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Economies come from flow, and not from scale, argues Professor John Seddon. We should look to where we can cut work, rather than join it up. People in Whitehall say ‘economies of scale' are a ‘no-brainer'. The service factory concept, they assume, must be cheaper. And outsourcing activities to low-cost providers obviously makes sense. But these ideas contain dangerous, misleading assumptions, and the consequences are, all too often, ever-rising costs and worse service. The folly of scale thinking has been learned in the private sector. Let's start with call centres. About 15 years ago, banks took ‘telephone work' out of their branches and gave it to less-expensive people in new call centres. Beyond cutting the costs of staff, the idea was that more phone calls would be picked up, as call centres got around the problem of resourcing to meet variable local demand. However, and despite careful planning, the banks experienced more calls than anticipated. It should have been a signal. Instead of understanding the signal, managers added resources – more people; specialised peoples' work – to cut down training costs; and standardised procedures. All of these activities were concerned with managing costs. Often, when you manage costs, your costs go up. The second type of factory to appear in the private sector was the ‘back office'. The idea was to ‘de-couple' the customer from the service. Customers are a bit of a nuisance if your job as a manager is to optimise your use of resources. So you use the ‘front office' – a walk-in centre or call centre – to take the customers' requests, then turn them into electronic ‘work objects', and send them off to the back office for processing. In that way, you can schedule your back-office resources to optimise their use. Once again, in private sector organisations which took this route, the same signal occurred – greater volumes of work in the back-offices than planned. Managers again sought further standardisation and specialisation, and found ways to get parts of the service provided by IT systems, again, attempting to manage costs. What was the signal? Failure demand – demands caused by the failures to do things or do things right for the customer. In banks, it was not unusual to find failure demand accounting for as much as 60% of all demand. Imagine then, the absurdity of service directors trying to squeeze agent activity times down by seconds – attempting to reduce costs – when many of the calls were created by the service design itself. Failure demand is an easy concept to appreciate. It has led to a target (NI14: Avoidable contact). People in the Cabinet Office believe getting local authorities to count it for reporting purposes will motivate them to do something about it. But this only motivates local authorities to under-report it. You cannot remove failure demand without understanding its causes. There are many, but three of the big ones are activity management, specialisation, and standardisation. Factory designs create their own – failure – demand. The mistake of managing activity as cost is being corrected by private sector organisations, bringing out-sourced work back from India. To keep it simple – if one transaction in India drives up the total number of transactions it takes customers to get a service, costs go up, not down. It illustrates that cost is in flow – the number of transactions – not activity. Service organisations are subject to a large variety of customer demands. If you accept that view of customers – they want what they want, anything you do to stop the service from absorbing variety will push up costs. Standardisation does exactly that, while specialisation creates more hand-offs and hence, more rework and other types of waste. All three – activity management, standardisation and specialisation – create more demand and thus,, massive costs. One example of the terrible costs created can be found in Advice UK's recent report, It's the system stupid. The costs of the failure of the Department for Work and Pensions and HM Revenue & Customs – both flagship service factories – to provide the primary services are profound. Failure demand is created into local authorities, advice centres, legal services, and the courts system. The evidence-base for more public service factories is, according to the recent Treasury report, based on ‘proxies, assumptions and estimates'. In other words, we are bullying the public sector to embark on economies of scale because we are seduced by the idea. There are many who have eschewed the idea of scale and learned instead to design against demand, giving customers what they want. They have used their understanding of demand to inform the expertise required at the point where they transact with the customer. The result is fast and clean flow and, hence, much lower costs. And there lies the paradox. When you manage flow, your costs go down. When you manage costs, they go up. Economy comes from flow, not scale. 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

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WHITEHALL

The folly of scale

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