Why are public sector efficiency savings so hard? (Part 1 – The processes)

With the government demanding that the public sector do more with less, much has been written about public sector productivity and efficiency recently. I sometimes wonder if there are more people writing about it than actually doing it.

That might be because doing it is damned difficult. Even seasoned corporate trouble-shooters have walked off the job when they have seen the size of the task and the obstacles in the way. Doing more with less is a tall order. Even doing the same with less is likely to prove beyond many public sector organisations

Why should this be? Well that’s such a big question that I have decided to divide this post into two. This post will look at the ‘micro’ reasons – why public sector processes are so difficult to improve and why methods used for making manufacturing firms more efficient don’t always translate to the public sector. In the next post I will look at the ‘macro’ reasons – the wider public sector environment and the political and cultural issues. It is, of course, an artificial distinction because all these things affect each other but I had to find a way of chopping this subject up, otherwise the post would have been very long.

Almost all public sector organisations are service providers and it is far more difficult to make productivity improvements in the service sector than in manufacturing. According to the CBI, manufacturing made average productivity gains of 4 percent per year during the last decade. Over a similar timescale, KPMG calculates that private sector service organisations only increased productivity by twenty-percent.

Most of the theories, methods and case studies about productivity improvement come from manufacturing. Over the past couple of decades, they have proved extremely effective in helping manufacturing companies to drive down their costs. But many doubt that such techniques can be applied to service organisations – at least not without significant adaptation.

Service processes differ from those in manufacturing in that the customer is actually an actor in the process, rather than someone consuming the product from it at the end. People being what they are, their needs and requirements are always slightly different so, while a process might look the same on paper, it is never quite the same for each customer. It will vary each time depending on how the customer interacts with the service provider. Service processes, therefore, are rarely as controllable and predictable as manufacturing ones.

This is exacerbated in the public sector because public-facing organisations have to deal with whoever comes through the door. While price acts as a gatekeeper for private service organisations, public sector organisations must deal with the poorest, least educated and least articulate people, some of whom may not speak English as their first language. Consequently, the customer’s impact on the process is even more significant. There might be a neat box on the process map saying ‘assess customer requirements’ but, in practice, this might take five minutes or five hours.

To standardise and streamline processes, service organisations often try to design out the complexity and unpredictability – because simple equals cheap right? However, this often means designing out the main source of the complexity and unpredictability – the customer. By channelling people through pre-determined options in call centres and forcing them to use standard forms or websites, the providers can make their processes more uniform and therefore cheaper.

Or so they think. According to John Seddon, standardised processes lead to ‘failure demand’ – the demand caused by failing to meet the customer’s need the first time around. Many organisations, he says, fail to account for failure demand when calculating their unit costs.

For example, let’s say that I run a claims operation. I have led an efficiency programme which has reduced my unit costs to £100 per transaction. My boss says, “Bloody impressive, Rick. Well done! Have this huge bonus.” What I haven’t told him (because it hasn’t even occurred to me) is that 80 percent of transactions have to be reworked because they haven’t met the customer’s need and so the customers go back through the process again. For every ten customers I am therefore spending not £1000 but £1800. My unit cost per transaction might be £100 but the cost per customer is actually £180.

An extreme example? Well this head of revenues at a local authority reckons that 80 percent of their contact requires re-work so perhaps my scenario isn’t that far-fetched.

While the privileged few can turn failure demand into additional fees or call-out charges, most service organisations have to take the cost on the chin. For public sector organisations, where services are free at the point of consumption, increases in demand translate directly into increased costs. Failure demand can therefore have a huge impact on public sector finances and, here’s the rub, investing in process improvement programmes might actually make failure demand even worse.

As if that isn’t bad enough, public sector processes are often complicated even further by the involvement of a number of different organisations. NHS trusts and local authorities often have to work closely together and with charities, the police and increasingly autonomous schools. Wherever you hear the term ‘multi-agency’ there will be an extra layer of complexity. Of course, they are all supposed to be working towards the same goals but, inevitably, the players will all have different interpretations of those goals. Under such circumstances, just understanding a process can be difficult enough, without trying to standardise and control it. A process map for manufacturing a PC or a car would be relatively straightforward compared to one for, say, taking a child into care. The latter would look like spaghetti on the page and, even then, would tell you little about how the process actually worked in reality because every time it would be different.

Service sector processes, then, are complicated by the fact that the end users are part of the process. Attempts to standardise these processes can lead to expensive failure demand. Because demand equals cost for public sector bodies, failure demand is especially damaging. Add in the complexity of cross-organisational working and big P and small p politics, and it is amazing that public sector productivity programmes achieve anything at all.

