Time to be open about costs

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Organisations in the not-for-profit sector, just like their private sector counterparts, require time, effort and resources if they are to be managed effectively. But there is increasing criticism from some quarters of the level of management and administration costs that these organisations incur. Charities and other not-for-profits need to be more confident in explaining their costs and in making the case for good management.

In a recent interview in Third Sector magazine, Conservative MP Charlie Elphicke criticises what he sees as the high administration costs of some charities. “Some charities are very high on management, marketing and lobbying costs,” he says. “Would that money not be better used to help people?” And he is not alone in expressing such concerns.

Surely, however, a reasonable amount of money spent on management, marketing and lobbying is helping people. Effective organisations need high quality managers and staff. They need offices and computers. They need ways of getting their message across to the public. And they do, on occasion, need to lobby politicians to make the law work for everyone.

When I give money to a charity, I do so because I support what it is trying to achieve. But I don’t tell it how to spend my money. I trust the organisation to know how to use my donation to best effect, whether that be giving it directly to a beneficiary, making an awareness video, campaigning against ill-thought-through legislation – or paying the office gas bill.

Charities and not-for-profits should be open about their management and administration costs, rather than apologetic about having them at all. They should explain what these costs relate to and how they are essential to the organisation’s work. And they should challenge those who seem to think that everyone in a charity should work for free. In today’s complex world, good management is a virtue. And it costs money. The sector must not hide from this fact.

The era of best practice is over

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It’s bad news for finance directors. When it comes to improving the finance function, there is no silver bullet. There is no super new technical wizardry or consultancy sleight of hand that will transform things overnight. And there is most definitely no such thing as best practice, no one-size-fits-all approach that will make your finance troubles go away.

This, at least, is the conclusion reached by the Institute of Chartered Accountants in England and Wales in recent research that it has undertaken into the finance function, as part of its Finance Direction initiative. At first glance, these statements seem quite odd. After all, we’re bombarded every day with information about ‘best practice’ in this and that, so surely there must be something in it. Mustn’t there?

The ICAEW research reminds me of some work I did with one of my clients a few years ago, to develop a way of identifying best practice in the higher education sector. After a lot of thought and discussion with people across the sector, we came to the conclusion that best practice is very difficult to come by. Even its less absolute cousin, good practice, turned out to be somewhat elusive.

It’s all very well for someone to say that they tried something and that it seemed to work well, but that’s a long way from saying (and being able to prove) that it will yield similar benefits for other organisations. In fact, it is often difficult even to be sure that the activity has yielded these benefits in the original organisation, given the absence of a ‘control’ and the understandable tendency of some organisations who have spent a lot of money on something to be overly positive about how useful it has been.

What it comes down to is that all organisations are different, with different people, different priorities and different organisational cultures. Just because something has worked in one organisation (if it did, in fact, work there), this is no guarantee that it will have a similarly positive impact in another organisation. While the sharing of experiences between organisations is to be encouraged, the wholesale adoption of some particular way of doing things just because it seems to have worked somewhere else is not.

What is ‘lean thinking’?

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I’ve spent much of the last few weeks working on process improvement, productivity and efficiency savings. One of the topics that has come up time and time again is ‘lean thinking’. However, it is often held up as a panacea for all kinds of ills, with little in the way of explanation or justification. So here, in a nutshell, is my beginners guide.

Like many process improvement concepts, lean thinking started its life in manufacturing. Its emphasis is on developing systems that produce exactly what the customer wants at the lowest cost and with no waste. Having been used successfully in this environment, it is now making an appearance in the delivery of services, including increasingly those in the public sector.

Womack and Jones* explain that the basic idea of lean is that an organisation should focus ‘obsessively’ on the most effective means of producing value for their customers. These could include external customers such as service recipients, or internal customers of a particular process such as financial services.

They go on to identify five principles of lean thinking:

1. Determine what your customers value. Find out what they want and what their specific needs are. All of your effort should go on meeting these needs.

2. Understand the ‘value stream’. The value stream is the series of activities that, when done correctly and in the right order, produce the product or service that meets the customer’s needs. Activities that do not form part of this value stream should be eliminated.

3. Improve the flow. Work should not be ‘batched’ or held up in bottlenecks. Instead, it should flow steadily and without interruption from one element of the value stream to the next.

4. Pull, don’t push. A lean system should be responsive to customer demand, so that work is ‘pulled’ through by customer needs, rather than ‘pushed’ by the capability, capacity and availability of the operator.

5. Strive for perfection. As the first four principles become embedded in a lean system, you will understand the system better and find more ways to improve it. Lean systems, therefore, get leaner over time. Value is increased and waste is reduced.

