Archive for October 5th, 2014

EY report not a fix-all

| 05/10/2014 | 33 Comments

The Ernst & Young report (on the rationalisation of the civil service) has good and bad points and, despite whether or not I like Ezzard Miller, he has a very valid point (referring to Privatization will cost more). The editor of the Cayman Compass and many of the readers on CNS seem to think the content of the EY report will fix all and should be implemented ASAP. Well, as I wrote to the editor of the Compass website, which he/she refused to post,  many should note the following:

Recent research conducted by both academic scholars and business similar to E&Y actual DO NOT suggest that privatization has all the many benefit spoken of. One main argument is that the public sector service would improve because it is profit driven. However, this argument is flawed as recent research has emphasised the role of intrinsic motivation in public sector service. That is, most civil servants are civil servants not because of the wonderful great salary, but because they want to serve “intrinsic motivation”.

Contrary to belief, benefits aren't that great in the civil service/public service. Yes, they have 100% health coverage, but that is only for one health provider, the HSA. If they go elsewhere they pay 100%. And yes, they get full pension contribution, but that is in the absence of cost of living increase, no bonus and no annual increment, even if additional qualification have been earned. There is more to the pension story should someone wish to find out the truth as well.

According to Fehr and Falk, 2002, the standard assumption in economics is that only extrinsic motivation (money) matters: humans respond to the provision of pecuniary incentives. But by ignoring intrinsic motivation, reciprocity and fairness, economics has constrained itself to a narrow subset of human behaviours which may affect our understanding of contractual relationships. When services/companies go private or are outsourced, contract design will play an important role in determining the success of outsourcing arrangements.  Can we really trust the private sector to be fair to public servants, most of whom will be Caymanians?

Another caveat is that some public services may be less suited to outsourcing than others because the expectation that high-powered incentives generate improvements in productive efficiency may be flawed in instances where intrinsic motivation is important.  The fact is the public service provides a SERVICE to the entire country. Neither finance nor tourism do. Reports/studies also suggest that there is some evidence indicating that quality of service may suffer in certain circumstances as a result of outsourcing and that workers may be worse off (at least in terms of their real wage).

When privatizing or outsourcing, there may be savings but the savings may be transitory – although the empirical evidence is thin, there is some evidence to suggest that hold-up is a problem in outsourcing contracts.

Other studies have highlighted the following: READ AND TAKE NOTE

Private equity investors are increasingly banding together so that, either alone or with joint investors, they can privately provide public services. This is because public service incomes tend to be guaranteed by the national or local state and are thus less risky than in the purely private area and, once a long term contract is secured, the provider effectively acquires near monopoly status and the capacity to return very high returns on capital employed. 

This is a point Mr Miller was trying to make

Frequently outsourcing may effectively mean taking over a going concern without having to invest any capital at all, since the equipment and premises and initial staff may be provided by the host undertaking. Providing outsourcing to public services is thus less risky than venture capital, and provides much higher returns than building a company up from scratch.

What does that mean? It means, of course, EY would recommend that public services businesses should be sold/privatized as it would be easy pickings for the private sector to take over because they are buying a business that is already stable in terms of capital investment needed.

In the UK, too, there is evidence that outsourcing can compromise the quality of service and lead to a competitive race to the bottom for both terms and conditions of the employees and for the commitment these staff then have to providing high quality services. The sharpest example of the risks this strategy poses to the public has been the spread of the MRSA (meticillin-resistant Staphylococcus aureus) bacteria in hospitals where out-sourced contractor cleaning has not been of the same standards as the previous in-house cleaning (Davies, 2010). Another disturbing example from social care has been the very high levels of agency working that occurred in the London Borough of Haringey, adding to the problems of detecting child abuse in two very high profile cases.

More studies on intrinsic motivation: the economic theory behind the drive to outsource public services is based on the concept that the absence of competition means there is little or no incentive on those delivering the services to reduce costs. This assumption underplays the fact that many public service workers bring strong motivation and commitment to their work, often a reason, indeed, why they choose to work in the sector (not my words but taken from empirical study).

One study states that the advocates of outsourcing then argue three indirect benefits: 1) the public sector can concentrate on its ‘core’ business; 2) contracting out services assists with control over their level and quantity; and 3) private providers are more likely to introduce innovation (Domberger, 1998).

Yet the distinction between ‘core’ and ‘non-core’ is open to challenge; the issue of improving output and quality is about good and bad organization and management rather than public and private; and while innovation capacity is notoriously difficult to tie down to any single factor, public funding is undoubtedly one of them. The issue of how people can exercise democratic control over the public services they receive when they are run by private companies whose reach will become increasingly global is not addressed at all.

