Written evidence submitted by Professor
John Seddon
SUMMARY
HMRC's failure should be a lesson in how not to conduct
public-service reform.
HMRC is the flagship of UK public-sector reform.
Its astonishingly bad results should be read as urgent warning
signals—which unfortunately they are not, since to do so
would be to fatally undermine the current narrative or set of
beliefs/ideologies of the "reformers". The shortcomings
are the consequence of poor organisation design, which, in turn,
is based on flawed but conventional thinking. HMRC should give
pause to all who believe in industrialising the public sector;
it is a profound source of knowledge about what not to do.
1. BACKGROUND
1.1 I, John Seddon, am managing director of Vanguard
Consulting. Vanguard's purpose is to help service organisations
change from a conventional "command-and-control" design
to a systems design. I have received academic awards for original
work on the design and management of service organisations.
1.2 This evidence is provided at the request
of the Committee, as I have "written about failure demand
in the context of HMRC" (from your invitation to submit evidence).
1.3 I have had no opportunity to study HMRC on
the inside; my evidence is based on what I have learned from public—academic
research, newspapers, presentations by HMRC staff, announcements
and articles by HMRC leaders—and private sources, essentially
moles. The evidence also draws on my knowledge of service organisations.
1.4 I regard HMRC as an indictment of current
approaches to public-sector service reform.
2. POOR RESULTS
SHOULD BE
SIGNALS
2.1 It has emerged that 1.4 million people have
unwittingly paid too little tax through the PAYE system, while
4.5 million have paid too much; another 17.9 million might have
paid the wrong amount, but HMRC is not sure. This amounts to 23.8
million people whose tax affairs are uncertain, a sizeable proportion
if not the majority of people who pay tax via PAYE. Apparently
people on PAYE nowadays move jobs more often, and many more people
have more than one job. The problem has occurred over the last
two years. It is a signal that HMRC's "reformed" service
is failing to absorb the variety of "customer" (taxpayers
and their agents) demands.
2.2 More broadly, the Committee has reported
that HMRC is failing to collect £28 billion in owed taxes.
Of relevance here is that this failure has become worse, twice
as bad, over the last three years, ie in a period when performance
might have been expected to be on an improvement track.
2.3 Failure demand
2.3.1 I define "failure demand" as
"demand caused by a failure to do something or do something
right for the customer" (Seddon 2003). It is a phenomenon
I first observed in the mid-1980s and is critical to understanding
and improving service organisations. All my sources indicate that
HMRC does not study demand—a cardinal omission.
2.3.2 Accountants have established web sites
to complain about the increasing number of transactions it is
taking to resolve clients' tax affairs, imposing extra costs which
they believe should be met by HMRC. Customer blogs and HMRC's
failure to pick up high volumes of calls to call centres are likewise
indicative of high levels of failure demand, which will cause
increasing costs and reflect poor-quality services for users.
2.3.3 The only study of failure demand attributable,
in part, to HMRC has been published by Advice UK ("It's the
System, Stupid"). Its report showed that as much as 40% of
demand into advice centres is caused by the failure of HMRC and
DWP to provide the primary service to citizens. The knowable cost
is estimated at £500 million per annum; the unknowable indirect
and knock-on costs will be considerably higher.
2.3.4 One example of these knock-on effects:
A charity provides volunteers to resolve problems arising from
the increasing difficulty getting adequate service from HMRC.
The charity helps about 20,000 people a year. It estimates that
95% of this work would not occur if HMRC provided a service that
worked.
2.3.5 Although all of the above illustrate palpable
failure demand, HMRC management appears to have no knowledge of
the phenomenon and its extent and causes. (It should not be assumed
that reference to "avoidable contact" is the same as
understanding and removing failure demand.)
2.4 Morale
2.4.1 Finally, morale among HMRC personnel is
reported to be shockingly bad, along with sickness and absence.
Instead of understanding that these are symptoms, HMRC management
commissioned something called a "cultural inventory"—a
waste of time and money—the results of which pointed to
middle management as the problem. Any action among management
will be counterproductive. Low morale is always a signal of poor
job design and a malfunctioning system.
3. RESULTS AS
A CONSEQUENCE
OF DESIGN
3.1 HMRC's failures are systemic. That term is
often used to infer that no one is to blame, but not here. The
blame lies squarely with management as custodians of the system.
It may be argued that final responsibility lies in the Treasury,
as HMRC managers do the Treasury's bidding.
3.2 HMRC has, over the last few years, been an
experiment in service industrialisation. Industrialisation is
believed to generate economies of scale. In fact the reverse is
the case. Industrialisation increases costs. For a more complete
argument see: "Why do we believe in economies of scale?"
