Introduction

This note provides background material for the Ministerial review team on:

• the policy and service delivery objectives that led to the establishment of DWI; and
• the views and expectations held by Ministers, officials and stakeholders at key stages in the process up to 30 September 1998.

The information in this note is drawn from a range of documentary sources and the responses of Government departments to the questions put to them by the review team.

Employment Strategy Outcomes

The establishment of DWI was part of the Employment Strategy formulated by the National/New Zealand First Coalition Government established in 1996. In September 1997, Cabinet agreed that Government employment policy would pursue two outcomes:

• the key outcome is the reduction in the percentage of long term unemployment among all working age beneficiary groups by job seekers obtaining unsubsidised employment; and
• the complementary outcome is maximising the involvement of job seekers in community work or training.

According to the Cabinet paper, the employment strategy outcomes reflect the view that while there are many people who move in and out of work, there is a "tail" of long term unemployed and benefit dependent people who need intensive management out of the "system". It is also desirable that people at risk of becoming long term unemployed or benefit dependent are accurately identified and prevented from moving into this long term group.

The need to integrate employment and income support policies and to target employment assistance at the long term unemployed were not new ideas. In 1994 (at a time when the economy was growing rapidly) the Employment Taskforce had argued that:

• economic growth would do little to assist those who, for whatever reason, had neither the right skills nor experience to take advantage of the new employment opportunities that a growing economy creates; and
• labour market related policies needed to be supported by income support policies which achieved their social goals without unnecessarily inhibiting people's opportunities to re-enter employment.

The Taskforce recommended that every job seeker who had been registered unemployed for over 26 weeks, as well as other targeted groups, should have access to individualised assistance leading to work. In response the New Zealand Employment Service (NZES) was funded to provide case management services. Income Support (IS) also received some funding to extend its own case management model to provide a work focus for sole parents.

This situation contributed to long standing tensions between the Department of Labour (DoL) and Department of Social Welfare (DSW) over resources and the development of strategy. According to DWI, "the two case management approaches inevitably produced competition between the two delivery agencies, especially over the gateway from welfare to work".¹⁶

The Employment Strategy Cabinet paper noted that there was perceived duplication in the services that were provided to some groups of job seekers. This was seen as causing two problems - higher transaction costs for the job seeker and inefficiency.

The Coalition Government's Policies

While the outcomes of the Employment Strategy were not new, the specific policies and delivery approaches introduced by the National/New Zealand First Coalition Government were.

The Coalition Agreement negotiated in December 1996 included the following policies:

• the integration of services delivered by NZES, IS, Community Employment Group (CEG) and Education and Training support Agency (ETSA) to job seeker beneficiaries (or communities) seeking access to employment assistance, income maintenance, and education and training assistance, with the objective of delivering seamless education to all clients;
• participation of job seekers in suitable part-time community work and training;
• the introduction of a community wage; and
• greater regional accountability and responsiveness to local labour market needs through the establishment of Regional Employment Commissioners.

These policies reflected the long held vision of Peter McCardle, who was appointed Minister of Employment, to establish an integrated employment service and to introduce a regional component to service delivery.

The views of the Minister of Social Welfare (Roger Sowry) on structural integration were less explicit. The National Party clearly supported the focus on improving the labour market participation of beneficiaries, and was probably prepared to accommodate Mr McCardle's vision as a possible mechanism for achieving more effective delivery of outcomes.

Many officials have commented that during the period leading to the establishment of DWI, the two Ministers had separate and sometimes conflicting objectives. However, while Coalition Government was a new experience for Ministers, the differences between Ministers in this area were probably no more pronounced than in a range of other areas. What was unique was the extent of policy difference between DoL and DSW.

Officials' Advice on Service Integration

It was not immediately accepted that the integration of services would be achieved through the establishment of a separate agency. During the time of the Coalition formation (November 1996) officials advised that there were essentially two approaches to integrating service delivery to individual clients:

• a structural approach involving physical and organisational integration of the service providers; and
• a systems approach involving careful design of interfaces between information, operational and delivery systems.

At the time officials favoured the systems approach.

There is (based on the information currently available) little between the two approaches in terms of financial cost. In the short to medium term, the systems approach under co-location is likely to be more effective and provide benefits in terms of the co-ordination and efficiency of employment and income support services. This is because it would avoid the disruption and associated risks which would accompany rapid structural change. It would also allow the two main service providers to maintain their business focus.

