Friday Economics - implications of the changing Australian labour market

  

Useful piece by Leith van Onselen in Macro Business, Australian unemployment in detail. Triggered by the latest  Australian labour force data, it looks at changes in employment over the last few years.

As an aside, I find the free Macro Business daily economic email briefings very helpful.

This first chart shows total Australian employment. You can see the rise in total employment, its peak, plateau and then slight decline.

The Australian population has continued to increase. Unemployment has been edging up, but not by as much as you might expect.

The reason for this shown in the next chart, the changing workforce participation rate. 

From 2000, the participation rate rose steadily, quite remarkably in fact for such a relatively short period. More people working helped drive Government tax revenues, as did increasing company tax collections.

The participation rate then dipped sharply. The decline began before the full global financial crisis hit, but was connected to it. The rate then rose, if to a lower peak, before declining significantly.

This was the period of the two speed Australian economy. As the mining sector boomed, the high value of the Australian dollar slowed growth or even forced contraction elsewhere. This, combined with progressive public sector cuts, led to people dropping out of the workforce. Economists call this the discouraged worker effect. After a certain period of unemployment, people give up and stop looking for work.

Note, however, that the labour force participation rate is still well above the 2000 level. It's helpful to remember that because some economists are now suggesting that declining workforce participation rates have created a choke point limiting Australia's return to trend growth. There may be a choke point, I don't think that there is, but it's more the participation rate is still high by historic standards. This means that there are proportionately fewer workers to draw back into the workforce.

Other factors come into play as well.

The next  graph compares growth in full time as compared to part time worker since 1991.

Growth rates for both categories display wild swings. The start of the period is Mr Keating's recession. This was the period of restructuring and process re-engineering as firms shed full time long term employees. These were, in part, replaced by part time workers. Then came a period of sustained growth in full time employment as business improved and firms corrected previous employment errors. Growth in part time employment dived, then rose sharply as new workers were added to meet immediate needs.

Over the whole period, growth in part time workers generally fluctuated more than full time workers. Part time workers are generally easier to add or get rid of. They are economic buffers. However, over the whole period, part time work on average grew father than full time work. The effect of this is illustrated in the next graph.

The fourth chart  shows the decline of full time employment as a proportion of total employment. The tile is actually a little misleading. Not all part time workers are casual, nor full time workers permanent or long term.

What is true, I think, is that an increasing proportion of full time workers are on often shorter term term contacts, while part time workers are, on the whole, more likely to be in casual work. I commented on the impact of this trend in an earlier post here, Friday Economics- economic outlook 2014:

While workforce flexibility does aid business activity, the growing proportion of the Australian workforce working in contract or casual roles has affected consumer behaviour. Greater work uncertainty requires people to hold larger cash reserves, as do the periodic employment gaps often associated with such work. It also depresses Christmas sales, since a not insignificant proportion of the workforce is now only paid when they work. Christmas is actually a low income period for many people. 

A few weeks back, I assisted in interviewing for a short term contract position. It was a relatively low level project officer role. All the applicants were over-qualified for the role, some had been out of work for twelve months. Every candidate we interviewed was considered as suitable for the position.

This was not a job in a high prestige area. In the past, it has struggled to get suitable applicants. Now, looking at the applicants from my own experience, I thought that if I could put them together in a single unit, I would have a very powerful multi-skilled team.

The point here is that, unlike some of my economist colleagues,I do not think that the present state of the Australian labour market creates a significant short term constraint on growth at trend or above. There are specific choke points, but there is also plenty of immediate scope for increasing hours worked or to bring skilled people back into jobs.

Friday Economics- economic outlook 2014

  At the start of November, I prepared an economic outlook for 2014 for publication in a business magazine. The piece is not on-line, so it seemed sensible to run it again here with an update, thus testing my assessment in light of the some what topsy turvy changes over two months since I wrote.

The piece begins 

Twenty thirteen has been a funny old year in economic terms. Globally, the year began with expectations of somewhat greater economic growth, continuing the slow recovery from the great global recession. Pessimism re-emerged as growth was slower than expected, turning again to optimism as growth began to pick up. At the 1 October Monetary Policy Meeting of the Reserve Bank Board, members observed that, on balance, the “data for the global economy had been a bit more positive of late and broadly consistent with growth of Australia’s major trading partners remaining around its long term average.”

How quickly things change! At the time the Board met, the US fiscal and debt crises were looming, but there was still an expectation that they would be resolved. Then came the partial US government shutdown, followed by brinksmanship over the debt ceiling. Debt default was avoided and the US Government re-opened, but with new deadline dates; January 15 2014 for government activity, 7 February for Government borrowings.

