Executive summary
	The focus of our audit
	The NSW government has amalgamated a number of departments.
	Amalgamating departments requires careful management. Amalgamation can provide benefits, such as better coordination of activities resulting in improved services and cost savings through reduction in duplication of roles and systems.  But they risk creating dislocation and uncertainty for the organisation, its staff, its suppliers, and its clients and customers.
	The objective of this audit was to assess if departmental amalgamations in NSW are being managed to achieve the intended outcomes and benefits. In particular we asked if amalgamations are: § well planned § implemented according to plan § evaluated to determine if outcomes and benefits are achieved.
	We also prepared a guide to assist departments involved in future amalgamations. The guide, Better Practice – Implementing Successful Amalgamations, accompanies this report.
	We reviewed literature on amalgamations in both the public and private sectors. We also conducted two case studies of the amalgamations that created the NSW Departments of: § Commerce, occurring on 2 April 2003, and § Primary Industries (DPI), occurring on 1 July 2004.
	Amalgamations between departments generally arise from policy decisions by government. It is not our role to examine the merits of those decisions. We only examined their implementation and outcomes.
	Opinion
	Both Commerce and DPI substantially achieved their stated amalgamation savings objectives as set by government. The departments are expected to achieve savings targets of about $150 million and $190 million respectively over their first four years.
	Our analysis indicates that there are two key factors in successful amalgamations. The first is effective early planning by departments based on clear objectives, supported by quick action. Second, significant synergies in service delivery can be achieved when departments with similar services and customers are amalgamated. The Department of Primary Industries is an example.
	The synergies available from the Commerce amalgamation were not as great as DPI’s. We found that Commerce has a diversity of customers and services basically unchanged since pre-amalgamation. It operates as a federation of semi-independent organisations providing specialist services to different sectors of the NSW economy. A 2006 study for the government sees value in breaking Commerce up and amalgamating its components with other departments with better synergies and benefits.
	We identified two key opportunities to improve the management of amalgamations. First, planning must build on the benefit of synergies arising from similar responsibilities and clients. This planning process must commence as soon as amalgamation decisions are made by government.  We have included two guides to assist with the management of the implementation, to gain the best from the synergies of amalgamation.
	Second, there is no formal review of whether anticipated outcomes and benefits of the amalgamations are achieved. We consider these reviews should be promoted and included in the annual reports of the amalgamated departments for three years following amalgamation.
	Key findings
Chapter 1 – Introduction to amalgamations	The NSW government supports the principle of reducing the number of budget funded departments by appropriate amalgamations. The policy was outlined in the Premier’s Economic and Financial Statement and supported by the Audit of Expenditure and Assets Report prepared for the government (both of February 2006).
	Another driver is the State Plan, released in November 2006. Although it does not specifically mention amalgamations, it does require significant joint working between departments. This may lead to pressure to amalgamate departments.
	When departments are amalgamated, consolidating ‘back office’ operations is currently a significant source of cost saving. The government’s Shared Corporate Service Strategy, focussed on reducing ‘back office’ costs, will diminish this opportunity. This will result in a future focus on amalgamations where service delivery synergies provide savings and improved customer service in ‘front office’ operations.
	Our study of both private and public sector amalgamations has identified better practice approaches to managing them. These key learnings are incorporated into the Better Practice Guide - Implementing Successful Amalgamations which accompanies this audit report.
	The consultation immediately after the Government's decision has an influence on finetuning the structure of the amalgamation. This consultation between the affected agencies and central agencies is part of the initial planning for implementing the amalgamation. Issues addressed include identifying the staff to be transferred, the acts or sections of acts to be administered by each agency, and how budgets, assets and liabilities are to be apportioned between the agencies. To assist with the steering group’s consultations we have produced a checklist of issues for consideration (Appendix 2). The checklist is designed to complement the separate Better Practice Guide (BPG).
Chapter 2 - The Department of Primary Industries	The amalgamation creating the Department of Primary Industries is achieving budget savings and making progress towards achieving the other objectives of giving rural NSW a stronger voice in government and providing better service to customers and stakeholders.
	The new department demonstrated a clearly defined and structured approach to planning the amalgamation. Baseline measures, to track the achievement of budget saving benefits, were captured at the outset by Treasury. Other more qualitative benefits, related to delivering improved service and providing industry with a more coherent voice, are now also being measured by DPI.
	Achievements under the Change Implementation Plan were monitored and reported by identified staff responsible for amalgamation. We are advised that corrective action, although not well recorded, was taken when required. Saving targets were reviewed monthly in conjunction with Treasury and the Cabinet Office.
	There has been no formal evaluation of the success of the amalgamation, but progress evaluations have been conducted. The amalgamation substantially met major targets during the first two years. In the second year the dividend distribution from Forests NSW (a commercial trading division of DPI) failed to maintain the targeted $20m increase. The increased dividend was largely based on operational efficiencies within Forests NSW and not amalgamation related.
Chapter 3 –The Department of Commerce	The amalgamation creating the Department of Commerce is meeting the saving objective set by Treasury.  There were no other objectives formally defined.
	As with Forests NSW, mentioned above, significant amalgamation savings objectives were based on efficiencies from within the former Department of Public Works and Services; the majority of these savings could have been achieved without an amalgamation.
