Friday, 23 October 2020

World-beating at what?


The first time that I came across Vilfredo Pareto and his eponymous principle was some 40 years ago in the context of a computer system managing the stocks of spare parts for repairing appliances. In this application, the 80/20 rule tells us that by holding the right 20% of all possible spare parts close to the point of use, 80% of faults could be repaired without having to order parts in. The savings in stock holding costs are significant – the hardest part is identifying which 20% need to be stocked, and that’s where the computer came in. In some ways, the principle can be thought of as a mathematical representation of the law of diminishing returns.

The 80/20 rule isn’t a precise law, but it’s a pretty accurate and highly useful rule of thumb which applies in many other spheres as well – like contact tracing, for example. Whether it was part of the thinking behind the 80% target set for the outsourced track and trace service in England is unclear, but its benefits to the outsourcer are very, very clear: the costs of achieving an 80% target are likely to be around 20% of the costs of achieving a 100% target. The graph between cost and target isn’t linear, but it rises only slowly up to about the 80% mark after which it rises sharply. I worked in outsourcing for a while, and experience suggests that anyone who wanted to maximise the profit margin on any service would choose an achievement target of around 80%; it’s a ‘sweet spot’ for the balance between cost and reward. If I could get away with no penalties for under-achievement as well, I’d think I was in outsourcers’ heaven. Fair play, the test, track and trace system may be an operational disaster having only a marginal impact on control of the pandemic, but no-one can criticise the outsourcers’ negotiation skills.

As for the government’s negotiation skills, on the other hand … the words generally attributed to PT Barnum spring to mind. As far as we know, Chris Grayling had no hand in this contract, but his spirit certainly lives on in government. They have an ideological commitment (and if ideology isn’t enough, an occasional political donation tends to help) to the idea that the private sector will always do better than the public sector, where ‘better’ is taken to mean ‘lower cost’ or, as they would prefer to phrase it ‘better value for money’. Sometimes it’s even true; the profit motive can indeed encourage a focus on costs and waste which an annual budget-setting approach does not. But often it isn’t true – apparent savings are just a mirage, a pretty picture hiding an approach based on corner-cutting and under-achievement with an approach to charging for change management which quickly devours those apparent savings in the initial price. One thing that the private sector is undoubtedly better at than the public sector is writing and negotiating contracts. It helps when those with whom they are negotiating are predisposed to believe whatever the outsourcers say. When the government refers to the service as world-beating, they are not lying completely, they are just referring to the profit margins rather than the service delivery.

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