Such is the importance of waste in lean thinking that it is worth dwelling on it in a little more detail. Bicheno and Holweg** have researched the different types of waste in a service environment and define them as follows:

  • Delay on the part of customers waiting for service, for delivery, in queues, for response or not arriving as promised. The customer’s time may seem free to the provider, but when he or she takes their custom elsewhere the pain begins.
  • Duplication. Having to re-enter data, repeat details on forms, copy information across or answer queries from several sources within the same organisation. (Is this starting to sound familiar yet?)
  • Unnecessary movement. Queuing several times, lack of one-stop facilities or poor ergonomics in the service encounter.
  • Unclear communication and the wastes of seeking clarification, confusion over product or service use and wasting time finding a location that may result in misuse or duplication.
  • Incorrect inventory. Being out-of-stock, unable to get exactly what was required, substitute products or services.
  • An opportunity lost to retain or win customers, a failure to establish rapport, ignoring customers, unfriendliness and rudeness.
  • Errors in the service transaction, product defects in the product-service bundle and lost or damaged goods.

A perfect system, in the eyes of lean thinking, delivers just the right amount of value to the customer (i.e. just what they want, no more and no less) in the right place and at the right time. Each step in the process works effectively and adds value to the final product or service. And critically, waste or inefficiency is eliminated.

While much has been written about lean thinking and its application to the service environment, it remains an evolving concept with no central authority or structured approach. Like many performance improvement concepts, it has its fans and it has its critics. And again like many such systems, it has spawned a plethora of consultants, models and accreditations.

In my view, lean thinking – like other concepts such as six-sigma – is not the be all and end all of organisational improvement. But it does ask some very pertinent questions about what we do and why we do it. And it provides some very powerful ideas for improving efficiency and reducing waste. While it may not be the solution for every problem, it is an idea from which every organisation can at least learn something useful.

References

* Womack, J. and Jones, D. (2005) Lean Consumption, Harvard Business Review, 83, (3).

** Bicheno, J. and Holweg, M. (2009) The Lean Toolbox: The Essential Guide to Lean Transformation,4th edition, Buckingham: PICSIE Books.

Sockmonkey to work with CIPFA and SUMS

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It’s been a big week. Firstly, I’ve been accepted as an associate with the Chartered Institute of Public Finance and Accountancy (CIPFA), providing consultancy services and short-term management support to CIPFA’s clients across the public sector. I don’t like to boast, but CIPFA describes its associates as ’the best of the best’, offering exceptional talent, experience and taking pride in the work they do. Aw, shucks…

And secondly, I’ve been accepted as an associate consultant with Southern Universities Management Services (SUMS). SUMS is a specialist higher education management consultancy firm that is owned and operated by a group of over twenty universities. It combines a deep knowledge of higher education with specialised expertise in strategy implementation, business improvement and organisational transformation.

These are both excellent opportunities for me personally and for Sockmonkey Consulting, as I work to establish myself and the firm as a provider of intelligent research and consultancy services and to develop a broader network of relationships across the public, not-for-profit and social enterprise sectors. I look forward very much to working with both CIPFA and SUMS in the months ahead.

The costs of sharing corporate services

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In a report issued today, the National Audit Office has concluded that government attempts to save money by sharing ‘back office’ services such as finance and human resources have actually ended up costing more money than they have saved. It appears that by creating complex services overly tailored to individual departments, the five shared services centres review by the NAO have increased costs and reduced flexibility. There has also been a failure, the report says, to develop the benchmarks necessary for measuring performance.

NAO report on shared services

The five centres, which were set up between 2004 and 2011, were due to cost £0.9 billion but have so far cost £1.4 billion. They have also not achieved the planned benefits. By the Government’s own estimates, they should have saved £159 million by the end of 2010/11, yet only one can demonstrate a break-even on its investment. The two centres still tracking benefits report a net cost of £255 million.

So why have these centres, which look so good on paper, failed to work out in practice. The report identifies a number of reasons.

1. The departments involved have not acted as ‘intelligent customers’. They have not sought to obtain detailed information on costings and benchmarks and have not tried to identify the key drivers of cost, which would have helped them to monitor progress and improve efficiency.

2. The services have been overly customised to individual departments. This has meant that the shared services centres have not been able to achieve the economies of scale that come with standardisation of processes and volume of activity.

3. The centres have not had a sufficient focus on improving efficiency. They have been working to get more customers on board, but have not paid enough attention to driving efficiency for their existing client base.

4. The IT systems used have been overly complex and expensive. The centres have set up top-of-the-range enterprise resource planning systems that provide far more functionality than is required. Simpler systems would have been more appropriate – and much cheaper.

5. There has been poor take up of the centres. The sharing of services is voluntary and many parts of central government have chosen not to use the centres, but rather to keep their corporate services in house. This means that some centres have significant spare capacity and have not been able to benefit from the anticipated economies of scale.

6. There has been limited challenge to the centres’ performance. With little in the way of central oversight and a lack of cost and performance benchmarks, it was left to individual departments to make sure that the arrangements delivered what they were supposed to.

The report concludes that the Government’s shared services initiative has not delivered value for money for the taxpayer. However, the NAO welcomes the Government’s commitment to addressing the weaknesses it has identified, with the Cabinet Office now taking overall leadership of the programme and planning to roll it out across the whole of central government by 2014. This is an ambitious strategy, but probably a necessary one if the potential benefits of sharing corporate services are to be realised not just in theory, but also in the real world.