Posted by Lancing Farrell 3300 words
People in local government regularly discuss effectiveness and efficiency. Often this happens in relation to pressure on revenues, such as rate capping. Most of the discussion centres on efficiency rather than effectiveness, and opportunities to stop delivering those services that are seen as ‘cost shifting’ from other government. The efficiency discussion is often not well informed. Frequently it focuses on inputs while ignoring outcomes and public value. Any savings are usually equated with cost cutting, not creating the same value at lower cost.
Australian researcher and writer Christopher Stone has published several papers on ‘false economies’. Each addresses a different aspect of productivity and efficiency in the public sector.
“Everyone has the right to know that money is not being wasted; that it is being spent as efficiently as is possible.” Christopher Stone, Decoding Efficiency, April 2013.
So, what is efficiency and how does it differ from effectiveness?
Effectiveness relates to the objectives of a process or activity – is it achieving the desired result. Some people say that it is ‘doing the right thing’. In comparison, efficiency is usually thought of as ‘doing things right’. Wikipedia describes efficiency as the ability to avoid or minimise wasting materials, energy, effort, money or time in doing something or in producing a desired result. In a surprising twist (for some) effectiveness can often be achieved through inefficiency.
Christopher Stone has taken a different approach to efficiency. In some ways he has combined the ideas of effectiveness and efficiency in the three types of efficiency he describes:
- Technical efficiency – using the fewest possible resources to produce an output (i.e. doing more with less). For example, building a road using the best mix of labour and capital.
- Allocative efficiency – resources are used to produce the output of highest value (i.e. doing the right thing). For example, building a road where it is most needed.
- Dynamic efficiency – using new ways of thinking about what you are doing (i.e. doing it the right way). For example, taking on new transport modes as they change over time – e.g. high speed rail instead of a road.
He says that a clear understanding of efficiency is needed to avoid implementing ‘efficiency’ measures that are actually detrimental to efficiency. For example, he describes ways that cost cutting can reduce inputs and have a disproportionate affect on outputs to such an extent that the service becomes less technically efficient (e.g. inputs are cut by 50% and outputs are reduced by 75%).
Stone says that all three kinds of efficiency are important and that the pursuit of only one type can get in the way of achieving the others.
“This is particularly important in areas which are complex and continuously changing, which is very often the case in public services. A simplistic approach to efficiency, particularly cutting across the board, often fails to recognise that resources are necessarily being devoted not only to produce current outputs, but also to make sure these are of the most value to citizens (for example by tailoring them to different needs in different locations or to different groups), and also to making sure that they change and improve over time as new technologies and new needs emerge.”
The ‘blind pursuit’ of technical efficiency, which is commonly seen in local government, can be disastrous if it results in the wrong type for assets for changing needs, or wrong models of service delivery, or if outdated technology continues to be used. Stone is particularly critical of efficiency measures that focus only on inputs without adequate consideration of the outputs being produced, the value of outcomes sought, or investment that is being made in future capacity.
Cuts to inputs are easily measured in public services. The impact on service quality or performance is much less easily measured, especially for public services that can have complex objectives. Stone describes many examples of inappropriate approaches to efficiency in public services, including non competitive conditions, single buyer situations, principal/agent problems, de-skilling, and loss of economies of scale.
A key element of his criticism is the lack of appreciation that public services are often provided where standard market conditions do not apply. Unlike competitive markets, he says ‘public services are those where distributional outcomes are particularly important, where services should follow need rather than capacity to pay, where minimum service levels are required – even if the costs are high, and where collective goods are to be produced’.
“Public services often involve … overwhelming commitment to the public rather than private interest. Such services are not best provided in a framework where the primary motivation is profit”.
Stone discusses the relationship between effectiveness and equity. He describes effectiveness as the ‘relationship between purpose and results’. An action is effective if it achieves the intended objective. In public services, equity refers to both ‘equal treatment of equals’ and the ‘unequal but fair treatment of unequals’. It can involve equity of access and equity of outcome. Public services are expected to serve the wider economy and society.