What was most interesting to read while doing my research was that “there is little evidence to actually prove the 'many' added benefits of outsourcing. (Taken from WLRI Working Paper 11, May 2012, Shared business services outsourcing: Progress at work or work in progress? Steve Jefferys Professor of European Employment Relations)

VERY INTERESTING POINT: Instead of simplifying operations, outsourcingoften introduces complexity, increased cost, and friction into the value chain, requiring more senior management attention and deeper management skills than anticipated. In addition, outsourcing has allowed organizations to transfer financial and operational risk to vendors, but organizations are discovering that their contracts will never fully protect them against customer damage and business losses caused by service disruption (Deloitte Consulting, 2005: 2).

As Danish study stated: Studies analysing the financial advantages of contracting out over longer periods tend to show that the relative advantage of using private companies disappears over time. NO evidence is given at all for the private sector cost reduction claim.

a. One quarter of the empirical studies showed no savings, and the best claim that can be made is that ‘half’ of the services examined showed that range of cost savings. But the real picture is much less clear.

b. The absence of clear measures to demonstrate success of outsourcing is of concern.

The pressures to outsource often arise from a sense of underperformance. Often, however, higher quality outputs and cost savings carried out in-house will result by removing the old managers and involving the staff in reorganizing their work and people interactions. This was also another point Mr. Miller was saying

This is what Deloitte Consulting had to say (Deloitte, 2005):

In today’s economy and labor market, organizations looking for differentiated growth solutions should avoid outsourcing when based solely on cost savings. Many organizations have been compelled to adopt outsourcing to improve their technical, operational, and process management skills. However, companies should outsource only commodity functions to guard against a loss of knowledge and should plan for short-term outsourcing to prevent vendor dependency…

An unfavorable mix of rising costs and increased demand will drive up the cost of outsourcing for organizations and vendors. Weaknesses in operational management will result in more deal failures, prompting organizations to bring more operations back in-house. In the long run, organizations that continue to outsource will experience a loss of bargaining power to vendors as the supply side consolidates.

Something to remember: 6,900 public servants and the effect of the EY report if implemented without careful thought is not about 6,900 individuals but a minimum of 13,800 people inclusive of the elderly and children under 5.

I am not a public servant nor would I want to be, but there is no way I could support the EY report in totality. There are some good points to consider, many of which I have heard the public service themselves put forward over the years.

Continue Reading

Newspaper’s ‘Jack’ blooper

| 05/10/2014 | 124 Comments

Cayman News Service(CNS): The newspaper that has tended of late to wallow in self-praise of its professionalism and scrupulous fact checking plopped a howler on its front page Friday. Apparently not thinking it odd that Hollywood superstar Jack Nicholson, one of the wealthiest and most award-nominated actors in American history with a net worth of $400 million, would arrive in Cayman on board a packed cruise ship, The Cayman Compass happily printed a picture of Tortuga Rum Company founder Robert Hamaty with “Nicholson”. It wasn’t, of course, the real Jack but professional impersonator Jack Bullard of Las Vegas, Nevada (left). According to Hamaty, he looked and spoke just like the real deal. “The staff called me (in) my office upstairs to say come and meet him,” he said.

The Compass reported on its front page on Friday 3 October: “Mr Nicholson got an opportunity to sample some cigars at Tortuga Rum Company on Wednesday, where he dropped in during a cruise ship visit to Grand Cayman.” (See below)

It doesn’t seem likely. Nicholson (the real one) has appeared in numerous films, notably Easy Rider, Five Easy Pieces, Chinatown, One Flew Over the Cuckoo's Nest, The Shining, Reds, Terms of Endearment, Batman, A Few Good Men, As Good as It Gets, About Schmidt, Something's Gotta Give, and The Departed.

He set a record for his role as the Joker in Tim Burton's Batman in 1989 by negotiating for a percentage of the movie's gross earnings, which earned him $60 million cumulatively – so, not your average passenger on a Carnival cruise ship.

In a recent editorial about misinformation from a government source, the Compass Editorial Board wrote: “[R]ather than rushing to our keyboards to copy-and-paste from the official script, we acted as any professional news organization should: We picked up the phone …”

Sadly, this time the keyboards were rushed to and the phone was ignored. A mea culpa is expected Monday. 

Cayman News Service, Jack Nicholson impersonator

Continue Reading