Applying the approaches and methods used in manufacturing firms will only go so far in the public sector. Things are a lot more predictable than people and public sector processes are crammed full of people at every turn, all with different interests and agendas.

Because improving productivity and process efficiency in the public sector is difficult, and difficult to understand, politicians, journalists and even some public sector leaders tend to look for magic bullets. Management costs, bureaucracy and back-office costs are favourites. But though these figures may look impressive, they are often relatively small compared to the overall cost of managing the service. NHS management costs, for example, are only 3 percent of the service’s overall running costs.

The awkward truth is that most of the public sector’s costs are buried deep in its frontline services and that significant efficiency savings can only be made by improving the way these services operate. That requires a lot of hard detailed work.

But that’s not enough on its own. The workings of public sector organisations are further complicated by the environment in which they operate. As well as grappling with process improvement, public sector leaders face a number of cultural and political factors, both national and organisational, which make improving the productivity of their organisations that much more difficult. That will be the focus of the next post.

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14 Responses to Why are public sector efficiency savings so hard? (Part 1 – The processes)

  1. Pingback: Why are public sector efficiency savings so hard? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Colin Talbot says:

    Interesting post, most of which I agree with – but I must point out that I have been saying these things to the Treasury Select Committee (where I have been a frequent witness and a special adviser) since at least 2004. It is all there in the evidence, and on my blog (WhitehallWatch.org) and in numerous articles for Public Finance.

    Keep it up – great stuff.

    • Rick says:

      Thanks Colin; it must be frustrating saying this and politicians ignoring it. The trouble is, stuff like this doesn’t fit neatly into soundbites or tabloid articles.

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  5. Brendan O'Donovan says:

    Hi Rick, nice post. Of course, if you follow Seddon’s theory, you’ll see the massive potential for genuine frontline efficiency savings derived from setting up a service to eliminate this failure demand. In one local authority housing association, they managed to halve the costs per repair for council properties, and similarly one hospital in the south west has managed to halve the cost of dealing with stroke patients. Simon Caulkin, the esteemed management journalist has written about these cases on his website. http://www.simoncaulkin.com/article/288/ As you say, it requires “a lot of hard detailed work” for managers to learn to change the way they think about their work, but it is eminently achievable. Keep up the good work.

  6. Alex says:

    Well this head of revenues at a local authority reckons that 80 percent of their contact requires re-work so perhaps my scenario isn’t that far-fetched.

    This is a key theme in The Machine that Changed the World – General Motors and Ford believed in running the line flat out and then fixing the problems in rework, Toyota, Audi/VW and Volvo in eliminating the sources of rework. So perhaps manufacturing is more relevant than you might think.

    Just not in the way most people seem to try to apply it to public services…

  7. luis enrique says:

    you might be interested in this, and references at foot:

    http://cmpo.wordpress.com/2010/10/18/spending-cuts-and-public-sector-productivity/

