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Untapped Potential
An Analysis of Cost Reduction within
Social Housing Organisations
January 2011
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Contents
Section Title Page
1. Introduction 2
2. Summary of findings 3
3. Cost reduction - Has the social housing sector done enough? 4
4. Cost reduction - Where are the savings being made? 6
5. Cost reduction - What does the future hold? 7
6. Conclusion 10
7. Baker Tilly in the Social Housing Sector 11
8. Baker Tilly Social Housing Sector team 12
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As the UK emerges from recession, with substantial unemployment and greater restrictions on lending, the
role of social housing is taking on increasing importance.
This is at a time when the sector is facing considerable change, with the arrival of a new regulator and a
new housing minister, Grant Shapps, who is moving the goalposts in terms of cost and demand.
Whilst the details of Mr Shapps proposals have, at the time of writing, yet to be finalised, one fact is
startling obvious; the operations of social housing organisations will be facing greater scrutiny both from
tenants and from regulatory bodies.
With one in five homes in Britain now social rented houses and demand for social housing on the increase,
there is no better time than the present for the sector to take a good, hard look at its operations.
It is against this backdrop that Baker Tilly carried out its latest survey, looking at the effectiveness of cost
reduction activity within the sector.
This reveals that, whilst the sector as a whole has achieved significant savings to date, the impact of theComprehensive Spending Review, combined with proposed Housing Benefit reform, suggest much greater
savings will be called for, and are possible.
1. Introduction
It was just over sixty years ago that Aneurin Bevans 1949 Housing Act became law and opened up
the provision of public housing within the United Kingdom. Six decades ago, our lives were very
different, but one thing that hasnt changed is the need for social housing for those struggling to
overcome financial and economic barriers.
Gary Moreton
Partner and Head of
Social Housing Group
Baker Tilly This report surveyed social housingorganisations across England and Scotland,
broken down as follows:
Organisation type
ALMO
LSVT
Traditional housingassociation
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Housing management and
housing maintenance were
the two key areas specifically
targeted by organisations
cost reduction tactics.
2. Summary of findings
In the past two years, 85% of organisations have
implemented cost reduction initiatives, with
increased performance and the normal budgetary
cycle as the two main drivers
Almost half (45%) of respondents valued their cost
reduction plans at 250k or less and all of these
respondents achieved their target. Only (25%) of
respondents stated that their target cost reduction
was greater than 5% or more
Almost four out of five (78%) organisations
achieved their cost reduction target
Housing management and housing maintenance
were the two key areas specifically targeted by
organisations cost reduction tactics, with a focus
(54%) on non-labour costs such as goods and
services through strategic sourcing andprocurement (48%)
Only 7% of organisations used external advisers to
develop cost reduction targets and only 15% used
external advisers to implement cost reduction plans
Over 90% of respondents are planning to make
further cost reductions, with 68% targeting a 5%
reduction or less. In value terms, almost half
(43%) of organisations are valuing future cost
reductions at 250k or less, with housingmaintenance and management as key targets
97% of organisations will use a comparison with
the previous years results as the main indicator for
cost reduction success
Only just over half (57%) of organisations believe
the sector will be under continual pressure to
reduce its cost base. Of this 57%, just over a third
(37%) believes this will have a negative impact
on tenants.
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3. Cost Reduction - Has the social housing sector done enough?
It is clear from this latest Baker Tilly survey that cost reduction has played a major part in the operational
strategies of the social housing organisations surveyed. More than four in five have implemented cost
reduction initiatives over the last two years.
The need to reduce costs (see below) has been instigated, in the main, by internal motivation. Both a company-
wide programme to increase performance and the annual budgetary cycle are the main drivers, and there is,
seemingly, little or no external pressure to reduce costs, at the moment.
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
0%
20%
40%
60%
80%
100%
Yes No
4
Has your organisation implemented any cost reduction initiatives?
Motivation for cost reduction (% of organisations)
Part of the normal budgetary cycle
A company wide programme to increase performance
Benchmarking
Organisational restructuring
Pressure from the board
New performance goals
Free cash / reduce need for external finance
Pressure from the regulator
Other
Reduce variable costs in line with lower turnover / increased VAT cost
Merger
Pressure from the tenants
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Notably, three quarters of respondents (75%) set their targeted cost reduction at a very achievable 5% or below.
For 47% of respondents, this equated to 250k or less in value.
Not surprisingly, only 6% of respondents failed to meet their targeted cost reduction.
When asked, Which of the following factors would you say helped you achieve your cost reduction targets?,
respondents overwhelmingly mentioned executive support together with a well planned approach. Interestingly,
support from the unions was not considered a key factor in the success of achieving cost reduction targets.
