Final summary O&M
Problem 1: make or buy
Different costs
Transaction costs
- Costs incurred when you make a transaction, is what makes a transaction less effective
- Components:
o Cost of negotiation
o Cost of agent control
o Cost of gathering information
o Cost of hiring agents
o Costs of making a contract
- Dynamic transaction costs (costs of persuading, negotiating and coordinating) decrease over
time. Which leads to the fact that market transaction is often more cost effective than
market integration.
- The more uncertainty there is between the parties, the higher transaction costs will be.
- Long term agreements: they are more expensive because external circumstances change.
There is more uncertainty and because of the bounded rationality it is more expensive.
- Insourcing: low transaction costs, organizations are controlled by a single organization so the
transaction costs of outsourcing are nullified.
- Outsourcing: high transaction costs
Production costs
- Cost of labor and material required to produce goods and services
Hierarchical administration costs
- Administration costs: the costs that it take to manage an organization (ex.
HRM/management related tasks)
- Insourcing: high costs because of the high amount of work
- Outsourcing: low costs because other organizations do the work
- Transaction vs administration costs
o Administrative costs are internal and transaction costs are external
Williams three critical dimensions
- Uncertainty: if you are certain about the different components of transaction.
o The higher the uncertainty, the higher the transaction costs.
- Frequency of transaction
o High frequency lowers transaction costs
- Transaction specific investments
o If the investment is for a specific single use (asset specificity), it would be really
costly and not worth it. If the investment is for repeated future instances, it would
be worth it.
Outsourcing
- Is a form of privatization
- A third party is hired to perform a service that normally happens within the organization
itself.
- A service previously done by the government is now performed by the private sector.
- To ‘buy’ something
- Costs:
o Low administrative costs > you mange nothing
, o Lower production costs > not 0, you have to pay for the service. Is still cheaper
because of the economies of scale.
o High transaction costs
- Outsourcing is often preferred because it gives both lower production and administration
costs, over only higher transaction costs.
- Pro
o Economic arguments:
Higher efficiency in pricing and production (specialization) because of
competition > higher quality and lower costs
Prevents monopoly exploitation
Public management techniques are inferior to private management
techniques
Less governmental spending
Low administrative costs
Low production costs
Less taxation
Reduces cross subsidies
o Ideological argument:
Running public enterprises is no longer part of the governments tasks.
o You can outsource the less significant task of the firm and focus on the organizations
main task.
- Cons
o You hope for more competition but this does not always happen > monopoly
o Governments can't control a private firm, they can't force them to act outside of the
contract.
o The flexibility lowers because of established contracts
o An increase in the parties involved can create accountability issues
Insourcing
- Organizations provide services on side, everything happens within the organization.
- Goes to the government away from the private sector > opposite of privatization.
- To ‘make’ something
- Costs:
o High administrative costs > manage everything
o High production costs > no specialization
o Low transaction costs > 0
Private management techniques
- Critiques of private management:
o Profit is more important than optimizing processes.
o Risk averse
o Dislike for shareholders
- In general, there is the idea that private management is better than public management.
o A reason is the lack of accountability in the public sector, this is higher in the private
sector.
o Non-public firms can specialize, as such it is cheaper and more efficient.
Different market structures
- Vertical integration: one company controls the organizations below it, hierarchy > insourcing
- Horizontal integration: firms engage in a similar line in production, so not a single firm who
commands, they all have equal powers > outsourcing
Neoclassical vs transactional economies (TCE)
, - Neoclassical economies
o Less realistic > ignores public organizations and transaction costs
- Transactional economies
o More realistic
o Transaction costs are central
o Analyzed in 3 levels of transaction costs (Williams)
Overall structure of the company > how operating parts are related to each
other
Middle level > focuses on the different parts of the company & try to find
the ‘efficient boundaries’ of the operating unit.
Human asset organization
o Has as goal to decrease costs at both the supply and demand side, and completion is
necessary to decrease these costs.
Problem 2: output measurement and output
management
Change in management strategy
- There was a shift from input management to performance management
o To allocate resources more effectively
o line-item budgeting: focused on allocating the budget to a specific item
o Zero based budgeting: ????
o Program budgeting: you finance programs over salaries, overtime etc
Input management
- The set amount of the budget from last year will determine the budget for the following
year
- Cons: > issues with transparency and efficiency
o You can't measure your results/outputs as the focus in on inputs
o The budget of the previous year does not always apply to the new situation
o The whole budget needs to be used to prevent budget cuts in the following year,
this leads to useless spending
o Management lacks a goal orientated attitude and do not improve efficiency
o Not beneficial in long term
o There is limited information to make decisions and big changes
o Is not flexible, can't spend your resources in a different way
Outcome based budgeting
- The solution: outcome-based budgeting
- Pros:
o More freedom for managers (does also give them the possibility to abuse this
power)
o Better allocation of resources
o Encourages more innovation and efficiency
o More flexibility
o Enhances forward planning, so better for the long term
o More insight to where the money is going, higher transparency
Performance management
- A market mechanism in the public sector
- Incentives
- Performance indicators: how to measure performance (ex. Setting goals and targets)
Problem 1: make or buy
Different costs
Transaction costs
- Costs incurred when you make a transaction, is what makes a transaction less effective
- Components:
o Cost of negotiation
o Cost of agent control
o Cost of gathering information
o Cost of hiring agents
o Costs of making a contract
- Dynamic transaction costs (costs of persuading, negotiating and coordinating) decrease over
time. Which leads to the fact that market transaction is often more cost effective than
market integration.
