to be honest, people really like doing policy jobs. The issue is trying to persuade them to get into the PPM space and stay there long enough in one post-good people in one post then get moved somewhere else.

Q100 Matthew Hancock: So why do people get moved as often as they do?

Gus O’Donnell: Again, we’re trying to slow that down, because they’re a very scarce resource and you want to move them to the area that matter most.

Q101 Matthew Hancock: Not only in project management, but in wider policy jobs, people move very quickly, is that not right?

Gus O’Donnell: Well, we’ve slowed that down quite a lot, actually.

Q102 Matthew Hancock: Have you got some metrics on that?

Ian Watmore: In the wider policy that’s variable. In any policy community that I’ve worked on in Whitehall, some of the team are relatively new and some have been there for donkey’s years. A balance is what we’re trying to strike between the people with the long memories who can remember when x, y, and z happened before, and the people who are developing new ideas and new thinking. That’s what we’re trying to do.

Gus O’Donnell: When I was Permanent Secretary to the Treasury, I introduced a kind of "let’s try and keep people in post for four years," and extrapolated that across to the Civil Service. Of course, the thing that would help enormously would be increasing the tenure of one year and three months-the Institute of Government worked this out-for Ministers.

Q103 Matthew Hancock: But there’s a follow-on from that with regard to this reduction of the use of consultants. For instance, in the Home Office, there’s been a 48% reduction; you attributed a lot of that to ID cards. Are you saying that all of this was due to ending projects, or has there also been stopping of the use of consultancy where it was deemed unnecessary?

Ian Watmore: I personally think that it’s difficult to be exact about this, but the vast majority of what has stopped has stopped because programmes have stopped. I think there has been some greater questioning of the use because of the downturn. People are saying this might be a nicetohave versus somebody’s job now. I think the process that we inflicted-which is what most Departments would say-on them at the centre has actually proved to be a good one in terms of questioning; most Departments now are applying that process for themselves, so fewer of these requests are actually coming forward. I think it’s a combination of all three.

Q104 Mr Bacon: Gus, you said a minute ago that tenure of Ministers was one of the problems, which is of course a classic issue that goes back decades. I’m sure you won’t mind my saying this, because the facts are a matter of public record anyway. When we met with Peter Gershon and Andrew Adonis, among others, in the seminar we held last week, one of the things he said was that of course Civil Service ministerial turnover was a problem. But he said that in a couple of different places, to some extent in the Department for Transport, but also when he’d been a Minister elsewhere, for example when he was in charge of academies, he was quite rapidly the person in the Department for Education who had the longest memory of academies of anybody in the Department. So it was the turnover of civil servants that was the problem. And I, unfortunately, have got quite a long memory on this Committee, and I remember Andrew Turnbull, when he was Permanent Secretary to the Treasury, telling us that there was a move to get longer tenure in response to a recommendation from Peter Gershon many, many years ago.

I really wanted to ask you about the issue of Civil Service formation and the way people are brought on, because Mr Watmore earlier gave a very interesting description of the way you bring people on and they turn into worldclass policy analysts. You, Sir Gus, earlier talked about the razorsharp people-in fact I think Mr Watmore did too-whom you see as recruits who come through. This has always been for me an interesting paradox. You recruit the very brightest people, you turn them into worldclass policy analysts, and the result is the Criminal Records Bureau, the Rural Payments Agency, the Child Support Agency, the national programme for it in the health service, the individual learning account, the junior doctors’ recruitment and many others which we see on this Committee as our bread and butter, all of which involve the use of consultants. Why? What’s going wrong? And do you know what the answer is? This is what I’d like you to com ment on , and this is from Jonatha n Powell’s book , which I’m sure you’ve read.

Gus O’Donnell: There are so many books.

Mr Bacon: I know, there are so many books, and actually, most of them are probably not worth the paper they’re printed on, but I can recommend this one; I think it’s rather good. What he says here on page 73 is: "It’s not just the mindsets of civil servants that is the problem, it is also the skill set. The upper reaches of the Civil Service are still staffed with policy advisors when what is needed are project managers". You said earlier, "Well, people like doing policy." When Charles Clarke was giving evidence to the Public Administration Committee two or three years ago, he made a point which I think is undeniable, which is that we’ve got policy coming out of our ears. He made the point that quite a lot of civil servants can’t keep up with the stuff that’s coming out of think tanks. What we need is people who can keep the show on the road. We haven’t got enough of them. You need to get more project managers earlier, don’t you?