In the United Kingdom cost saving has become an important focus as part of government austerity measures. A recent publication by Locality (a nationwide network of community enterprises) and Professor John Seddon (principal of Vanguard Consulting) has examined ‘saving money by doing the right thing’, which emphasises replacing ‘diseconomies of scale’ with ‘local by default’. They challenge the prevailing view of the national government that public service efficiency can be driven by economies of scale and standardisation.
Their concerns differ from those of Stone, who has focussed more on problems in inappropriate privatisation and outsourcing. These have been actively used in the UK for many years. The focus of the publication is on the large-scale services that deliver poor quality, fail to meet demand, and waste money.
This approach is epitomised by up-scaling contracts or services (e.g. providers aggregating services or joining together in letting large contracts), reducing the number of providers (e.g. multiple councils delivering one shared service), and defining a limited number of outcomes (i.e. reducing the number of services available to a standard set). The authors say that costs have been reduced as greater efficiencies have been created, however it has been at the expense of services that actually met the needs of those receiving them.
As a result, they believe that the real demand for most public services in the UK is not growing. Instead, an artificial demand is being created by the inadequacies in service delivery. This demand has been described as ‘failure demand’ by John Seddon. It is the demand caused by ‘failure to do something or do something right for the customer’. In the context of up-scaling services, it occurs when service provision doesn’t match the variety inherent in the demands. Variety is greater for the personal services delivered to individuals, compared to services delivered to their properties or places they use.
The report notes that demands are not ‘person-shaped’ or’ service shaped’. When there is failure demand and high volumes of people re-present (i.e. they keep repeating requests for services) it indicates that demands have been screened out of the service rather than accommodated – when a problem isn’t resolved the person simply re-enters the system through a different ‘doorway’. In local government this is evident when customer service complaints escalate to managers or people directly contacting their councillor. This failure demand is taken into the system and treated as new demand.
“The failure to provide services at the points of transaction has the effect of amplifying the volume of demand presenting to the system. Hence the refrain of constantly rising demand. Yet studies into health and social care is both predictable and stable. What is rising is ‘failure demand’.”
Locality and John Seddon have focussed on health and social services, which represent the ‘pointy’ end of demands on public services. Not everyone needs help from public services because their life has come off the rails in some way. Many people just need the basic services to be delivered reliably by their council. However, failure demand is also evident in demands for these services and it drains resources similarly. In resource intensive services (e.g. roads) it can be a disproportionate drain. One or two people whose expectations of service have not been met can influence changes in service levels that commit millions of dollars.
It is worth thinking about some of the variety in demands that typically occur in services. In addition to different types of services being requested, in its most basic form, variety can be described in terms of the variability introduced by customers. Frances Frei describes five types of variability:
- Customers want a service when it suits them.
- Customers can ask for a range of services.
- Customers vary in their ability to do what they need to do in order to receive a service.
- Customers will expend varying degrees of effort to get a service.
- Customers have different opinions about what it means to be treated well.
This variability adds complexity, unpredictability, and cost to delivering services. In response, councils often try to standardise services to reduce responsiveness and improve efficiency. In practice, this often means ‘designing out’ the source of complexity – i.e. the customer variability.
Standardisation of services is commonplace in local government. It is often justified in terms of equity (i.e. everyone gets an equal and fair share of available resources), efficiency (i.e. services that are less responsive to each customer’s unique requirements are more predictable and efficient to provide), and cost saving (i.e. deliver the service on a large scale to obtain economies of scale).
Economies from scale are interesting to examine. There are undoubtedly savings to be made in optimising the use of available management resources and ‘back office’ capacity. Many services operate with surplus capacity in these areas. After these savings have been made, there are often few economies to be gained from simply adding one service to another. For example, if the services required to maintain the road networks in two municipalities are added together there are still as many roads requiring as many maintenance actions.
