Choice, competition, markets and human services: Some thoughts

The PC has a two-stage reference on increasing the application of competition, contestability and informed user choice in the provision of human services. The first stage will identify the most prospective areas for the application of such principles whilst the second will tell us all How to Do It.  Its origins I presume are in the Harper Competition Review’s tacking on human services to its remit. It’s odd that such a large change should be proposed by the four people comprising the Harper Review all of whom (I am assuming from their CVs) have had pretty minimal involvement with human services. I’m not sure Plato had quite this in mind, but there you go – the economic reformer as philosopher king.

I recall attending a two day seminar on the subject put on by the Harper Review and it was fairly clear that the panel itself was a bit bemused by it all. I thought that they’d got the idea for this departure in competition policy inquiries from their terms of reference, but on inspecting them further in writing this post, I can’t find evidence of this. Perhaps there was an exchange of correspondence between the inquiry and the Government.

In any event, I recall Gary Sturgess admonishing the policy elite that had turned out to the two day conference “stop it or you’ll go blind”. Gary was unimpressed with the Procrustean way in which the report rehearsed the advantages of competition and choice concluding that if it’s good for shopping centres it must be good for human services without any real understanding of the difficulties of delivery. You’ll get some insight into his thinking if you read this speech he gave to British Services Association in London earlier this year.

Here’s a central passage:

I have always been uncomfortable with the terms ‘contracting out’ and ‘outsourcing’ because they imply a denial of responsibility that is, I believe, embedded in the use of the word ‘out’. Governments cannot outsource the responsibility for delivering public value, and yet all too often, the process of organising a procurement and negotiating the terms of a contract seems to encourage this very mindset.

There is no necessary connection between contracting and outsourcing. But the frequency with which one is accompanied by the other, in the private sector as well as the public sector, suggests that we need to be extremely careful in how these tools are used. The way in which some government agencies have sought to maximise risk transfer is evidence of an outsourcing mindset, the frequency with which price becomes the principal driver in contracting, the manner in which questions of quality and flexibility are so often sacrificed.

I have the same concerns when politicians and policymakers speak of ‘public service markets’ – the use of this term seems to carry with it an underlying assumption of ‘laissez faire’ – simple consumer markets of the kind that are studied in first-year economics. I have battled this repeatedly in my home country ¹, where our national government is constructing a massive voucher scheme for disability support services.

It is a reform that has bipartisan support – it was initiated by a Labor government – and the prospect of choice has been warmly embraced by people with a disability and their carers. But until very recently, when questions concerning the design and stewardship of the supply side were raised, policymakers responded: ‘oh, the market will fix that’. The problem is that there is no market – that is the challenge that policymakers have set. And there is no reason why the market will address supplier failure in a timeframe that will be relevant to a person with a severe disability. …

I think many so-called public service markets are much more like corporate supply chains than commodity markets. If Ford mismanages its supply chain, so that its vehicles burst into flames, there is no point blaming their suppliers. It is Ford that will face the cost of recall. It is Ford’s brand that will be trashed. It is Ford’s share price that will suffer. And while Ford may lay off some of the blame on its suppliers, it is Ford that will bear the vast majority of the reputational and financial cost.

The Harper Review responded to Gary’s and others’ critiques by adding this point to its competition policy principles. “Governments should retain a stewardship function” but it’s all pretty skin deep. It didn’t go out of its way to document the rich pathologies that lie in wait for the unwary – the profound agency problems that arise from the fact that, by the time failures are uncovered, the best and the brightest have moved on to the next glorious phase of their careers, which, as Gary laments, lionise Olympian policy making over delivery, even though delivery is of the essence in these markets.

In any event, here are two thoughts on these issues for what they’re worth.

The custodian of the system is a resourcing, risk bearing, mechanism designing and optimising brain

Following Sturgess’s great analogy with a large firm, I think we can go a little further simply by changing the firm. Ford is good for making the basic point that all outsourcing in Ford is subordinate to Ford’s stewardship of the whole supply chain – and its bearing of the ultimate risk.

However Toyota took things further in a very creative way. It understood much better than Ford that the organisation needed to understand things for the perspective of others. From the perspective of customers and from the perspective of its most important partners in production – its suppliers and employees. In this Toyota was finessing some of the pathologies of central planning anatomised by the likes of Hayek, even if he took no interest in their achievements and what they might mean for his thinking.

Toyota drew both suppliers and employees in with higher levels of trust, security and collaboration. Where American car companies sent their engineers into suppliers as ‘inspectors’ to spot potential efficiency gains which could then be deducted from the prices they were paid, Toyota was assiduous in sharing the benefits of cost reductions with suppliers with obvious impacts on their future interest in productivity improvements. Likewise, understanding that building a car is about coordinating and optimising around 90,000 manufacturing operations, it distributed it’s ‘brain’ amongst its workers, arranging them into cooperative teams and spending literally ten times as much as their American counterparts on training – particularly in statistical control techniques and the latest NC machine tools and encouraged them to endlessly strategise and optimise their productivity in quality circle meetings.

