134 – ‘A new theory of value creation for local government’. Do we need one? Part 4 – Integrating the thinking.

Posted by Lancing Farrell                                                                              1600 words

cutting diamond

This last post in this series (see here, here and here for previous posts) is an attempt to synthesise a new theory of value creation for local government using the ideas discussed in the previous posts.

First, a quick recap on strategy, business models and operations stratgey.

  • The strategy is the position that an organisation takes in relation its market, the value it decides to create, and how it decides to create that value and operate at a surplus.
  • Every organisation explicitly or implicitly employs a business model that describes the design or architecture of the value creation, delivery, and capture mechanisms it will use.
  • The operating strategy then guides decisions about vertical integration, capacity planning, facilities planning, services technologies, and process technologies.

A new theory of value creation for local government will need to integrate these concepts into a cohesive and repeatable approach. The working description of a council developed in the previous posts is that:

Councils are multi-service organisations serving a defined geographic community or customer base, which can itself be quite diverse, to deliver whatever services they want at whatever service levels they decide they need.

This statement contains a number of key pieces of information:

  • A multi- service organisation – in many ways a council is like a diversified group of companies operating under the one brand.
  • Serving customers in a defined geographic area – a focus approach is required to services marketing and delivery.
  • A diverse customer base – market segmentation may be required to ensure that the needs or expectations of all customers are met.
  • Services and service levels are determined by the customer – the Local Government Act makes it clear that councils are to deliver the services that communities, through their political representatives, say they want.

You can challenge these ideas but they have significance in thinking about value creation and how a council needs to operate. I have highlighted some of the terms with particular relevance to a discussion about value creation. At this point it is worth noting that when I use the term customer, I mean ratepayers, residents, service recipients or clients, and citizens. Everybody.

For a start, the complexities inherent in local government make the strategy question and deciding on who are, and are not, customers; and what service will, or will not, be provided; and how services will be delivered efficiently, quite difficult. Most councils falter at this first hurdle because multiple services are to be provided to a diverse customer base and the customers, through a political process, determine what those services will be.

It is a type of ‘wicked problem’ that councils aren’t well equipped to handle. Councillors want to tell constituents that they can have what they want and when they want it. Telling them ‘no’ and explaining why often takes a level of skill that most politicians don’t have.

The services provided by local government have been discussed in several earlier posts (see ‘Why do we provide the services that we do in local government’, ‘Local government services. How to define them?’, and ‘Core services in local government. What are they?’). It is difficult but not impossible and essential to know what services you are delivering before selecting a business model. One way to think about local government services is to separate services to property, places and people. This division reflects the ‘evolution’ of local government services from essentially servicing private property, to providing public places, and then delivering services to people in their homes or public facilities. Each of these service groups could have a different business model.

Now to business models. Sayan Chatterjee has identified four choices of business model. These are:

  1. Efficiency-based – the logic is to use human or capital resources to produce commodities.
  2. Value-based – the logic is to position outputs as a “want” items and command a price premium.
  3. Network value (loyalty-based) – the logic is to supplement the profit logic of the value-based model with attributes that attract and retain customers.
  4. Network efficiency – the generic value capture logic is to increase the volume of transactions and create efficiencies across a network of suppliers and customers.

In local government, two of the choices are more common –efficiency-based and value-based. You could argue that some of the other models apply, for example network efficiency where councils are in an alliance, but it is an unnecessary complication at this stage to consider them. Let’s keep the discussion simple for the time being.

Once a business model has been selected the link to operations strategy becomes clearer. This is worth some discussion.

Efficiency-based

The efficiency-based business model relies on using human or capital resources to produce commodities efficiently. In the private sector, a business using this business model must compete through superior asset utilisation. It is a common expectation of councils that they will produce basic services efficiently. People often talk about ‘roads, rates and rubbish’ as being the appropriate focus for councils – i.e. rates are paid for efficient services to property. The idea is that these services are provided equally and at low cost to all properties.

Improving the performance using an efficiency-based business model requires capacity to be ‘unlocked’ through process innovation. Over time, the true capacity of productive resources is reduced by process constraints. Eliminating these constraints will result in higher asset utilisation and lower risk. One way to do this is to ensure that demands placed on the work system are smoothed to match capacity. This is usually done by shifting those demands in time and place.

This happens in local government through the standardisation of services to create scale economies and eliminate customer-introduced variability. The desirable demand characteristics for services delivered using the efficiency-based business model are high volume, low variety, low variation and low customer contact.

Value-based

The value-based business model relies on positioning its outputs as ‘want’ items that command a price premium. In the private sector the use of this model is obvious – Apple has made a fortune using it. In the public sector it applies where customers want choice or if services need to accommodate customer-introduced variability. In these situations, councils are expected to create the value sought by the service recipient.

It has interesting implications that are often not thought through when councils commit to using a value-based business model, often for services delivered to people and sometimes for services delivered to places. If the service has been funded for efficiency-based delivery, adopting a value-based approach will most likely lead to budget overruns. Service recipients are also likely to be dissatisfied if the organisation is attempting to meet their needs within very tight resource constraints.

When price signals are absent and services are free at the point of consumption (because they have been paid for in the annual land tax) it is difficult to meter out services equably. There is a real risk that the ‘squeaky wheel will get the oil’ and demanding customers will get more than their fair share.

Organisations using a value-based business model invest in capital or human resources to create products or services that will command a price premium. They also focus on visible outputs. In the public sector this translates as the need to justify any additional cost in providing a value-based service instead of an efficiency-based service. If additional cost is to be incurred, the benefit must be apparent. This is an important point. If the value created is not visible to the recipient, it is a waste of effort.

Operations strategy was discussed in detail in the post Some characteristics of services demands that are importantand ‘Separate, relate and integrate. Redesign operations to meet services demands’. I will not elaborate further here, other than to say that strategy selection can be through one or all of the four ways discussed in the last post.

So, how does this all come together in a theory of value creation? Simple.

theory of value creation

Chatterjee, Sayan 2013. Simple Rules for Designing Business Models, California Management Review, Winter.

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