Managing in a Mixed Economy - Case Study Example

Lecturer: Table of Contents Introduction 2 Background 2 Public and Private Sectors 4 Drivers of Change 8 Structural Developments 8 Public Expenditure 9 Economic Stagnation 9 Performance Management and Measurement 10 Balanced Scorecard Approach 11 Conclusion 12 References 12 Introduction Public sector management has been dominated by bureaucratic structures that have often hindered effective accomplishment of government policies. New public management seeks to eliminate the long-standing barriers through integrating competitive practices applied in the private sector. Public sector managers have a responsibility of facilitating the desired change through innovativeness and developing strategies that enhance efficiency in utilization of public funds. Financing for infrastructure development and operations of public organizations presents a significant hindrance to innovativeness. Funding depends on government policy and priorities while internal revenue generation may not be sufficient. It is therefore necessary for public sector managers to engage initiatives that promote capital generation and effective service delivery. This paper presents a critical evaluation of the management issues in London Underground Limited that is a public railway transport organization. Drivers of change, performance management and measurement have been discussed, as well as how well they have been applied in the company. Background London Underground Limited offers transport services within London as well as some parts of the neighbouring towns of Essex, Buckingham and Hertford. The organization began its operations in 1863 and currently has a capacity of more than 1 billion commuters per year. It is an affiliate of the government owned Transport for London Corporation (Day & Reed, 2010). Over 90% of the operational expenses are financed through commuter fees initially through sale of travel cards and more recently an automated ticketing system introduced in 2003. The company’s longstanding operation has faced significant management and financing issues. It was turned in to a Public Private Partnership (PPP) in 2003 under the labour government after efforts by the conservative government to privatise it were defeated. The treasury also rejected London’s mayor Livingstone’s idea of raising revenue through issuance of bonds with future ticket revenues as security (Butcher, 2010). In 2010, the PPP faced numerous organizational challenges that led to its collapse. The companies that formed the PPP were involved in endless rows over costs and court battles were the order of the day for 10 years since its establishment. Some of the private companies in the partnership were considered by government to have been overpaid and hence contributing to the financial challenges. Some of the companies exaggerated their overhead expenditures, while their loans were taken at a higher interest rate than the public sector loans. Significant amounts of finances are spent on improvements up to 40% more than what similar infrastructure in New York and Hong Kong spend on such activities in terms of GDP (Purchasing Power Parity exchange rates) (Glover, 2003). The public private partnership was expected to lower the cost of managing the organization but instead increased the construction costs and hence the public did not realize any benefit. The company infrastructure program was thought to be better placed under the Transport for London (TfL) where it is currently expected to expand at minimal costs that will save the public significant sums of money compared to the PPP (Butcher, 2010). The major failure that London Underground has faced is associated with the long term contract with one organization lasting over 30 years. This domination by a single organization was characterised by diminutive motivation for enhanced performance. The private partners in the PPP were focused on maximizing profits by manipulating the decision-making process at the expense of the public, especially in maintaining a huge wage bill for the executive level employees. Such spending may not happen in government managed organization. Since TfL took over, significant improvements in the company have occurred with operations becoming more reliable through modern renovations of stations. The renovations and expansions have been accomplished through government funding in the program to support transit and have occurred over a short period of time compared to the private sector’s strategy that was associated with delays and cost plunders at the expense of the tax payer (Butcher, 2010). There are suggestions for conventional funding strategy that will involve short term contracting for small scale commitments through Private Finance Initiatives. These are aimed at enhancing the capacity of TfL in adapting to the fluctuating conditions and to ensure that expenditures are based on prevailing needs. PFIs are useful in infrastructure development as well as improving management through integration of innovative practices in the company (Glover, 2003). The government is considered to be better placed to oversee the non-profit approach to the management of London-Underground. Private companies can effectively be involved in undertaking explicit contracts based on particular projects such as infrastructure development rather than the daily operations of London Underground. The business oriented strategy of managing the company adopted in 2003 is regarded as ambiguous, expensive and failed the test of efficient public sector management (Day & Reed, 2010). Public and Private Sectors The economic theory of 1970s considered government to be a major impediment to economic growth through bureaucracies that hindered effectiveness in public service