People Graph

Public sector economy of scale is a myth

By: John Seddon and Richard Tomlins
Published: Wednesday, December 3, 2014 - 13:38 GMT Jump to Comments

In fact, social value is at the heart of the balance sheet. John Seddon and Richard Tomlins respond to S A Mathieson's piece on social value, published last week.

There was one point in S A Mathieson’s excellent provocation “Social value’s good intentions look costly for the public sector” when the public sector took a life of its own detached from the interests of the service users we think that it is meant to serve:

“Social value sounds like a mixture of things that could actually harm the public sector as a whole.”

We might spin this around and say if public services aren’t maximising social value (those social, economic and environmental benefits that are important to people) then why are they being provided in that way…or at all?

Mathieson’s article produces some charge sheet against social value and the Social Value Act, that rare beast of an Act of Parliament that achieved cross-party support. That charge sheet is not well grounded, even leaving aside the “coulds” rather than “woulds” that precede each of the charges.

Mathieson’s rationale is if the public sector pursues social value:

It might lead to localist agendas and increasing costs through a local base in every local authority area. Those local bases are only legally permissible where it is a reasonable requirement of the contract, in which case it seems reasonable to have that local base?

Paying a living wage or living wage “plus” to employees will disadvantage those in receipt of services who are not on the living wage. Are we really suggesting that those providing public services are not worthy of the living wage? It seems more economically beneficial to ensure that those being employed on public sector contracts are earning at least this amount, which they are then more likely to spend in the local economy rather than participating in a race to the bottom on wages.

Big companies will have more time to evidence social gains and win contracts! Well, only if the public sector is lazy in its commissioning. We work with local firms who absolutely have a track record story to tell because their employees live in the area, and they employ apprentices who are from the area and they get their vans serviced at the garage down the road and they pick up their materials from the local builders merchant.  Make the social value requirements clear so these stories can be told and don’t mark the tender submission on glossy promises!

Only the first councils will benefit as “protectionist” barriers go up. Actually, we’re talking about making the value that local firms do, and can, provide transparent so that it can be identified and grown. This is about releasing value that has previously been ignored across local authorities. The pot is bigger than the bigger “profit” fixated firms might lead us to believe.

Its hard to calculate. We provide training to people on the tools through to senior civil servants and we’ve yet to meet someone in a training session that doesn’t “get” social value. Is it hard to identify the number of people on a training course, the jobs that they get and the confidence and well-being that they develop? Social value is a grand label for the common sense of “making a difference”.

Prices will be pushed up. Really? So investing in a future workforce, employing local labour and having a local base so that employees are more productive will push up costs?

We will lose the benefits of economies of scale provided through factory hubs and the benefits that they provide to disadvantaged areas where they are often based. Leaving aside the number of factory hubs that are off shored and the profits from private sector factory hubs that are taken off shore, this is the point that we were reduced to apoplexy!

Since Margaret Thatcher, every prime minister has placed public-sector reform at the top of their domestic agenda with the avowed intent of reducing costs. To this end, in the last decade governments, regardless of political colour, have pursued the notion that economy can be achieved through scale; that bigger is better. Hence the rise of call centres, back offices, sharing and outsourcing services. But costs have risen inexorably and, frustratingly for everyone, services have not improved. 

You have to get down into the nitty-gritty of what happens in practice to understand why. Politicians have been chasing the chimera of cost-management. Counterintuitively, managing cost drives costs up.

Services are moved to call centres because telephone calls are cheaper than face-to-face services.  But every shiny new public-sector call centre John has studied has experienced volumes of demand far beyond what was in the plan – it’s what he calls failure demand, caused by the failure of services to work for citizens so that they have to come back or call again until the problem is fixed. 

The mistake is to assume you can bodily separate the “telephone work” from the departmental services of which it is part; the consequence being that it fragments the flow of the service.

Likewise, the idea of the “back office” is to reduce costs by moving service work away from places of customer contact where customers “interrupt” (!) the work of service agents, preventing managers from “sweating” the labour. But back offices, too, create failure demand. 

People in back offices take a “rules and procedures” view of customers – quite different from seeing them face-to-face – and the standardisation and specialisation of work means that the arrangement fails to deal with the variety of customer needs; so more “failure demand” as they keep coming back.

Sharing services creates a short-term illusion of savings because there are genuine savings of the “less-of-a-common-resource” type (fewer managers, buildings, IT systems; real gains but often hard to achieve, especially given that 90% of large-scale IT systems fail) – but the bigger promise of longer-term reductions in transaction costs never comes through. 

As with “back offices” the principal culprit is the standardisation of services; again, standardisation prevents the system from absorbing the variety of customer demand, hence demand volumes rise inexorably (failure demand again), and where these ventures are outsourced to private-sector providers with contracts based on activity volumes, we end up paying more and more for worse and worse services.  You couldn’t make it up.

The volumes of failure demand being created in public services are eye-watering.  It is not merely a cost to the bottom line; poor-quality public services carry the unknowable cost of harm to individuals and communities. Failure demand is an easy concept to understand – but also easy to misunderstand. 

People often think the causes are people not doing their jobs right – it fits with their current world view that it’s the people that make the difference. But failure demand is systemic; the only way to eradicate it is to change the system.

Good service design is human, local and sensitive to needs. The secret of effective service is to give customers what they need – a counterintuitive idea, since most managers wrongly equate improvement with (greater) resource and thus believe it will drive costs up.

Actually, better service is cheaper. Based on thorough knowledge of demand, effective systems are designed to equip the front line with the expertise they need to respond to predictable customer demand and, where they don’t have it, to “pull” that expertise where it is needed.

No “back offices”, no standardisation, no targets – but instead measures that relate to the purpose of the service from the customers’ point of view. As achievement of purpose improves, costs fall out. The truth is that economy is achieved through flow, not scale.

Using these principles, housing repairs can be delivered on the day and at the time customers want (if your telephone provider could do that you’d cheer) and at much lower costs. Similarly stroke-care costs are halved as the service is improved; there are many other examples.

Perhaps the most profound example is with services for people whose lives have fallen off the rails.  Instead of having to navigate the functionally-designed services crossing many boundaries (mental and medical health services and the plethora of social care services), they are met by one person who has the expertise to help them define what a good life means to them; to help them take responsibility for achieving that and organising the necessary resources to help them. 

The impact on costs is nothing short of astonishing, the impact on lives profound, and, most interesting of all, demand for services falls. Fewer problems for individuals, families and communities. Isn’t that the purpose of public services?

John Seddon is Managing Director of Vanguard and a Visiting Professor at Hull Business School. John’s latest book “The Whitehall Effect: How Whitehall became the enemy of great public services and what we can do about it” is published by Triarchy Press.

Richard Tomlins is Director of Cohesia, a Visiting Professor of Race and Diversity at Coventry University and a member of The Home and Communities Agency’s Equality and Diversity Board Advisory Group.

The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of The Information Daily, its parent company or any associated businesses.

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