	The Department of Commerce did not adopt an overall strategic approach to amalgamation planning – it adopted a number of approaches over time. In our view, the amalgamation would have benefited from more effective early planning based on clear objectives.
	Staff responsible for amalgamation activities were identified at the planning stage. Activities supporting amalgamation were monitored and reported for a limited period during the amalgamation, and when required necessary corrective action was taken and recorded. Although a comprehensive saving plan was not created, it was evident that savings was the focus of considerable attention.
	Baseline measures, to track the achievement of budget saving benefits, were captured at the outset by Treasury. There has been no formal evaluation of the success of the amalgamation, but a number of progress evaluations have been conducted. The amalgamation met the defined saving targets during the first three years.
	Recommendations
	It is recommended that central agencies and agencies promote:
	§  the Checklist (Appendix 2) to assist officers during the consultative steering group phase where details of the government’s amalgamation decision are clarified to prepare for department’s management of the amalgamation (page 14)
	§ use of the Better Practice Guide – Implementing Successful Amalgamations by officers responsible for implementing amalgamations (page 18)
	§ review of achievement of anticipated amalgamation outcomes and benefits. Results to be included in the annual reports of the department for the three years following amalgamation. This also applies to restructures which add activities to departments (page 14).
	Response from the Department of Premier and Cabinet
	Thank you for your letter providing the draft performance audit report - Managing Departmental Amalgamations, Department of Commerce, Department of Primary Industries and Implementing Successful Amalgamations - A better practice guide - for managing the amalgamation of government departments.  As requested by you, this letter provides the comments of the Department of Primary Industries (DPI), the Department of Commerce (Commerce) and the Department of Premier and Cabinet (DPC). I note that the report acknowledges the achievement of savings in the order of $340m over four years resulting from the amalgamations of a number of smaller agencies into DPI and Commerce. The two case studies show that governments amalgamate agencies as the need arises. This may occur during the term of a government (as was the case with DPI) or immediately following an election (as occurred with the creation of the Department of Commerce).  The lead time will vary depending on the priorities and concerns of the government of the day. The DPI merger had three months lead time for a staged approach. The successful execution of this amalgamation has been well documented in the report. The keys to the success of the amalgamation have been:  the drive, determination and clear focus of the Minister; the appointment of an interim board between announcement and implementation; the early appointment of the Director-General and a cohesive executive and senior management; extensive planning; effective consultation and regular communication with staff and stakeholders; and the hard work and dedication to the task by every member of staff throughout the Department. The Audit Office report acknowledges that the objectives of the amalgamation were well planned and clearly defined. In consultation with staff and other stakeholders, a Change Implementation Plan was developed for the first year of operation and a Corporate Plan for the subsequent three years. These Plans were given considerable momentum by clearly assigning accountability, including timeframes for achievement, to senior managers across the organisation. I am advised that the “Building DPI” program to promote focus on “One DPI” was attended by 95% of the Department’s staff and was instrumental in clarifying the plans and objectives of the Department at all levels of the organisation. The amalgamation of DPI has resulted in rural NSW and in particular the agriculture, fisheries, forest and minerals industries now having a stronger voice in government. As a result of the amalgamation, DPI has been able to bring together the support in government of these closely linked rural based primary industries in NSW and provide better services to the department’s customers and stakeholders. The establishment of Commerce occurred immediately after the 2003 NSW State election. On 2 April 2003 a Special Supplement in the Government Gazette was issued announcing the appointment of Ministers and the Allocation of Administration of Acts, making machinery of government changes including the establishment of Commerce, effective immediately.
	Despite the short timeframe to establish Commerce, significant achievements have resulted. The report found that the Commerce amalgamation is expected to deliver savings targets set by Treasury of $150m over its first four years to 2007-08. I am advised that Commerce has met its performance targets following the amalgamation and has continued to grow with further business groups added including the State Records Authority, Corporate Shared Services, elements of Department of Natural Resources and NSW Businesslink.
	In addition to savings identified, Commerce has indicated that other financial benefits flowed from the amalgamation which included rationalisation of a number of non-core business including Q Stores, CM Solutions and the State Mail Service which were sold to the private sector realising $13m for government. Using the experience drawn from these two amalgamation case studies and other research, the Better Practice Guide – Implementing Successful Amalgamations provides a planning framework for agencies undergoing amalgamations. It provides a summary of key questions and specific action checklist to assist agencies with the process. I note that the Audit Office has proposed that results and outcomes from amalgamations be reported in departmental annual reports for three years following amalgamation However it is preferred that results and outcomes be incorporated within existing performance management systems of new entities. This will enable more efficient reporting via mechanisms such as the State Plan, Results and Services Plans and management reporting rather than establish and additional reporting regime. The Audit Office report shows clearly that significant benefits can arise from agency amalgamations.  These benefits include service delivery improvements, greater organisational coherence and improved efficiencies. As you know, one of the major initiatives implemented since these amalgamations was the establishment of the Performance Review Unit in my department.  The work of this unit will assist in ensuring that decisions on the structure of agencies and services are based on sound evidence arising from a systematic review program. Thank you for the opportunity to respond to the report.
	(signed)
	Robyn Kruk Director General Dated: 22 February 2008