Public organizations could improve and reduce their overheads

The day-to-day management of many public organizations could be improved by organizing their overheads better. That would result in lower running expenses and a greater appreciation by internal customers. This is stated by Mark Huijben in his thesis entitled ‘Overhead Gewaardeerd’ [Evaluating overheads]. Huijben was awarded a PhD by the University of Groningen on 20 January 2011.

You can make a lot of savings in this area, states Huijben, who has been investigating the overheads of over 1300 organizations in 27 different sectors since 2001. Overheads encompass all the actions involved in the management and support of staff on the work floor. This includes the board and the management staff, HRM, automation and factors such as communication and legal affairs.

Fat or muscle

Overheads are often regarded as the ‘fat’ of an organization, but according to Huijben ‘muscle’ is a better metaphor because these actions are very important. Huijben concentrated on the overheads generated by governmental and semi-governmental organizations like ministries, municipalities and independent administrative bodies such as the Chamber of Commerce, De Nederlandsche Bank and the Police Academy. In addition, he drew comparisons with companies from the business services sector. Huijben shows that the overheads percentage at the ministries scores the highest – there, 41.9% of the total number of jobs are for the management and support of the own organization. The next in line are housing corporations (34.6%) and municipalities (33.6%). Sectors with very low overheads include healthcare (13.2%), education (14.4%) and industry (13.6%). ‘There are major differences among the sectors’, according to Huijben. ‘Overheads can vary by as much as a factor of two even between organizations in the same sector.’ And that is undesirable, says Huijben, because his research also reveals that higher overheads do not lead to higher production.

Determine the levels centrally

Previous research by Huijben on overheads percentages already pointed in the same direction. Huijben’s newest results only strengthen these earlier conclusions. For his PhD, he also examined the causes of the differences between organizations and sectors. ‘These differences are to a major degree the result of how the overheads are managed and organized’, explains Huijben. ‘One organization may have these matters much more strictly organized than another.’ According to Huijben, what works particularly well is to determine centrally just how large the overheads departments should be, combined with clear work agreements on the extent and quality of the service provision to the other organization parts. However, at many organizations these agreements are anything but clear. Another method, the internal charging of costs, turns out to be pointless in many cases. One reason in favour of charging costs is that line managers would then become more cost conscious. In practice, however, the managers are usually judged on other organizational aims. This can also lead to undesirable differences in the service provision to departments.

Centralization

‘Centralizing the day-to-day management within the organization can work well’, states Huijben. ‘When the overheads are spread throughout the organization, it is very difficult to put your finger on exactly what everyone is doing. This is particularly true of many municipalities.’ Huijben’s research shows that there are alternatives. An organization such as the Child Care and Protection Board has concentrated virtually all its day-to-day management activities in one centralized office. ‘The advantage of this is that the overheads are clearly visible, which creates counterpressure and keeps the overheads down’, explains Huijben. ‘It makes an organization less complex. In many other large organizations the management departments are often spread over the whole organization, making them less transparent.’

Cuts

The research results mean that question marks can be placed by the planned reorganizations at ministries and the cuts in healthcare and education: ‘Ministries are busy designing country-wide “shared service” centres. I have doubts about the effectiveness because scaling up does not lead to economies of scale for overheads, with the exception of a limited number of very executive tasks.’ According to Huijben it would be better to make the day-to-day management tasks much more transparent, for example by centralizing them as much as possible, and then not outside but inside each of the ministries. In addition, there should be a norm for their extent and for the service level provision. With regard to the cuts in education and healthcare he says: ‘There the overheads percentage is already very low. Financial pressure has already reduced the amount of fat significantly. This means that further interventions will have negative effects for the primary processes in these sectors.’

Curriculum Vitae

Mark Huijben (The Hague, 1970) will be awarded a PhD by the Faculty of Economics and Business of the University of Groningen, where he previously completed degrees in econometrics and business economics. His supervisor is Prof. G.J. van Helden. His thesis is entitled ‘Overhead gewaardeerd. Verbetering van de balans tussen waarde en kosten van overhead bij organisaties in de publieke sector.’ [Evaluating overheads. Improving the balance between value and overheads costs in public sector organizations.]

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