Benchmarking: an incentive to improve, a distraction or a red herring?

In the question and answer session of the presentation I gave a couple of weeks ago I was asked how I thought a process of benchmarking should fit into the annual budgeting process. I gave an answer at the time but I don't think I expressed my view as well as I could have so I thought I would have a go in writing.

The question was posed to me in terms of unit costs: if we are preparing our budget for a service how should we take into account the fact that our neighbours or peers deliver the service for a lower (or higher) unit cost? On the face of it this seems like a good idea and I'm sure there must be some sound theories to support it. My answer to the group, though, was sceptical, borne from experience rather than theory.

I think that the "information" a public sector organisation gets from such benchmarking is unhelpful. I think carrying out a benchmarking exercise is "busy work"; it feels like you're doing something positive but in practice you're using up a lot of resources and getting very little in return. They say you don't fatten a pig by measuring it. Well, benchmarking is the equivalent of trying to fatten your pig by measuring someone else's.

I've been involved in numerous benchmarking activities over the years (it was a key feature of the Audit Commission's work in the 90s and 00s) and the first problem is agreeing common definitions so that the information is at all comparable. The development of accounting standards and financial reporting standards has no doubt improved the consistency of treatment by public bodies, but that does nothing for the second, and bigger, problem: that public managers will cling to favourable comparisons and find reasons to criticise unfavourable ones. (I once has a manager who was very quick to claim successes were the result of his management but failures were the result of external factors beyond his control. Sound familiar?) If you want an academic reference for this, Demeere et al (2009), writing about the use of activity-based costing in healthcare, said:

"... healthcare managers might argue about the accuracy of the models estimated costs and pro"tability rather than address how to improve the inef"cient processes, unpro"table products, and considerable excess capacity that the model has revealed."

Demeere et al actually touch on the potential negative consequence of benchmarking: complacency. If a public manager's unit costs (or whatever) are good they do not need to try harder; if they are poor, they might try hard to make a defence but they can avoid the need to improve their service.

Many aspects of public management these days are informed by or developed from private sector practice. Do private sector organisations benchmark with each other? Perhaps, but it seems unlikely that an organisation could benchmark with competitors directly so they are more likely to use competitors' prices as the benchmark. They may ask themselves, Can we sell our product for the same price as the competition and still make an adequate return? If the answer is no then they either have to find a way to make their product more cheaply, charge a higher price and compete on the basis of quality/design or cease to produce the product. If the answer is yes then that's great, but it would not stop them from seeking efficiency improvements in order to improve their gross profit margin.

How does that compare with a public service? Well, there are some services where charges are made but generally there is not a market because public bodies usually have a monopoly on the service in some geographic area. But there are some areas where there are comparable private sector providers whose prices could be used as a signal. Except, how many local authorities would compare the unit costs of their schools with fee-paying private schools, or compare their access-for-all leisure centres with members-only private gyms? "They're not offering the same things as us," would be the cry so of course our unit costs are different from theirs.

So, based on my experience, what would I recommend? In my view the answer is much easier to find than carrying out benchmarking exercises because the organisation already has it. The answer is to compare our own unit costs over time. This avoids all the problems of alternative accounting treatments, geogrpahical differences in prices, etc. and it builds on the idea that however good a service is the managers should strive to improve it. I'm sure that if all the time and energy spent carrying out benchmarking work and then defending or criticising the results was spent on improving services the benefit for the public would be significantly improved.

Reference

Demeere, N., Stouthuysen, K., & Roodhooft, F. (2009). Time-driven activity-based costing in an outpatient clinic environment: Development, relevance and managerial impact. Health Policy, 92(2-3), 296–304. doi:10.1016/j.healthpol.2009.05.003

Collaborate to improve value for money

Many of us would intuitively agree with the truism that two heads are better than one but that doesn't mean that we work that way. In the public sector there are often tens or even hundreds of organisations that carry out similar functions to each other but in different localities. Despite 20 or 30 years of talking about sharing services, in one way or another, little happens. Whilst most public bodies have the power to work with others they are not obliged to do so. That is not always the case, though.

Over the last year I have been working with Lincolnshire Police. In the UK police forces are expected to collaborate with each other in order to save money. This is not so relevant for routine policing but neighbouring forces can share in the savings made when specialist services are combined into a single team. There are examples of this all over the country.

