178 – The Prime Minister’s mini summit – is there a lesson for local government leaders?

Posted by Colin Weatherby                                                                                                         500 words

malcolm turnbull

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Some time ago, I posted on what I would do if I was the CEO. This post is in a similar vein.

The new Australian Prime Minister Malcolm Turnbull called a mini summit last week and invited leaders from the worlds of business, unions, community organisations and think tanks to discuss the state of the economy and the best way forward for economic reforms.

Reporting about the planned summit reflected the openness of the new national leader to discussing ideas other than his own. It was a move that his predecessor failed to make. The Sydney Morning Herald described the summit as suggesting that the new Prime Minister is keen to discuss big ideas and ‘send a message of creative optimism’ to the leaders invited. The Prime Minister is quoted as saying that the summit is a ‘rare opportunity to achieve consensus on the most pressing economic and social issues’ facing the country.

I am not sure whether the summit reached consensus or whether it will really influence government thinking and action. It has certainly signalled a new approach by Malcolm Turnbull.

It occurred to me that local government leaders could take a similar approach. Continue reading

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29 – Local government shared services. Is it the silver bullet for rate capping? – Part 2

Posted by Colin Weatherby                                                                         950 words

In the previous post, I discussed economies of scale and the cost savings possible through shared services. This post continues the discussion, starting with the implications of front and back office separation.

The history of ‘back office’ and ‘front office’ separation is worth some discussion. According to Seddon, it began with an article by Richard Chase in the Harvard Business Review in 1978. In the article, Chase recommends separating the ‘high customer contact’ and ‘low customer contact’ elements of the service system because of the different operations involved. Low customer contact operations are more efficient and, as a result, have lower costs and it makes sense to isolate them from the disruptive effects of customer interactions if it can be done without sacrificing service effectiveness. However, service effectiveness is exactly what Seddon believes has been lost in many of the cases he cites. Continue reading

28 – Local government shared services. Is it the silver bullet for rate capping? – Part 1

Posted by Colin Weatherby                                                                                         620 words

The Victorian state government plan to cap municipal rates has revived discussion about shared services. Some leaders see shared services as a silver bullet to reduce costs. What potential do shared services have to help councils respond to rate capping?

The article Government shared service back in vogue notes that shared services are usually justified by business cases promising operational efficiencies and cost savings. However, the article cites numerous examples of shared services that have failed to deliver.

In 2011, the West Australian government disbanded its Office of Shared Services centre after an Economic Regulation Authority review found the project was over budget and unlikely to deliver promised savings of $57 million a year. Instead the project had cost $401 million and achieved minimal savings.

The Queensland Health payroll upgrade was developed under the auspices of a shared services group. Originally with a budget of $98 million, and due for completion in July 2008, the project was the subject of a royal commission last year and is expected to cost taxpayers $1.2 billion by 2020.

In The Whitehall Effect John Seddon documents examples of similar failures in the United Kingdom. The track record of failure suggests that there are significant risks associated with shared services. So why are they regularly on the public sector reform agenda? Continue reading

19 – Integrated planning in local government. Some questions and answers. Part 2.

As discussed in the previous post, integrated planning involves each level of planning occurring in the correct sequence with goals cascading between plans to create alignment.  Here are some further thoughts.

An integrated planning process starts by effectively linking organisational strategy with planning.  Stace and Dunphy say that a ‘well argued, well documented strategic plan’ is not a strategy.  Instead, they say strategy is an ‘active process of thinking and communicating, generated at the corporate and strategic business unit levels, by which leaders gain the intellectual, emotional and behavioural commitment of their people in stretching the limits of the corporation’s ability to achieve success’.  It is the set of understandings that guide the direction and behaviour of the organisation.  Mankins and Steele believe that often strategic direction is established in spite of the strategic planning process, not because of it – “… with the big decisions being made outside the planning process, strategic planning becomes merely a codification of judgements top management has already made, rather than a vehicle for identifying and debating the critical decisions the organisation needs to make to produce superior performance”.  In local government, strategy arises from long term community plans and the day to day activities of the Council and the Executive.

So, integrated planning enables the continuous review and creation of strategy to influence plans.

An integrated planning process has one agreed set of organisational priorities. Resources are allocated to those priorities and the collective effort aims to implement those priorities and measure success in doing so.  Building an organisational plan by adding together the strategies and actions from multiple, independently created plans is unlikely to achieve this outcome. A top down approach is initially required to set high level parameters (i.e. the strategy) that planning then takes into action.  Each part of the organisation can use those parameters to create plans that cover their contribution towards achieving organisational priorities.

So, integrated planning occurs when each planning unit is working within shared parameters to achieve common strategic priorities.

An integrated planning process will link actions across functional areas.  The ‘silo’ effect commonly described in local government, needs to be overcome to achieve high performance.  If each department plans separately without clear strategic priorities and shared high level parameters, there will be a functional bias as each department optimises their activities.  There will be competition for the resources available within the common resource pool.  A focus on cross-functional processes when planning will help to integrate the work to be done in implementing strategy.  This will require processes to be identified, understood and owned, so that they can be properly considered in plans.

So, integrated planning recognises and reinforces cross-functional processes.

Planning isn’t integrated simply because we all do it at the same time, and integration isn’t achieved simply by joining together multiple independent plans.  A planning process is required that is top down and bottom up, and driven by functions (or departments) and processes.  The planning framework prescribed in NSW local government is a really good starting point.

Lancing Farrell

Mankins, Michael and Steele, Richard 2006. Stop making plans, start making strategy in Harvard Business Review, January.