delivery. The public sector has since evolved in to a form that resembles the operations of the private sector (Flynn, 2012). The private sector organizations strive to accomplish competitiveness through enhancing quality in product and service delivery. On the other hand, the public sector organizations do not compete and therefore there is a likelihood of reluctance in delivering high quality services to the public. However, both types of organizations in the contemporary operating environment share a common goal of ensuring that they acquire the best value for their money. Public sector’s efficiency is measured in terms of spending efficiency of public funds. Citizens are viewed as clients and hence customer satisfaction is among the key objectives of service delivery. They are constantly demanding better quality services that are delivered promptly and at an affordable cost (Rubin, 2009). Public organizations that are unable to satisfy these needs are unlikely to survive in the market as more private players are engaging in similar activities giving the public an option, contrary to the traditional public service that enjoyed a monopoly environment dominated by government corporations (Alford & O’Flynn, 2012). This shift in the market environment puts public organizations in a similar situation as the private sector companies that must leverage their resources to maintain customers. The government is faced with public criticism in matters of expenditure compelling public sector managers to put greater emphasis on project turn-around time and increased efficiency in public supply chain management. This must occur in line with the prevailing conditions of transparency that are typical to the public sector, which poses a significant challenge to innovativeness. Greater output is required with minimal resources including reduced staff in the public sector as the government is compelled to minimize wage bill while increasing efficiency. Lean manufacturing is a term that is typical to the private sector but has become common place in the public sector. It is aimed at avoiding wastage at all levels of service delivery (Maleyeff, 2006). Change in both public and private sectors is also being influenced by the need for process visibility, greater agility and transparency. Process visibility is aimed at enhancing the speed of sourcing and lowering the cost of inventory while improving the cash conversion cycle. Public and private sector managers are engaging in decision making based on facts rather than the traditional perspective in public service decisions based on policy guidelines. It eliminates the justification of poor resolutions by enhancing information confidence in place of assumptions and narratives (Alford & O’Flynn, 2012). The private sector professionals have managed to unremittingly eliminate unnecessary costs by making it a priority. Public sector managers have also realized the need to engage cost reduction strategies for their organizations to remain sustainable in the long-run. It is a strategy that is successfully being applied to increase public confidence in government run corporations. Agility is desirable in both private and public sector organizations. To remain competitive, promptness in customer service has to be enhanced through innovations and discarding obsolete technology in a cheap and timely manner. The public is aware of technological advancements and the government has no option but to ensure that services are rendered according to consumer needs. Maintaining obsolete infrastructure for the reason that public funds were spent in development is no longer enough justification for lack of innovativeness in the public sector (Starling, 2010). Resistance to change in the public sector that is enhanced by strict bureaucracy still remains a major challenge as public organization managers attempt to adopt best practices of the private sector.Tax payers are expected to finance the operations of the public sector and the government is supposed to oversee successful utilization of public expenditure. Nevertheless, government bureaucracy leads to the establishment of structures and procedures that hinder innovativeness among public service managers as well as delaying actions that can reduce wastage of finances. These hindrances occur in a mixed economy whereby the public is able to compare the services offered by private sector that is dynamic and profit oriented. The comparison raises questions such as why the government is unable to manage its resources effectively in service delivery as is the case in the private sector (Shafritz & Hyde, 2011). London Underground needed to enhance service delivery through reducing conventional bureaucracy and engaging a market based approach to management of public transport, which is one of the key government services that affect a wide population. The government also aimed at enhancing citizen service delivery that is an important determinant of the relationship between the government and citizens especially with regards to re-election in to office (Glover, 2003). Public sector managers have an obligation of adhering to the unique regulations of transparency and accountability. However, these rules among other bureaucratic constraints can be overshadowed by the integration of the private sector management strategies such as supply chain concepts and leadership (Starling, 2010). The issue of accountability demands that public sector managers disclose essential information that could be used to save public funds. For example, public sector supply chain management is weakened by government regulations of disclosure of the prices of goods. When such information is made public, bidders will leverage on their accuracy to ensure that their prices fall