The fact that the public sector is facing unprecedented challenges is fast becoming a cliché. Too often, however, these challenges are seen solely in the context of the recession and the consequent pressure on resources. In reality, the public sector is facing not just reduced investment but also uniquely complex problems such as climate change, chronic disease and an ageing population. All of these issues cross bureaucratic boundaries and are less responsive to traditional service solutions, requiring instead significant changes in the behaviour of clients and citizens.

What is absolutely clear therefore is that the traditional public sector response to a recession – efficiency savings, greater central control, deferred expenditure and some fiscal stimulus – will not be sufficient this time. Instead, we need to see a more radical strategy built around greater innovation, genuine collaboration across service and sector boundaries, more devolution, and a stronger emphasis on influencing citizen behaviour. It was in that context that I agreed to lead a strand of the Operational Efficiency Programme (OEP) dealing with local incentives and empowerment.

The report, published as part of the budget papers, has four major themes. The first is to do more to facilitate genuine local joint action. I have been impressed by some of the early work in places like Cumbria, where all the public agencies have resolved to work more effectively together and to manage the public investment in the country as a shared resource. In Cumbria that annual investment amounts to £7.1bn, and a small saving in percentage terms is very significant. But in addition there are very few clients now whose needs can be adequately met by one agency working in isolation. Like it or not, our system of governance is very fragmented, and agencies need to work harder at collaborating around clients and citizens. That very same collaboration is also a proven route to innovation, because different players bring different perspectives and approaches to the table.

We have long talked about joined-up government, but few would suggest that we have made the progress that is necessary – and if we are to deliver better quality at less cost, we’ll need to tackle this more vigorously. The OEP report therefore recommends establishing 12 pilots called ‘Total Place’, building on the Cumbria model. But it also recommends setting up a high-level official group, which I will chair as an independent. That group will be sponsored by the Treasury minister Yvette Cooper, communities secretary Hazel Blears and the Cabinet Office minister Liam Byrne. It will exist not to steer the project, but to learn the lessons of the pilots and, if necessary, to recommend changes in central government systems and practices to encourage joint local action.

The second theme of the report is to build on the relative success of Local Strategic Partnerships and Local Area Agreements (LAAs). The recent report by the Institute for Government, Performance Art, highlighted ways in which the recent promising progress could be accelerated, and the OEP has endorsed many of these. So we shall be looking to reduce the number of indicators and targets; ensure that all the performance frameworks of central government departments are aligned and brought within LAAs (including health and police); review the practices around mandatory targets; and look to extend the concept of a single capital pot. The report also recommends that each LAA should have a designated ‘Whitehall Champion’ drawn from the top 200 group.

The third theme concerns employee engagement. If we are to increase levels of public sector innovation, we need much more commitment to engaging frontline staff (and, of course, clients). There are some excellent examples of this across Whitehall, and in recent weeks I have been inspired visiting and learning from the staff involved. But this is still not the norm; we need to redouble our efforts to engage the front line in a way that enables them to reshape services. This ambition should be reflected in our performance-management systems; I hope that in future capability reviews will look at innovation capability and the extent of frontline engagement. Of course, employee engagement does not just enhance productivity and innovation; it also builds real staff commitment and satisfaction.

As chairman of the Design Council, I have become increasingly convinced that one other route to innovation is through design: building services around client need. So a further recommendation of the report is to run 15 pilots which will enable public sector teams to work with designers to revisit their services and, in some cases, their core strategies. This approach has worked exceptionally well already in the private sector, and I can see no reason why it should not be transferable.

Finally, the report acknowledges the need to constantly review whether we at the centre are reducing the space for local creativity and initiative by the burdens we impose. In future, therefore, there will be a rolling programme of independent reviews of services, with the intention of reducing bureaucracy.

The future should not just be about cuts. Of course, we need to strive to make efficiency savings by the better management of property IT and back office services, and the OEP report clearly spells this out. But the future also needs to be about finding new ways to develop, deliver and fund services. It is about better quality at less cost – and this is what the final strand of the OEP report is all about.

Sir Michael Bichard is director of the Institute for Government and the author of the ‘Local Incentives’ strand of the OEP