The immediate direct effects on the US economy were relatively small, with Standard and Poors estimating that the shutdown had shaved at least 0.6 per cent of the US economy’s annualised growth rate in the December quarter. The impact on confidence and business certainty is likely to have been much greater.

You can get a feel for this from the increasingly concerned comments made by central bankers as the crisis proceeded. “We felt helpless”, the SMH’s Glen Hutchens reports Reserve Bank Governor Glen Stevens as saying. “The Bank could neither predict nor properly prepare for the way the drama might play out”. It wasn’t just the impact on global financial markets that had to be considered, but also a possible forced contraction in US Government spend equivalent to 4 to 5 per cent of US gross domestic product.

Doubts linger, casting a continuing cloud as we move towards 2014. Uncertainty over the ending of quantitative easing and the impact that this might have on markets adds to doubt, as do continuing uncertainties over the Chinese economy. Despite these doubts, I think that 2014 is likely to be a better year in economic terms, far better than some analysts allow.

Comment

The US sorted its fiscal and debt limit problems, at least for immediate purposes. Quantitative easing has begun to end, although in a very tapered way. Both are positive for the economic outlook. 

The Importance of Business Confidence

One of the unusual features of the last two years has been the general lack of confidence displayed by Australian business. I say unusual, because the Australian economy has actually performed quite well in global terms. Many international economic commentators have been bemused by this Australian economic gloom, pointing to the divergence between it and the actual performance of the Australian economy.

This first graph prepared by the Reserve Bank illustrates the confidence problem. Business confidence plunged with the onset of the global financial crisis to levels lower than those holding in the recession of the early 1990s. Business confidence then rebounded sharply as the crisis eased and Australia’s mining boom picked up pace, peaking slightly above the levels holding over the previous decade. Business confidence then began an inexorable decline.

Confidence is important, for without it business will neither invest nor employ new people. The progressive decline in business confidence dragged on economic activity, effectively feeding itself. Political uncertainty fed the lack of business confidence, especially in the last period. You can see this in the sudden rebound in business confidence following the election. If sustained, this will encourage increased economic activity, providing a first building block for economic expansion.

Comment

At the time I wrote these words, I did not forsee the instability in Australian Government policy, nor the nature of the debate that would take place in the lead-up to the release of the Mid Year Economic and Fiscal Outlook with its somewhat lower Treasury economic projections, nor the almost forced announcement of Holden's intention to cease manufacturing. This will probably have minimum real economic impact  over 2014, but it has damaged confidence.

The swing in economic commentary was quite remarkable. Over a four week period marked by selective leaks on the budget position, the central tone in commentary went from neutral/slightly positive to negative/neutral. It was really quite a remarkable swing that must affect confidence. For the moment, call this one a negative.     

Consumers on Strike

Retail sales have been relatively stagnant over the last two years. Effectively, consumers have been on strike. There have been good practical reasons for this. In Australia, as in may other countries, personal debt levels rose during the long period of economic growth, supported in part by rising asset values. Savings rates dropped to very low levels.

This process went into reverse following the global financial crisis and subsequent global recession. People sought to save more, to spend less, to de-leverage, adding to downward economic pressure. The effects were muted in Australia by the mining boom, but persisted nevertheless.

Structural change in the Australian workforce reinforced the process. While workforce flexibility does aid business activity, the growing proportion of the Australian workforce working in contract or casual roles has affected consumer behaviour. Greater work uncertainty requires people to hold larger cash reserves, as do the periodic employment gaps often associated with such work. It also depresses Christmas sales, since a not insignificant proportion of the workforce is now only paid when they work. Christmas is actually a low income period for many people.

Further downward pressure has been added by public sector cuts backs and then, more recently, by cut backs in mining employment as mining companies seek to curtail costs. The combined effect can be illustrated by the second graph drawn from the Australian Bureau of Statistics showing the employment to population ratio from April 2012 to September 2013. This shows clearly the decline in the proportion of Australians actually employed over the last eighteen months. This decline has been significantly greater than the increase in the unemployment rate because many Australians have dropped out of the workforce.

In simple terms, there are fewer Australians working, and those who are working are less prepared to spend money.

This is likely to turn round over 2014. The increase in savings and consequent decline in willingness to spend associated with financial de-leveraging, structural change in the workforce and uncertainty about the future has probably peaked, although the effects will linger. Further, the labour force data suggests that there is considerable scope to increase employment without creating new wages pressures. The combination provides the second building block for better economic conditions in 2014.

