Do ‘efficiency’ and ‘effectiveness’ conflict? Eli Goldblatt, author of the 1983 book ‘The Goal’, which led to the theory of constraints, believes that they do. Goldblatt was a physicist who applied his scientific thinking to manufacturing. (Incidentally, Deming was also a physicist.) In ‘Beyond the Goal’ Goldblatt argues that the objective of every manager is to manage well, but what does it mean to manage well?
“To manage well”, he says, “we have to satisfy two different and necessary conditions. One is we must control costs. If we don’t control costs, costs will go too high and we are bankrupt. This is true for a ‘for profit’ organisation and for a ‘not for profit’ organisation. On the other hand, we must protect sales. Sales are the things (products/services) that we promise to the external world. In business, it is the service or product, if you are in the army, then it is what you promise – defence. Do one without the other, you have done nothing.
To control costs where do you start? Where the costs are drained. In every department! So in order to control costs you must judge according to the local impact. But now look at sales, your impact on the wider world. This is not done by one person, because if it was, you wouldn’t need an organisation. If you look at a for profit organisation, for example, you have people who are designing the product, those who are producing, those who are shipping, those who are billing and receiving the money, those who are marketing and getting the customers. If any one of these links drops the ball, sales fall. Sales are achieved through the synchronised effort of all links.
That means that if you want to protect sales, that is, what you are promising to the external world, you can no longer just look at the local impact, because what may be good for one department may be disastrous for another. So to manage well, I must control costs and to control costs I must look to local impacts, but I must also protect my sales and to protect sales there is no way I can just look at local impacts”. – hence conflict.
Now ‘controlling costs’ is what we mean by efficiency, and ‘protecting sales’ is what we understand by effectiveness. So, in business – and in government – we have a conflict.
The question of how to determine whether internal business units are efficient and effective is common across all industries. A business unit can demonstrate efficiency in cost control, improved timeliness of service, and minimising waste. It can be effective by providing higher quality services (to other business units) that in turn enhance the organisation’s services. A reduction in cost (budget) of the business unit may not result in improved effectiveness as the unit will have a range of practices that can be optimised through use of technology and resources (technology and resources being provided by cost). If the technological capability or resources falls below a threshold level, the business unit can no longer be effective. An example of this is local government agencies whom have a small waste fleet are not cost competitive against a contractor fleet because the scale of the operation prevents gaining efficiencies of scale. Whether or not they can provide an effective service depends on other factors.
When we change the focus from internal business units, and look at how infrastructure decisions are made (decisions to renew, replace, build new, or seek other service delivery methods), the discussion is more around the balance of cost when compared with level of service. If we pay more for a higher level of service, there is no gaurantee that the service will be more efficient. It may be more effective, as effectiveness is defined by the higher level of service. A different view is if we seek to reduce the level of service (provided by assets) we can pay less, but there is still no direct correlation with efficiency.
This may be a serious concern: cost is often subconsciously used to measure efficiency when evaluating infrastructure pricing. That is: a lower price for the same product is implied to mean it is more efficient. (Side note: tender evaluation processes include qualitative attributes but they relate to the builder, not to the asset being created). We need other measures of efficiency such that cost takes a second seat, and where timeliness and optimising the use of resources (over the life cycle of the asset of course) are the primary decision rules.