Gus O’Donnell: We need a mix. Let’s be absolutely clear about this.

Q105 Mr Bacon: But the balance is not right.

Gus O’Donnell: I think the problem you’ve got, as a Committee, is that you listed all those things, yet you’ve got what we call a very censored sample. If you actually came and did reviews of all the successful projects, what are the things that are happening about all of the successful projects? The NAO did a Report on successful projects.

Q106 Mr Bacon: "Delivering successful IT-enabled business change"?

Gus O’Donnell: Yes, and curiously enough, the amount of media attention that got was-

Ian Watmore: Zip, to use a phrase.

Gus O’Donnell: A round figure. But I would urge you to think about balancing out-

Q107 Chair: Tell me. I’m really anxious to hear. We have had one or two, but we try very hard to look also at what’s good.

Gus O’Donnell: The Olympics-a really interesting, massive project, on time, to cost.

Amyas Morse: There have been about four, five reports on the Olympics.

Gus O’Donnell: Great.

Amyas Morse: They have them every year, twice a year sometimes.

Gus O’Donnell: Has the Committee had a go at the Olympics?

Ian Watmore: One of the Comptroller and Auditor General’s staff came to me in 2005 or 2006, whenever we did the successful projects report, and said, "Can we have a list?" We gave them, I think, 100 projects and they selected 25. We could’ve given them more. Every day of the week, every part of Government is implementing things successfully. Some of them go wrong. I don’t want to enter a debate on some of the specifics too greatly, but a lot of the ones that you’ve listed that have gone wrong went wrong because of ministerial policy decisions upfront, and they were found out in the implementation phase.

Q108 Mr Bacon: I have to say I’m afraid I agree with you , looking back at a lot of projects. It’s quite often the case that it’s Minsters that make a mess of things , and I’m sure that will continue.

Ian Watmore: And it comes out in the implementation phase because, that’s where the poor decision finally reaches the public.

Q109 Mr Bacon: Isn’t that the responsibility of the Civil Service? Sir David Omand made the point that if you’re designing a good policy, unless the person who’s going to deliver it is in the room when the policy is being designed, it won’t be a good policy. Now , in what you were saying earlier, I think it was the universal credit you were talking about , I didn’t detect-that is why I came in earlier about i mplementation - that that is imbedded in the DNA of the Civil Service . Are you telling me it is?

Ian Watmore: Yes.

Gus O’Donnell: Oh yes, very much. A mantra I give to everybody is that there is no distinction between policy and implementation. You need to build in the implementation right from the start. When I look back on things like tax credits, you’ve just got to get the people-in this case HMRC-in the room, and think about implementation right from the word go. It’s a bit like presentation as well. All three need to be there from the start. And we do have lots of very good deliveries; I would not want you to go away with the thought that the Civil Service doesn’t have good deliveries. If you look at the agency chief executives, they produce a document every year summarising their successful projects. It’s well worth a read; there are lots and lots of things that work.

Q110 Mr Bacon: We saw Liz Ditchburn, who’s Value for Money Director for DFID , just the other day , and she gave us tremendous confidence , I have to say. I ’m sure there are more like her.

Gus O’Donnell: There are thousands, and I see them every week around the country. It’s a shame they don’t get the coverage they should get.

Ian Watmore: We’re about to implement a new major projects authority point, right at the beginning of a project, to ensure that projects cannot be announced and enacted without the proper consideration of the sorts of issues that you raise.

Q111 Mr Bacon: And will this be inside the efficiency and reform group ?

Ian Watmore: Yes.

Q112 Mr Bacon: I caused this Committee to go to Italy on the basis of something I heard somebody once say , which was that Italy ’s OGC could stop projects. It turned out when we got there that it had a limited ability to do that. Will the ERG’s major projects group be able to stop projects in their tracks ?

Ian Watmore: That is what the Cabinet Office Minister has committed to, and it is in the Cabinet Office plan to implement such an authority.

Q113 Chair: It’s a gateway. What’s the difference between this and a gateway? It’s completely the same thing , dressed up again.

