Centralisation (Merging groups)

Centralisation (Merging Groups)

August-September 2017 (Opinion)

Economies of Scale

Being bigger seems more efficient. After all, it is cheaper to buy from a supermarket than from a dairy. There is a phrase for it, ‘economies of scale’, meaning that a larger company can automate processes, employ technologies and make savings that are not possible in a smaller one.

Government has tried to make use of this by favouring centralised (usually Wellington-based) groups in funding decisions and sometimes forcing local groups to merge into larger, regional ones, or distributing funds only to ‘parent’ bodies of regional groups.

Has it worked? Probably not. There is, in fact, some evidence that it achieves the opposite and that it is the smaller groups that are more efficient in the use of their money and converting dollars into services.

‘Economies of scale’ are not an economic truism. The principle applies to manufacturing and, somewhat less, to retail. For service-based organisations, however, there are no real savings to be made when growing, but there are new costs that don’t exist in smaller groups. These costs are driven by three main factors: 1.) higher compliance requirements for larger organisations especially in the fields of health and safety, working with people, and accounting; 2.) proportionally much higher management effort required to manage staffing and performance, strategies, targets and policies; 3.) higher management effort required to manage consistency around brand, quality, outputs etc. Many things that sort themselves out in a smaller team require much more formal processes in larger organisations, and qualified (and expensive) managers. Staff in smaller organisations are also much more likely to be willing to accommodate the needs of the organisation in terms of the hours they work, taking holidays etc.

For these reasons, it is generally cheaper to, for example, hire a sole trader for your plumbing needs than to engage a larger company, even though the sole trader may actually make more money per hour than the person employed by the larger company. What you will get from the larger company, however, is more consistent quality.

Government and some other funders can, of course, make savings at their end by funding larger rather than smaller organisations, because their costs are driven by the number of contracts to manage, not their size. Larger organisations are more likely to be capable of reporting on output and outcome measurables in a consistent way that fits into government or funder policy, further reducing contract management costs. It is much more difficult to align smaller organisations with a specific reporting regime that delivers the kind of numbers that a government department needs to measure its success (or otherwise) in meeting targets.

There are other factors in favour of smaller organisations specifically in the not-for-profit sector: they usually have better access to volunteers, for example, as volunteering in a smaller organisation can give more of a sense of making a difference than being a managed part of a bigger machinery.

In the last year especially I’ve seen a few organisations having been shunted aside by government departments in favour of larger ones, and seen centrally designed programmes replace initiatives with a wealth of local knowledge and networks. I think such measures will produce great statistics on paper because of the improvements in reporting on measurable, but I strongly suspect that the effectiveness of government-funded social initiatives is actually decreasing.