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May


To cut costs, start from the other end

Mon, 11th Apr 2011

 Austerity to preserve the status quo is like trying to save the dinosaurs - dumb. But even if you accept austerity, slashing from the top, as the government is doing with the NHS, the police and almost every other public service, is super-dumb: a sure way to raise costs, worsen service, or more likely both.

Costs are what worry politicians and most managers most, so focusing on them seems natural. But it is actually back to front. Paradoxically, managing cost drives cost up. The promise that cuts will leave the NHS front line intact is meaningless, as we are now beginning to see. The result of deciding the amount of cuts first and fitting the organisation to it is never 'more for less', as politicians hope. It is always 'less for less' at best – and 'less for more' at worst.
 
Why? Because cost, like profit, is a consequence – an effect, not a cause. Costs are low if you do something well, high if badly. Those who didn't know already should have learned from the crisis that treating profit as an end in itself and managing it accordingly is not a trivial error. Managing by cost is as destructive as managing by profit, and for much the same reasons: it distorts priorities and destabilises the system, making it harder and more expensive to manage.
 
Ironically, politicians are absolutely right in their intuition that most public-sector organisations are dismally inefficient. Unfortunately, they don't realise that the private sector is no better. The issue isn't public or private, market or state. It's how work is designed.
 
Thus, while a typical manufactured product may take weeks or months to complete, it spends only a tiny fraction of that time actually being worked on. Most of the time is spent waiting to be pushed in batches through the next process or being taken in and out of storage.
 
The same is true of services, which have adopted the same clapped-out model. Dealing with a standard mortgage takes an hour of actual work. Yet by the time the application has been sorted, scanned, sent to a back office, processed, returned to a front office, checked and despatched to the customer, several weeks will have elapsed.
 
IT, outsourcing and shared services have made only minimal difference to this dismal performance. In fact, they are no more than (very expensive) go-faster stripes; by reinforcing the notion that the way to improve the whole goes through optimising the parts, they have seriously held back development of a better way of delivering service.
 
To control costs, organisations always assume that big is better. So a police force decides to shut down small police stations and concentrate staff in much bigger establishments, with a centralised call centre between them and the public. But a minute's reflection confirms that the cops have one – and one only – cardinal asset: local intelligence. Increasing the distance, and multiplying the contacts, between the citizen and the police makes the service less effective (increasing response times and the chances of error) and thus drives overall costs up.
 
Or consider the NHS. The family GP is a brilliant concept. For any condition, a GP who knows your history and circumstances can make better, more intelligent treatment decisions that one who doesn't. So what do we do? We put doctors in giant health centres and demand that they spend no more than 10 minutes on individual appointments, thus ensuring that that they don't know their patients and their priceless, long-nourished combination of personal and medical knowledge is useless. Instead of going straight to the most likely solution, he/she has to work through the checklist one by one before (with luck) arriving at the same result, only much later. Worse service, higher costs.
 
Once you know the reasoning, you can see it everywhere. One way newspapers try to cut costs is by pooling the sub-editors who edit and trim the copy filed by front-line reporters. Like all such functional centralisations, it is a false economy. Whereas previously a query could be settled face to face, it now has to go by phone or email. If a business article is picked up by a sports sub, the queries (and opportunities for misunderstanding and mistakes) multiply; quality goes down, work and rework go up, more than wiping out any conceivable gain from the pooling.
 
The inevitable response to all such centralising attempts is to recreate the local expertise in some form, thus dashing the hope of savings. In the university where my wife works, managers decided to centralise the departmental administrators. Instead of having a trusted right-hand person at their shoulder who knew students, lecturers and the business of the department inside out, department heads now have no such support. Either they do the extra work themselves or recruit a junior for the purpose. Either way, the department and the students suffer; the gains are illusory.
 
Cutting costs is a classic example of management obliquity. Like profit, to which it is obviously linked, reduced costs are the reward for doing something else, ie serving the customer better. It was Taiichi Ohno, the architect of the Toyota Production System, who made the brilliant counterintuitive leap: good service (doing the right thing at the first pass) costs less, not more. Therefore, to cut costs you have to manage value. By focusing exactly on what the customer, internal or external, wants and designing the system to deliver against demand, costs fall away, surely and permanently.
 
Proving the point, Toyota has paid a heavy price in terms of raised costs, at least temporarily, for forgetting its own truth. Most managers and politicians have never learned it in the first place. Of course, our immediate crisis was caused by the equal and opposite mistake, assuming that profit in the financial sector could be decoupled from the way it was made. But in our impersonal, inefficient and unresponsive service industries, both public and private, we also see a more chronic crisis: a grim reflection of the cumulative failure to understand cost. For the moment there is no sign of that grinding crisis ending, only getting worse.

 


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