They did something else. They sought to craft a hybrid competitive/collaborative system based around protecting collaboration from the corrosive effects of competition where it made most sense to – particularly with new knowledge. They insisted that their suppliers form a ‘knowledge commons’ within the Toyota family. They did this by giving a lot of their own technological knowhow to suppliers and also by sponsoring regular supplier wide open days – both at Toyota and supplier factories – and by the implicit threat that non-cooperation in the knowledge commons would disqualify them from Toyota’s patronage. This rapidly normalised the culture of sharing and collaboration both within and between firms within the ‘family’ of suppliers thus increasing the rate at which successful innovations spread. In the upshot, Toyota plants often doubled their competitors’ labour productivity while exceeding their production quality.

And something else is indispensable – and arguably the most difficult thing to build in the system. It’s brain. As TACSI’s submission to the PC Inquiry into Human Services argues:

In order to decide how competition, contestability and choice can optimise performance in particular human service markets, the Commission needs to pay attention to the design of the ‘brain’ in these markets. Here, we use ‘brain’ to describe the systems of intelligence gathering, judgement, market experimentation, evaluation, judgement, knowhow and market shaping that are likely to sit within government.

A ‘brain’ works out what creates outcomes and what doesn’t. A ‘brain’ would know how the system is currently performing and how to improve and grow
services when they are working. A ‘brain’ could also ensure that knowledge is
transparent to outsiders and widely shared for learning.

In many of the sectors in which we work, although the initial system rarely performed as we would like to see, increased outsourcing has in fact reduced expertise as to what
works. The risk is that government has become an expert in contract management, and service providers have become experts in ‘contract delivery’. ‘Brains’ have atrophied on both sides.

You’ll detect echoes of my ideas about the indispensability of independent monitoring and evaluation (embodied in my proposal for an Evaluator General) in all this. And I hope you can also appreciate that doing so is an order of magnitude more difficult than the system within Toyota, where quality, cost and profitability are relatively clear concepts. Human services is a much more difficult arena in which to know what works and what doesn’t, how it works, how it effects other parts of the system, the difference between long and short term impacts and so on.

Control and choice within markets and within systems

Finally, note how unimaginatively we’ve bound up the idea of choice and competition and a fairly stereotyped economics 101 approach to markets. We think of choice as consumers choosing from suppliers. But consider how case-managers are chosen for clients in child protection agencies around the country. Commonsense would lead you to believe that the match between case-manager and client would be pretty important to its success. But how is the match made? There may be some differences in the various systems around the country. But as far as I know clients – troubled families – don’t choose their case-managers. And neither do case-managers choose their clients. Just like students don’t typically choose their teachers, or teachers their students.

It’s all on auto-pilot. For a tiny modicum of convenience ‘the system’ never considers it. It’s just a system allocating job-lots as if this was a simple commodity market. Moreover it becomes possible to imagine a system with lots more ‘choice’ in it – lots more competition between providers – without any more choice for either clients or case-managers. (I’d be interested to know how much of this kind of choice is delivered in the Job-Active network. Of course competition between suppliers can create an environment more conducive to this than a singular hierarchy, but a central brain would be finding out how important it is, sharing experience so that those in the system can learn from each other.)

Now I came to this line of reasoning by thinking of what we do in Family by Family. In that program the family seeking help – chooses their mentor family from a selection of families that they get profiles of as if they were in a dating service. And here’s the thing. We didn’t give the families seeking help the choice out of some political or ideological judgement that choice is better, or even that we were ’empowering’ them. It just seemed natural to do this when seeking to build a service around their needs. Not the needs of all the other higher status participants in the process – the mentor family, the family coach and other professionals running the program.

The ideal type ‘perfect competition’ appearing in economic textbooks is a miraculous synthesis of interests. Each side expresses the opportunity cost of alternatives – in their choices and their conflict of interest – buyers want to minimise prices and sellers want to maximise them – is mediated by free competitive entry into the market.  The vast number of preconditions for perfect competition illustrate how ‘special’ this ideal state is. It exists pretty much no-where in the empirical world, though the powers of the ideal are so miraculous that markets work extremely well or at least better than alternatives in a surprisingly wide number of productive circumstances. But we’re really pushing it to imagine that this should be assumed to be the case in many human services.

Of course none of this is to say that the hierarchical, centrally controlled systems we have are much chop – dominated, as they are, by producer and employee interests. Indeed, it’s this very fact that gives some rough and ready plausibility to the idea that, whatever its shortcomings, competition between providers might actually be better than this. But surely we can do better. I think we can do a lot better by embarking on the countercultural journey of placing the needs and perspectives of users at the heart of all the difficult choices we need to make to build a better system.

I’m reminded of the Great John Dewey’s thinking on education in the late nineteenth and early 20th century in which he proposed that:

Now the change which is coming into our education is the shifting of the center of gravity. It is a change, a revolution, not unlike that introduced by Copernicus when the astronomical center shifted from the earth to the sun. In this case the child becomes the sun about which the appliances of education revolve; he is the center about which they are organized.

Postscript: The interview of the blog post.

https://soundcloud.com/666abccanberra/dr-nicholas-gruen-my-favourite-economist-2-8

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