Big is beautiful (again), by Colin Talbot and Carole Johnson

5 Jan 06
What goes around comes around. For decades, small-scale government was all the rage. Now large centralised public agencies are back in fashion. Colin Talbot and Carole Johnson investigate the merger mania that is leading public services to grow like topsy

06 January 2006

What goes around comes around. For decades, small-scale government was all the rage. Now large centralised public agencies are back in fashion. Colin Talbot and Carole Johnson investigate the merger mania that is leading public services to grow like topsy

The 1980s and 1990s were the decades of the drive for small government. For most reformers, such as Margaret Thatcher, this meant less public spending, fewer people employed in the public sector and less regulation. On just about every count they failed. A major survey this year by the Organisation for Economic Co-operation and Development, Modernising government – the way forward, concluded: 'Government has a larger role in the societies of the OECD countries than two decades ago.'

Public spending remained stubbornly around the same levels, as a percentage of gross domestic product, and even increased in some countries. Public sector employment did shrink slightly, mainly due to privatisation and contracting out, but remained at historically high levels. Regulation, though rather more difficult to measure, was commonly agreed to have increased, despite vigorous efforts to reduce it.

But small government also came to mean – especially in the UK in the 1990s – small organisations. It was the era of 'unbundled government'. Small, it seemed, was beautiful. Large, monolithic public services were to be broken up into lots of itty-bitty 'agencies': executive agencies in government, NHS trusts, locally managed schools, independent higher and further education institutions and so on. Hundreds of new organisations were hacked, sometimes brutally, out of the old public administration bureaucracies. They sprang up almost overnight, most with their very own chief executive, mission statement and designer logo.

Some academics attributed this movement to a global trend towards 'small-scale production' and the end of 'Fordist' mass production in both the public and private sectors. Others talked about the networked society or 'post-bureaucracy'. One recent award-winning business book by John Roberts – The modern firm – discusses at length the new dominant model of the 'disaggregated' company. Later the change was attributed to the rise of a new 'managerialist' ideology and the so-called 'new public management'. This, in turn, was said to be fed by new ideas from economics – public choice, new institutional economics, transaction economics and so on.

The more pragmatic reasons given for these changes were many and various. Greater autonomy would give managers more room to manage. Organisations could focus on a single 'job to be done' rather than being large, one-size-fits-all, multifunctional monoliths. They would be 'closer to the customer' and more focused on their needs; as 'arm's-length' organisations, they could be managed through 'contracts' that specified their tasks, budget and performance. Multiple organisations producing the same services would enable the introduction of some form of competition between them. Finally, competition, contracts and more flexible management would between them produce efficiency savings.

All of these explanations seem plausible at face value. But, as the late, great, economics professor and Nobel Prize winner Herbert Simon pointed out in 1945, these sorts of maxims usually have exact opposites, which seem equally attractive. Managers need to be controlled to prevent them indulging in budget-maximisation and other games. Organisations too narrowly focused on the job-to-be-done can ignore the bigger picture and end up causing more problems than they solve. Public organisations have to safeguard the citizens' and taxpayers' interests by ensuring equity and sticking to the rules. Internal management is usually cheaper and more flexible than contracting out – 'make not buy'. Joined-up government is needed, whereas competition might lead to inefficiencies through wasteful duplication, unused capacity, extra transaction costs and poor co-ordination. Large-scale organisation is relatively efficient and offers economies of scale. Why duplicate back-office services and purchasing and supply when you can run them together?

Over the past 15 to 20 years, the first set of arguments has dominated policy. In 1995, the average public servant would have been working in an organisation that was much smaller than in 1985. But by 2005 the trend seems to be in reverse. Today, a public servant is more likely to be working in a much bigger organisation than they would have been a decade ago. As the box overleaf illustrates, we are being engulfed by merger mania across the public sector.

In health in the early 1990s, for example, there was a massive disaggregation of the monolithic health service into 'purchasers' and 'providers' – the latter being mainly newly created NHS trusts. Initially, there was more or less one trust per hospital, but gradually throughout the late 1990s there was a series of mergers into ever-bigger trusts, now more usually involving four or five or even more hospitals. In some cases, the new super-trusts are as big as the old district health authorities they were carved from.

With local government and other services, there has been a similar trend. While some services have been given their independence – the old polytechnics, further education colleges and, of course, schools – other aspects of local government have gradually been consolidated into larger and larger units. The creation of unitary authorities in Scotland and Wales was a partial step in this direction. But this is now gathering pace, with proposals to do the same – only bigger – in England and to merge authorities in Scotland and Wales and create seven super-councils in Northern Ireland (from the current 26).

