Publicly owned utilities: a benchmark approach.

Recent trends toward privatization have made those engaged in the practice of public administration increasingly nervous; at best their jobs might become superfluous; at worst, obsolete.

This is especially true of utility managers who have felt political pressure, rooted in the need to improve performance and reduce costs, to apply private-sector service delivery methods to their businesses.

Promoters of privatization argue that, as monopolies, utilities are not operating within a competitive environment. Consequently, they argue, government-owned and operated utilities have become inefficient, with little or no incentive to hold down costs.

The absence of a competitive environment, coupled with a myriad of external social and political factors governing the conduct of public service providers, has made privatization an attractive alternative for providing public services.

This threat has given rise to a more “market-based” concept of utility management, one that proposes efficiency and responsiveness to the customer (the public) can best be achieved by introducing the competition that marks the private sector to the public sector.

Indeed, many public utility managers are now realizing that they can effectively compete with private service providers, since, on paper at least, the public model is much more efficient than the private model because profit and tax burdens are non-factors.

This, in turn, has forced utilities to look inward to their organizations to determine how they can “re-engineer” to improve their services, in effect, allowing the monopoly to enter the competitive marketplace.

“Managed competition,” a new approach to privatization–based on the concept of public utilities or services submitting bids to continue their services in a competitive arena–was pioneered by the city of Phoenix in the early 1980s, when the city’s public works department gradually learned how to successfully bid against private sector providers using a combination of competitive application of technology and good business practices.

The basis for managed competition is the principle that, through re-engineering (adopting private sector principles and practices), a utility or service can become at least as efficient and cost-effective as a private contractor.

In theory, assuming equal comparisons, a publicly operated utility or service should be more cost competitive than a private provider, largely because the profit margin and tax burdens that affect private providers are eliminated.

Most private-sector corporations have clear goals and articulated mist signs. However, public utilities, on the other hand, have just begun changing their existing operating structures to more “customer oriented” structures, developing goals and missions as part of a customer-centered approach.

The American Water Works Association has recently been developing tools and methodologies to enable utilities to conduct self-assessment practices. One of these methods, the Performance Improvement Process, is a three-phase process that consists of a self-assessment phase, an improvement phase and a measurement phase.

A critical component of the self-assessment phase is a tool for actively comparing the utility to other organizations. Benchmarking is one of these tools.

Called “benchmarking,” a technique long practiced by the private sector, this method combines internal assessment activities with comparisons to other utilities to seek out best management practices.

Before beginning to use benchmarking, however, the utility should first embark on a strategic planning process that can clearly define its direction with respect to becoming competitive as well as its self-improvement goals.

The strategic planning process documents a utility’s mission, objectives and goals, including longer-term visions, as well as shorter-term quick fixes. Integrating the “voice of the customer,” or ratepayer, into a public utility’s goals has a significant impact on the organization’s strategic planning activity.

It allows ratepayers to enjoy the same consideration and responsiveness as successful private businesses give their customers–a customer-centered approach that utilities historically have employed infrequently, if at all.

A truly competitive utility now must take an holistic approach to strategic planning, focusing not just on financial goals but also on customer satisfaction, flexibility and productivity.

A plan is needed to guide the implementation of the utility’s strategic plan. First and foremost, the organization must be open and ready to accept change. The result of the strategic planning process is a document that looks to the future and serves as a tool for charting the direction the utility must take in achieving its objectives. It should include a schedule of improvement activities and processes by which management may allocate resources and funding to implement the goals defined by the plan.

Strategic planning should occur early in the self-assessment phase so that tools can be identified to help the utility achieve its objectives.

While best management practices and superior performance are difficult enough to achieve in the private sector, achieving them in the public sector can be nightmarish.

Formalized benchmarking efforts face many obstacles, including:

* financial restrictions that limit funding for self-improvement programs;

* public sector skepticism of the benefits of benchmarking;

* lack of a clear mission that limits consensus on benchmarking targets;

* lack of motivation-enhancing rewards and programs;

* cultural barriers;

* lack of competitive pressures to improve; and

* lack of precedent on benchmarking within the private sector.

As with other quality improvement endeavors, benchmarking can be costly or inexpensive, depending upon the type and extent of benchmarking comparisons being sought. The varied approaches and types of benchmarking activities have resulted in a significant difference of opinion among experts and managers alike in what benchmarking really should consist of and how to apply it within the public sector. There are essentially two types of benchmarking categories: performance (metric) benchmarking and process benchmarking.

* Performance Benchmarking. In performance benchmarking, one organization’s costs or other numerical values, such as performance measurements, are compared with the same values of others. Performance benchmarks do not, by themselves, identify how to improve a process or increase efficiency. Rather, they are metric parameters that measure the performance of a specific entity.

Confusion may arise because of pressure to use performance benchmarks to compare efficiencies between different entities. However, since each entity has its own unique set of controlling variables, direct comparisons may be inaccurate. Considerable effort is required to account for these variables so that equivalent and fair comparisons can be made.

Many types of control variables must be accounted for when normalizing performance data for comparison between utilities, including differences in debt service, geographic conditions, cost of living, regulatory requirements, type and magnitude of technologies employed, economies of scale, demographics and geographic considerations, as well as operations and maintenance practices.

Unfortunately, non-normalized comparison performance data are most often used within the public sector, unlike in the private sector where processes typically are not compared until all control variables are accounted for. In fact, comparing entities based on performance data alone is at best an extremely difficult and dangerous proposition in light of the potential for misuse, incorrect interpretation and unreliable data and should be discouraged. Instead, performance benchmarks are best used for internal purposes to track improvements or as a means to support a more result-oriented approach to benchmarking.

* Process Benchmarking. Process benchmarking focuses on improving internal programs and processes by learning how the best organizations conduct such activities. In process benchmarking, a utility’s practices and other non-numerical items, such as procedures and systems, are compared to others. With this focus, benchmarking does not get bogged down in accounting for control variables that affect performance benchmarking outcomes. Comparing practices and procedures, such as one utility’s complaint response mechanism to another’s, helps identify better methods and procedures of conducting business.

The power of process benchmarking is its ability to immediately improve a process or system, unlike performance benchmarking, which may imply a better method, but does not define it. Most private industry benchmarking activities have focused on process benchmarking, and it is also likely to provide the public sector with the best return on its benchmarking investment. While it may incorporate performance benchmark elements, process benchmarking is focused more on making processes and other cost centers more efficient.

Competitive forces are pressuring utilities to seek better ways to conduct their business, and formal benchmarking has been shown to be a powerful tool for self-improvement by utilities. Its power lies in using direct comparison to others, focusing not on other utilities’ costs but on their procedures, methods, technologies and other controllable elements that can be implemented by the benchmarking organization.

Selecting partners who exhibit strong performance potential and best-of-the-best characteristics means the utility can observe, on a first-hand basis, how these organizations have become more efficient.

Benchmarking is considered to be a continuous process. Once results are realized, the use of performance benchmarks for assessing improvements over time rounds out the comparison. With the momentum of one successful benchmarking, other projects can follow, each requiring less effort as the utility moves up on the learning curve.