Opinion: Failure costs

POSTED: 06/20/11 1:00 PM

The letter Minister Franklin Meyers sent to GEBE caused some initial confusion about the term inefficiencies. We know now that Meyers was pointing to the failure costs the company has to put up with due to heavy water losses on its water distribution network and to power outages.

The term inefficiencies seemed to indicate that the company is working inefficiently and this could of course be used as a billy club against managing director William Brooks. But nope, we’re just talking about failure costs.

These costs are no stranger to other segments in the economy. In fact every organization, every business has to absorb failure costs. The only sector that has been consistently researching its failure costs is construction. In that sector, these hidden costs increased from 7.7 percent in 2001 to 11.4 percent in 2009, the last year over which these figures are available.

Failure costs are expressed in a percentage of a company’s gross turnover. So a large construction firm with a turnover of, say, $140 million, sees $15.96 million go down the tubes every year. An analyst for Price Waterhouse Coopers said last year in the Volkskrant that the profit margin in the construction sector is razor thin – between 1 and 2 percent.

Against that background, it is clear that the better a company manages to control its failure costs, the more profit it will make. Going in the opposite direction with ballooning failure costs will cause many a construction company to go belly up.

The causes of failure costs in the construction sector are four-fold. Number one is the poor preparation of project; they require costly technical adjustments during construction. Partners in the sector do poorly as far is concerned, companies do not do enough project evaluations and the companies are working with constantly changing partners, which leads to communication problems.

Other sectors also incur failure costs. It is remarkable that nobody talks about this, or even makes an effort to research the depth of the problem. GEBE’s failure costs are not necessarily limited to water losses and power outages. Like any organization, GEBE also has to deal with the consequences of miscommunication.

Simply put, these failure costs occur when, for instance, a painter shows up for a job and the supplier of the paint has not delivered, leaving the painter empty-handed. A carpenter who goes to his job site to discover that he has forgotten his hammer is another simple example of failure costs.

Clearly similar mishaps occur in all organizations: an advertisement that was paid for but did not appear in the newspaper, a meeting where key participants fail to show up, judges waiting for the arrival of suspects at the courthouse, or civil servants making a variety of mistakes.

Let’s apply the construction sector’s failure costs level to the government organization, whereby the 420 million guilders budget is taken as its turnover. This shows that the government is wasting 47.88 million guilders ($26.6 million) of tax payers’ money this year.

But maybe comparing a civil servant to Bob the Builder is unkind; maybe our government workers perform much better. A failure cost level of, say, 6 percent would make the civil service look like a super hero – and still the amount of wasted money would be something like $14 million this year. Joe Average won’t like that, because he is footing the bill.

It is obviously tempting to blast GEBE for its inefficiencies, even though at least part of these costs is the results of decisions that were taken in the past.

For sure, telling people who are struggling to pay their utility bill that GEBE’s inefficiencies in water losses alone equal free water for 5,000 households will contribute to making it the most hated company on the island.

But, as figures from other sectors of the economy clearly indicate, this is a distortion of the reality we all have become accustomed to living with.

It is easier to criticize the splinter in some else’s eye that to deal with the two by four in one’s own.

 

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