Tuesday, 17 July 2012

Professional Services, Markets and the Poor 3: Value-based organisations

by David Leonard

Organisations that are managed locally and professionally – particularly value-based ones – do better at providing quality services in market settings.

In my first blog post in this series I established that most of the world’s poorest people live in countries where they have to pay (formally or informally) for professional services. They pay even for services provided by governments. For better or worse, the poor are participating in markets for health, education, veterinary medicine and other services.

In the remaining posts in this series, I will ask: What can be done to make these markets work better for the poor? In post 2 we saw that payments to individual service providers have strong limitations. Except in a limited set of circumstances, they don’t overcome the unequal information problem. As a result, although they may stimulate quantity of effort, they tend not to produce better quality.

In this third and final post in the series, we’ll see that making payments to organisations offers better institutional solutions to the challenges of providing services for the poor.

Payments to organisations 

Incentives (in the form of jobs, salaries, bonuses and spoken appreciation) that are mediated through organisations are more likely than payments to individuals to have a positive effect on quality but only if the values of quality and service are institutionalised in the organisation. There are several components to this proposition:

Organisations have a greater ability to signal a commitment to quality than practitioners do as individuals. Because facilities have a physical and continuous presence they are much more visible to the public and more subject to public discussion than individual practitioners within them.

Organisations have a greater ability to observe and reward the performance of their staff than individual users of the service do. Because of information asymmetry individual users do not always know when they are being badly served. This is particularly the case in human and animal health because of the variable effectiveness of treatment, where bad care might nonetheless result in recovery and a ‘state-of-the-art’ intervention could still end in death.

A similar, even if somewhat smaller, imprecision in user judgments about quality of service is also evident in education. Students and parents often do not know the real value of the teaching they have received until they see their national school-leaving exam results. And even then they cannot be certain which teachers were responsible.

Particularly if the organisation decentralises personnel management to the facility level, it is possible for local professional supervisors to make formal or informal observations there of the quality of the processes in which employees are engaged and to apply a wide array of rewards and punishments relatively quickly.

Organisations that directly manage individual practitioners are more likely (but still are not assured) to be motivated to provide effective oversight and associated incentives, for they are more likely than individuals to be able to signal their character and thus to benefit from extra custom and increased income through the provision of quality.

Explicit incentive payments may be paid to individual practitioners but it is important that they be mediated by the group or organisation in its collective interest, not made directly by the client. These organisations also are likely to perform best if their local professional staff have decentralised control of their personnel and financial management (deconcentration), under the eye of client participation.

Nonetheless, the costs to an organisation of establishing a reputation for institutional quality are significant. From the empirical evidence it appears that the returns to a reputation in additional or higher paying custom are sufficient to maintain quality effort but in themselves are not enough to induce most organisations to create it. Thus the organisations that have invested in the creation and maintenance of quality are more likely to have had pre-existing ‘other-regarding’or altruistic values.

Finding or creating appropriate organisations

In otherwise difficult environments value-led organisations are exemplified by the services of many Christian missions in parts of Africa and the Bangladesh Rehabilitation Assistance Committee (BRAC) in South Asia. The presence or absence of such value-driven organisations is a part of a country’s deep institutional context, which is an aspect of path dependence.

Countries have different institutional repertories and thus will have different tools available with which to overcome their problems with information asymmetry. But that inventory also might be changed by donors or political initiatives that subsidise the long-term, initially-costly investments in new needed institutions.

This blog post draws on a paper currently under consideration with World Development: 'Institutional Solutions to the Asymmetric Information Problem in Services for the Poor', by David Leonard, Gerald Bloom, Kara Hanson, Juan O’Farrell, and Neil Spicer.

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