The cost of restructuring
History repeating
Last week RNZ published a well-researched article by Katie Kenny, pointing out that the public sector staff cuts that we've seen in 2024 don't necessarily lead to great budget savings. They based this on workforce data and salary increases, which makes a lot of sense. There is a lot more though that should go into the bottom line of public service cuts, so today I want to talk about the cost of restructuring. Let’s jump on in.
Redundancy
This is the first cost item that most of us think of when we hear restructuring, and in 2024 it's certainly high on the list. RNZ reported the average redundancy pay at $56,400 and total redundancy cost at nearly 50 million. I'm always a bit torn on these big figures… They certainly need to be transparent, but they have a certain shock value that's not helpful because it all depends on proportion. The target for this year is 1.5 billion in operating savings - 50 million is a drop in the ocean compared to that. But the article further cites that “departmental operating spending in the year to 30 June was 619 million” - 50 million of that is a sizeable chunk, and the restructuring continues alongside further calls for voluntary redundancy, so the bill will only go up.
Redundancy is the most controlled and predictable part of restructuring
- that’s both in the downsizing kind we're seeing this year, and the more ‘strategy’-driven restructures that I'm documenting in my research between 2018 and 2021. When planning a restructure managers can weigh up different cost options, I've been in the room when managers discussed the pros and cons of making one senior specialist redundant or keeping two entry-level admins. It allows for more rational – if cruel - arguments to be made when the salary cost matters to a decision, like I assume it does this year.
Redundancy pay is reported in ‘Annual Review’ documents, which every public sector organisation has to submit to their Select Committee once a year. In a field where so little is measured, redundancy pay is a reasonably accessible figure.
For my dissertation I gathered all restructure documents from all 62 public service institutions between 1st July 2018 and 30th June 2021, and I recorded for each of them what impacts they had on individual roles. This was a time of growth (more on that later in this post), still 23% of existing roles were disestablished and 26% of new roles were established. This is not a full account of workforce data going up or down, as I'm only counting what happened inside an official restructure. Not all roles that are disestablished in a restructure lead to redundancy pay as people often get reassigned into new roles after ring fenced application process (a topic for another day).
But even in a time of growth, restructures seem to be a means to selectively keep employing certain people and letting others go. I counted 7,037 disestablished roles in my dataset. If we assume that only a third of those actually got redundancy pay at the same average cost as above, then the total redundancy cost across those three years would be over 134 million. I must stress, this is a rough estimate in service of an argument:
Redundancy pay is not only a feature of the current public sector downsizing. It's a constant expense, the cost of doing restructure business.
… one that gets officially accounted at least, but with a very murky cost-value relationship.
Recruitment
It's a common argument that restructures lead to people leaving who the team actually wants to retain. Some people say it's especially the ‘valuable’ staff that leave, because they know they have other options. Recruitment is way more expensive than people think, I find. New Zealand’s public sector has All-Of-Government agreements with several recruitment agencies, and it's rare for managers to do their own hiring directly. How much that costs on average is hard to pin down, business.gov.nz has a calculator that puts recruitment cost for public service employees around $1,500, while this article puts the total cost over $7,000.
I haven’t found any published studies that gives us a reliable figure of how many people might leave as a direct consequence of restructuring, but in my (still to be published) survey of 1,400 PSA members:
39% (or 595 individuals) said that they were actively looking for other employment, 36% (or 538 individuals) said that a team member of theirs left voluntarily due to a restructure, and 5% (or 70 individuals) said that they have left.
This data is to be taken with a pound of salt, but even were we to assume that something like 10% or 15% of people who go through a restructure end up changing their job and needing to be replaced, then we’re facing sizable figures. Especially when the replacement is contracted-in, as we’ll address further down.
Labour & Support
Every private sector job I ever worked in had some kind of requirement to track my hours and what I spent my time on. The public sector doesn't tend to do that (and perhaps for good reason). So it's unlikely that we'll get good stats on what time and effort is being spent on restructuring. But all-staff meetings, time spent with HR or support workers like union reps, time off and sick leave due to stress, and one-on-one meetings between people trying to make sense of what is happening - all that must amount to a solid amount of time that is not spent on the job and could be expressed in a figure for lost labour. And if one was fancy, one might even calculate lost-opportunity cost, accounting for project delays and such that happen because of uncertainty of who is in charge next month.
I assume the cost of external consultants that are so often involved in internal restructuring to be immense, but so far I have no good data on exactly how much we’re talking.
Offering employee assistance programmes is a standard, and no restructure document goes without a page that encourages staff to make use of the provider the organisation has. In my survey:
11% participants indicated they had used an EAP service for support, and 5% used it for careers counseling.
Good on them! But yet another cost item goes onto the restructure bill. And let’s not forget legal cost - they don't tend to be cheap to say the least.
The crux with workforce size
The data from the Public Service Commission shows very clearly that the public service workforce has grown substantially since 2018. This is used as evidence for the ‘wastefulness’ of public sector and feeds the assumption that we have to cut staff numbers in order to reign in public spending. I use this dataset in my research also, there was a 19% growth in public employees between 2018 and 2021.
The factor were missing from this calculation, however, is contractors.
In 2018 the cost of of contractors working in public sector was the hot topic of the day, and the Labour government decided to lift the hiring cap for public servants that existed before to bring down spent. They said:
The estimated cost of contractors and consultants in the year to June 2017 was more than $550 million, nearly double the $272m spent in 2008/09 before the cap was introduced.
PM Chris Hipkins was then cited saying:
"Lifting the cap creates incentives for agencies to find efficiency savings. It's up to agency chief executives to demonstrate why they can no longer manage within existing budgets."
Feels like time is one flat circle, no?
It would be immensely useful to know what proportion of the headcount growth that we've seen in the years since is due to ‘hourly-rate public servants’ moving on to the official payroll. But alas, I don’t know if we have that evidence – ping me if you know where it is.
This matters SO MUCH because it’s quite conceivable that the opposite will happen now:
Permanent employees and their salaries are moved out of the operating budgets, and contractor salaries (they tend to be substantially higher) are tapped out of capital expenditure budgets.
In that case we would have a classic left pocket - right pocket situation, and of the pockets is more expensive (depending on how you look at it).
In conclusion
Doing a solid calculation of all restructure cost is one of those things I'd love to do had I six more months to play with in my PhD. I can offer a few facts in my research, but others are quite complex and require a closer look to be more than populistic shocker stats.
What I can say for sure is: restructuring cost goes well beyond redundancy - and that’s not even addressing the human cost of restructuring, which will be the topic of another post. When restructuring is chosen as a means to achieve savings, all ripple effects should be accounted for (literally).
As our government in New Zealand is following its cost saving strategy in the public sector, it's completely possible that a focus on headcount leads us down the wrong path when we try to reduce ‘waste’. The final tally-up is not yet near, but knowing what I know, and seeing how similar – if mirrored – the simple explanations are that both Labour and National use in ther time, I’m seeing a massive pendulum swing in a most brutal way, to many.