Ian Watmore: Most gateway reviews are reviews for the programme director once the thing has actually been started. This is about not starting things. It’s dragging the review process right back up to the front, making sure that Ministers’ policy advisors, deliverers and all the rest are in sync, that this is deliverable.

Q114 Chair: Well, we do look forward to MoD contracts going through this process.

Ian Watmore: I don’t want to quote an informal meeting, but the meeting I had with the Secretary of State at DWP shows they’re absolutely thinking about implementation of the universal credit programme as we speak.

Q115 Mr Bacon: I’ve got one more question, very quickly. I should say, as a declaration of interest, I suppose, that a long time ago I used to represent the consulting industry. In fact, it was at the time that your office, the Cabinet Office-it’s got your name on it, Sir Gus-came out with this study on the Government’s use of external consultants. It was 1994. The thing that’s always concerned me is not merely in terms of the way the Government procures consultancy. All these reports say the same things about the failure to consult properly, about whether you need to, and about whether you’ve got the right skills and evaluate afterwards and project manage and all the rest of it. The thing is, you’ve got essentially an oligopoly. Mr Watmore talked about these big firms which will come more under the purview of the whole public sector through the whole-of-Government view. If they’re found wanting, hopefully they won’t get so much work; I think that was the gist of it. I’m amazed that wasn’t going on already; you only have to look in the newspapers and you think, "My goodness, are they really going to hire Fujitsu again?" or "Are they really going to hire so-and-so again?"

The question I have is this. Not only are you, if you’re a big consulting firm, in a position to say to Government, "Yes, yes we can put 200 or 400 consultants on that if you need them", you’re in a position where you have an enormous infrastructure and overhead, where it’s in your interest to sell complexity and to sell the projects where it’s essential to put 500 or 1,000 people on it, otherwise you don’t have a business anymore. It’s in the interests of civil servants , in the rather "you never got sacked for buying IBM" kind of way, to go with a very small limited number of people in an oligopoly. By the way, the turnover in the consulting firms is one every six years, so basically it’s the same people moving round. You not only are making the same mistakes again and again, but you’re not allowing the opportunity enough for smaller people to come in with smaller, quite often cheaper and perhaps more effective, ideas. You’re propping up this very expensive industry and the skills are remaining outside, rather than being transferred enough into the Civil Service, in terms of the PPM space where they’re needed.

Gus O’Donnell: There is move now for the small business thing to move to two basic frameworks, one small and one above £100,000. Do you want to describe it?

Q116 Ian Watmore: What we’re trying to do as one of the changes in procurement going forward is define each category of procurement, whether it’s travel or office supplies or whatever. One of them is professional services, including contractors and consultants. We’re trying to get that on one model where contracts below £100,000 go to the small SME type of businesses-particularly some of the smaller ones that have niche ideas, perhaps with experienced people from the bigger consulting firms who’ve set up on their own with none of the overheads, so you’re getting good people at lower prices-in order to be able to get a much broader spread of that type of capability. Then the contracts that are above that will tend to go to the bigger firms, but we’re also trying to encourage bigger firms to subcontract to smaller firms as well by measuring the supply chain effectiveness. This is true for consultancy but it’s also true for a whole range of products and services. So again, I’m agreeing with the direction of your question; it’s something we can take better advantage of and by grabbing it, essentially, we should be able to do that.

Chair: Stephen.

Q117 Stephen Barclay: One of the areas where consultant spend often happens is when something’s gone wrong and it needs to be brought in quickly; do you keep data at the centre on the SROs and how many of those have got project management qualifications?

Q118 Ian Watmore: I don’t know that we have specific data to hand that I could lay my hands on. One of the things I was saying earlier was that the plan we have for the major projects authority, and one of the questions that we absolutely want a certain answer on, is that the person who is the SRO isn’t just the person who thought the policy up. It is the person who has the right allround skills set, which will often involve having had a significant implementation part. Another common cause I have found in my personal view of the projects is that it’s usually Departments that haven’t got a history of big projects and programmes who do it with the best person available to them, but not the best person available across the system, and that’s what we’re trying to introduce.

Q119 Stephen Barclay: Could you perhaps liaise with the Departments to let us have a note on what the percentage is, because it’d be interesting just to know how many are generalists and how many are actually project managers?