Comment

I think that consumer confidence was hit by the discussion associated with the Commonwealth Government's budget position and the Holden decision, and all this just before Christmas with retailers dependent on Christmas sales. Talk about timing.

There have been signs of some of weakening in the labour market too, although this is more anecdotal than anything else. This would not be surprising given the changed business mood. However, at this stage my position remains the same. 

The Exchange Rate

The Australian dollar is likely to provide the third building block for faster growth. By all measures, the Australian dollar is over-valued, although there is dispute about the exact scale of over-valuation. This has depressed economic activity through lower Australian dollar returns on exports, combined with higher import competition.

So long as quantitative easing remains in force in key countries and especially the US, the dollar is likely to remain over-valued. However, as quantitative easing ends with consequent rises in international interest rates, the Australian dollar will fall. We have already seen how the merest hint of an end to US quantitative easing shifted the value of the dollar down. Quantitative easing will end, although the timing is uncertain and the process likely to be messy.

Australian interest rates will rise over 2014, in part because of the need to avoid or at least minimise an emerging property bubble. However, what is relevant from an exchange rate perspective is the differentials between real interest rates. So long as Australian rates rise less in real terms than interest rates in other key countries, the value of the Australian dollar will fall. This is likely, given that real interest rates in major developed countries are now so low or even negative.

A lower Australian dollar brings benefits, but also costs. We saw this in the September quarter, when the Australian import price index rose by 6.1 per cent, the export price index by 4.2 per cent. Both increases were directly associated with a fall in the value of the Australian currency. The increase in export prices benefits exporters, the rise in import prices aids domestic production but also feeds directly into inflation.

Inflation will rise as the dollar falls. For the present, Australian inflation is quite low, well within the Reserve Bank’s target range. However, it is likely to kick up noticeable over 2014, adding somewhat to interest rate pressures.

Comment

Action in the US to end quantitative easing has begun and the Australian dollar has fallen. The taper actually helps us by minimising the immediate currency flows that might have adversely affected emerging markets. The fall in the value of the Australian dollar has already begun to feed through, including an unexpected but helpful lift in Western Australian Government revenues.

The Reserve Bank has the capacity to cut rates if that is necessary to counter domestic economic weakness, thus further reducing the value of the Australian dollar. However, for the present I hold to my analysis for 2014.    

Investment

In October, Reserve Bank Deputy Governor Phillip Lowe noted in a speech that the developed economies have been in an investment drought since 2008. Investment has also been very low for the world as a whole.

Graph three illustrates this.

Note the longer term downward trend, as well as the sharp fall since 2008. Note, too, the widening gap between investment in major developed countries and total world investment, a sign of the economic shifts that have been taking place within the global economy.

By contrast, Australian investment has a proportion of GDP has risen quite sharply since 1993.

Graph four presents the dramatic change that has taken place. Australian private business investment peaked at levels not seen since the gold rush and post gold rush periods.

This growth has been almost entirely due to the mining investment boom. Outside mining, private business investment has been quite low, mirroring international patterns. As a consequence, Australians started talking about a two speed or even patchwork quilt economy.

In many ways these were accurate descriptions, but also missed an important point. Unlike past booms, the cost pressures associated with the mining investment boom were effectively quarantined to mining, leaving the remainder of the economy in a better position to grow.

With the end of the mining investment boom, investment as a proportion of GDP has started to fall, placing downward pressure on economic activity. This has led some analysts including Deloitte Access Economics to talk about investment in quite gloomy terms. I don’t share that view. Indeed, investment is my fourth building block for better economic conditions in 2014. I am not saying that investment will boom, simply that it will be better than expected.

In balance sheet terms, Australian business is well placed to expand investment if conditions suit. Corporate debt levels have been reduced, while liquid assets have risen. Banks, too, are in a position to expand business lending. But will conditions suit? I think that they are likely too.

In October, the Australian Bureau of Statistics released some quite remarkable numbers. The trend estimate for total dwellings approved rose 2.5 per cent in September, up 15.1 per cent from the same month last year, and has been rising for twenty one months. The increase was driven particularly by dwelling units, up 20.9 per cent in trend terms, but private sector houses also rose by a substantial 10.6 per cent.

These statistics are supported by a variety of anecdotal evidence. The property sections in Australian newspapers including the Financial Review are expanding, an expansion not limited to housing. Investment in retailing, office building and industrial estates and rural land are all displaying signs of increased activity.

