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Industrialising the service sector is a false economy and fatal in the public sector

June 8, 2009

Alistair Darling has demanded further £15bn efficiency savings through more IT-led front-office/back-office public-service designs. In the accompanying Treasury report, these totals are justified by ‘proxies, assumptions and estimates’, not evidence. Indeed, the evidence points firmly the other way; the further industrialisation of public services will inevitably lead to higher costs and worse services.
By John Seddon. A version of this article appears in Public Finance, June 2009.

The folly of industrialisation began in the private sector. Advances in telephony led companies to centralise telephone work in call centres, taking advantage of lower labour costs; first building call centres in low-wage areas of the UK and latterly outsourcing them to lower-cost economies. The result, most often, was an unanticipated rise in the volume of calls. Instead of seeing this as a signal, managers responded by adding more resources and further specialising work (hence the growth in IVR – ‘press one for this and two for that’). Similarly, the allure of further ‘back-office’ economies – optimising use of resources by de-coupling the customer from the service itself – led them to create IT-dominated designs which sorted and routed work through processes dominated by service-levels and standard times. Again, the volume of work grew. Again the signal was ignored and similar tactics, further specialisation and outsourcing obviated any understanding of the real problem.

Service industrialisation represents the pursuit of lower costs through economies of scale. Yet higher costs ensue. The most evident cause is ‘failure demand’ – demand caused by a failure to do something or do something right for the customer, who then has to call again, creating extra work. In industrialised financial services organisations 40 to 60% of all work coming in may be failure demand. In police forces and local authorities it is usually higher.

Failure demand is an easy concept to understand – if we delivered services that worked, we would have less demand and thus more capacity – but to the wrong mind-set it becomes a ‘lever’ to reduce costs. Hence NI 14: ‘avoidable contact’, guidance for which obliges local authorities to measure and report it for publication in a national league table. This is management by fear, which encourages managers to engage their ingenuity in under-reporting; no one is engaged in solving the problem.

Removing failure demand requires understanding and eliminating its causes. And these lie in industrialisation. Managing workers’ activity, standardising work, increasing specialisation and outsourcing on the basis of activity costs are the primary causes. Advice UK has documented the disastrous effects of these designs in the public sector, where the failure of DWP and HMRC to provide primary service throws high levels of knock-on failure demand into local authorities, RSLs, advice agencies, legal services and the courts. It is a lesson on the folly of managing costs.

It has been impossible to obtain evidence of the impact of back-office initiatives in local authorities, usually on grounds of commercial confidentiality. Yet we see regular controversy in the media, and informal sources provide evidence of heavy investment – £6m in one county – with no return. Claims for improvement usually cite lower transaction costs, which may be true, but are irrelevant, because the true costs of service are in end-to-end flow, not transactions.

Private-sector organisations that have learned this lesson design their services against customer demand. They ‘smarten up’ rather than ‘dumb down‘ putting workers in control of a system designed to serve customers and requiring managers to work on the system. This means getting rid of all arbitrary measures (targets and budget-based measures) and instead deriving measures from the purpose of the service from the customers’ point of view. The consequences are large improvements in productivity (400% is not unusual), massive improvements in service and transformation of employee morale.

Local authorities that have pioneered this approach in the public sector (for example Stroud) achieve improvements that make Gershon targets look derisory. Ironically, Stroud appeared in an Audit Commission report promoting greater use of back offices (Stroud has none): the Commission, like the authors of the Treasury report, won’t let evidence get in the way of their narrative and ideology.

The Conservative Party promises to sweep away the bureaucracy of public-sector control. It is an urgent necessity. The current push for further industrialisation should be halted and reviews of the current debacles should provide knowledge to prevent further failure. Stopping doing the wrong thing will save a fortune, but we also need policies that encourage people to do the right thing. That in turn will require that responsibility for performance is given to local leaders. Free from the need to comply they will have the opportunity to innovate.

John Seddon is author of: “Systems Thinking in the Public Sector: the failure of the reform regime and a manifesto for a better way”, Triarchy Press, 2008.