When Demand Exceeds Revenue

gombadmin Blog

by Rick Little, Director, Performance Measures

In working with measures for the SUCCESS Framework, I receive repeated comments from agencies about the relationships between the three variables of quality (Q), throughput (T), and operating expenses (OE). Here are a few examples:

    • “Our costs are fixed and quality is high. Our system QT/OE can only be improved if we increase throughput. We don’t control the demand for our services so we have no influence on the throughput for our system.”
    • “Quality multiplied by throughput is the numerator. Our quality has improved but throughput is down so we look bad.”
    • “Staffing costs are fixed so our OE does not adjust to changes in quality and throughput.”

These concerns and others are better addressed once individuals understand the SUCCESS approach. To begin, I’d like to address why we encourage the approach in all public systems. It’s more than fostering an environment of continuous improvement and innovation – although, that is justification enough. The most important reason is that we have a problem: The demand for public services always exceeds available revenue. This is especially acute in Utah as our population continues to grow.

For several years, Utah has been ranked as one of the fastest growing states. In 2014, we were second behind South Dakota whose growth may wane with lower gas prices. Since 1995, the state population has increased 31 percent – almost twice the national average (the US population increased 17 percent during the same period). Population growth is the single most influential driver of increased demand for public services. The inflation-adjusted total state budget has increased more than the growth in population; however, most of that increase is due to education and federal funding. After adjustments for inflation, the state General Fund has increased a modest 7.5 percent since 1995. This means that today, there are fewer inflation-adjusted general funds per Utahn than in 1995. The SUCCESS Framework assists state agencies to meet increased demand with available revenues.

Few would argue that every system in government should add value or should not endure. The SUCCESS Framework is engineered to assist agencies to increase value for every taxpayer dollar. In this strategic objective is a measure: value/costs. Costs are defined by operating expenses (OE). The operating expenses for each system are known. The challenge is in how we define and measure value. The SUCCESS approach defines value in terms of what each system does (throughput) – and how well it does it (quality). Throughput (T) is the volume of productivity observed in the system. If a system processes applications then the count of applications processed is a likely measure of throughput. If another system serves low-income at-risk pre-school children, then the number of children served is the throughput.

Most systems do not control or influence throughput—most throughputs are a function of citizen demand. Variations in throughput are expected. Over time, throughput for most systems will increase. As systems uncover hidden and unused capacity, they can begin to meet growing demand without increasing operating expenses or will increase investment at a reduced rate compared with demand.

Quality (Q) is defined by one or more attributes that determine whether or not throughput meets expectations. Quality describes the degree of excellence and benefit of throughput. It is how the product or service can be evaluated in terms of its success. Poor quality results in extra costs and negative outcomes for citizens. When viewed together, we can determine not only what we do in government but how well we do it. In the private sector, quality is inherent in throughput assuming that the market won’t purchase a product that lacks quality. In government, there is no such external control and it is imperative that there is a deliberate and explicit focus on quality.

The strategic SUCCESS Framework measure of value/costs becomes QT/OE. Long-term system improvements reflected in the measure QT/OE narrow the gap between demand for quality public services and associated costs. While always looking for cost efficiencies is important, doing so without considering how to improve quality and increase capacity to meet demand is not be enough.

The measure of QT/OE is at the mercy of the relationship between throughput and costs. This is by design. Quality is a complement to throughput intended to ensure that system outputs meet certain standards of performance. The primary approach for narrowing the gap is to improve quality and meet increased demand while holding costs neutral.

QT/OE is a system-wide strategic measure used in addition to operational indicators. Most systems need and have tactical metrics that help inform daily decision-making. Measures that help supervisors assign work, automate tasks, order supplies, etc., are critical indicators that support good management decisions.

While it’s generally true that systems don’t control demand and costs are fixed in the short-term, doing things better, faster, and cheaper will eventually reverse the trend. While government cannot always control throughput, it can control quality and operating expenses. The goal should be to focus on what we can control and thereby do more and better work within given revenues. Every system, whether it serves vulnerable populations or processes business licenses, can and should improve performance – especially as it relates to quality, throughput, and cost.