Saturday, September 3, 2011

Getting Bigger By Consolidation Not Only Isn't Better ... Generally It's Worse

People responsible for leading governments, like those leading many companies, believe the exact wrong thing about size and what it means with respect to an organization's effectiveness and efficiency.

Getting bigger by combining several smaller entities all too often results in a much more costly and poorer performing organization. Thus, replacing smaller governments with a single and much larger government often brings disaster.

On the other hand, subsidiarity is a well established and entirely logical organizational principle which makes the case that decisions should be made at the lowest competent part of an organization. Subsidiarity is a foundational feature of federalism which asserts the rights of the parts over the whole. The smaller the better, assuming the competence to be present. The objective evidence strongly supports the principle of subsidiarity, counterintuitive though it may be.

Think about one specific example. If scale and size brought effectiveness and efficiency to an organization, our national government would be the most effective and efficient enterprise in our country. Of course, that's nonsense, and almost all bureaucracies are both costly and ineffective.

When Civic Mergers Don't Save Money makes the point well when it begins by saying, "Governors and lawmakers across the U.S., looking to trim the costs of local government, are prodding school districts, townships and other entities to combine into bigger jurisdictions. But a number of studies—and evidence from past consolidations—suggest such mergers rarely save money, and in many cases, they end up raising costs."

What it doesn't say is that government mergers not only don't save taxpayers money, but they usually result in poorer service, too. In sum, smaller is much better, according to the data.

Yet despite these facts, one Illinois state senator "proposed a bill that would lead to local governments being either combined or dissolved in a bid to save money." That's simply a wrong headed view of the virtue of big versus small organizations, including but not limited to government.

The above referenced article dismisses the Illinois politician's boneheaded argument by citing a fact based study of Illinois townships demonstrating the superiority of smallness:

"But a study this year for a group representing most of Illinois's 1,433 townships used state data to show that tiny townships are the state's most austere government operations. Spending by the state's townships grew 17% from 1992 to 2007, adjusted for inflation, according to the study. State expenditures over that same period grew 51%, while spending by larger municipalities grew 50%; school districts' spending rose 74%. One reason: Townships have fewer employees per person and use more part-timers, reducing salaries and benefits."

A similar situation arises as the result of corporate mergers. In fact, two thirds of corporate mergers don't add value for shareholders, and one third actually end up with the merged company performing worse than the two companies did prior to the merger.

One unimpeachable fact is that smallness brings greater focus, ownership and accountability to virtually any situation. If we know it's MOM (my own money) being spent, or close thereto, we'll be better fiduciaries than if it's OPM (other people's money). That's because OPM is easier to spend (for proof look to our Washington based elected officials), and it brings less ownership and accountability as well. It also brings less personal and hands-on knowledge to bear on the situation.

Subsidiarity works. People who know the job best are the people performing the job. If they also know the people personally who are counting on them to do their job well, they will have a greater tendency to perform up to that level of trust placed in them by their fellow citizens. Simply stated, we don't want to let our friends and neighbors down by slacking on the job.

And that's why bigger isn't always better. In fact, it hardly ever is close to the benefits of smaller.

And that principal-agent fact of life works in virtually all situations. The message; think personal and think small. Know the details and know the people involved.

The best governance decision making tree goes from (1) the individual to (2) the city to (3) the state to (4) the national level. I really wonder why we don't act that way. Things would be so much better if we did.

Thanks. Bob.

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