A local government watchdog has challenged an upbeat report on Birmingham City Council’s ambitious business transformation project.

The Audit Commission says it is not clear that all of the promised £900 million savings will be achieved.

The warning was issued as it emerged that almost half of £42 million savings projected for this year are in danger of not being realised.

A traffic light system used by the council puts £11 million of the savings at red, where unless remedial action is taken there is only a 50-50 chance of success, and £8 million at amber, where there is a 25 per cent chance of non-delivery.

In its Comprehensive Area Assessment of public services in Birmingham, the commission warns of the dangers of not hitting the savings target.

The CAA report points out that this year’s uncertainty follows a £10 million shortfall in business transformation savings in 2008. However, in his annual report, council Corporate Director of Business Change Glyn Evans insists savings of £60 million have already been generated over two years and more will follow as the programme picks up pace.

The aim over the 10-year lifetime of business transformation is to trigger a 15 per cent improvement in productivity and £1.5 billion in reduced costs.

With the cost of getting the project underway set at £675 million, the council expects to produce net savings of about £900 million.

Mr Evans adds that the successes of business transformation – led by private outsourcing firm Capita through Service Birmingham – are becoming “increasingly visible” and that the scheme is an effective mechanism for delivering efficiency savings.

Efficiencies are being driven through investment in new IT systems that will eventually allow most council services to be accessed online, resulting in job losses across the council’s 40,000 non-schools workforce. Mr Evans says the “leading edge nature” of the project has resulted in Government departments and major UK cities visiting the council to learn lessons from the way Birmingham is implementing such a huge change project.

But the Audit Commission takes a more cautious view, warning that a shortfall would cause problems for council departments since forecast savings have already been removed from budgets.

The CAA report adds: “There is evidence that business transformation is improving services and delivering financial savings. However, the scale of savings and service change is substantial.

“If it doesn’t deliver this will be a significant problem for the council as it is relying on these savings to balance its budget and make real improvements to key services.

“Business transformation is an appropriate and worthwhile approach to cost management and service improvement. There is, however, a significant way to go before we can all be certain that it will deliver.”

Council leaders reacted by playing down the cash-saving aspect of business transformation, stressing that the project was chiefly about improving service delivery and not about cutting costs.

Chief executive Stephen Hughes said: “This should be about the outcomes, not the processes. We have a great foundation to take this forward.

“This is about how we can better organise to reduce costs, reduce duplication, reorganise services to bring them closer to the people.”

In his report Mr Evans says the scheme is delivering improved services for everyone in Birmingham.

He adds: “It is also providing the city with a national and international reputation for the innovation and public sector entrepreneurship that it encapsulates, as the council takes its learning from its transformation journey to date and shares it on the world stage.”