This can be downloaded from: http://www.systemsthinking.co.uk/6-economies.asp
3.3 Two of the features in HMRC:
— 3.3.1 Activity
(the calls workers take and the folders they work on) is assumed
to equate to cost, so all workers' activity is monitored and managed.
Close monitoring and lack of autonomy are the primary cause of
low morale. It is simple to establish the counterintuitive truth
that 95% of the variation in workers' performance is due to the
system—the way work is designed and managed. Working on
the "5%", the people, is not only a cause of demoralisation,
it is to ignore the enormous potential for improvement in attending
to the system.
— 3.3.2 The
assumption behind standardisation is that it will reduce costs.
This is false. Management is concerned with reducing transaction
costs—the cost of a telephone call or other discrete process—but
the true costs of service are end-to-end from the taxpayer's or
agent's point of view. Standardising work simply prevents the
system from absorbing variety. It increases the volume of transactions
(causes failure demand) and thus drives overall costs up.
3.4 The ideas of work standardisation and activity
management have been reinforced through HMRC's so-called "lean"
PaceSetter programme. This travesty of "lean" has made
the mistake of treating both organisational problems and the tools
developed in the Toyota System as universal, thus ensuring that
the real lessons are lost in translation. Rather than become an
economic exemplar (as Toyota did), HMRC performance has worsened.
For the full argument about the folly of "lean" see
"Re-thinking lean service". It can be downloaded from:
http://www.systemsthinking.co.uk/6-brendan-jul09.asp
3.5 It is a travesty, for example, that under
the guise of lean, HMRC employees are encouraged to problem-solve
management's wrong problems; why they haven't met today's targets.
Employee initiative is directed away from where it could be of
enormous benefit.
3.6 HMRC's enormous investment in IT systems
will only exacerbate the situation. IT is notoriously bad at absorbing
variety. The costs of the new IT will continue to rise as more
effort is poured into attempts to solve the wrong problems.
4. POLICY-BASED
EVIDENCE, NOT
EVIDENCE-BASED
POLICY
4.1 HMRC is an important lesson in the failures
of service industrialisation. Unfortunately, just as HMRC managers
ignore the signals, successive ministers and HMRC leaders have
done the same. The reason is identical: the signals don't fit
the narrative. The narrative of reform that ministers adhere to
is economies of scale. But economy of scale is a simplistic and
dangerous myth. Economy comes from flow—minimising end-to-end
time and effort—not scale, as was originally demonstrated
by Toyota and is now being confirmed in a number of forward-looking
public- and private-sector organisations throughout the country.
See for example: "Managing for the Better" a review
of a The Vanguard "Leaders Summit" by Simon Caulkin.
Download from www.systemsthinking.co.uk .
4.2 Call centres, back offices, shared services,
standardisation, specialisation, transaction-cost management,
people management, IT-dominated processes—all these features
of today's scale approach to service reform can be shown to drive
overall costs up. Evidence to support that claim does not need
to be disputed, however: it is simply excluded from the narrative.
5. BETTER DESIGN
STARTS WITH
BETTER THINKING
5.1 A thorough understanding of "customer"
demand would enable HMRC managers to design a service that would
reliably and economically absorb the variety of ("value")
demand. This in turn would remove most or all the failure demand,
with consequent dramatic impact on effective capacity. Advice
UK, already mentioned, is an encouraging example of the principles
at work in this sector (there are many examples in other sectors,
including the private). It should be noted that Advice UK's results
have been achieved despite the lack of cooperation from government
agencies—with positive engagement they would be even better.
These designs increase the amount of expertise provided at the
point of transaction (while reducing costs), which in turn
means better service and happier workers.
5.2 Examples from housing benefits services show
how service can be improved as costs fall. As well as delivering
all benefits in a matter of days, local authority exemplars provide
a "complete" service to their clients, attending to
their broader individual needs. The implications of such examples
are profound. They demonstrate, as just one instance, how using
these proven principles a single universal credit could be delivered
locally, at much lower costs, today. But the exclusive belief
in scale means we will wait for an industrialised design (one
UK call centre and web-based service) that is to be delivered
in seven years and is doomed to fail.
6. SOME RECOMMENDATIONS
6.1 The Committee should:
— 6.1.1 Forcefully
encourage HMRC senior managers to study the extent of and causes
of failure demand. It is a vital re-educational step.
— 6.1.2 Demand
evidence from those in the Treasury and elsewhere who promote
the unquestioned belief in economies of scale (when Geoff Mulgan
worked at Number 10 he commissioned such a study, unpublished,
which failed to find the anticipated benefits).
— 6.1.3 Conduct
a complete review of the true costs of service provision by HMRC
as a lesson to others.
— 6.1.4 Call
for a halt to further scale initiatives pending rigorous examination
of the alternatives.
January 2011
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