within the government estimates. This practice is considered to be inappropriate among private sector supply chain professionals. It is therefore an extra challenge for public sector managers associated with the existing laws of UK government as well as the various county procedures (Shafritz & Hyde, 2011). Minimum savings in the public sector can be accomplished through assimilation of some private sector strategies in to the existing procedures such as strategic sourcing whereby flexibility is allowed in the procurement process to ensure continuous improvement and re-assessment of the process of acquiring goods and services. Supplier relationship management is also an important strategy that can help public service managers to advantageously plan and manage exchanges with suppliers to increase value for the organization. It can help in risk reduction as well as discovering new value through developing a better and more cooperative association with suppliers. Inventory management has successfully been applied by private organizations to ensure efficiency and reduce wastage by maintaining sufficient supplies while avoiding excess supply. Public organizations are faced with problems of inventory management thereby failing to safeguard public assets from fraudulent deals (Andrews et al. 2011). Drivers of Change Change has been inevitable in the current operating environment of London Underground. The mixed economy is characterized by market based decisions such as the choice of transportation method. Nevertheless, the government plays a critical role in the decision making process such as infrastructure development for public and private transport as well as policies for the management of transport services. The management of railways has been a preserve of the government for close to 4 decades since 1948 until the government made drastic changes in a bid to increase efficiency in 1996. This resulted in the subdivision of the railways in to over 100 units that were sold to private companies (Day & Reed, 2010). These changes were as a result of the issues of structural developments, increasing public expenditure as well as the challenge of economic stagnation discussed here in. Structural Developments Technological advancements in the railway transport sector influenced changes in London Underground to meet customer expectations. It requires upgrades of the existing infrastructure to allow automation of railway operation. Long term competitiveness of the company significantly depends on its capacity to align operations with the current economic realities. Commuters were satisfied with the new transformations in London Underground including automated payment methods through travel cards, which eliminated the inconvenience of cash payments (Glover, 2003). They are also able to plan their journeys well ahead with the computerised travel plans and also receive information real time regarding important aspects of their journey. Signalling systems were installed in three lines and have been significant in boosting the travel logistics. The company was successful in maintaining customer relationship management infrastructure that enables it to enhance customer experience in railway travels. The technological innovations in CRM have enabled the company to effectively manage its interactions with present and prospective customers through automation and synchronization of transactions, promotion, customer care and technical support. The changes enhanced the company’s operational vision, which enhanced customer and employee satisfaction (Day & Reed, 2010). Public Expenditure Increased public spending has been a significant issue associated with reduced private investment. Much of the spending was for the maintenance of a large workforce that was rendered ineffective by powerful bureaucracy in government. Great efforts were focused on preserving bureaucracy rather than promoting consumer interests (Rubin, 2009). The conventional human resource model applied earlier by the company was out dated in the current operating environment. There was need to maintain a proactive workforce that would be visible to the public and well equipped to deliver quality services. New technology necessitated review of the organization’s staffing structure. This meant the maintenance of a lean and competitive workforce as is the case in many successful private sector organizations (Moynihan, 2008). Economic Stagnation Economic stagnation is characterised by high rates of unemployment and reduction in growth rate. Few companies are willing to make investments during such periods yet the government has a duty of ensuring policies that promote employment creation (Ashworth, Boyne & Entwistle, 2010). By liberalizing its control on railway transport, the government encouraged over 100 companies to invest. London Underground was successfully placed in Public Private Partnership (PPP). This was an important strategy aimed at increasing economic growth through employment creation and increased efficiency. It was also a strategy to integrate private sector strategies in public service to enhance consumer satisfaction. Nevertheless, the government’s strategy of vetting partners failed to prevent the entry of unscrupulous entrepreneurs whose aim was only to accumulate wealth from the company through inflated cost of operations. Nevertheless, the new management under TfL has been successful in the integration of private sector competences in the company’s operations (Butcher, 2010). Performance Management and Measurement Performance management is comprised of activities that confirm the successful and effective accomplishment of organizational goals. It may focus on any or all the departments of an organization as well as individual employees. Performance