This expansion is not limited to building. Rising share prices and increased confidence has led to a resurgence of initial public offerings. The markets are moving. Indeed, if you ignored the official economic statistics and the sometimes gloomy commentary based on those statistics and relied only on newspaper reporting, you might be forgiven for concluding that a new boom was well underway! Herein lies a problem, for the Reserve Bank may in fact be forced to move earlier on interest rates than would otherwise be the case in order to control investor exuberance.

Comment 

My glasses may have been too rosy here, but for the moment I hold to my position.

The Global Economy

As a trade exposed economy, Australia is affected by economic conditions elsewhere in the world. Here, too, I am more positive than many commentators. Yes, there are some problems. As I have written in my column, China remains a question mark because of the need to rebalance the economy, a process likely to prove messy. The US fiscal cliff and debt ceiling debates still cast a shadow. However, Australia does not need the rest of the world to boom in order to grow. All the country needs at this point is continued global economic growth even if at moderate level. Here the signs are reasonably positive.

The Europeans are slowly dragging themselves out of a recession that, in statistical terms, bears a striking resemblance to the Great Depression. The results have been absolutely awful from a European perspective in human and economic terms, but the immediate likelihood is for slow growth that has the potential to accelerate once properly underway. The US too has been growing despite the best endeavours of US politicians.

My best judgement in all this is that while I see few signs of a rapid acceleration in global economic growth, there will be growth. And that’s all Australia needs at this point.

Comment

Global economic growth and especially US growth has been stronger than expected even two months ago. This building block remains positive.

Conclusion

In writing, I have consciously tried to break from the gloom that sometimes dominates current economic analysis, to set out the reasons why I think that 2014 is likely to be better in economic terms than 2013 so far as Australia is concerned. In so doing, I focused on four building blocks.

The first is business confidence. Low business confidence has been a drag on the Australian economy, but has now resurged. I think it likely that business confidence will remain positive.

The second is consumption. Australian consumers have been on strike, again dragging down the economy, because of both uncertainty and the effects of fundamental strategic change in the workforce. That strike is coming to an end.

The third building block is the exchange rate. The Australian dollar has been overvalued. Over 2014, I expect the value of the Australian dollar to fall. This will have adverse price effects, but the overall impact will be support for domestic economic activity.

My final building block is investment. Yes, the end of the mining investment boom will exert downward economic pressure. However, I do not share the gloom and doom view of some commentators. There is increasing evidence of an investment boom in non-mining areas, a boom that will encourage economic activity in non-mining areas of the Australian economy. In fact, the big economic challenge of 2014 may be to find the best way of managing that boom without depressing the overall economy.

In all, I think that 2014 will be an interesting and potentially profitable year.

Comment

Pollyanna may be speaking, but for the moment, I am prepared to hold my overall assessment, 

Slater & Gordon 2012-2013 after tax profits up 67 per cent

It been interesting watching the evolution of Slater & Gordon since it first announced its intention to list on the stock exchange back in 2007. Now it is one of three listed law firms, along with Integrated Legal Holdings and Shine.

At a time when many Australian law firms are struggling to retain let alone increase fees, eight of the ten largest firms by revenue saw fees drop by up to 5% in 2012-20130, Slater & Gordon fees for the 2012-2013  financial year rose by $A80 million to $A298 million, with net profit after tax up by 67%. The firm has also moved quite aggressively into the English marketplace via acquisition.

Slater & Gordon has the advantage that its core consumer legal services marketplace is not subject to the same cyclical fluctuations as the commercial market place. It is also aiming to rebuild its class action pipeline.   

Monday Management - common management problems: the micro-manager

This post continues my common management problem series with a look at the micro-manager, one of the most common reasons for management failure.

All staff know the micro-manager. This is the person who cannot let go real control, who tries to set, control and check every activity. Lacking authority and responsibility, staff cease to be independent workers and instead become no more than arms and legs for the manager.

One common symptom of micro-management can be found in the complaint by managers that staff will not take responsibility, that they have to do everything themselves. When I hear this complaint, I automatically check for micro-management. Most times I find it.

With some managers, micro-management is a deeply entrenched feature of their personality, a need to control. There is often little you can do with such managers to improve the situation. If they are important in their position because of their knowledge or particular skill-sets, you may just have to work around them. Otherwise, you are better off removing them, or at least reducing their staff management role.

The partial or inconsistent micro-manager can be a particular problem, simply because they are harder to spot.

