Kent was an independent kingdom when in AD 597 Augustine arrived and converted King Aethelbert and his wife Bertha. The spirit of independence lives on and Kent recently elected a Reform council that, together with other such councils, is the first real test of Reform to put its principles into practice.
It has not started well, with suggestions of a large council tax increase, and the whip being suspended from four councillors who behaved badly in a Zoom call with the local leader, which was then subsequently leaked to the media.
I had already heard from reliable sources that the councillors were going native pretty quickly, and had become defenders of the status quo, which did not surprise me as this happens throughout the governmental system. I have known Conservative ministers who became the great defenders of their woke departments while in office and nonconformist councillors who became stalwarts of the bureaucracy.
However, it is unfortunate that it is happening to Reform quite so quickly. A new party has an opportunity to be radical and to re-examine how business is transacted. It has no previous decisions to defend or sunk costs to be misled by. It can start afresh, and it is hard to believe that a council with a gross budget of £3.2 billion, and a net expenditure of £1.5 billion, cannot find some savings.
It has 1,148 staff (excluding the 1,120 who work in the schools network) who earn over £50,000 pounds per annum, and a total employment bill of almost exactly £1 billion. There must be some ability to reduce staffing levels and save money. Even in its statutory duties, it is the duties that are statutory, not the method of delivering them.
It must also look at some of its ill-defined costs, such as the £128 million pounds spent on the Deputy Chief Executive’s department, or the £17 million of corporate budgets. Neither has much detail set out in the latest annual report.
It is easy to talk about cuts, but implementing them is difficult and painful. Some services may become worse, and some provision may have to be withdrawn, as savings will need to be made in adult social care and in the costs associated with special educational needs. This will be politically difficult and will be constrained by statutory duties, but it is no good pretending that the state can be rolled back and then balking at every politically difficult cut.
In some ways, it appears as if the political world is obsessed with the wrong American businessman. The example that should be followed is not Elon Musk, who is an entrepreneur rather than a cost-cutter. The two are different - those who set up businesses need to spend money to make them work - cost savings come later in the business cycle. The model ought to be Jack Welch, who ran General Electric (GE) for twenty years, from 1981 to 2001. In his heyday, he was feted as the greatest businessman of the century, but his reputation has dulled in the last quarter century.
Welch took over a sprawling electoral conglomerate in mature business areas, and set himself the task of ‘growing fast in a slow-growth economy’. This he succeeded in doing. During his tenure, he took the market capitalisation of GE from $12 billion to $410 billion, a compound growth rate of 12.5%, ahead of inflation for the period. Sales grew from $27 billion to $130 billion, a compound rate of 5.4%, but earnings per share did much better, rising from 47 cents to $4.13, or 7.5% compound.
The difference between the 12.5% annual growth in total value for shareholders, the 7.5% growth in profit and the more modest 5.4% growth in sales needs explaining. At the beginning of the period in 1981, GE was seen as a gently failing company, where its directors were managing decline. Hence, its profits were not expected to grow, and the valuation was modest. At the end of the period, it had shown twenty years of steady growth, and so was valued more highly by investors who thought that these returns would continue to increase, and so it deserved a premium over less well-managed companies.
The excess growth in profits was achieved because Welch was rigorous in ensuring that costs were kept down, thus each dollar extra of sales was more profitable, as the costs associated with it were lower. He removed by sale or closure businesses that were weakest, aiming to be number one or two in any market. He famously fired the bottom 10% of managers each year. This was known as ‘rank and yank’, where the top 20% were rewarded, the middle 70% encouraged to improve, and the lowest 10% fired. It earned Welch the nickname ‘Neutron Jack’, as he removed people, but left buildings standing, rather like a neutron bomb. This may not be attractive phraseology, but he cut the workforce by 81,000 out of 411,000 in continuing operations in his first four years and abolished the nine-layer management system. At the same time sales grew.
Governments are not businesses, they do not have to sell their wares, but they can learn from them. It is essential that Reform councillors in Kent do so. It is a litmus test for the whole Party’s credibility. What can they do that would help and show a sense of purpose?
First, adopt the 10% rule, cut the least well-performing 10% of staff, and reap the productivity gains. This was the follow-on from the ‘rank and yank’ policy. Those who remain are better and more productive. Second, stop doing things that are not the core of the council’s activities. Does it need to hold heritage assets, or could they be passed on to other public bodies? These will not provide huge savings, but they would show a sense of purpose.
Third, it should leave the investment property market and sell all its commercial properties, unless they are also used by the council. Many councils in recent years decided to use their access to cheap capital to become property companies. In general, they are not very good at it; the cost of capital has risen, and rents have fallen as people work from home, making the investments particularly poorly performing. It is an area best left to the private sector.
Similarly, all non-core assets ought to be sold. Any money realised could be used to pay down debt, which would reduce the interest cost. To do this, the new councillors will need to challenge the orthodoxy that runs so much of the public sector. They will need to use their political authority to overrule the bureaucratic inertia. It will not be easy.
They must also ensure that the services that affect most of their voters, that is to say the state of the roads and bin collections, are run well. But it is possible. If they succeed, then the benefits for Reform would be enormous. It would show that it is not just a party of words but also of deeds.
If Kent Council fails, heaven help us, for then the Blob will truly have won and will have not just taken Reform captive, but also infected them with Stockholm syndrome.
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