Monday, April 20, 2015

Why bigger is rarely better

      Back in February, the Montreal Gazette reported that the Quebec planned to eliminate some 1300 middle managers in their health care system. The aim was to save money. They expected to reduce the bill for health care by about $220M per year. See:
      The recent riots in Quebec indicate that the government has proceeded with its austerity plans, eliminating jobs throughout the public sector. In healthcare, some 182 care-giver agencies were to be replaced by 32 “umbrella” agencies.
     Anyone who has followed the history of rationalising a system by combining smaller units into larger ones knows that larger organisations need more, not less, management. The reason is simple: an organisation is an information network. We organise ourselves into teams and larger systems in order to perform work that we can’t do separately. The very essence of these systems is information flow. Goods and services flow wherever information about them directs. When information is blocked at any point in the network, the whole system slows, and if the blockage continues, it eventually stops.
     A fundamental property of a network is that the number of the possible paths through it increases exponentially with size. This means that the larger the organisation, the more effort must be expended to ensure that the information moves along the proper paths. Beyond a certain size, the organisation uses more effort to move information than to do its productive work. One symptom of this is that the productive workers must spend more and more time documenting their work.
     So, in the long run, the new system will cost more, not less.
     The wider economic effects of firing 1300 people will be felt almost immediately, and will be negative.
     Assuming the projected savings are real, some $220 million will be removed from the Quebec economy. That’s a lot of money, and will reduce economic activity in Quebec. Economists estimate that on average each dollar spent generates about five dollars of economic activity. So saving the Quebec Treasury $220M will cost the Quebec economy about $1 billion. That will of course cost the Provincial Treasury a lot of money. Probably about $220 million.  Net savings to the Treasury: zero. Net effect on the wider economy: a cost of about $1 billion.
      But it gets worse. These middle managers are the people who manage patient care, who plan. They will be replaced by senior manager from higher up the food chain who haven’t done this work for some tine, if at all. The effects of replacing experienced people with inexperienced ones can only be imagined.
     So why is the Quebec government going through this futile exercise? Because too many people believe that a government budget is the same as a household budget, and too many people think when they spend money it disappears. Too many politicians, who should know better, make the same mistake.
     They don’t understand the basic principle of a money economy: My spending is your income, and your spending is my income. If we all spend less so that we will have more money to pay down our debts, we will all earn less, and after we’ve taken care of the basics, we will all have less money to pay down our debts.

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