Often insecure, this type of manager would not usually see themselves as a micro-manager. If queried, they would say (correctly) that they do give staff autonomy.

The core problem with these managers is that they are inconsistent. They stand back in most cases, but then intervene on an irregular basis. Having allocated a task with a report back deadline, they then ask before the due date, have you started or finished this task?

The staff member in question who has been trying to set his or her own priorities may not even have started the task. Now he/she finds a worried manager creating worry in the mind of the staff member. Suddenly the staff member has to shift focus, even though something else may suffer.

This can have exactly the same effect as the more extreme micro-manager cases in that staff take less responsibility for their own work, pushing responsibility up-stairs to their manager.

From an overall management perspective, it is easier to help the partial micro-manager improve performance, subject to one qualification: the problem has to lie with the manager, not the firm itself.

Too often, partial or inconsistent micro-management by one manager is in fact a symptom of, a response to, micro-management at the next level up. In worst cases, micro-management across the firm may be a cascade effect from the CEO or managing partner. Here we have a systemic problem.

One difficulty with micro-management is that it can yield high performance simply because the manager in question is so driven. However, it also has great dangers.

I saw a simple example of this recently at project level. The manager in question had to go on leave in the middle of a critical project roll-out. While the rest of the project team had the skills required to continue the roll-out, the project struggled because team members did not know everything that the manager had been doing, nor did they have the authority to take over key elements of the manager's role.

This case illustrates the practical problems that can arise should the micro-manager suddenly leave the scene.

At a more macro-level, the firm suffers because the bad drives out the good.

Unable to work in a micro-management environment, staff leave. Those who remain are less likely to be able or willing to accept responsibility and to provide the drive that the firm may need. Remove the micro-manager or managers, and the firm may go into sudden decline as a consequence.

I have stated the problem, but what on earth can we do about it as a personal level? The starting point for both the micro-manager and the staff affected is to ask why, why does this happen? At my next post in this series, I will look at this questions, the possible answers and responses.

Monday Management - Introducing Common Management Problems

Some years ago I began a series of blog posts on the theme common management problems – and what to do about them. The posts drew from my practical experience as a manager and a consultant. I wrote them because I had found that many people who had acquired some form of management role actually didn’t know what to do in a practical sense.

The problem is especially acute in professional services because so much of the work is individual: individual in the way work is structured, individual in relation to clients, individual in the way performance is measured. There is limited scope to learn how to manage by actually doing. Problems exist even in those areas of professional services where projects and project management are the norm.

Project management is not the same as management, although many project management techniques are also management techniques. A professional discipline in its own right, project management centres on individual projects. These may be simple or complex. They may involve a single person or a much larger team of full and part time people. However, they do not necessarily provide you with the skills required to manage a team with functional responsibilities involving multiple activities with varying time horizons, where the focus is on the achievement of broader results rather than individual project outcomes.

Lack of management skills and experience may be an especial problem in professional services, but it is not limited to that sector. Management is a craft, not a science. It has to be learned through practice. Across sectors, the thinning of management structures has reduced the opportunities for people to grow into management through progressive learning by doing. The problem is compounded by the growing role of specialists in senior management roles and by modern management command and control structures that have reduced the authority and scope of responsibility of individual managers.

Interestingly, the widespread adoption of project based approaches within organisations has further compounded the problem. This may sound counter-intuitive. Surely these approaches play an important role in improving organisational effectiveness? Well yes, but many areas that have moved to project based approaches end by displaying many of the cultural features to be found in professional services. There is the same emphasis on individual matters or assignments; performance assessment becomes narrower; it becomes more difficult to attract attention too, or resources for, issues that fall outside current assignments.

Staff have always complained about managers and management. However, the volume of complaints seems to have risen significantly over the last two decades. Importantly, managers themselves complain about the difficulties they experience in managing properly, in simply coping with the demands placed upon them. A surprising number of those in apparently managerial roles express actual dislike for the management process. Their focus is on their personal performance, on the things that they have to do themselves. The need to deal with people, to be responsible for others with varying needs and personalities, is seen as an impediment to their own performance.

If project management is not the same as management, nor is administration. All managerial roles involve a degree of administration, another thing that many professionals complain about, but that is only part of the manager’s role. Administration focuses on rules and systems, while management focuses on the organisation of resources and especially people to set and achieve objectives and to undertake specific activities.

Finally, management is not the same as leadership, although a measure of leadership is a necessary part of management. A leader may or may not be a manager. Indeed, many of those who see themselves as leaders are in fact extremely bad managers! There is a certain irony in the parallel rise in emphasis on leadership and governance at a time when management as such has been in decline. These trends are connected, for governance is a control on leadership that has become more important as management has declined.

