A month or so ago, I wrote in Post Alley about the fragmentation of our public sector into too many governments, and our consequent inability to focus the public sector on solving public problems. Now I want to propose ways to make governments more efficient and effective, to establish priorities and to be more accountable to the public.
In the private sector markets enable companies to deliver value to customers efficiently. When customers pay for products they value, that powerfully focuses businesses on understanding customer needs and lowering costs. Markets also provide the mechanism for integrating complex supply chains, since no one gets paid if the customer doesn’t pay. Government doesn’t work that way. Unlike the market linkage between customer and supplier, the government links taxpayers to tax collectors and to legislative bodies deciding how to spend the collected tax dollars. That means a lot less discipline in the public sector.
During my time in the legislature, I characterized this process as, “We spend to show we care.” I really didn’t care if legislators “cared.” Rather, I cared if they achieved desired outcomes, which were usually only vaguely articulated if at all.
Legislative bodies authorize spending for agencies and programs, for capital and operating expenditures and for resources such as labor, computing, rent, and paper clips. Legislators and auditors hold managers accountable for spending appropriated funds in accordance with the appropriation authority granted in each of these silos. This amounts to a loose discipline, far from the accountability and efficiency of markets.
This is also a process guaranteed to fail. Take, for example, building the budget for the University of Washington. It starts around April of an even-numbered year when departments submit their ideas to the provost. Next, the provost must balance all the department’s requests, turning them into a single submission to the state’s Office of Management and Budget. This is done in the early summer. Once all the state’s budgeted organizations have submitted their requests, OMB uses the various inputs to create a draft budget for the governor’s review and submission to the Legislature. This process lasts for the summer and into the fall. The governor’s proposed budget is submitted to the Legislature in time for the January (odd year) legislative session.
The Legislature receives the budget in a table with four columns. The first is the base budget, what would have to be spent in the next biennium to equal what was spent in the last – the status quo budget. Next comes the governor’s budget — which legislators say will be ignored. The next two columns represent the Senate and House proposed budgets, followed by a column showing the difference between House and Senate. Budget negotiations focus on these last three columns.
Once House and Senate have agreed on the numbers it’s finally, belatedly, time to vote. Once all the votes on amendments and bills lead to constitutional majorities, the budget goes back to the governor who, after some line-item vetoes, signs the bill and the budget becomes law. This reconciliation usually happens before the end of the 105-day legislative session, though it often can take 30-day special sessions to reach agreement. OMB now notifies all the budgeted agencies of their appropriated budget and on July 1 (odd-numbered years) the agencies know what they’re authorized to spend for the biennium.
This is ridiculous. A two-year forecast begun 18 months before the forecast period cannot be accurate (though it is precise). Even given the interim adjustments during the even-year legislative session, such a budget can’t anticipate emergent events through the biennium.
Is there a better way? Yes, and it’s been done.
When I was mayor of Mercer Island, we shifted to “product-based budgeting.” which emphasizes outcomes not spending levels. The system focused planning on what we would deliver and, adapting an idea from the Toyota Production System, we examined unit cost and quality of delivered products. An early example was our park system where we defined three types of parks: active playfields, passive fields, and open space. We tasked our Parks Department and Maintenance Department to figure out quality standards and the Finance Department to calculate the unit cost for an acre of park.
They took the task seriously, defining the quality of active and passive playfields based on grass length. Given these standards, the maintenance team had to focus on measurable factors: What was necessary to maintain these fields to the standards, then build the legally required spending budget to finance the processes and deliver the required quality fields? Accountability was on measurable delivery: maintaining playfields to standards and not exceeding the unit-cost target.
This concept passed the city council unanimously. In subsequent years teams were able to reduce the unit cost of maintaining our parks while meeting or exceeding their quality standards — the elusive more bang for the taxpayers’ buck. Once parks employees and managers had the target quality and cost metrics, they had standards to evaluate changes in their processes. For example, what types of mowers could reduce costs and what changes would result in better, less expensive outcomes?
During my time at King County, we built one of the first Activity-Based Costing (ABC) teams in the public sector. ABC is a technique used widely in the private sector to determine product costs and evaluate changes. Our playfield process used a simple ABC approach. Over the last 40 years ABC has become a well-established technique, and a few cities, such as Barcelona, have adopted the system.
Here’s another example. One of our first analyses focused on invoices. King County, due to the merger of Metro and King County in the 1990s, had two accounting systems when I arrived in 2009. The county selected an enterprise-management system to replace the duplicate personnel, purchasing, and accounting systems. Once the new system was implemented, we wondered what it did to costs, so we applied our new ABC skills on invoicing.
We asked the question: What does it cost to process an invoice? The average answer, $27. But it turns out, if an invoice goes fully automatically through our enterprise management system, with no employee touching it, the cost is $15. If done manually, it’s $17. Hold on. The difference between doing it solely by the computer or having someone touch it is $2? So how do you get an average cost of $27? The answer was errors — the average invoice with errors cost
What kinds of errors? Investigation found lack of a purchase-order number was the most common error, and it’s easy to understand how an accounts-payable clerk could burn $90 trying to track down a purchase-order number. That analysis led to measuring error rates by office, tracking them enterprise-wide and implementing training programs to reduce errors. In the end error rates plummeted because of the focus on the cost of delivered value. It can be done.
Also, in the process of focusing on delivery, not spending, all the various players have skin in the game. Suddenly, it’s not accounts-payable’s problem, since each office plays in the process and can be held accountable for their participation.
Sounds simple, but elected officials don’t seem to be adopting ABC or similar techniques. Why not? I think it’s a combination of the “performative” nature of elections and the lack of rewards for making government work. Inside government, it’s a cultural constraint on employees, since people who spend their careers in government are acculturated to the Progressive-era structures of appropriations and rules. This is a big reason why our infrastructure projects such as Sound Transit cost so much more than in other industrialized nations. Another cause is governmental fragmentation.
Two final thoughts: First, accountability’s root word is “count.” If you can’t count it, there’s no accountability. Second, during my private sector career at Boeing we developed an acronym, RAA, which stood for Responsibility, Accountability, and Authority. Responsibility is a scope statement, the area in which one has permission to act. Accountability is the standard for evaluating how you use the permission. Authority is the permission, derived from the Responsibility and Accountability.
The public sector uses spending as the “count” and consequently leaves very little “permission” for public servants to improve the processes they are responsible for. Worse, it provides plausible deniability for elected officials and governments who merrily continue “to spend to show they care.”
In short, we can do better if we empower public employees to manage delivery as well as spending.