Gus O’Donnell: Is it the case, though, that people who are really good at programme project management all have a technical qualification in it?

Ian Watmore: It would be unusual.

Q120 Stephen Barclay: I guess the question is: what visibility do you have on who is being hired as SROs? We do see in this Committee, quite often, the issue of where accountability sits. I think there’s concern that the Permanent Secretaries are slightly above the day-to-day running of projects to be truly held accountable, but then the SRO tends to be a generalist or often disappears at the point at which it’s come to this Committee because there’s a problem, and I’d be just interested as to how that’s being managed proactively.

Ian Watmore: I would suspect that is one of the common causes of problems in the past and it usually comes back to the small Department problem. DWP have some of the best people around, in that they move them around within DWP. Sometimes we want to get them out of DWP to Defra for the Rural Payments Agency or whatever, and that’s the type of role that I think my organisation needs to play.

Q121 Stephen Barclay: But I don’t know, for example, if the training college at the Civil Service has particular courses for the SROs, or how that works, so it would just be interesting to know. Could I bring it back a bit more specifically to the Report? Paragraph 1.10, page 16, says: "Departments were asked to provide details on their spending on consultants broken down by categories as defined in the Public Sector Procurement Expenditure Survey. Few Departments were able to provide details…and over a third of all spending is uncategorised". Do you have a date for when that’s going to be resolved by?

Ian Watmore: To be frank with you, I think the realistic first chance to get that sorted in full is from the new financial year, because what we’re trying to do with this financial year is move to the position where we have that new category purchasing system up and running for April. It’ll only be really when we do that that we will start to get the management information flowing regularly through the system, rather than having to go and retrospectively collect it, which is what we always try and do in this, and that’s where you get the data inconsistencies.

Q122 Stephen Barclay: Sure. Flowing from that, and this picks up on Richard’s point on the extent to which Departments are acting autonomously-I tried to touch on that with the key performance indicators that they were not bothering to fill out-paragraph 2.16 says that only six Departments were always adhering to their own approval levels. So presumably the civil servants , at what level I’m not sure, were spending over the £250,000 threshold, so to whatever level, and again, there is the issue of the oversight of that. Is that now fully addressed?

Ian Watmore: Well, again, I think the historical position was that Departments were encouraged to do things but it was to left to them to do. I think under the new Government’s approach, they are mandated to do it and it is our job to ensure that they do.

Q123 Stephen Barclay: So someone is monitoring that from the centre?

Ian Watmore: Yes. I don’t want to get into a case where I have an army of people monitoring an army of people, because that’s the sort of complaint we usually get from the supplier community, and one of the reasons the cost of projects goes up. But I am expecting us to audit what they do and the Minister for the Cabinet Office and the Chief Secretary have allowed themselves the position to call in anything and everything if they perceive a particular Department is not complying.

Gus O’Donnell: One thing I would add: we hope that, in time, we’ll be able to put these approvals up a bit. I mean, for now, it’s looking at everything; it’s really small. I think there’ll be a kind of earned autonomy, I hope, a bit later and we might move to a more proportionate level where Departments have convinced us they’re doing this well, and then we might get the approval level up a bit.

Q124 Stephen Barclay: And we’ll be catching that for interims as well, will we? Okay. And could I just finally ask about training budgets? One of the things we’ve touched on in the hearing today is that there’s an issue to do with recruiting the right skills and training people up. On Department budgets-Sir Gus mentioned the pressure of 30% on the Cabinet Office budget-what sort of impact will that have on training budgets?

Ian Watmore: I think there is a shortterm risk on training budgets, to be honest. It’s always the case that when you’re in a financial hole in an organisation, it is one of the things that most comes under pressure, which is why we’re doing an explicit review of what we’re calling learning and development, which I think is analogous with training, and we have Lucy NevilleRolfe doing that review for us from Tesco. Our intention would be to set the expectation for the whole spending review period about how much people should invest in training and what the best way to deliver it is.

Gus O’Donnell: But to answer your question, I think what you’ll see is quite a big dip in learning and development expenditure, because with the change of Government, there has just been so much in the way of new people bedding in and all sorts of new policies and the spending review. There’s been a lot of internal work and not much time for learning and development. I think we need to, as it were, get that back into the right space as well, but when the Lucy NevilleRolfe report comes in, we’ll be looking at that as a guide towards where we need to direct that spending. But I suspect that overall, the numbers will be down.

