A Tale of Three Cities
It was the first of times and it was the last of times when the Council of Three Cities was held wherein the city fathers from Paris, London, and Madrid came together to address common problems. It will come as a surprise to no one in our day and time that their most urgent issue was sinks. All three cities had them and in all three cities they occasionally became clogged and needed fixing. After a long and passionate discussion, they came to the conclusion that having a sink that flowed well was a citizen’s right. The Council of Three Cities issued a proclamation to this effect and commissioned a study to understand the true scope of the problem.
I will spare the reader the details of that study (it was several thousand pages long and it is not clear that anyone ever actually read it although staffers produced an executive summary more appropriate for the city father’s use). This summary disclosed that the average citizen needed two sink repairs per year and that they spent, on average, $100 per year for repairs. We now know that there was some fine print in the details of that study. Specifically, the data were from several years back and to ensure the purity of the report no effort was made to adjust for inflation. There were a few petty and picky souls that questioned the validity of the data on this basis. However, it was rightly pointed out that the data must be accurate because this had been a government study after all.
Now that they understood the scope of the problem, what should be done? Clearly the first role of government in any problem is to create a governmental program. Without that nothing can be done. Once that is done then we sometimes fund the program depending on whether we need to just show our support for the problem or actually try to impact the problem. In this case they actually intend to have an impact and so the program needed funding. Without funding how could the citizen’s right to a well flowing sink be ensured? Fortunately, our cities all had a tool for just this purpose they call taxes (note there are numerous synonyms for taxes). And so it was that all three cities passed the Sink Access and Protection Act which established a tax of $100 per person per year.
To this point this has been a tale of uniformity and consensus. Alas, the remainder of our tale uncovers the reality that the cities were all in favor of uniformity so long as it was done their way. So here begins the Tale of Three Cities…
Paris Minnesota and the Fee-For-Service
Fade from black to the town of Paris, Minnesota. In the great city of Paris, the city fathers established a program they dubbed Fee-For-Service. Under this program when a sink was clogged the citizen would contact a plumber of their choice. When the plumber had completed the repairs, the citizen would pay the plumber. Then the citizen would obtain Form Q17 from the city, complete it, and submit it to the city in a plain white envelope along with a copy of the bill from the plumber. Once that form had been processed, generally within a few years, the city would issue a check to reimburse the citizen $50 dollars (the calculated average rate from the study for each repair visit) or the cost of the repair which ever was less.
Those who are students of the history of plumbing will recognize the importance of Paris, Minnesota. For millennia plumbing had been a skilled trade and those who did this for a living generally ran their own businesses. It was in Paris that plumbing entered the industrial age. Bill the businessman was a visionary and he singlehandedly revolutionized plumbing. He brought a loose knit bunch of individual, independent workmen together into the well greased business organization we know today. Long before the city fathers introduced their Fee-For-Service program Bill had consolidated a noticeable fraction of the plumbers in Paris.
By the time Paris got their program running it turns out that the costs for a clogged sink had gone up to $55 per event but it was far too late to change the law (the city fathers only met once each decade after all). The decision was made quite wisely to let the free market address this shortcoming.
That might seem to be a problem for our esteemed Bill but that is because we are not the visionaries that Bill was. When the new program was introduced, Bill brought together his advisors (most had previously worked at an energy concern called Beenwrong before joining him). He posed the problem to them. The city was now going to only pay the customer $50 dollars for a sink repair but they were charging $55. Everyone outside of this creative group presumed that the customer would have to pay the extra $5 dollars.
The advisors first noted that the $5 differential was a disincentive for the customer. If they were to maintain the growth expectations of the all knowing market analysts they had to eliminate this barrier. Well, his advisors had just the answer. They would submit their normal charge of $55 but they would accept in payment the $50 and being the nice guys they were “forgive” the extra $5. This meant the customer would not have any financial reason not to have their sinks repaired. Who could argue with that?
Bill cut to the heart of the problem and pointed out that if he reduced his revenue per event to $50 his profits would go down by $5. This is where it gets a bit complicated. After long technical deliberations in the research lab they found the answer. Use cheaper parts. They had determined that they could use lower quality parts which cost $5 less. So while their revenue per sink would sink, their profit margin would be preserved, as financial experts I consulted will attest.