Can management be learned? Yes. Like any other craft, management skills can be learned, although management abilities (the final capacity to do) will vary between people. The keys are knowledge and practice. For that reason, I am drawing together and updating my previous posts to provide practical guidance to all those who wish to improve their management skills.

Postscript

I was asked about the current fad for activity based working and the associated idea of bossless teams. How do these fit with the type of argument I am mounting?

Later I will write something on both. However, for the present, activity based working is popular in certain larger professional services or certain financial firms where work is predominantly individual, or involves small variable teams. The term really relates to office design as much as it does to the organisation of work, although the first affects the second. It can be a productive approach.

Bossless teams rely on particular group dynamics and types of work and on the surrounding culture to be effective. I think that they actually first appeared in certain manufacturing activities, although I stand to be corrected there. Again they can work in particular circumstances, although in the end there is always a boss!

In terms of the fit with my argument, the best way of organising work will always depend on the type of work. I don't think that either detract from my focus on the importance of management.

I would be interested in reactions from readers in terms of their own experience with these different forms.  

March employment data suggests continuing weakness in the Australian economy

 

The latest Australian employment statistics suggest continuing weakness in the Australian economy.

The graph from the Australian Bureau statistics on the left shows employed persons. You can see how the seasonally adjusted numbers shot up then down. These stats are very volatile, but its quite a big fall.

A better feel is given by the numbers. In summary:

• Employment decreased 36,100 (0.3%) to 11,592,700. Full-time employment decreased 7,400 to 8,111,300 and part-time employment decreased 28,700 to 3,481,500.
• Unemployment increased 25,900 (3.9%) to 686,900. The number of persons looking for full-time work increased 30,900 to 501,900 and the number of persons looking for part-time work decreased 5,000 to 185,000.
• The participation rate decreased 0.2 pts to 65.1%.
• Aggregate monthly hours worked decreased 5.0 million hours to 1,627.3 million hours.

The graph on the right hand side from unemployment. You can see the kick-up in the seasonally adjusted rate. The unemployment rate increased 0.2 pts to 5.6%.

ABS normally prefers to use trend estimates, because these flatten things out. But both seasonally adjusted and trend show an upwards drift in unemployment.

During the week the Australian currency measured by the trade weighted index reached a new high. So long as quantitative easing continues in certain advanced countries, the dollar is likely to remain high with consequent pressure on domestic economic activity.

With so many Australian workers now on contract work, the fear of unemployment also exercises a downwards effect on spending and on economic activity.

FTI to acquire Taylor Woodings?

Back in September last year, US based FTI Consulting announced that it had acquired the assets of KordaMentha (Qld) (KMQ).

Founded in 1992, Brisbane based KMQ had operated under a licence agreement with KordaMentha since 2003 and specialised in turnaround and restructuring, corporate advisory and corporate recovery. The acquisition added nearly 70 professionals in Brisbane and the Gold Coast and market FTI's entry into the insolvency marketplace. It was a bit of a blow to KordaMentha. They have re-established in Brisbane, but the web site states that the Gold Coast office is being operated out of Brisbane. 

Now the Financial Review reports that FTI is close to finalising a deal to acquire insolvency firm Taylor Woodings to further extend its reach. Insolvency is interesting because its one of the few professional areas where service and market conditions actually facilitate multidisciplinary working. 

Policy, programs, control and complexity - ICAC on problems in NSW public policy and administration

I fear that this has been a sadly neglected blog. In this, the first post for 2013, I want to return to a common theme in my writing across all platforms, problems in current approaches to management in both the private and public sectors. One part of my message has been the way that organisations are drowning in their own systems.

The trigger for the post was a November 2012 article in Corruption Matters (Number 40), a twice yearly publication from the NSW Independent Commission Against Corruption  intended to raise awareness about corruption related issues, Can those at the helm see where they are going? If you want to see the original, go here, click on publications by date and then click on November 2012. I agree that it's not a very user friendly approach; to many pdfs!

While I disagree with aspects of the analysis in the article, it does illustrate some of the points I have been making. For that reasons, I am reproducing it in full with commentary.

The article begins:   

"Almost exactly 20 years ago, David Osborne and Ted Gaebler described the importance of uncoupling policy and regulation from service delivery when it comes to driving transformational change in government; that the act of “steering” the boat, if you like, works best when separated from the act of “rowing”.

