NAO warns lack of cost insight risks undermining government efficiency drive

Government departments are failing to understand the true costs of running their services, leaving them unable to target inefficiencies or prioritise investment, according to a new report from the National Audit Office (NAO).

The watchdog warns that while most departments can calculate the overall cost of delivering a service, many lack detailed insight into the specific activities that drive those costs. Without that level of understanding, managers are left blind to where cumbersome processes, poor-quality data or outdated systems are inflating spending.

The finding comes as public bodies face financial pressures and are expected to deliver on ambitious productivity and efficiency targets set out in the 2025 Spending Review. With government operations costing around £450 billion a year, the NAO argues that a failure to get to grips with detailed costs risks undermining efforts to improve services and secure value for money.

Missed opportunities for efficiency

Private companies and other organisations routinely analyse their running costs in detail, using the data to pinpoint poorly performing services, highlight inefficiencies and guide digital transformation. The NAO report suggests government is lagging behind in this area, in part due to fragmented accountability, weak incentives and the absence of clear guidance on cost analysis.

Previous attempts to improve financial insight have often lacked consistency or momentum, limiting their impact, says the report. Departments sometimes resort to workaround processes to bypass inflexible technology, but these short-term fixes can themselves drive up costs and reduce efficiency.

Recommendations for improvement

The NAO outlines a series of steps departments could take to build a clearer picture of where money is being spent and how processes could be improved. These include:

• Defining the scope and boundaries of all major services and designating a senior responsible service owner to manage and improve costs at an operational level
  
  
• Developing practical guidance on applying cost analysis techniques, illustrated with real examples rather than broad principles
  
  
• Using simple methods such as measuring staff time spent on activities as a first step to building a more accurate view of costs
  
  
• Identifying where targeted training could strengthen the ability of finance teams and service owners to deliver this work

The report also highlights the importance of building capability and creating incentives that encourage departments to adopt cost analysis as a routine management tool.

Gareth Davies, head of the NAO, said government needs to look beyond blunt budget reductions: “Simple budget reductions will not achieve the efficiency or productivity gains that government wants in order to improve value for taxpayers and service users. A better and more detailed understanding of the cost of individual components of service delivery is needed to help managers improve performance.”