During 1997 Ministers and officials worked through a range of organisational design options for implementing the Coalition Agreement. A Dedicated Development Team (DDT) comprising officials from the key agencies was charged with providing the costs and benefits of different options. In November 1997 the DDT asked Ministers¹⁷ to make "in principle" decisions between three options:

• virtual (or non-structural integration);
• virtual integration as a phased move towards full integration; and
• full structural integration.

It is interesting to note that although officials had been working on the issue for a year, the options identified were virtually the same as those put forward at the time of the Coalition formation. This indicates that the development of options was protracted and that officials did not find it easy to reach agreement in the absence of an agreed direction from Ministers.

In their advice to Ministers¹⁸, officials noted that policy trade-offs would be required. Currently there were synergies between income maintenance policy and wider social policy, and between employment policy and wider labour market policy. Capturing these synergies would be more difficult under full structural integration. However there would be potentially greater synergies between income maintenance policy and employment policy.

The advice given by key departments on the three options put before Ministers is summarised below. Although the extent to which the arguments used influenced Ministers is not clear, they are worth examining because they provide a useful insight into the motivations and conflicting priorities of departments, both at the point of the Cabinet decision and, arguably, throughout the restructuring process.

The Department of Labour's advice reflects its concern that there would be a "takeover" of NZES under full structural integration. It supported virtual integration as a stable end point in itself. It considered that any final move to full structural integration should only follow evaluation of full integration.

DoL argued that the most important issue in considering the options was the achievement of the Government's employment outcomes and that efficiency was a secondary objective. The Government's outcomes could best be achieved through virtual integration because:

• the two businesses of DSW and DoL were different, with core competencies and strengths. Virtual integration would allow them to "stick to their knitting" and retain clear accountabilities;
• most of the identified efficiency gains of structural integration would be able to be realised through the alignment of systems and processes; and
• regional accountability and devolution would be problematic under full integration. One person would be accountable for both a function which is centrally specified and requires consistent application (benefit administration) and another which requires responsiveness and flexibility (employment services).

DoL identified transitional risks under full structural integration including possible loss of staff, decreased productivity, possible industrial relations disruption and the diversion of management attention to building the new organisation. It specifically noted that:

It will be very difficult, if not impossible, to implement successfully the new policies arising out of both the employment strategy and benefit reform work during a period of major organisational change.

The Department of Social Welfare supported the concept of full structural integration, but considered the risks in of an immediate move to full structural integration were high. Its preference was for a move to virtual integration as a first step towards full integration.

Like DoL, DSW considered that an immediate move to full structural integration could involve a conflict between organisational and policy objectives:

An immediate move…is likely to divert management and staff attention and affect morale at the same time that key Government policy changes arising from the employment strategy, benefit reform, and strengthening families are being implemented.

DSW were also concerned that integration processes should not put at risk "the exceptional efficiency gains that have been achieved by IS in recent years". It argued that these efficiency gains had been achieved because of the strong management culture in IS, and that the achievement of future efficiency gains was dependent on maintaining the culture.

Treasury supported a direct move to full structural integration, primarily on the basis of the cost savings that could be achieved.

Treasury considered it was unlikely that significant differences in effectiveness would occur between the two alternative approaches to integration. However, if differences were to occur it is likely that a single organisation would be more effective.

On the face of it, one organisation with one clear accountability structure charged with getting clients into unsubsidised work could be more effective than two separate organisations.

Treasury noted that getting agreement between organisations had been difficult to date and argued that one organisation would be more adaptable and could increase flexibility for Ministers in the future.

Unlike the two operational departments involved, Treasury did not think the transitional risks associated with full structural integration were too large, and was optimistic about the change management process.

There have been massive structural changes throughout the economy over the past decade. The changes envisaged here, while large, are not out of line with other changes in the past. Therefore we consider that the risks…should be manageable with strong leadership and a direct move to the creation of one organisation.

The State Services Commission also supported a move to full structural integration. It noted that the separate areas of focus of IS ad NZES were already converging as a result of the strategic policy decision that income maintenance was primarily transitional assistance for people as they moved towards unsubsidised employment. A single organisation, with clear accountability and no duplication or overlap of activities, was the logical extension of this process, was more likely to give effect to the employment outcomes sought by the Government and should provide better customer focus.

Like Treasury, SSC considered that transitional risks could be minimised "provided a well planned and managed implementation process is put in place".

In commenting on the advice that they offered at the time, some departments now consider that insufficient attention was given to risk management. In retrospect, risk management strategies focussed only on things that were likely to occur up to the 1 October 1998 launch date (in particular the risk that benefit payments would be missed) and did not identify issues that were likely to occur post launch.