The idea that those who steer should be separated from those who row has been taken up with gusto throughout the public sector; although not necessarily in the way envisaged by Osborne and Gaebler. Theirs was a call to action for a decentralisation of authority by separating the macro-level function of government from the micro-level creation and administration of public programming. In other words, have government influence direction in a broad sense in order to empower frontline agencies and communities to solve their own problems by creating and delivering services that resonate with the needs of their specific audiences."

Comment: I actually have some problems with the Osborne/Gaebler approach because operations and policy need to be integrated and inform each other. Indeed the article recognises this. Part of the problem is that what constitutes policy gets totally confused. The simple steering/rowing classification fails to recognise the distinctions between different types of policy and operations and is, as we shall see in a moment, part of the problem. The article continues:   

"The reality, unfortunately, is that in some cases agencies and communities are stripped of this power almost completely. Frequently, almost all aspects of policy, procedures and program design are centralised within  distinct policy groups (those under the guise of steering), with little discretion devolved to staff in the operational units (those rowing). A cursory examination of almost any agency’s organisational chart will show a policy group in head office that is separated from the operational group."

Comment: Boy, did that strike a chord. However, it's much more complicated than that. A whole variety of delivery aspects get centralised, from policy through risk management to communications and reporting. As soon as you classify something as "policy", and this includes organisational policy, then it gets complicated. Create a policy or indeed oversight group, and it has to do something to justify its existence. The article continues:

"Disconnected policy

The result is that a disconnect can develop between the policies, procedures and programs directed from above and the operational realities of service delivery at the coalface. Operational staff are often unaware of he relevant policies, are unable to comply due to on-the-ground realities,or deliberately work around these policies to achieve the necessary outcomes.

For example, the Commission has seen corruption inadvertently facilitated because one policy in a given organisation, which required delegation and signature-checking for a transaction, was made impossible because of a supplier-payment timeframe dictated in another. In other cases, corrupt individuals have claimed the complexity of a policy was such that they could not understand what gifts were permitted."

Comment; Again, this struck a major chord.  You make me responsible for delivery. Then impose policies and procedures that mean I can't deliver. Of course if I'm serious about my job, I'll find a way of working around the problems created. That does open the way for corruption by unscrupulous staff. Sometimes, however, it's actually the only way in which audit trails and accountability can be preserved as honest staff fight to create ad hoc procedures that will meet the intent of policies and procedures despite the formal detail. The article continues:

"Often procedures for tendering cannot be followed in remote areas because there are neither enough suppliers nor staff to run the tender process as it has been designed. In one case heard by the Commission, a policy required an academic to be responsible for staff security vetting in specific situations, which did not work out."

Comment: I put this next paragraph on it's own because it has a certain personal resonance. I'm not sure that Sydney based ICAC staff would know what a remote area was. There are no tertiary institutions there. My own alma mater was recently the subject of an ICAC inquiry, but while its headquartered outside Sydney it cannot be classified as remote. But more importantly, rules laid down in Sydney designed for big urban centres can have unforeseen consequences.

I recently listened to a discussion on a building program in remote areas. The tender rules required a specific approach intended to protect subcontractors. The program manager said bluntly that either people would lie or we could not build. The builders did not have the financial resources to comply with well intentioned ideas. The article continues:    

"In some human service organisations, there are tens of thousands of pages of policies designed to cover every future operational eventuality and in response to almost every previous problem encountered. This so exceeds the cognitive capability of any staff that they cannot, and do not, follow much more than the broad intent that is communicated by their manager.

In short, the uncoupling of steering and rowing at this micro-level can result in policies, procedures and programs that are not suited to operational realities. Control of operations is neither by traditional policy prescription and compliance nor by devolved accountability for outcomes. All too often, the result is wasteful, low quality services. In turn, the waste, complexity and unworkability that stems from disconnected policies becomes conducive to corruption."

Comment: What can I say? Sigh, it's true!, although the problem really lies not in the uncoupling of steering and rowing, but in the attempt of the steerers to over control, to move into areas that are not properly their space. The problem is further compounded by multiple layers of steerers, multiple decision and control points. The article continues: 

"Integrating design and operations

The waste, mistakes and overall escalation of costs that results from the separation of design and operations is a central concern for personnel in the manufacturing industry. Far from seeing a benefit in separating the steering from the rowing at the micro-level, the approach of “designed for manufacturability” (DFM) aims to bring together those who design the product with those who make it. By designers understanding operations and vice versa, a product can be designed that the operations function of the organisation is suited to making. Costs and waste are reduced, and quality improved through a joint focus on, for example, simplicity, fewer parts, standard parts, ease of fabrication, minimal handling and use of modular components.