Now to the casual observer this might seem to pose a risk. Wouldn’t the cost reductions result in more frequent repairs? Certainly they will. However, there was no limit on the number of repairs per citizen per year. So Bill will have more business. The citizens would not complain because they didn’t have any cost out of their pockets and in fact might respond favorably to the idea they were getting more service now that the government had taken over sink repairs. A win all the way around.
Bill’s advisors didn’t stop there. They also pointed out that some percentage of their customers never paid their Bill (pun intended). Under the new program this might be even worse. After the customers paid their taxes it would be a hardship for many of them to pay the plumber and wait for their money back from the government. Just to make bad matters worse, Form Q17 was complicated and unintelligible and unless it was filled out properly and on time the city wouldn’t reimburse the citizen anything. So in the interest of eliminating the hardships imposed on the citizens they would develop software to automate the completion of Form Q17, they would fill it out for the citizen and submit it to the city, and on that form they would indicate that the city should send the payment directly to Bill. This meant the citizens would not even need to go to the trouble of getting the money from the government and sending it to Bill. For most of them it was as if the payments for sink repair didn’t have any financial impact on them at all. By sheer coincidence Bill wouldn’t have any bad debt problem so in fact his net profit per event would rise.
It was impossible to see what would happen next. First, the city hadn’t taken into account the fact that they would have to hire additional staff to process all of the claims. While this did help reduce the unemployment rate in the city, the cost of processing forms added $15 per citizen, per year, to the cost of the program. Second, much to the chagrin of the city fathers and for reasons they never have figured out, the actual sink repair rate turned out to be 3 per year rather than the 2 they had expected. So the expenditures for sink repairs turned out to be $165 per citizen per year. They managed to fund the shortfall the first year by cutting out the free lunch program for the inner city school children and then in an emergency session increased the tax rate for the following years to $165.
Eventually, an inquiry uncovered the root cause of the debacle. That fine print in the commissioned study was read (perhaps for the first time in history) and it was recognized that they had relied on flawed data. Since the company that did the study was clearly at fault they would never use them again. A resolution never to use that company again absolved the city fathers of any responsibility and life was good. Unless perhaps if you had to pay taxes in Paris. Fade to black.
London, Texas and the Government Managed Sink
Panorama of the city of London, Texas. Zoom into the city council chambers. The council has determined that the city sink problem was one that the city should take on. This was too important to leave to the whims of the private sector. We find the city comptroller presenting his analysis to the city council. Based on the number of sinks in the town, the rate at which they became clogged, and the time it took to fix a clogged sink he had determined they had enough work to keep 3 plumbers busy. So a motion was made and carried and they created a new city department for sink fixing. This new department shall be called the Government Managed Sink program.
They recruited Mike the manager for the department who then hired three plumbers. Mike endeavored to formulate the proper supplies they would need and after several intense junkets (designated as due diligence research trips) and working dinners, the city put out tender requests for each type of supply and got the cheapest price they could on each of them. Ultimately, they had 15 suppliers. They also put out a tender for renting equipment and also awarded that contract to the lowest bidder. All of this was above board and completely transparent.
Life went along fairly well except for a few problems. One was that the pipe supplier had specified (and delivered) pipe that had a diameter of 3/8th inch. The problem was that such narrow pipe had a tendency to become occluded and so had to be replaced more often than expected but at least it was cheap. Another problem was that to get the low rental rate on the equipment, Mike the manager had agreed that if the rental company had another customer that needed the equipment at the same time that the city would wait until the equipment was not busy. So sometimes there was an unavoidable delay in getting the sinks repaired. But what could you expect, it was a government program and at least it was free. It has been said some people resorted to the black market to buy plumbing services when they just didn’t think they could wait any longer. It has been said, but no one really thinks it ever actually happened.
Sam was one of the plumbers hired initially but it was clear he wouldn’t last long. He kept saying they could ultimately save money if they bought better pipe because they would have to do fewer repairs. He went so far as to contact a supplier and get a quote so he could show Mike just what was possible. Yes, dear reader he was just that misguided. Mike was forced to formally reprimand him and he was told that it was inappropriate and potentially criminal for him to participate in negotiations with vendors.
Sam just didn’t fit in with the city program in other ways. For example, one day Sam suggested that during the time they had between sink repairs that the three of them could begin a program of preventative maintenance that his friend Joe had told him about. I am sure you can imagine how popular that made him with the other two plumbers, but their concern was for naught. When Mike the manager caught wind of this he explained that they didn’t have the money to spend on preventative maintenance and even if they did they were funded to fix sinks and didn’t have the financial authority to use those funds for anything else. If Sam was caught spending the city’s time on unauthorized programs that could result in his being fired and perhaps even prosecuted for something. Sam was clearly treading on thin ice. Sam eventually left. No one knows where he has gone.
