- March 18, 2019
- Posted by: Peter Lunio
- Category: Analytics, Business Initiative, Finance & accounting, Operating Model, social housing, Social Housing VfM Analysis, Uncategorized, value for money
Over the past few years, there has been significant cost emphasis in the sector as a result of the 1% rent reduction and focus by the regulator. We have seen a number of associations employ an across-the-board approach to cost reduction because it is fast, relatively easy, and appears “fair” to organisational units and other stakeholders. Nonetheless, our experience and our research suggest there is a smarter approach that is both more effective and more likely to be sustainable. It based on the fact that “A diet helps you lose weight for a while, whilst a lifestyle change makes you healthy”
It appears that a majority of associations have adopted the diet approach. This is borne out by our analysis of our IwP Housing Performance database, (where we have analysed the 230 associations in our database and looked at the percentage of associations who have reduced their Cost Per Unit year upon year since 2016) which shows that 70% of housing associations have failed to deliver a year on year reduction in CPU over the past three years. Those that have significantly bucked the trend in are Midland Heart, Leeds Federated, Severn Vale, Wellingborough, Cottsway, to name but a few.
For a more detailed analysis read our article on Housing Associations are they cost efficient?
Cost reduction/efficiency was one of the most frequently cited goals of VfM programs/corporate objectives as cited in VfM reports. Most transformation efforts have the major focus of reducing costs, combined with boosting outcomes and improving the pace and quality of service delivery. The problem is that seemingly most of these cost-reduction efforts fail.
What explains this poor record? One explanation is that many change leaders are using the wrong approach to cost-cutting. Our experience suggests that many associations that make big budget cuts simply to “force” efficiency improvements are less likely to deliver and sustain the intended cost reductions. Among all the cost-reduction efforts we have examined, those that used direct budget cuts were less likely to be successful than those that did not. Of all the housing associations -transformation levers we examined, budget cuts were among those that had the highest correlation with change-effort failure – for the simple reason that these cuts are easily reversible. Only when reductions are not easy to reverse are they sustainable.
It is our assessment that if RP’s want to make sustained headway in containing costs, they need to look beyond budget cuts to a much broader, more sophisticated tool kit. To do better for less, housing associations need to build capabilities, harness data and analytics and reinvest savings.
Our work on the social housing sector efficiency has highlighted, the tools available in a cost-reduction effort typically include spending reviews, procurement optimisation, and digitisation etc. However, our work points to three additional, crucial actions that can double or triple the success rate of transformation programs that involve cost reduction. When used in combination, these tools have an even greater positive impact on outcomes.
The first action is allocating sufficient personnel to implement the change. Our experience shows that this is one of the most critical success factors in any cost-reduction program. There is unmistakable evidence that change efforts—even those aimed at saving costs—should not lack resources.
2. Advanced Analytics
The second action is using data and advanced analytics, which points to new insights in effectively managing finances. Cost-focused transformations that harness data and analytics to target their efforts are more likely to succeed as those that do not, as analytics advances, organisations can harness data to shape smarter cost-saving initiatives for example in procurement, arrears management, repairs and maintenance. We have helped a number of organisations in providing them with fresh cost insights using our predictive analytical tools.
The third action is using financial savings from change initiatives to fund further reforms. Cost-focused transformations that used this approach were more likely to succeed than were those that did not. Using savings to fund further improvements—for example, services for tenants, and staff’ capabilities—appears to create a more meaningful purpose for cost-reduction efforts and to boost the motivation of the staff implementing the changes. This approach, however, might require organisations to change their budgeting processes and decision-making time frames to enable departments to “invest to save.”
The regulator and government are urging over housing associations find ways to do more—and better—for less. Before embarking on cost-cutting, however, they should take a sober look at the success rates of such programs. There are smart ways to ensure that cost-reduction efforts not only achieve their targets but also support better outcomes for tenants. It is time for associations to harness the full strategic and technological tool kit to target savings better and use the released funds to shape a more effective, responsive housing sector.
To read about how to deploy organisational lifestyle changes please read our article on “ The next generation operating model for the digital housing association”