It is only by standardising the two services, which in practice usually means moving to the lowest cost elements of each service model, that a consistent and standard service can be delivered. One or both groups of service customers will now have a new service that may or may not meet all of their needs.
John Seddon’s chapter on ‘Managing demand’ in The Whitehall Effect makes good reading. He describes failure demand is a major consumer of available capacity, which can actually increase costs. He says that ‘if you focus on cost, your costs rise’. His recommended order for improvement action is effective, then efficient, then sustainable. If efforts to reduce costs lead to increased failure demand it has been counterproductive.
The idea that service failure leads to failure demand, which then consumes available capacity ties in nicely with Sayan Chatterjee’s ‘simple rules’ to capture value using different business models. He says that for efficiency-based business models (common for many local government services) that the focus should be on improving asset utilisation by unlocking capacity.
“The basic premise behind this simple rule is that in many businesses the true capacity of the productive resources is undermined due to some process constraints. Eliminating these constraints are the first core objectives in these situations.”
Failure demand is a significant ‘process constraint’. It introduces inefficiency, distracts management and creates no value. In contrast, ‘value demand’ is the work that should be flowing through processes to meet customer purpose and deliver the services they expect and need.
Focussing on the system of work to increase effectiveness and efficiency and reduce costs is not just advice provided to the public sector. In a nifty little book entitled ‘Controlling Costs’ author John F. Gittus advises taking the ‘systems approach’ as the starting point. His simple logic is ‘what comes first – the system or the people working in it?
“Unnecessarily long or complicated systems attract headcount costs like nothing else. Beat the system first and the headcount shake-out is painless but significant.”
The focus on employees is important for local government. If depreciation is taken out of operating costs, labour costs for most councils will be 50 to 60 percent of costs. Labour costs in the public sector also tend to increase faster than inflation, a fact recognised in the application of rate capping in Victoria by allowing for 3.5% growth in labour costs per annum. Effectiveness in local government will almost always require better use of labour, which will be a major challenge in applying Chatterjee’s ‘simple’ rule to improve efficiency-based services. It will be a bigger challenge with value-based services.
Gittus provides a methodology to improving systems. The first step is to list all major systems. In local government this can be difficult. Most councils would be unable to list major systems or even the services they provide. Many councils are busy creating service catalogues to identify the ‘products’ they produce from services delivered through the various processes running across functions.
The second step is to process map or flow chart each system, looking for opportunities to remove unnecessary steps. This is highly relevant to local government where systems or processes are seldom identified or reviewed. After improving systems, Gittus goes on to list other potential actions including cost savings through waste reduction, economies of scale, value analysis, converting fixed costs to variable, sub-contracting, eliminating loss making activities, and efficiency improvements. That is the order that he recommends applying them.
Stone also provides a list. His is a list of recommendations for those seeking to improve public service efficiency:
- Focus as much on results as on resources (outputs as well as inputs) of the public service (e.g. when cuts are announced, evidence should be provided that the same services can be maintained with fewer resources, or the likely reduction in services should be outlined at the same time)
- Ensure that short-term efficiency gains will not result in larger long-term efficiency losses
- Conduct independent and thorough investigation into the advantages and disadvantages of in-house and outsourced service provision before any outsourcing decisions are made
- Conduct independent and thorough investigation into the advantages and disadvantages of public and private ownership of public service organisations or infrastructure before any outsourcing decisions are made
- Consider society-wide costs, not just direct costs to government budgets, so that public service cuts do not impose costs on the population that are greater than the savings.
Stone’s list is a steadying reminder that public services exist to serve the whole community and that cost cutting should not impose additional costs on the community. This links directly with the concept of public value. Mark H. Moore says that public value is the ‘collective view of the public or community about what they regard as valuable, especially with regard to the use of public money and authority’. The arbiter of whether or not public value has been created is the collective citizenry.