Several functions of local government and other services are also being swallowed up into national or regional agencies. The probation service, which used to have more than 40 local services, has been effectively 'nationalised'. Environmental protection and meat hygiene functions have been aggregated into national agencies. Police forces are likely to be merged into 15 or fewer regional forces, with possibly a single force for the whole of Wales.

And, to be fair to central government, for once they are not doing anything to the rest of the public sector that they are not also doing to themselves.

When New Labour came to power the five largest 'agencies' (or bodies 'working on agency lines') were the prison service, the Benefits Agency, the employment service, Customs & Excise and the Inland Revenue. Since 1997, every one has been the subject of large-scale merger activity and the 'Big Five' have been reduced to the 'Mega Three' (see boxes overleaf).

So what is driving the merger mania? Well, the two overriding themes seem to be efficiency and co-ordination. The Gershon efficiency drive has certainly ramped up the perception that joined-up back-office services, including IT and purchasing, mean big efficiency gains. The 'economies of scale' doctrine is clearly back in fashion in a big way. And this started well before Gershon, as the arguments around the JobcentrePlus merger suggest. But Gershon has certainly given this added momentum.

The second key strand of argument has been around 'joined-up government', especially in the context of providing 'seamless services' to the public. This is closely linked to the idea of focusing on 'outcomes', which fragmented organisations with a narrow focus on single 'outputs' are now seen to have neglected, if not actually damaged.

Notice that ideas such as 'close to the customer' and accountability have disappeared from these arguments. Customer service is still seen as important, but now you don't have to be close to them, just take a customer viewpoint (ie, do some focus groups and surveys and a bit of 'mystery shopping'). Accountability to citizens likewise has retreated into its old, public administration, format – formal accountability through ministers and other elected officials. So, too – for these organisations at least – has the idea that competition is the best route to efficiency gains. Efficiency now comes not from competition and contracts but by 'economies of scale'.

This is not to say that there are no longer elements of decentralisation and fragmentation (and competition) at work. The move to larger but far more independent and competitive NHS foundation trusts is a case of both some consolidation and much more autonomy and competition. The extension of the city academy idea into a wide range of schools is a similar move.

But the reality is that today an individual public servant is much more likely to be working in, or about to be working in, an organisation that is much larger than it was five or ten years ago.

Nor is recentralisation restricted to organisational structures. Witness the following statement in this year's Pre-Budget Report, which formalises the re-centralisation of pay controls into the Treasury: 'Furthermore, to achieve a more co-ordinated approach to pay across the public sector, this Pre-Budget Report announces that the government is establishing a new single gateway for major pay decisions. Reporting to the chief secretary to the Treasury, the gateway will set common objectives for pay across government, extending and strengthening existing arrangements for considering the structure of new pay deals.'

That sounds like centralisation to us. It is not clear how far this trend will go and it would be wrong to extrapolate too much. We will probably not return fully to the old large-scale centralised public bureaucracy model of the 1970s.

Although one of the much-touted benefits of more unbundled and networked systems was supposed to be their ability to be 'nimble' and to react to external challenges and threats more quickly, there are some signs that the default position is 'back to bureaucracy'. After the September 11, 2001 attacks on the US, the reaction of the federal government was not to increase decentralisation, fragmentation and unbundling but precisely the reverse – the Department of Homeland Security is the epitome of 'big is best'.

But it hasn't worked. When Hurricane Katrina hit New Orleans in August it exposed the ineptitude of the Federal Emergency Management Agency, which had been subsumed into the Homeland Security behemoth. Fema had lost its focus on dealing with natural, as well as terrorist, emergencies and much of its freedom to act independently.

These almost cyclical patterns to reforms – from centralisation to decentralisation and back again – have been noted in some of the management and organisation literature but rarely taken too seriously by either researchers or policy-makers. The reform patterns are never exactly cyclical and things rarely return to their original state. But it does seem that there are irresolvable contradictions – paradoxes – at the heart of public organisations that do produce permanent instability and change. We seem to be heading back to, if we are not already in, a phase of '(re)bundling government' and 'big is beautiful'. We confidently predict it will not last and that some time – maybe in five years or maybe longer – we'll be back to 'small is beautiful'.

Colin Talbot and Carole Johnson are respectively professor and research fellow at the Centre for Public Policy and Management, Manchester Business School


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