Untapped Potential

An Analysis of Cost Reduction within

Social Housing Organisations

January 2011
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
1. Introduction

It was just over sixty years ago that Aneurin Bevan’s 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 hasn’t changed is the need for social housing for those struggling to
overcome financial and economic barriers.

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 the
Comprehensive Spending Review, combined with proposed Housing Benefit reform, suggest much greater
savings will be called for, and are possible.

Gary Moreton
Partner and Head of
Social Housing Group
Baker Tilly This report surveyed social housing
organisations across England and Scotland,
broken down as follows:

Organisation type

ALMO

LSVT

Traditional housing
association

2
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 and
procurement (48%)

Only 7% of organisations used external advisers to

develop cost reduction targets and only 15% used
external advisers to implement cost reduction plans
Housing management and
Over 90% of respondents are planning to make housing maintenance were
further cost reductions, with 68% targeting a 5%
reduction or less. In value terms, almost half the two key areas specifically
(43%) of organisations are valuing future cost
reductions at £250k or less, with housing
targeted by organisations’
maintenance and management as key targets cost reduction tactics.

97% of organisations will use a comparison with

the previous year’s 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.

Has your organisation implemented any cost reduction initiatives?

100%

80%

60%

40%

20%

0%
Yes No

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.

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

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

4
 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.

60% Targeted cost reduction

50%

0 -5%
40%
6 -10%
30% 11 -15%

16 -20%
20%

10%

0%
0 -5% 6 -10% 11 -15% 16 -20%

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.

6 Aids to cost reduction

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“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 Tilly’s 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

5
 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.

Areas targeted for cost reduction

Housing maintenance

Housing management

Finance

Senior management

IT
Development

Other back office

HR

0% 10% 20% 30% 40% 50%

Cost reduction targets were achieved, predominantly, by strategic procurement, with the main emphasis on
non-staff reductions.

Cost reduction measures adopted

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

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

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.

“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 considered
as a main option. The feasibility of such a move should, at least, be investigated.”
Peter Lunio, Baker Tilly Associate Director, Social Housing Group

6
 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.

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 restructuring
Other
Pressure from the regulator
Pressure from the tenants
Merger
Free cash / reduce need for external finance
Benchmarking
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

% of organisations

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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.

Planned value of future cost reduction

>5m

2.5m - 5m

1m - 2.5m

751 - 1m

501 - 750k

251 - 500k

0 - 250k

0% 10% 20% 30% 40% 50%

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.

Areas to be targeted for further cost reductions

Housing maintenance

Housing management
Development

IT

Finance

Other back office

HR

Senior management

0 1 2 3 4 5 6

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 year’s financial results. Less than 10% will be evaluating using
key performance indicators.

How will you know if these initiatives will be sufficient?

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Comparison Benchmarking Discussion Prior Other
vs. previous years’ with your peers experience
results

8
 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).

Future uses for external advisors

Develop cost reduction targets

Implement your cost reduction initiatives

Train and develop your staff in cost reduction techniques

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.

“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 has
been 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 better
tenant services.

Most associations have harvested the low-hanging fruit, achieving up to 5% cost reductions without
significantly changing work practices. The results of Baker Tilly’s 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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 7. Baker Tilly in the Social Housing Sector

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 the
team or go to our website: www.bakertilly.co.uk/sectors/socialhousing

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 8. Baker Tilly Social Housing Sector team

Midlands Technical
Gary Moreton Philip Brown
Partner and head of Social Housing Head of Social Housing technical

gary.moreton@bakertilly.co.uk philip.brown@bakertilly.co.uk
Tel: 0121 214 3100 Tel: 0121 214 3100

South
Andy Allchin
Partner Benchmarking and process management
Peter Lunio
andy.allchin@bakertilly.co.uk
Associate Director – Baker Tilly
Tel: 0117 945 2000
Management Consultancy

peter.lunio@bakertilly.co.uk
East Tel: 0117 945 2000

Peter Howard
Partner

peter.howard@bakertilly.co.uk
Tel: 01284 763 311
Tax Services
Graham Batty
Senior Tax Manager

London graham.batty@bakertilly.co.uk
David Lewis Tel: 0121 214 3100
Partner

david.lewis@bakertilly.co.uk
Tel: 01923 816 400

VAT Services
Steve Hodgetts
North
Keith Ward VAT Partner
Regional Director steve.hodgetts@baker tilly.co.uk
Tel: 0121 214 3100
keith.ward@bakertilly.co.uk
Tel: 0161 830 4116

Scotland Corporate Finance

Janet Hamblin Jim Clifford
Partner Corporate Finance Partner

janet.hamblin@bakertilly.co.uk jim.clifford@bakertilly.co.uk
Tel: 0131 659 8338 Tel: 01923 816 400

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About Baker Tilly
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