Public sector productivity is a real-life issue

“The Four Seasons” was written by Vivaldi in 1723 for a string quartet. Today, it still takes four musicians and the same technology to play the same piece. But the labour cost of the string quartet has increased significantly since the 18th century. From a management perspective, opportunities to reduce the cost of a live performance of The Four Seasons are virtually zero. Irrelevant to the public sector? Not so fast.

Baumol’s cost theory (1966) helps us to understand what’s going here: because some activities cannot be substituted for technology, the costs of these activities will rise over time in comparison to those activities where some substitution can be made. As an example of this, technology has made banking much cheaper than it used to be. Conversely there have been limited opportunities to substitute technology in the process of seeing your dentist, and the cost of visits to the dentist will continue to increase.

Much of the public sector is labour intensive: 70% - 80% of expenditure in agencies is made up of wages and salaries. Most agencies will say that, over the last decade, they have achieved all they can to meet wage and cost inflation by realising efficiency savings. Further savings can only be achieved by reducing staff numbers.

Let's say we subscribe to this model (labour-intensive service delivery models with very limited ability to reduce staff levels). We would conclude that public sector staff numbers cannot reduce and must rise in line with increasing demand for services. If staff numbers are at least fixed and wage rates rise with inflation, the inevitable result will be ever-increasing expenditure.

But is this right? There are numerous examples where the cost of public services has been reduced through changes in process and the use of technology. For example, the cost of providing passports has significantly reduced through online applications, standard processes and triaging. Another example is the online filing of company annual returns: the costs have reduced to such an extent that further fee reductions may be possible.

So unlike The Four Seasons, there are many opportunities to introduce new technologies and change the way we work to deliver high-quality services at affordable levels. Ongoing improvement in public sector productivity is essential if ever-increasing public sector expenditure is to be avoided.