I recently discovered that the Welsh Assembly has passed an act (acts are called measures, though, in Wales) that requires Welsh local authorities to collaborate with each other with a view to improving the overall efficiency and effectiveness of local government services. The measure is not prescriptive about which services to collaborate on or the form of the collaboration: these decisions are left to the local authorities to work out together.

One aspect of any collaborative arrangement that has to be resolved is what form the collaboration should take. In legal terms this could range from informal arrangements through delegation from one authority to another, a formal contractual arrangement to a joint venture company or joint committee. Recently the Welsh Local Government Association commissioned Trowers and Hamlins to give general legal advice on the pros and cons of the various collaborative arrangements that are available to local authorities. This guidance has just been published on the WLGA's website.

I mention this partly because I contributed to the document in terms of the financial implications of each of the possible arrangements. I also mention it, though, because it might be useful to managers in local authorities outside of Wales. The exact nuances of the law might be different—and any local authority, in Wales or elsewhere, should get specific legal advice on their specific proposals and not rely on the contents of a general report—but in broad terms the report can help decide which forms of collaboration might be suitable and which are not.

Minor roadworks

I live in the north west corner of Derbyshire where there aren't major roads or motorways. Over the last few weeks I have come across roadworks on lots of the local roads. Not major roadworks, just one of those machines that scrapes off the top few centimetres of the road surface so that it can be replaced with fresh, smooth tarmac. However, I am sure that I won't be seeing any more of these small schemes next week, or again until next March because it is the end of the financial year.

If I were being cynical I would suggest that these works were only being done to make sure that the budget for 2011/12 was as fully spent as possible. That might be the case but I don't know because I don't have the budgetary control report for Derbyshire County Council. What I do know, though, is that public managers still measure their importance and their success by how much money they spend. Until a few years ago the value of public service as measured in national statistics was deemed to be equal (exactly equal) to how much was spent. So, spending more on the roads (or in hospitals, schools, libraries, wherever) meant more value was created. That's changed now (but I won't go into the detail here) but for many managers it is still the case that if they spend more on their service, they deliver more outputs and that must mean they deliver more value for the public. Sounds fair enough, doesn't it?

If I were being more positive, though, I could suggest that these schemes are taking place now because the council's managers operate in the same way that most people do when faced with a deadline; they leave things until the last possible minute to start and then finish just in time.

Whatever the reason, there are several hundred metres of improved roads all around my neighbourhood and, as a cyclist I value it because it will make my riding in the summer a bit faster and a lot smoother and more comfortable. If they hadn't done it no value would have been created but the question is, would more value have been created if they spent the money on something else?

We can afford anything, but not everything

This Q and A by the BBC about public sector pensions makes an interesting distinction between whether public sector pensions are unaffordable and/or untenable. It reminded me of something that I would often say to councillors and managers when I worked as a finance director: "We can afford anything that you want to do, but we can't afford everything you want to do." That is pretty much the case for all public organisations. Generally they are big, with lots of money, staff, offices, computers and other resources so they could direct them to do almost anything that could be feasibly be demanded by society. The problem of public management is that society makes multiple demands and there have to be trade offs. If a pound is spent on service A, it is not available to be spent on service B. As the finance director of a large council I was, like my senior colleagues, looking for the councillors to make decisions about priorities against which we could allocate resources. The trouble is, for every decision someone is the loser. If you're elected to represent people it is very difficult to make decisions that make some of the people you represent worse off. It doesn't placate the losers to hear the politician say. "we had no choice" because, patently, they did have a choice and they made it. Unfortunately, this leads to politicians trying to avoid making decisions (despite every politician always claiming that they make the tough decisions whilst their opponents never make them). Such decision-avoidance is one reason that many organisations find themselves "salami-slicing" at budget time: ie they make (relatively) small cuts to every service/team/unit rather than protecting the budget of the most important and making large cuts (or abolishing) the least important services because if everyone is a loser in a small way then it's almost the same as having no losers at all.

Going back to the BBC article, it mentions that it is not possible to say public sector pensions are unaffordable because as a society we have not set out what proportion of public money ought to be spent on them. It would also be the case that if public sector workers did not receive pensions there might be higher salaries to pay now and in the future there might be more spending by government in state pensions and welfare benefits to workers who would no longer have as much money from an occupational pension to live on. 

So, it seems, after a year or more of the government saying we can't afford these pensions, the rhetoric is moving towards we don't want to pay for these pensions. At least that is more honest.