To integrate the design and operations functions of a given organisation requires significant organisational change. Culturally, the division between the designer elite and the operations staff has to be broken down. This is often difficult, as organisations may exist as silos with few connections between them. There is often a physical separation of designers from operational managers that must be overcome; as is the case with the physical separation of policy staff and operational staff in government. When coordination mechanisms are consciously developed to link design and operations, they often function for a short period at the initial stages but tend to revert to the designer-driven norm as the product is modified and upgrade – again not dissimilar to initial rounds of consultation by policy units followed by top-down directives."

I found this writing a little confusing. Design for manufacturability is a two stage process, both requiring better integration with design, manufacturing and sales staff. The first stage aims to get products that deliver better results at lower manufacturing costs. However, once the product hits the market, the process continues with the aim of further improving functionality while reducing manufacturing costs. The process takes place within a framework of corporate policies set by management.

Expressed in this simple way, we can see that policy development and then implementation can be equated to to the manufacturing process. Again, we have an issue linked to the meaning of the word policy. In equating policy to design, there is a danger that the main message - the need to achieve better integration of policy and operations - will be lost. The problem lies as much in what are now called governance systems, the framework within which policy operates and which equate to the corporate policies within which the manufacturability process operates, as in normal policy operations.

In the big organisations, the mega departments, that now dominate the public sector, you find a hierarchy of policy areas that actually suffer from very similar problems as operational areas. The result is a bit of a mess that cannot easily be resolved through better integration of policy and operations. If you actually map one of the main policy fields and its supporting programs, you will find a complex and somewhat crazy spider web of reporting lines, decision points and policy/service interactions that nobody really understands.

The article concludes:

"While there is no doubt that uncoupling steering and rowing at a macro-level is important in driving transformational change, such an uncoupling may become dysfunctional at the micro-level. For a single frontline officer to require multiple and vastly different performance reports from the one non-government organisation that is providing services under several contracts with the one agency can be seen as a symptom of problems generated by the separation of program design from operations.

Another symptom is the prevalence of policies that run to tens of thousands of pages in length or a child protection officer, in a remote location, that sleeps in their office with at-risk children, against policy, because there was no other option. Separation of the function of steering – as intended by Osborne and Gaebler – from the accountable, devolved responsibility for operational outcomes is sensible. But the separation of micro-level policy and program design from operations under the guise of steering may well be counterproductive and conducive to corruption."

Comment and conclusion

I agree. In narrowing the focus to the separation of program design and operation, the article focuses on a real problem. The examples given are real. However, the old saying that a fish rots from the head is germane.

The malaise that the article refers to starts at the top where the interaction of theories of management and governance interact with institutional structures and politics (politics is just as prevalent in the private sector, although the form may be different) to create the framework within which the delivery mess occurs. Without change at the top, reform further down the chain becomes very difficult.

Australia in the Pacific century

Interesting short piece by Robert Gottliebsen (Obama spearheads an Asian coup) in Business Spectator on the implications for Australia of the US's re-engagement with Asia. The key point is that Australia risks being sidelined. 

I'm not sure that's right, but it is a risk. Over on my personal blog I have been musing from time to time about the changes taking place globally and the implications for Australia. It's a sort of check and update thinking series. We all have to do this from time to time.

This morning (Art, pop music & a dash of fracking) I mused in part about the implications of the US's growing energy self-sufficiency. The US is a very big economy. I know that seems self-evident, but we tend to forget it in all the discussion on the rise of China. As the US changes direction, it has a lot of economic levers to attract Asian interest.

How this might affect Australia is unclear. Here Mr Gottliebsen's point is worth considering. Australia may be a member of the G20 and may have passed Spain to become the world's twelfth largest economy, but it's still a small economy. 

Focus not on Asia, but on the Pacific. Where might Australia fit in a world where the economic centre of the Pacific gravity shifts to the US?  Should Australia be talking about a Pacific rather than Asian century?   Just a thought.

Keddies and the need to revisit billing practices

My major post yesterday was on my personal blog - Sunday Essay - Keddies and the importance of values. That post looked at the growing avalanche affecting the partners and former clients of Keddies, previously a major Australian personal injuries law firm. The post includes links to previous writing on my part as well as external sources.

In writing the post, I looked back over my previous posts on alternative professional services billing practices. It's probably time to revisit this. There is no perfect answer, but the Keddies approach actually bet the firm.