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Measuring efficiency is sometimes ineffective

June 22, 2016

Striving towards greater efficiency (and hence needing to measure it) sounds like a desirable and attainable objective. Everyone has an innate understanding of what efficiency looks like; we are satisfied when we achieve the efficient completion of a task, and appreciate it when we observe it in others. However, it is difficult to measure efficiency precisely, especially in the public sector, and even more difficult to know that optimal efficiency has been achieved.

So what is efficiency? This is normally defined as the ratio between output and input, seen most easily in physical systems such as engines. Engines use a measurable amount of chemical energy in the form of fuel and produce a measurable amount of kinetic energy. Efficiency of the engine is simply the ratio of the usable output energy (disregarding waste energy, i.e. heat) divided by the input energy.

Many organisations have a looser usage of the term ‘efficiency’. A worker or a team might be called efficient if they work in such a way as to produce few errors (so there is little need for re-work) and with the task done in a time that seems reasonable.

Efficiency is a key concept in economics; or rather a set of concepts encompassing allocative efficiency, technical efficiency and production efficiency. Production efficiency occurs when an economy cannot produce additional amounts of a good or service without reducing the amount of another good or service. This does not specify the amounts of each individual product. To do this, one needs to consider allocative efficiency, which occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences. The closest economic term to the everyday concept is technical efficiency, which occurs if a firm is producing the maximum output from a given set of inputs.

In the private sector, there is a strong incentive for a firm to be as efficient as possible (in the technical sense) to avoid being outcompeted by one that is more efficient. But in the public sector, what does efficiency mean? The nature of outputs are contested, there is usually no competitive pressure and perhaps most important of all, there is little incentive to achieve high efficiency, partly because it is so difficult to measure.

Often, the nearest that we get is to the related concept of cost-effectiveness. In this analysis, two or more alternative courses of action are considered to compare the effectiveness (the extent to which an objective is realised) with the overall resources used, i.e. cost.

Yet again, we see that what appears to be a sensible approach founders on the rock of measurement difficulty. And when efficiency cannot be reliably measured, it is hard to provide incentives for its achievement, and so difficult to achieve the level of efficiency in the public service as is achieved in the private sector.

So what do we do? First, have a realistic view of what can be measured; not forgetting that sometimes it is possible to measure efficiency. But if it is not, recognise that effectiveness is often equally important, and is usually easier to measure.

© Numerical Advantage 2016
http://www.numericaladvantage.com.au

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From → Articles, contrarian

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