Public services management: Every competitor needs a yardstick: Data from 'strategic peers' can point the way when normal comparison is elusive. Roger Trapp reports

THE NEED to operate commercially is now widely acknowledged within the public sector. But there is less agreement on how this should be brought about. After all, when an industry has been nationalised there is necessarily little or no competition, and therefore a shortage of appropriate bodies with which to compare performance.

The lack is especially acute at a time when the concept of benchmarking is taking hold in the private sector. Hailed by consultants and managers alike as a genuine way of measuring performance, it is being used to assess companies' progress not only in relation to direct competitors but also to other types of business.

PIMS Associates, the strategic management consultancy, believes it has found a way of driving home the idea in the public sector. It recently completed a study for the Department of Trade and Industry, as part of the British Coal review, that drew on comparisons with other natural resources businesses around the world in both private and public sectors regarding overheads and their effect on profitability.

In the past decade, it had also carried out studies in Sweden of the Procordia conglomerate and Scandinavian Airlines System, and in Austria of Austrian Industries, which, rather like the former National Enterprise Board in the UK, sought to direct investment in a range of industries.

The basis for this expertise, said Tony Clayton, the senior consultant responsible for the British Coal study, is an extensive database established over the last 20 years. Instead of focusing on companies, the information relates to businesses. For instance, it concerns, say, Dulux paint in the UK rather than the whole of ICI. It is by concentrating on business units that valuable comparisons can be made across private and public sectors and national boundaries.

The database - which now extends to 22,000 business years, says Mr Clayton - was developed from research begun in the early 1960s at General Electric in the US. The intention was to enable senior managers to understand, in quantifiable terms, the reasons for differences in performance between various arms of the business. Researchers recorded the actual financial, operational and competitive experiences of the company's divisions over a period of time and analysed the figures to establish how different combinations of the factors might affect performance.

A decade later the research was translated into a project at Harvard Business School. Here, the concept was named PIMS - Profit Impact of Market Strategy - and the database was expanded to include input from other companies. By 1975, the Strategic Planning Institute had been set up to focus specifically on the analysis of company performance. And three years later PIMS Associates was formed to provide practical assistance to companies interested in the programme. After adding information gained through every project undertaken, the consultancy now claims to be able to undertake assignments for any type of business.

'The idea is that if you collect enough data on businesses - on things like how they are structured, market share, resources and productivity - you can tie these things to financial performance,' said Mr Clayton. The firm claims to offer 'explanatory power' of about 75 per cent - in other words, its analysis can explain three-quarters of why a business performs as it does.

The principles were applied to the whole operation of Austrian Industries, where the framework was used to decide what could be rescued and what could not. 'It is forcing people to think about the structure of business,' said Mr Clayton, adding that this was extremely important if a management that had been used to a 'bureaucratic and uncompetitive world' were to be equipped to face a different environment.

He said that government ministers as well as employees of public entities need to learn to think about the viability of individual units rather than concentrating on the whole.

'The problem that we face is that governments tend to imagine that you just privatise something and it floats or dies,' he said. But it is not as simple as that. A business can have a lot of resources but still fail because it is badly positioned in the market.

Positioning and potential of a business are determined by measuring performance against those in similar competitive situations or working environments. PIMS calls the comparative businesses 'strategic peers' in that they are similar in terms of specific criteria. Market share and positioning are just two of a wide range. Hence, while the British Coal study centred on overheads, and looking at the structural aspects that drive them, the firm could just as easily have looked at investment levels, research and development spending or any number of factors affecting the strength of the business.

'We measure about 200 to 300 things about a business,' said Mr Clayton. As time goes on and material is added, the data becomes more statistically valid and up-to-date. All information is sorted and becomes anonymous once it joins the store.

It is in this sense that the firm - which in 1990 hived its European arm off as a separate, management-owned licensee - remains true to its roots. Although it has offices in six countries and customers in about 20, it is 'still, in a sense, a research outfit', said Mr Clayton. 'We do a fair bit of consulting, and that generates the data, which in turn drives the research.'

As a member of his local council, though, Mr Clayton is perhaps in a better position than many other consultants to watch the idea in action. 'These principles we see in research I can see directly at home,' he said.

(Photograph omitted)