Whilst social housing organisations completely understand the need to cut costs to maintain efficiency, in
comparison to the commercial sector, many could be said to be setting themselves fairly modest targets.
Baker Tillys back office benchmarking programme has identified the potential to make savings of over
1m in some organisations. There are some big opportunities for further positive change in the sector.
Gary Moreton, Baker Tilly, Head of Social Housing Group
0%
10%
20%
30%
40%
50%
60%
0- 5% 6 - 10% 11- 15% 16 - 20%
Targeted cost reduction
0 - 5%
6- 10%
11- 15%
16 - 20%
0%
1
2
3
4
5
6 Aids to cost reduction
Execu
tivesupp
ort
Clearw
ellp
lanne
dap
proa
ch
Cle
artargets
Suffi
cientc
omm
unic
atio
ns
Suffi
cientacc
ountability
Necessary
incentiv
esin
pla
ce
Supp
ortfrom
union
s
5
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4. Cost Reduction Where are the cost savings being made?
The majority of savings being made by social housing organisations are front-line focused i.e. in housing
maintenance and management.
Cost reduction targets were achieved, predominantly, by strategic procurement, with the main emphasis on
non-staff reductions.
Non-labour costs, such as those for goods and services, were the key areas of focus, with 54% of respondents
targeting these for cost savings. Four out of five respondents (41%) cut back on overhead labour, such as
finance, HR and IT, whilst only 22% looked at frontline staff and 13% at capital assets.
0% 10% 20% 30% 40% 50%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Areas targeted for cost reduction
Cost reduction measures adopted
Housing maintenance
Housing management
Finance
Senior management
IT
Development
Other back office
HR
Non labour reduction through strategic sourcing/procurement effectiveness
Other non staff reduction
Other overhead staff reduction
Overhead labour reduction based on a process redesign
Frontline staff reduction through lean operations
Outsourcing
Other frontline staff reduction
Frontline staff reduction based on cuts in services
The social housing sector has always faced a challenge the need to balance value for money with being a
responsible employer and supporting the community. But should a Housing Association be a job creator at the
expense of efficiency?
Outsourcing could be a possible solution to this dilemma. However, it appears that it is not currently consideredas a main option. The feasibility of such a move should, at least, be investigated.
Peter Lunio, Baker Tilly Associate Director, Social Housing Group
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5. Cost Reduction What does the future hold?
With over 90% of respondents planning to make cost reductions in the future, the onus lies with
social housing organisations to take note of environmental, political and regulatory change to ensure
that any financial savings that are made continue to be sustainable on the efficiency and efficacy of
the sector.
As the pressure for social housing grows, so will the need to respond to increasing demands on both
performance and supply.
Interestingly, despite the changes noted above, the sector remains focused on the same motivations for cost
reduction as previously, i.e. the normal budget cycle and a company-wide programme to decrease costs.Pressure from the regulator is only noted by 6% of respondents; benchmarking, either within or outside the
sector, receives 0% recognition as a factor determining cost savings.
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Motivation for cost reduction initiatives
Part of the normal budget cycle
A company wide programme to increase performance
New performance goals
Pressure from the board
Reduce variable costs in line with lower turnover / increased VAT cost
Organisational restructuringOther
Pressure from the regulator
Pressure from the tenants
Merger
Free cash / reduce need for external finance
Benchmarking
% of organisations
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Yet again, housing maintenance and management are seen as the main targets for cost-cutting, with a non-labour reduction through strategic purchasing and procurement viewed as the key strategy and easy targets.
Evaluation of the effectiveness of any cost-cutting strategies will, in the main (by 97% of respondents), be
carried out by comparison with the previous years financial results. Less than 10% will be evaluating using
key performance indicators.
0% 10% 20% 30% 40% 50%
Planned value of future cost reduction
>5m
2.5m - 5m
1m - 2.5m
751 - 1m
501 - 750k
251 - 500k
0 - 250k
0 1 2 3 4 5 6
Comparisonvs. previous years
results
Benchmarking Discussionwith your peers
Priorexperience
Other
Areas to be targeted for further cost reductions
Housing maintenance
Housing management
Development
IT
Finance
Other back office
HR
Senior management
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
100%How will you know if these initiatives will be sufficient?
Cost reductions are targeted in the main (by 68% of respondents) as 5% or less; 72% of respondents expect to
achieve cost savings of between 0-500k in the next financial year.
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Finally, there is the question of whether the sector believes that it really is time for change and what the future
has in store. Tellingly, only just over half (57%) of those surveyed forecast any pressure over the next few years
to reduce their cost base. Of these, only 54% believe that cost-cutting can lead to greater efficiencies.