Q125 Stephen Barclay: Yes, but you can see the risk; in your evidence earlier, you said that there’s going to be a future implementation phase where consultant spending might go up, or is likely to go up, so the logic would be that the training needs to happen before that, which would be in the next period. Again, it comes back to Mr Bacon’s point. Paragraph 2.22 says: "An estimated 30% of contracts are not placed through frameworks, and two thirds of these are not completed"-the frameworks, that is. So we’ve got Departments not completing the frameworks, and we’ve got Departments going outside their thresholds. There’s a gap in terms of the central gathering of data, not just on the arm’s length bodies, but particularly around some of the other areas like professional services and interims, and there’s the issue of the SROs. It is very understandable that training budgets will be squeezed, but there’s a potential to squeeze them just ahead of the implementation phase, which is the exact phase where there might be-

Ian Watmore: I think if I can refer to the answer earlier, there is an opportunity for us, in the period between the brakes being slammed on, if you like, and the new reforms biting, to actually get some of the things you highlight in order, in particular getting better quality of data, greater control over the start of new projects, and getting the right sort of SRO. Also, we want to continue to increase our own capability in some of these critical things that we’ve talked about: IT, finance, project management and the like.

Q126 Mrs McGuire: Following on from Stephen’s question and the point that consultants are often brought in when things go wrong, could I refer you to paragraph 1.7, page 12, which indicates that there is a tendency by Departments to spend on consultants at the year end. This sounds very much like the pattern that I remember in local government of what used to euphemistically called "slippage"; every school used to get a new video recorder, even if they didn’t need it, or a new television or whatever. It almost looks like every Department gets a consultant after everybody comes back from the holidays. What are you doing currently to try and even out that spend? I think it would, with the greatest respect, be quite difficult to rationalise that sort of pattern of spend, but you may well be going to do that. I would have thought that in a planned situation, there would have been more consistency of expenditure across the year, notwithstanding the fact that there may be bumps in the middle or whatever. It just strikes me as an unusual pattern of spend.

Gus O’Donnell: Let’s look at the graph. In July it’s 12%, and in March it’s 13%. If you had a smooth across the year, it’d be 8.3% on average.

Q127 Mrs McGuire: So you don’t agree with the NAO’s comments?

Gus O’Donnell: All I’m saying is that this suggests to me, when I look at it, that it’s quite lumpy, and consultant spend is quite lumpy. If it had been a year-end surge, and there was no surge anywhere else, that would’ve been consistent with that, but having said that, I think there is an a priori reason why you would expect March to be a bigger number. We have a system, we all have a system. You set up an incentive structure for accounting officers, which is if we overspend, we get crucified, and if we underspend, that’s fine. The incentive structure is very skewed; the only way as an accounting officer you can be absolutely certain you’re not going to overspend is you have to hang back a bit, so with the best will in the world, that’s going to be there. Now, there is a way of solving this: it’s called a credible end-year flexibility system, but the problem with end-year flexibility systems is that they have to be credible and part of the problem is it’s very difficult for people to believe that the Treasury isn’t, at the end of the year, going to say, "Thank you very much and by the way, we’re going to keep all that" which is what has happened.

Q128 Mrs McGuire: Do I take that then as an implied criticism of the NAO’s use of the graph that you have challenged?

Gus O’Donnell: I haven’t challenged it, I’ve used it.

Q129 Mrs McGuire: You have implied that somehow they have over-egged their own pudding in this, because they have definitely said there was a tendency to spend up to the budgets at the end of the financial year. So you think the graph gives a misleading impression?

Gus O’Donnell: Well, no, I’m just reading from the graph. It says 12% in July, 13% in March. To me that suggests it’s lumpy, but I’m actually agreeing with their point. I don’t think these data actually support it, but I’m agreeing with their point that the incentive structure for accounting officers is very biased towards there being a March surge, and that’s in general.

Amyas Morse: Confirmed the other day for the last four years, as it says also in the Report, so that’s good.