- The more uncertainty there is between the parties, the higher transaction costs will be.
- Long term agreements: they are more expensive because external circumstances change.
There is more uncertainty and because of the bounded rationality it is more expensive.
- Insourcing: low transaction costs, organizations are controlled by a single organization so the
transaction costs of outsourcing are nullified.
- Outsourcing: high transaction costs
Production costs
- Cost of labor and material required to produce goods and services
Hierarchical administration costs
- Administration costs: the costs that it take to manage an organization (ex.
HRM/management related tasks)
- Insourcing: high costs because of the high amount of work
- Outsourcing: low costs because other organizations do the work
- Transaction vs administration costs
o Administrative costs are internal and transaction costs are external
Williams three critical dimensions
- Uncertainty: if you are certain about the different components of transaction.
o The higher the uncertainty, the higher the transaction costs.
- Frequency of transaction
o High frequency lowers transaction costs
- Transaction specific investments
o If the investment is for a specific single use (asset specificity), it would be really
costly and not worth it. If the investment is for repeated future instances, it would
be worth it.
Outsourcing
- Is a form of privatization
- A third party is hired to perform a service that normally happens within the organization
itself.
- A service previously done by the government is now performed by the private sector.
- To ‘buy’ something
- Costs:
o Low administrative costs > you mange nothing
, o Lower production costs > not 0, you have to pay for the service. Is still cheaper
because of the economies of scale.
o High transaction costs
- Outsourcing is often preferred because it gives both lower production and administration
costs, over only higher transaction costs.
- Pro
o Economic arguments:
Higher efficiency in pricing and production (specialization) because of
competition > higher quality and lower costs
Prevents monopoly exploitation
Public management techniques are inferior to private management
techniques
Less governmental spending
Low administrative costs
Low production costs
Less taxation
Reduces cross subsidies
o Ideological argument:
Running public enterprises is no longer part of the governments tasks.
o You can outsource the less significant task of the firm and focus on the organizations
main task.
- Cons
o You hope for more competition but this does not always happen > monopoly
o Governments can't control a private firm, they can't force them to act outside of the
contract.
o The flexibility lowers because of established contracts
o An increase in the parties involved can create accountability issues
Insourcing
- Organizations provide services on side, everything happens within the organization.
- Goes to the government away from the private sector > opposite of privatization.
- To ‘make’ something
- Costs:
o High administrative costs > manage everything
o High production costs > no specialization
o Low transaction costs > 0
Private management techniques
- Critiques of private management:
o Profit is more important than optimizing processes.
o Risk averse
o Dislike for shareholders
- In general, there is the idea that private management is better than public management.
o A reason is the lack of accountability in the public sector, this is higher in the private
sector.
o Non-public firms can specialize, as such it is cheaper and more efficient.
Different market structures
- Vertical integration: one company controls the organizations below it, hierarchy > insourcing
- Horizontal integration: firms engage in a similar line in production, so not a single firm who
commands, they all have equal powers > outsourcing
Neoclassical vs transactional economies (TCE)
, - Neoclassical economies
o Less realistic > ignores public organizations and transaction costs
- Transactional economies
o More realistic
o Transaction costs are central
o Analyzed in 3 levels of transaction costs (Williams)
Overall structure of the company > how operating parts are related to each
other
Middle level > focuses on the different parts of the company & try to find
the ‘efficient boundaries’ of the operating unit.
Human asset organization
o Has as goal to decrease costs at both the supply and demand side, and completion is
necessary to decrease these costs.
Problem 2: output measurement and output
management
Change in management strategy
- There was a shift from input management to performance management
o To allocate resources more effectively
o line-item budgeting: focused on allocating the budget to a specific item
o Zero based budgeting: ????
o Program budgeting: you finance programs over salaries, overtime etc
Input management
- The set amount of the budget from last year will determine the budget for the following
year
- Cons: > issues with transparency and efficiency
o You can't measure your results/outputs as the focus in on inputs
o The budget of the previous year does not always apply to the new situation
o The whole budget needs to be used to prevent budget cuts in the following year,
this leads to useless spending
o Management lacks a goal orientated attitude and do not improve efficiency
o Not beneficial in long term
o There is limited information to make decisions and big changes
o Is not flexible, can't spend your resources in a different way
Outcome based budgeting
- The solution: outcome-based budgeting
- Pros:
o More freedom for managers (does also give them the possibility to abuse this
power)
o Better allocation of resources
o Encourages more innovation and efficiency
o More flexibility
o Enhances forward planning, so better for the long term
o More insight to where the money is going, higher transparency
Performance management
- A market mechanism in the public sector
- Incentives
- Performance indicators: how to measure performance (ex. Setting goals and targets)