measurement is a strategy for information gathering, analysing and reporting with regards to the accomplishments of the targets that have been set by an individual or organization (Andy, 2009). It also entails reviewing processes and approaches within organizations to check whether the output corresponds to the targets. It helps to determine whether public resources have been managed effectively and also to determine whether public servants are adding value to the organization. Effective performance measurement tools such as the balanced scorecard approach applied by London Underground can be applied in the public sector to determine and enhance their effectiveness (Dooren, Bouckaert & Halligan, 2010). Balanced Scorecard Approach The balance scorecard is a significant tool that enables the strategies of an organization to be matched with the corresponding activities and outcomes. It applies a strategy map with connected measures and indicators. London Underground successfully applies the balanced score cared approach to measure financial performance, customer satisfaction, internal efficiency and organizational growth (Moynihan, 2008). Customer satisfaction is a key aspect that the organization emphasizes in its operations and the latest evaluation revealed an overall increment by four points. It is considered to be the highest since the performance measurement strategy was adopted in 1990. Measuring customer satisfaction is important to the organization as it helps in understanding customers. Understanding customer needs enables an organization to increase their loyalty and hence greater revenue as they are encouraged to buy the service more often. The organization is in a position to address emerging issues before they get out of control. Moreover, measuring customer satisfaction allows the organization to attract and retain new customers. In the case of London Underground, the customers are the public and hence greater satisfaction means public endorsement of government efforts (Transport for London, 2013). Measuring internal efficiency is also a significant aspect of the balanced score card approach that is aimed at ensuring effective utilization of an organization’s resources. It also allows effective forecasting to determine the development needs. For example, London Underground realised that passenger journeys increased above the forecast by 13 million in 2013. This is an indication of the need for a better forecasting strategy to avoid last minute rush that is associated with customer congestion. Journey times also improved by over 1 minute, which is a significant accomplishment as the trains will cover more journeys in the long-run. However, the performance measurement failed to highlight financial performance and organizational growth (Transport for London, 2013). It is important that these aspects be put in to consideration in every performance measurement. They should be outlined clearly to provide a road map of how public funds are being spent as well as the future of the company. Conclusion It is important for the government to encourage private sector participation in public service delivery. This helps to decrease public spending on sectors such as railway transport that can be effectively managed in collaboration with the private sector thereby boosting economic growth. However, strategies that put the public interests ahead of partners’ interests in Public Private Partnerships need to be employed to avoid failures such as those experienced in the PPP adopted in the management of London Underground. Performance management and measurement are important strategies that can help to promote organizational effectiveness through identifying emerging issues in the process of accomplishing organizational goals and ensuring timely refinement. The balanced scorecard approach is effective in providing a holistic evaluation of an organization’s performance. It needs to be applied comprehensively to cover all the aspects of performance for an organization to benefit from its strengths. References Alford, J. & O’Flynn, J. 2012. Rethinking Public Service Delivery: Managing with External Providers, Basingstoke: Palgrave Macmillan. Andrews, R., Boyne, G., Law, J. & Walker, R. 2011. Strategic Management and Public Service Performance, Basingstoke: Palgrave Macmillan. Andy N. 2009. The performance measurement revolution: why now and what next?, International Journal of Operations & Production Management, 19(2), pp.205-228. Ashworth, R., Boyne, G. & Entwistle, T. 2010. Public Service Improvement: Theories and Evidence, Oxford: OUP Oxford. Butcher, L. 2010. London Underground PPP: background - Commons Library Standard Note, Available at, [Accessed 19th April 2014]. Day, J. & Reed, J. 2010. The Story of Londons Underground, Middlesex: Capital Transport Publishing. Dooren, W., Bouckaert, G. & Halligan, J. 2010. Performance Management in the Public Sector, London: Routledge. Flynn, N. 2012. Public Sector Management, London: Sage Publications. Glover, J. 2003. Londons Underground, London: Ian Allan Publishing. Maleyeff, J. 2006. Exploration of Internal Service Systems Using Lean Principles, Management Decision, 44(5), pp. 101-109. Moynihan, D. P. 2008. The Dynamics of Performance Management: Constructing Information and Reform, Washington, DC: Georgetown University Press. Rubin, I.S. 2009. The Politics of Public Budgeting: Getting and Spending, Borrowing and Balancing, London: CQ Press. Shafritz, J. & Hyde, A. 2011. Classics of Public Administration, Stamford: Cengage Learning. Starling, G. 2010. Managing the Public Sector, Stamford: Cengage Learning. Transport for London, 2013. London Underground Performance Report Period 10 (9 December 2012 – 5 January 2013), Available at, [Accessed 19th April 2014]. Read More