By Kevin Meyer
Conventional thinking has it that when two similar organizations merge the sum is more efficient than the parts. That's the thought behind mergers of companies, government entities, and the like. But is it really true? Perhaps not – at least on the government side of things – and that can give us some lessons for the mergers of other types of organizations.
Governors and lawmakers across the U.S., looking to trim the costs of local government, are prodding school districts, townships and other entities to combine into bigger jurisdictions. But a number of studies—and evidence from past consolidations—suggest such mergers rarely save money, and in many cases, they end up raising costs.
There are several reasons for this.
The logic often cited behind consolidations is saving money by shedding layers of management or having departments share equipment such as snowplows. But managers and equipment account for far less than half of local governments' expenses—most of their cost is rank-and-file labor.
Another reason: When small governments merge, they often "harmonize" services and employee benefits to the highest level among the combining units. In other words, the consolidated city finds it politically expedient to take on the more-expensive version of everything.
But since it is counterintuitive, our legislators are trying to incent the practice.
Still, when it comes to controlling local government's largest cost—labor—smaller governments generally do better. Take Illinois, where budget troubles and pension obligations have eroded the state's credit rating. There, state Sen. Terry Link proposed a bill that would lead to local governments being combined or dissolved in a bid to save money. "There are a lot of these units of local government that aren't necessary anymore," said Mr. Link, a Democrat. {wow – a Democrat saying parts of government aren't necessary? -ed]
But a study this year for a group representing most of Illinois's 1,433 townships used state data to show that tiny townships are the state's most austere government operations. Spending by the state's townships grew 17% from 1992 to 2007, adjusted for inflation, according to the study. State expenditures over that same period grew 51%, while spending by larger municipalities grew 50%; school districts' spending rose 74%.
Now the real question is what can be extrapolated from this information. If local government is more efficient than state government, is state government more efficient that the federal government? Can two small companies be more efficient than one larger company? We've actually seen that in many industries.
Agility, customized service vs. a one-size-fits-all approach, optimization of resource conversion and delivery vs. bureaucracy.
"In government, the whole idea of economies of scale is turned on its head," said Wendell Cox, who produced the report for Township Officials of Illinois, an umbrella group for the state's townships.
A few years ago Bill had a two-part series on the problems with economies of scale in manufacturing. It's still true – and not just in manufacturing.
david foster says
My Chicago Boyz colleagueJonatha has an example of the costs of government centralization:
http://chicagoboyz.net/archives/24294.html#
Jim Fernandez says
So what your saying here is, if Kevin Meyer and Bill Waddell combined their talents to write one blog post; we would get a longer, incoherent and less informative article. Makes sense.
Kevin says
Good one Jim…!
I was thinking overnight that there’s some company – is it Gore? – that purposely limits the size of its plants to 100 people or so. Once it grows larger it is split up. That was determined by them to be the optimal size for their cultural effectiveness.
Steve Harper says
Kevin – That ~100 people (I think it’s actually 150 is the “hard” limit), comes from cultural history. They found that tribes have always naturally limited themselves to 150 or less. It has roots in how many people you can keep prescient track of in your brain. Groups of people tend to start splitting themselves apart at around 150 if left to their own devices. Every species does it at some number, for humans it happens to be around 150. Large corporations try to maintain “unity” by creating procedures and policies when they get above 150 or so. It happens.
What I think is most important is that the group have a common set of values and beliefs. If you can maintain that common set of values and beliefs, you stand a much better chance of maintaining overall unity well above 150 people.
Alex Twigg says
Morning Kevin – nice blog – BTW I really look forward to reading yours and Bills comments each morning! Really insightful, often prevocative always thought inspiring! Not sure if you saw the M & A article in the February 2011 edition of the Harvard Business Review; to quote “Companies spend more than $2 trillion on acquisitions every year, yet the M&A failure rate is between 70% and 90%.” Now there’s some waste!
John Buzolic says
I just read Bill’s two part series from 2006. Some very passionate comments :)
davek says
I find this article very interesting espiecialy when you said governors and lawmakers across the U.S., looking to trim the costs of local government, are prodding school districts, townships and other entities to combine into bigger jurisdictions. They will always find a way to cut cost, but cutting from schools is wrong. Just my opinion. Thank you for the article. Great one.
Martin_B says
“Dunbar’s number is suggested to be a theoretical cognitive limit to the number of people with whom one can maintain stable social relationships… It has been proposed to lie between 100 and 230, with a commonly used value of 150.”
http://en.wikipedia.org/wiki/Dunbar's_number