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Can we afford our diseconomies of scale?

It is surely not unreasonable to assume that even those with no background or interest in public sector commissioning and procurement would be able to understand that dealing with citizens is different to manufacturing pins.

But despite the obvious difference there remains one overriding principle that commonly informs our approaches to both.

One of the clues for what the principle is can be found on the back our £20 note in the form of the famous economist Adam Smith (1723-1790).

And more specifically in the phrase ‘economies of scale’, which has led to deeply embedded assumptions about the way the world works. That is to produce anything efficiently, at the best price and to deliver quality it must be done at scale.

Even those with no background or interest in business or economics will have heard the phrase ‘economies of scale’. And even though there is often agreement about the added value of small scale, diverse, grass roots intervention, and the idea that we need to ‘scale out’ rather than ‘scale up’ innovation in the community sector, there is currently a complete lack of a connection between these concepts and mainstream public sector delivery.

Service delivery is so often specialised and scaled in ways that assume that economies will naturally occur. Although such processes can sometimes drive productivity gains, it is alarming that this thinking completely dominates the design and management of service delivery, including significant aspects such as commissioning and procurement, at all levels of the public sector in the 21st century – and yet often it simply isn’t true!

Why do we tolerate services that are remote, provide less impact and cost more, in the current climate? The answer at least in part is because our mind is closed to the very idea that disaggregation might be more cost-effective. Indeed perceived inefficiencies almost always seem to lead to strategies based on a further tier of aggregation, scale and management control. Very often to a point where inefficiencies become so opaque that they become desperately difficult to address, even as they become more apparent to the rest of us. And as we do this we also drive out the plurality of supply and local multipliers that are widely recognised as vital for high performance in public sector spend.

The consequences of this trend are spelled out in the excellent recent report by CLES on local procurement for the Federation of Small Businesses.

It is for these reasons that Locality is working with Professor John Seddon of Vanguard Consultancy on a ground-breaking research project which has major implications for all of our members, and challenges some of the widely held assumptions that in our view lead to ‘diseconomies of scale’.

Locality members have reported endless examples of diseconomies of scale to us, from youth services to legal aid services to mental health interventions, through to employability schemes like the Work Programme, probably the most extreme example of scale thinking and one which is having disastrous consequences for poorer communities and smaller providers. Reports relate particularly to areas of complex social need where solutions would be better found by responding to particular individual needs rather than ‘one size fits all’.

So this week we set out our challenge to scale thinking, Public Services, Civil Society and Diseconomies of Scale, and outline our plans to develop an evidence base which we hope will encourage a new approach to public service decision-making. An ambitious aim? Certainly. But it’s not just us making this argument. The importance of innovation and diversity in the community sector was underlined in the NESTA publication, Mass Localism, reflecting on the successes of their Big Green Challenge. It asserted that the government should resist the temptation to scale successful community innovation. Successive governments have simultaneously accepted that ‘one size does not fit all’ and yet at the same time been obsessed with finding successful models and ‘rolling them out’. Mass localism represents a different approach: enabling local innovation to flourish and celebrating diversity of provision.

This is a fundamentally different way of conceiving the design and delivery of services. Locality members know from first hand experience that the more complex the social problems, the more important it is to design services in such a way that ‘deep value relationships’ can be formed by the frontline service agency with the client – and this more accessible, responsive and embedded provision can deliver stronger and more cost effective outcomes and impacts.

In early discussions about the research that we’ve undertaken, one community sector leader said to us: ‘Well that sounds really interesting, but it almost sounds as if you are going to argue against one of the immutable laws of economics’. Well, we would argue that ‘economies of scale’ is in no way an ‘immutable law’ when applied to the delivery of services and that things often become more expensive when you do them at scale because management costs can multiply rather than divide.

What do you think? We will periodically provide updates as our work progresses, but in the meantime we would welcome your comments, ideas, evidence, and most importantly your critical challenge.

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Jane Leathley
Jane Leathley
11 years ago

I punched the air and shouted ‘yesss’ on reading this. I have been following John Seddon and Vanguard for a while and been distressed that ‘our’ sector was being dragged further and further into the public sector’s wrong-headed approach at all levels – not just procurement. ‘We want to see economies of scale’ has also been a mantra for our local authority voluntary sector grant scheme. An awkward silence followed my suggestion that that there is nothing automatic about scaling up resulting in savings, and in fact lots of evidence that it often does the opposite.And having the audacity to ask them for their evidence base has not gone down well. Delighted to hear that ‘our’ sector is developing an evidence base on this one. Thank you!

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