The Efficiency - Effectiveness Trade Off
Key research questions
There is no consensus over the practical measurement of efficiency or effectiveness in the public sector. To assess whether the historical and current reforms improve public service productivity requires objective measures of productivity. Productivity is broadly defined as the ratio of outputs to inputs. Until 1998, the UK like many other countries equated the value of output with the value of inputs, hence productivity was zero by definition. The Atkinson (2005) review revolutionised public sector productivity measurement by recommending that output should be measured directly (e.g. using pupil attendance) while making appropriate quality adjustments (e.g. using GCSE performance). The central thrust of Atkinson’s argument was that imperfect measurement was better than none.
The choice of output and particularly quality proxies will affect the measure of efficiency. For example public service productivity fell during the period 1997-2007 despite significant investment. This investment was in the form of pay rises following a period in which public sector pay growth lagged behind the private sector, and the focus was on improving public service effectiveness (e.g. hospital quality, patient safety, waiting times) rather than on increasing output. If these quality improvements are not captured in the ONS measure of output it may underestimate productivity growth. The Coalition government faces a similar problem within education with the proposed reforms to qualifications, such as an end of modular courses and an end to GCSE equivalence for vocational qualifications, which will reduce the ‘quality’ of most schools (as currently measured) and therefore lower productivity. Measurement of output and outcomes is therefore crucial.
While government may wish to focus on improving productivity, evidence suggests that society prefers more services, greater access or improvements in the quality of service even at the expense of productivity (Dowding and John, 2009). Equally, an increase in productivity may not be welcome if it comes at the expense of a decrease in the output of public services. Therefore the user goals for public services may not be aligned with government objectives. At the heart of the open public services reforms is making providers more responsive to user demands (Cabinet Office, 2012). However, what users value may be inconsistent with increasing productivity and that dimensions of quality that matter to users are not captured in the measures of productivity chosen. For example, Porter and Teinberg (2006) argue that healthcare providers must understand what adds value to consumers and remove all processes which do not generate value. This problem of understanding the objective of public service organisations may be compounded by the requirement for commissioners and purchasers to include a measure of “social value” when awarding contracts or recognizing service providers.
Efficiency and effectiveness may therefore be irreconcilable. A narrow focus on cost reduction and economic efficiency may come at the price of lower effectiveness (e.g. goal attainment) or poorer quality, and vice-versa i.e. a trade-off may exist. Certainly, evidence suggests that if providers compete on price that quality suffers (Propper et. al. 1994; Propper 1996). If providers profit maximize, then there is an incentive under asymmetric information (e.g. over service quality) for opportunistic behaviour that increases profit by underproviding that characteristic that is difficult to observe. Notwithstanding opportunistic behaviour, there is also reason to believe that improving productivity is contradictory to meeting other organisational goals such as effectiveness. For example reducing length of stay after surgery may come at the expense of higher re-admission rates or lower patient satisfaction. Studies tend to focus on individual aspects of performance (i.e. productivity or effectiveness) and little empirical evidence is available on the potential trade-off between efficiency and effectiveness (Andersen and Blegvad, 2006).
Dr. Shimaa Elkomy