Q130 Ian Swales: Can I just return to Mr Bacon’s point about the skills that you need? You talked about IT, project management and finance. Can we just talk about the recruitment side of things? I think three times you’ve spoken about growing and training and developing these skills, so there seems to be a heavy emphasis on what you’re getting at the front end. Can you confirm whether you’re recruiting graduates based on sort of one track, or do you have different tracks, and do you say, "Well, we need to recruit graduates who are likely to be experts in this area or in that area"?

Gus O’Donnell: Yes, various tracks. I would stress that we shouldn’t overdo the importance of just the graduate recruitment. That’s about 450; recruitment to the Civil Service is bigger than that, but for them, yes, we recruit them on different tracks, so there’s the generalist track, but what we’re trying to do now is get them in and then get them going down different routes. So some of them will go down the finance specialism. One of the things that came out of the capability reviews was the fact that our HR professionalism wasn’t good enough, which does related very closely to what you’re saying. So we’ve been trying to get in that, and you do these things partly by recruiting at different levels, so we’ve got finance people at more senior levels, we’ve got HR people at more senior levels, but we are now trying to grow more of those professionals.

Q131 Ian Swales: Well, the reason I ask the question is because in response to this project management issue, which does seem to be key, a lot of your response was, "Well, it takes time and we’re doing this, that and the other." To what extent have you got an emergency recruitment programme up through the levels, saying, "This is a real issue that we need to address and we’re going to get people in, and they may have done engineering projects, they may have done all kinds of things, and not just consulting projects"? My experience as a senior manager in industry was that I always got engineering project managers on to my IT-type projects because they knew how to deliver physical things and they were very good at delivering nonphysical things. To what extent are you bringing those kinds of people into the Civil Service?

Q132 Ian Watmore: This is not a onetrick solution here. The growing from the graduate level is part of it, but direct hires in at the various levels is also part of it. We’re trying to attract people with the sorts of backgrounds that you talk about, and people who actually are prepared to come in at the lower pay grade and swap the higher pay for the greater challenge of the public sector, and we have good success at that that; there’s a lot of good people now in the system.

Q133 Ian Swales: So in the last 12 months, let’s say, how many people have you recruited above graduate level-experienced people-specifically with an eye towards project management, approximately?

Ian Watmore: Well, I wouldn’t be able to answer, because individual Departments have been doing that and recruiting individually.

Q134 Ian Swales: Isn’t that something else you ought to have an oversight of? This is strategic for you, isn’t it?

Gus O’Donnell: Every Department’s doing this, and as you rightly said, there are vast numbers of arm’s length bodies involved in this. When you think about our delivery, through agencies in large part and arm’s length bodies, they are separately hiring to their needs.

Q135 Ian Swales: Okay, but forget the arm’s length bodies for now. In the Departments, you say you’ve been trying to get more project management expertise; how many people, approximately, do you think you’ve brought in, specifically with an eye to project management, to the Departments in the last 12 months?

Ian Watmore: I really don’t have the data for that.

Q136 Ian Swales: Well, is it 10 or 100?

Gus O’Donnell: I think you’re making a mistake there when you’re saying, "Look, forget the agencies and all the rest of it." If you think about it, the average Government Department-the Cabinet Office, the Treasury-has staff of around 1,000 to 2,000. Where are the numbers? It’s in DWP, it’s in HMRC, it’s MoJ and MoD. They account for 70 to 80% of the Civil Service.

Q137 Chair: I’m going to ask you one final question . I think everybody then needs then to go. One of the interesting things that ha s come out is that I think Alan Milburn would love this; it’s a Stalinist, c entralist organisation. I think it’s a question to you really , Sir Gus . H ow do you reconcile this huge centralisation of authority and power with the ability to respond flexibly at the local level? There is a real tension . How do you recognise it ?

Gus O’Donnell: Absolutely, and I think the phrase the Minister for the Cabinet Office has used is "tightloose". There are certain things which we’re trying to be very tight about and we’re going to mandate from the centre: data collection, approvals of various projects and those sorts of things. But on policy, we’re going to try, as the coalition Government agreement says, to get that out to a more local level. So there’s going to be mandating, if you like, of the way of doing the corporate services-all that sort of thing-but at the policy end, different things will happen in different places.

Chair: I look forward to that reconciliation of that tension. Thank you very much indeed for giving us you r time.