It is similar to the concept of shareholder value in the private sector. He says that public managers need to try and understand what constitutes public value so that they can set out to deliver it through their operations and be held accountable for their performance. If savings need to be made because revenues are capped, the value needs to remain the same for less expenditure (for it to be a saving rather than simple cost cutting) or there needs to be an informed engagement with the arbiters of value to determine what service levels can be changed to cut costs.
In his book ‘Recognising Public Value’, Moore provides a detailed case study that describes how the state of Oregon dealt with significant budget cuts. In a dynamic political environment and a requirement to make cuts of up to 15%, Oregon ‘re-focussed’ state agencies by reducing base budgets to 80% of current levels but opened the door to funding being restored to above 90% if programs linked to the ‘Benchmarks’ from the Oregon Progress Board.
“The Oregon Benchmarks were a set of broad concepts and specific measures that sought to capture the economic, social, and environmental health of the state.”
The Benchmarks came from a ‘sweeping and energetic strategic planning initiative’ called Oregon Shines, which involved 16 committees of business, labour, education and government leaders. Committees consulted through citizen planning sessions and other processes. The intention was to capture the value citizens expected the state to support and create.
Imagine in a rate capped environment if the council leadership allowed ‘business as usual’ budgets of 90% of current levels and required that at least 5% of the reduction would need to be ‘invested’ back into services with the goal of reducing growth in service cost over the medium to long-term. Instead of arguing about cost reductions and whether or not they are savings or service cuts, the effort would turn to areas where everyone knows a change is needed to provide better services at less cost. All staff would volunteer cost savings through waste avoidance and help identify future service needs.
It would need to be supported by good community engagement processes to avoid ‘council think’ driving all public value determination. In saying that, the knowledge that intelligent and experienced council workers have about how services are, and could be, delivered is invaluable when added to understanding of community and customer expectations.
In a last thought on cost cutting, Australian management author Alistair Mant has another view. His book ‘Intelligent Leadership’ describes ‘frog’ and ‘bicycle’ systems. These are metaphors for different kinds of systems in which the essential difference lies in the relationship of the parts to the whole.
A bicycle can be completely disassembled and then reassembled with confidence that it will work as well as before. This is not possible with a frog. Once you remove a single part the whole system is affected instantaneously and unpredictably. Furthermore, as you continue to remove parts the frog will make a ‘series of subtle, but still unpredictable, adjustments in order to survive’.
He goes on to say that most big organisational systems contain bits of frog and bicycle systems. He is critical of cost cutting measures that seek to drive out cost from the ‘various and separate, bits of a bicycle’.
“The problem is that separate cost-cutting exercises can weaken the integrity of the big frog. This won’t be evident to the disembodied cost-cutters. If their minds are wired up in a bicycle sort of way, they can see, at the component level of operation, that they are making an improvement. Usually it is the customers, as time passes, who begin to sense that, at the system level of operation, the whole frog is weakening.”
Local government necessarily has a focus on effectiveness (achieving desired results or value) and efficiency (achieving those results/creating that value using the least amount of resources). Frequently the emphasis is on efficiency, especially when costs must be reduced and top management is after savings. Cutting inputs is easy but unless the same value is produced, it is not a saving but a simple cost cut.
If the result is loss of value expected or needed by the community or customer, pressure will return to reinstate the service or service levels.
Chatterjee, Sayan, 2013. ‘Simple Rules for Designing Business Models’, California Management Review, Winter.
Frei, Francis X. 2006. ‘Breaking the Trade-Off between Efficiency and Service’. Harvard Business Review, November.
Gittus, John G. 1992. ‘Controlling Costs’.
Locality and Seddon, John 2014. ‘Saving money by doing the right thing’, March.
Mant, Alistair, 1997. ‘Intelligent Leadership’.
Moore, Mark H., 2014. ‘Recognising Public Value’.
Seddon, John 2014. ‘The Whitehall Effect’.