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Finding the Sweet Spot of Value and Cost

A concept called value-cost leveraging can cut the costs of delivering public services while providing better satisfaction.

It was the writing of three Harvard business professors that first turned me on to the concept of "value-cost leveraging." This tool, originally designed to help service industries improve profits, is equally useful to government managers seeking ways to squeeze more and more value out of shrinking financial resources.

Value-cost leveraging involves finding specific things that your customers value but that actually reduce your costs. For example, providing a salad bar can be less costly to a restaurateur than having servers prepare salads individually in the kitchen. And in many cases diners at the restaurant prefer using a salad bar to having a prepared salad brought to them. They can choose exactly the ingredients they want, load up their plates and go back for more, and they can serve themselves when they want.

Choice can be valuable. And, sometimes government can provide choice at little or no cost. A few years ago, our firm was working in a New England state applying the principles of value-cost leveraging to services for children with developmental disabilities. The governor and the legislature were struggling with the need to substantially cut the budget for these services. Parents and advocates had organized stiff resistance to the cuts.

I'll use round numbers to describe what happened next. The average annual state expenditure for a child with developmental disabilities was about $10,000; these services were prescribed by the state and delivered at the county level. Parents complained about the lack of flexibility and the quality of service even as they vigorously defended the status-quo budget for these services.

When we were testing various ideas with parents and advocacy groups for finding savings in the budget, we suggested giving parents what amounted to a voucher that would allow them to choose the mix of services for their children as well as the source of such services from among state-certified organizations. They jumped on this possibility. When I asked them how much the power of such choice was worth to them, I found the group would gladly prefer a $9,000 "voucher" over the $10,000-per-child funding under the existing system.

Yet, choice is not the only approach to value-cost leveraging. Jeff Zlonis, a business partner of mine who is an expert in this area, suggests these avenues for finding value-cost leverage in the delivery of government services:

• Talk with your customers about which aspects of your service they consider valuable and which are not so valuable to them. In their book "Service America! Doing Business in the New Economy," Ron Zemke and Karl Albrecht introduced a methodology that they called "moments of truth" to find the high-value aspects of a service. Compare these with the costs associated with that value, and you are going down the road of value-cost leveraging.

• On a whiteboard, lay out a cause-and-effect representation (or logic model) of the service you provide. Start with the ultimate benefit to those you serve and work back, listing the factors that make that benefit most valuable to those customers. Then map the things that make each of those factors valuable. This "map" gives you clues about where value is. You may find that you spend a lot of money on some things that add little value, or vice versa.

• People want information, and these days information can often be provided very inexpensively. For example, call centers that tell you approximately how long the wait time will be receive consistently higher customer-satisfaction ratings than those that do not. Are there ways you could add value for your customers by providing them with inexpensive information?

• One aspect of government that is most unlike business is that government is often in pursuit of "fairness." But defining fairness can be elusive. In many cases, we have taken the "safest" route and defined fairness as "treating everyone the same." But there may be cases where treating people situationally is perceived as fair and is far less expensive. For example, many states subsidize their public universities to keep tuition costs down. The benefits of such subsidies accrue to all students regardless of their financial need. Would it be fairer and less expensive to subsidize financial aid instead of the institutions?

• Think about how you could apply principles of value-cost leveraging with your own employees. To be sure, adequate compensation is essential to all of us. Yet some workers might value less-expensive things--such as recognition, increased freedom and decision-making authority, or a chance to see firsthand the impact of their work on people they serve--higher than they would a raise.

Next time you are experiencing a budget crunch (like tomorrow), try applying the principles of value-cost leveraging. It's a simple analytical planning tool that will help you find the sweet spots among various elements in your service-delivery system--those things that create the most value at the least cost.

Babak Armajani was a Governing contributor. He was the chair for the Public Strategies Group, where he and his partners focused on transforming bureaucracies into customer-focused enterprises.
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