  8. Christopher Bean says:

    An excellent and very apposite post; at the very heart of these observations is something that the public sector has really failed to comprehend, instead of grasping ‘It’ they have instead in classical terms attenuated ‘It’ and that ‘It’ is the complexity. A few years ago I was asked: why is there an increasingly adversarial relationship between demand and supply in the public sector? the answer was rather simple it was what a scientist might describe as the entropy, a manger might identify as uncertainty, or City thinkers as as Caveat Emptor, Caveat Genitor but what ever semantic is used the effects and affects were and are the same – unintended outcomes; the failure of the Treasury’s 3Es to deliver the aspiration. Why because complexity is by its nature counter-intuitive; it’s not the same as complicated (which intuitively we all know); yet public sector tries to simplify by linearising what is non-linear, pretending that if they create more and more process they will conquer this annoying reality, it will be defeated by simplifying ‘It.’ BUT the reality is that we need complexity, it’s what provides the variety of options necessary at the coal face; but that reality has to be transmuted from policy. Last March the Public Accounts Committee Chair identified the top ten challenges to public sector service delivery, at number one was, yes, that’s right complexity. BUT again what he identified was the need to simplify ‘It.’ OGC Best Practice, Treasury Green, Magenta Books, NAO, Public Administration Committee (particularly Grand Strategy hearing) have a lexicon where the word ‘complex’ predominates and yet there is no guidance to public sector practitioners as to how to understand what the Governor of the Bank of England describes as Its’ nature.
    The result – building the wrong system right doesn’t make it any less wrong. The difference between this and building the right system is the difference between verifiable and viable. Anglo Irish Bank built a wonderfully viable system, the City’s auditors and regulators didn’t really do anything wrong, in their eyes, as they had just verified the verifiable criteria of the system they were asked to audit! The NAO points to its success as: efficiency savings, BUT, as the public service productivity divide with both i/p and o/p informs; the marginal utility is trying to tell us something, if only policy (and probably strategy) had a more appropriate lens! Audit has in reality a regulatory function, in UK national audit has independence, but this means that it does what it knows; it knows how to verify it does not know how to assess viability in an increasingly complex world? OGC, Main Gate Reviews look at capturing the necessary ‘requirements’ BUT the tools they use relate to verifiable criteria with the complexity described as: qualitative intangibles and embraced by terms such as ‘procurement’ judgement (the police used this term just this week in terms of their new Integrated Competence Framework).
    This is obviously not easy, it needs as we are told ‘thinking about’ BUT the reality again is that in the UK’s public sector it hasn’t yet started thinking about how to think – to understanding ‘It’; it still seems to believe that doing better what it did before will suffice. BUT the pathology is also trying to tell us something; it is telling us that we need complexity and that needs a new awareness, an awareness that some countries seem to understand better than others in terms such as competitive and comparative advantage. An economist reminded me this week that we shouldn’t forget that growth is a measure of productivity and, although currently measured in monetary terms, it is a measure as to how viable a system is with its changing environment. Just looking at growth in terms which relate to terms such as velocity of money, is to hide the true nature and viability of the reality.
    The Treasury 3Es are no less complex than the three ball problem in physics, we know that the nature of three inter-acting parts can be complex, hence, so much more difficult to understand; yet it wouldn’t be acceptable to just take one away to solve the conundrum – BUT that is what the call to simplify complexity is asking. ‘It’ is a cognitive problem it is not the complexity’s problem – its our difficulty in understanding, interpreting, its nature. To test this premise just go to a local government Executive Board mtg where they will tell you they are taking an holistic approach and then observe the reality.

    Look forward to your next instalment.

  9. vincelammas says:

    Hi Rick,

    I have looked to John Seddon’s writings a number of times in relation to shared services and management behaviour in general, http://www.attractorconsulting.com/2010/04/rejecting-command-and-control-2/
    and I have been working with organisations over the last four years to scope, support and encourage action which is underpinned by an understanding of complexity and systems thinking.

    @Brendan O’Donovan You are right to highlight there are major elements of inefficiency and poor design in almost all public services – everyone I talk to in the public sector recognises and accepts this. The work needed to resolve these problems, is, indeed detailed and challenging – but it can be done!

    Generally it is easier to change services in small steps by engaging people and supporting participation at a local level.

    @Alex The key conclusions that Seddon draws is that efficiency lies in the flow of work (not scale) but the approach to designing services cannot use the same approach used in manufacturing.

    Seddon criticises the application of LEAN and Six Sigma in service organisations because they stem from an attempt to standardise work or remove variation – things he he considers inherent with customer service.

    I think his most powerful critique of public sector organisations relates to the “command and control” culture. Huge top-down change programmes and management structures are most unlikely to deliver efficient local solutions that meet customer need. The effort and cost involved in managing and measuring service delivery and change at a national level is, in my view, generally very wasteful.

    It is on that basis that I now favour local autonomy approaches like Local Government devolution and decentralisation, Total Place, Foundation Trusts, Academies and free schools. Leadership teams should should be looking downward and outward, not updward and inward – at their customers and their needs, not at their managers and politicians!

    It’s not just that the politicians arent listening of course, but also linked to the fact selling our government a large scale investment or change programme is often in the interests of many commercial parties who work with and advise government.

  10. Tom Roche says:

    I think we can all agree that public services cater for a far wider demographic than any private sector organisation ever will (or even want to). But in spite of this, and without getting too bogged down in Seddon and failure demand and the like, I think productivity theories derived from manufacturing can be helpful in the public services sector. The key for me is that only the agency doing the service delivery really understands the end users and their needs. No-one should come in and tell them how to do it better. BUT, that agency is very likely also involved in other activities but which are not core to its service delivery. For example, HMRC does tax collection, so people had to submit their self-assessment tax returns by yesterday. It has run a huge advertising campaign so people were aware of the deadline. But what does HMRC know about advertising? Are its tax people also creative advertising gurus? Maybe, I doubt it! So HMRC finds someone else to do its advertising, and concentrates on doing its tax stuff, which it knows how to do. The same could be said of IT, payroll, or facilities management. They all do these things but it’s not their core purpose.

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