Future uses for external advisors
Develop cost reduction targets
Implement your cost reduction initiatives
Train and develop your staff in cost reduction techniques
The use of expert advice of external advisers to guide and assist in the cost-cutting process remains limited.
One in ten of the respondents (10%) intends to use external advisers to develop cost reduction targets (up from
7% over the previous period), whilst almost one in three (31%) intends to bring in external help to implement
cost reduction initiatives (up from 15% previously).
The social housing sector has demonstrated a robust character, with strong balance sheets, over the
economic turmoil of the last couple of years. As a result, in comparison to the commercial sector, there hasbeen less pressure on organisations to make significant cost reductions and to capitalise on the significant
external expertise which is available to them.
There could be sizeable gains to be identified, at the very least, by benchmarking outside of the sector and
also by undertaking an independent and impartial review of operations.
Keith Ward, Baker Tilly Director, Social Housing Group
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6. Conclusion
This report provides an interesting and thought-provoking overview of how social housing organisations
view the financial pressures placed upon them by their sector, and also how the political and economic
factors of the future will impact on their cost strategies.
It is clear that the vast majority of organisations have worked hard to embed value for money as a culture, but
the continual steps that are being taken in this area can only be considered as incremental. Arguably, it is
steady, almost cautious, progress.
Against the backdrop of political change, a new regulator, public sector cuts and benefit reform, further cost
reductions are required, especially for associations seeking to continue development and provide bettertenant services.
Most associations have harvested the low-hanging fruit, achieving up to 5% cost reductions without
significantly changing work practices. The results of Baker Tillys back office benchmarking programme suggest
that greater savings, in the order of 1m or 20%, are achievable. It is time for the sector to be more aggressive
and transformational, driving through cost savings to support service development and tenant programmes.
The sector is going to have to look at the way it operates and open up its thought processes, comparing itself
to commercial bodies as well as sector wide benchmarking. External professional advice may be needed to
help boards with strategic and tactical advice to move away from the year-on-year incremental 5% cost
reduction targets.
Above all, the social housing sector will have to innovate like never before to deliver the Government target of
increasing the number of new-build social housing homes delivered each year. This is against a capital budget
down from 8 billion to 4 billion.
Now is the time to untap the potential locked within the social housing sector and take even larger strides
towards the value for money goal.
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Baker Tilly is a leading firm of auditors and advisers to the not-for-profit sector. Our client base and presence
has increased continuously over recent years. We have over 150 social housing sector clients, ranging from
traditional Housing Associations (HAs) to LSVTs, ALMOs and other specialist housing operations.
The housing sector is operating in one of the most turbulent times in living memory with many challenges, but also
opportunities. Baker Tilly are focussed on helping clients Survive and Thrive.
Our services to help you Survive include:
Audit
Corporation Tax
VAT
Risk Management
Pensions
Debt Management
Back Office Benchmarking
Governance
Our services to help you Thrive include:
Financial modelling
Corporate Finance
Business Process Improvement
Benchmarking
Procurement
Strategic Planning
Asset Management
Mergers and Restructuring
IT Consultancy
Employment Consultancy
See overleaf our specialist housing sector team. If you would like further information, either contact a member of theteam or go to our website: www.bakertilly.co.uk/sectors/socialhousing
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Gary Moreton
Partner and head of Social Housing
gary.moreton@bakertilly.co.uk
Tel: 0121 214 3100
Philip Brown
Head of Social Housing technical
philip.brown@bakertilly.co.uk
Tel: 0121 214 3100
Midlands Technical
Andy AllchinPartner
andy.allchin@bakertilly.co.uk
Tel: 0117 945 2000
Peter Lunio
Associate Director Baker Tilly
Management Consultancy
peter.lunio@bakertilly.co.uk
Tel: 0117 945 2000
South
Benchmarking and process management
Peter Howard
Partner
peter.howard@bakertilly.co.uk
Tel: 01284 763 311
Graham Batty
Senior Tax Manager
graham.batty@bakertilly.co.uk
Tel: 0121 214 3100
East
Tax Services
David Lewis
Partner
david.lewis@bakertilly.co.uk
Tel: 01923 816 400
Steve Hodgetts
VAT Partner
steve.hodgetts@baker tilly.co.uk
Tel: 0121 214 3100
London
VAT Services
Keith Ward
Regional Director
keith.ward@bakertilly.co.uk
Tel: 0161 830 4116
Jim Clifford
Corporate Finance Partner
jim.clifford@bakertilly.co.uk
Tel: 01923 816 400
North
Corporate Finance
Janet Hamblin
Partner
janet.hamblin@bakertilly.co.uk
Tel: 0131 659 8338
Scotland
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2011 Baker Tilly UK Group LLP, all rights reserved.
Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorisedunder the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountantsin England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.
oc
About Baker Tilly
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