Stace, Doug and Dunphy, Dexter 2007. Beyond the Boundaries – leading and re-creating the successful enterprise.

16 – ‘Council rates capped from mid-2016’, The Age, 21 January 2015

‘Council rates will be capped next year with the state government forcing councils to justify any increases above the rate of inflation. Councils must now send their budgets to the Essential Services Commission for permission to raise rates above inflation. Inflation – as measured through the consumer price index [CPI] – is currently running at 2.3 per cent. Last financial year rates increased by an average of 4.23 per cent.’

Some people will be thinking it is about time that municipal rate rises are curbed. Nobody likes paying more taxes. But is it a smart move?

Rate capping has been in place in NSW for more than 30 years. In 2013 the NSW Treasury Corporation reported that a quarter of the state’s 152 councils had a ”weak” or ”very weak” financial sustainability rating. If not corrected, half would be ”very weak” financially within three years. In 2014 the number of councils requesting rate increases above the 2.3% cap set by the Independent Pricing and Regulatory Tribunal almost doubled. The requested increases ranged from 5.5% to 11%. The increases reflect the financial realities confronting local government and ‘catch up’ increases to cover lack of revenue

NSW councils have responded to the rate capping in different ways. Ryde Council has created an RSA-type animation that neatly explains to residents the choices that need to be made.  It illustrates the implications of the demands for growth in services and infrastructure when revenue is declining.  New works are less possible and maintenance and cleaning standards have to be reduced with long term impacts on infrastructure.  Ryde is having to define ‘core’ services, i.e. what is essential versus what is nice to have, and balance reducing service levels with increasing rates.  It is a simple and effectively told story (https://www.youtube.com/watch?v=iR_BJKAo0dA).

The overall effect of rate capping seems to have been a reduced ability to provide services to the community, accumulated backlogs in infrastructure renewal or replacement, and increased reliance user charges for revenue. According to Brian Dollery and Albert Wijeweera the increase in rates in NSW since 1995 has been about half the increase that has occurred in Victoria and council rates per capita are lower that every other state and only higher that the Northern Territory.

Councils in Victoria experienced enforced rate cuts and capping for a period of time in the 1990’s. The Kennett Liberal/National coalition government capped rates in 1995 and imposed a cap of one percentage point below inflation. The cap was lifted in 1997 to allow increases of up to 3 per cent – with Ministerial approval. In 1999 the Bracks Labor government scrapped the cap altogether. The councils unable to draw on financial reserves or liquidate assets were profoundly affected and the impacts, similar to those now evident in NSW, were enduring.

The arguments in favour of rate capping are worth some discussion. They revolve around preventing councils from abusing monopoly powers in delivery of services; stopping expenditure on services or infrastructure that the State government regards as ‘non-core’; reducing the risks of poor governance; and limiting the ability of councils to provide services that are better provided by the private sector. Essentially, it reflects a lack of trust by the State government – councils won’t make sensible decisions without supervision.

In practical terms, what is it likely to mean for Victorian councils from day to day?

For a start, some councils are talking about entering into shared services to reduce costs. This has been a popular idea with CEO’s for a while that has failed to take effect. But will shared services really help? The evidence suggests that the savings are seldom as great as people think and there are initial costs involved in making those savings. John Seddon writes eloquently on the shortcomings of shared services. More in a future post.

What else can councils do? Reducing expenditure on capital works to enable funds to be used for recurrent operational expenditure is one likely response. In the short term this is fine if there are not pressing asset renewal demands or community demands for new assets. Cutting back expenditure on new assets will be easier for developed municipalities. It will not be as easy for developing municipalities where population growth is creating demand for new assets to meet community needs. In all municipalities, reduced expenditure on asset renewal will ultimately result in reduced fitness for purpose and increased future costs.

What about cutting recurrent operational expenditure? This is much more difficult because the community is likely to immediately lose services. There will be opposition from those who no longer receive the benefits of a service that is cut. The typical council operational budget is about 60-70% salaries and wages, 10-30% contractors and materials, and 5-10% plant and equipment. There will need to be a reduction in staff numbers for the cuts to be meaningful. This is likely to result in industrial disputes. If staff numbers are not reduced, there will need to be big cuts to expenditure on contractors and materials and/or plant and equipment, which impacts directly on the ability of staff to be productive.

Reducing expenditure on contractors is probably the easiest cut to make, especially if it doesn’t directly impact on delivery of services to the community. For many councils, this type of cut will impact on major maintenance/minor renewal of assets, which often sits outside the capital budget because the amount is below the threshold for capitalisation or the works do not increase asset life and cannot be capitalised. In the 1990’s it was cuts to this type that had long-term impacts when assets failed and needed premature renewal because of inadequate maintenance.

Rate capping has been shown to reduce the ability for councils to respond to community demand for services and to adequately care for physical infrastructure. It takes away the potential for local communities to determine the amount of funding they want to provide for council activities. It might drive administrative efficiencies, but at what cost? More than anything, it says that the State government knows more about meeting local needs. In every respect, it is just wrong.

Colin Weatherby

Dollery, Brian and Wijeweera, Albert 2010. An assessment of rate-pegging in New South Wales local government, in Commonwealth Journal of Local Governance, Issue 6: July (http://epress.lib.uts.edu.au/journals/index.php/cjlg/article/view/1619)

Seddon, John 2014. The Whitehall Effect.

The Age. http://www.theage.com.au/victoria/council-rates-capped-from-mid2016-20150120-12tz7k.html