In the right direction

June 30, 2006

Clare Montagu, special advisor and Rob Whiteman, Chief Executive, London Borough of Barking and Dagenham.
Public Finance

The public sector is on the road to efficiency – now it needs to get its productivity act together. Clare Montagu and Rob Whiteman explain



Productivity needs to have a greater focus in the provision of public services, but understanding of it is under-developed. The debate so far has focused on statistical and methodological issues, such as the adequacy of performance indicators and league tables. Our ability to measure service outputs in a meaningful way is limited – the substantial additional investment in staff in the NHS, for example, appears to have resulted in a reduction in productivity, although the contra view is also argued.



Public sector managers, like their private sector counterparts, need to see driving down unit costs as intrinsic to delivering a high-quality service. Given the public’s growing awareness of council tax levels in particular, this is especially so for local authorities.



It seems sensible to start with some definitions of ‘efficiency’ and ‘productivity’. As the issues overlap, these terms are often used interchangeably. One could argue that ‘efficiency’ is about cost and value and ‘productivity’ is more about narrow cost; or one could argue that ‘efficiency’ is about narrow input productivity, and that ‘real productivity’ is more about value.



The point is that public services need to work on both, and so some clarity about definitions would be helpful. Public sector managers are more driven by the need to demonstrate value than being self-motivated to religiously reduce all costs; and so some greater attention to the cultural issues of the latter – but not at the exclusion of the former – would be useful for many organisations.



Sir Peter Gershon described ‘efficiency’ as ‘making the best use of the resources available for the provision of public services’. This is clearly linked to productivity, since higher productivity will involve more efficient use of existing resources. Productivity and efficiency also share the same objective in the public sector – releasing more resources to the front line, which, after all, is the title of Gershon’s review.



In practice, though, the efficiency agenda in the public sector has at best become an exercise focused on excising ‘wasteful’ components of expenditure or practices; and at worst merely a reporting exercise, rather than a genuine transformative agenda looking at how we reduce the net cost of total resources deployed on service outcomes.



The first challenge is to help local authorities unpick the differences between ‘efficiency’, which all too often is only expected from public service managers when resources are squeezed and budget cuts are imminent, and ‘productivity’, which we strive to improve through cost management, regardless of financial circumstances.



The second challenge concerns the measurement and consequent misunderstanding of productivity in the public sector. The definition of productivity in relation to unit costs of production is more easily understood in the context of manufacturing – a car for example, where the unit of output is a single good sold on at a price. But this cannot easily be applied to the public sector, where outputs are not just quantitative but can also be qualitative and complex.



The third and greatest challenge for local authorities is seeking to promote productivity in the provision of their services. Private sector firms and managers are motivated by profit, and raising productivity is key to increasing profit, market sentiment and personal financial reward. The primary motivation for public service managers is, instead, delivering a high-quality service that meets the needs of the public. Cost considerations do apply, especially during lean financial years, but only as a means to an end. Personal financial reward and success at work are not usually dependent on the productivity of the service.



We need to make the case that high-quality services are those that are highly productive, and if we do not seek to increase their productivity, we are short-changing service users, since we are forgoing the opportunity to release more investment to frontline services. So, even if it might be a harder argument than in the private sector – because the relationship between productivity and desired outcome is more indirect – it is one managers and staff should be encouraged to embrace.



All too often, managers will justify having not challenged a cost because they have budget provision to cover it. This attitude requires root-and-branch cultural change. But how can a productivity ethos be established in local authorities?



One possible way is to give managers a specific productivity objective as well as service delivery requirements, as the bread and butter of their performance appraisal and development process. When appropriate, this should be supported by financial incentives or rewards.



There is also an important role for the bodies responsible for training the professionals working in local authority services. Productivity needs to be embedded in professional development, otherwise it risks being seen by these staff as just cost-cutting or outside the responsibilities of their professional domain.



Local authorities are getting better at procuring value-for-money materials and services, as the various discipline regimes, from Best Value backwards, have demanded. One of the areas all authorities are considering is repeat procurement, on both revenue and capital. Typically an authority will have a rigorous gateway for council tenders – a procurement process that is designed to ensure fairness, competition and value for money – but will it always spend as much time and energy ensuring the same supplier still delivers the right service for its needs when it comes to repeat contracts?



Achieving productivity is a challenging agenda and because it involves fundamentally changing some work practices, it will be a tough nut for some authorities to crack. It cannot be done at an individual level – authorities need to work together regionally and with local public management partners. A better constitutional settlement for local government would also promote shared agendas with professional bodies and Whitehall departments to ensure the ethos of productivity is embedded across the public sector. The present settlement implies that central government is productive and needs to ensure greater efficiency is squeezed from local government by regulatory intervention, but does anyone believe this to be true?



Local Area Agreements potentially have a significant role to achieve public management efficiencies in an area. The hope must be that through these, local authorities and partners can join together their HR modernisation, ICT/e-government, asset rationalisation, and service improvement plans rather than be forced to view each as a separate plan to be reported to the relevant Whitehall department, regional government office or agency. Similarly, they should be encouraged to act with other local authorities.



Finally, two points are worth developing to take forward this agenda. In the case of the public sector, who wants or will use productivity data? The public will have different needs from regulators, for example. Do public bodies do enough to explain efficiency, or simply follow the reporting requirements set for them? Are the public more interested in quantitative or qualitative measures, or a mixture of both?



Also, there must be no sacred cows, because the prize is great: the opportunity to transform the services we deliver to our customers and ensure even more resources are diverted to the front line where they make the most difference.



Clare Montagu is special adviser to Education and Skills Secretary Alan Johnson, writing in a personal capacity, and Rob Whiteman is chief executive of the London Borough of Barking and Dagenham. Made to measure: understanding local service productivity, a collection of essays from the New Local Government Network, was published this week (www.nlgn.org.uk )


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