As for the other two plumbers life was not bad. They didn’t make as much take home money as their private counterparts but they worked less time (not having to handle all that ugly business stuff like billing and collection since this was a city service) and had great benefits. With the unexpectedly high pipe breakage rate and the work schedule regulations for city employees, Mike was forced to hire a total of four plumbers. Since the city had a balanced budget law, this increase had to be balanced with increased tax revenues. So in an emergency session, the city council had to increase the sink tax. What were they to do? This was an indispensible city service now.
One last note, it seems that the citizen’s overall satisfaction rating for the sink repair service has gone down. No one knows why. This decline parallels an increase in clogging events and an increase in the wait time for repairs. But we all know the dangers in ascribing causation to correlation. Most rational minds suspect that this is just another sign of the unrealistic expectations of the younger generation. Zoom out to panorama of London.
Madrid and Bundled Risk Benefit
Camera slowly comes into focus on a glass etched with the name Madrid Country Club in Madrid, Ohio. Seated at a table is the Mayor Mayer along with his closest political allies from the city council. Mayer is sharing the disappointing news that their last candidate for the manager of the planned city department of sink repairs, one Mike the manager, had accepted a similar position in London. They were stuck and had no prospects to move this important initiative forward and expand the government.
As fate would have it, seated at the next table over was Ernie the entrepreneur and since Mayer had a booming voice Ernie found it impossible not to hear the frustration in the Mayor’s message. Taking the initiative, Ernie soon inserted himself into the conversation. Ernie asked how much the city had budgeted for this department, how many sinks were involved, and what kind of service level they hoped to achieve. Doing a little quick math in his head he said, so you plan on spending $100 per citizen per year for sink repairs? What do you think will happen if the city grows? Well responded the city fathers, clearly as the city grows and the city coffers grow along with it the total budget will grow proportionately.
Based on this, the next morning Ernie made a radical proposal. His company, Ernie’s Ever Expanding Enterprises had a division called the Bundled Risk Benefit division that would like to supply the service for the city for exactly the per citizen rate they had budgeted and that he would guarantee that price for six years along with the service levels they wanted. It was fortunate that the city had a good dental program because there followed much gnashing of teeth. Finally, the city decided this was their only alternative so they agreed.
Ernie brought in the four most reputable plumbing parts suppliers and explained to them he had no interest in parties or dinners or junkets. What he wanted was good quality parts, a reliable supply chain, and low prices, in that order of importance. Furthermore, he didn’t want to have to deal with multiple suppliers. He would choose one supplier and that agreement would be reviewed every two years. He got excellent parts. The winning supplier also offered to keep some of their inventory at Ernie’s facility so they could always get their parts in minutes. Lastly, the supplier proposed a 12% discount in pricing.
Ernie then hired three plumbers, one a young plumber named Sam. Sam was full of ideas. One of Sam’s ideas was that it there were long term cost savings from using better supplies like larger diameter pipe. Sam also had this idea of preventative maintenance. Even though that wasn’t part of Ernie’s contractual obligations he could see how that would be better in the long term and since he had a six year contract he decided to give it a try. In the first year that extra work cost him an extra 5%. Since Ernie had agreed to a fixed fee from the city that meant he lost money the first year. But in the second year the number of sink repairs went down by 30%. With fewer sinks to repair his supply costs went down saving him a lot more in the second year (and ever year thereafter) than he lost the first year. In addition since there were fewer sinks to repair Ernie was able to start offering hot water heater servicing with the same staff.
The city sink department is now in the sixth year and life has been good. Sam is now in charge of the division. The city has been within budget, the sinks of the city have been flowing wonderfully, and Ernie has just donated a new public swimming pool to help the city grow.
But trouble is lurking on the horizon. A new city manager has been hired and he has asked Ernie to give him an accounting of the costs Ernie has for sink repairs. Ernie’s response was that his costs are his problem so long as he provided the service for the price he had agreed to. The city manager has been heard to say that in the last city he was in they had their own department and clearly Ernie must be over charging them or he couldn’t provide such excellent service much less having the money to donate that pool. Clearly they need to look to their neighbors for a better way to do this.
Camera slowly goes out of focus.
ozsystems 
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