Is Amalgamation an Orphan?

A recent question from one of the Saugeen Times readers asked if anyone else felt that amalgamation was not working?  Let's examine the facts.

The Past

At the time it was put into place the government had one catchy phrase to push the amalgamation called  'Economy of Scale'  It was good marketing

Change took place quickly as more and  more areas were combined.  It looks like the final structure is in place now.  There has been some talk about going further, but that might cause a taxpayer furor of unprecedented magnitude.

What was the Goal?

That sounds like a silly question because the goals are just as the phrase says, that is, save money and time ... economy of scale.  

Nobody seems to have set a benchmark for what it cost then vs. what it should cost the taxpayer now.  Just do it and good things will transpire, seemed to be the obvious way to proceed.  No contract with the taxpayer was made that would say....

Dear Taxpayer... If we amalgamate our costs will go down and our efficiency will go up.  Here is how you can measure it.......

What is Meant by Economy of Scale in Theory?

Economies of scale can be enjoyed by any sized organization by expanding its scale of operation. The common ones are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), and marketing (spreading the cost of advertising over a greater range of output in media markets). Each of these factors reduces the long run average costs of operation lowering the incremental combined cost of unified organizations.

This all makes sense when two business enterprises are both producing either similar or complementary products and have like or complimentary plants.  These are combined and organizations like finance and accounting, human resources and R&D come together..  It seems obvious when towns are fixing roads and supplying garbage service, water and other infrastructure items, that amalgamation should work, but does it?.

What do Business Schools Think About Economy of Scale?

In general MBA type people like Economy of Scale, but they have learned a lot about the application of it over time.  Here is how they want business to implement it.

  • Push control as low as possible in the organization.  They do not want geographically large organizations to 'run into themselves' because of the new strain of size.  They want local experience and expertise to come to the front.  They want control of day to day operations left at the lowest level and in the smallest area.
  • Use less people to do the same thing.
  • Use less $ to do the same thing.
  • Produce a product quicker and with less cost.
  • Portray a consistent message to a larger audience.
  • Measure $ and efficiency at every level by comparing with the past.
  • Insure customer satisfaction.

So this is all very simple in concept.  If you have three organizations that are doing basically the same thing, then bring them together, cut the manpower and equipment and do the same thing at lower cost. Make sure you don't just multiple the resources by three or more.  Measure every step of the way and make changes as required to reach the goal.  So two managers merge to one, two or more recreation directors merge to one.

How Can the Taxpayer Measure Progress?

The taxpayer has only one measure and that's the tax bill that they receive. There have been no studies done that account for growth and inflation to make them feel better.  The services seem the same as before, quite satisfactory.

But, people 'feel' in a tangible way that things are worse than before relative to taxation because they can measure it.  A house on the Lake that received a $4000 tax bill some years ago now might expect $12,000.  As one moves away from the Lake the taxes decrease.  Some are the same, but most have gone up.

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The rationale in the present value argument goes something like this... If you sold your house on the Lake you would receive 3 times as much as before.  It is like everyone is buying a house under the guise of speculation.  Some people do that.  They buy a house, fix it up and sell it, but most people buy a house to live in it.  They bought their houses a long time ago in some cases so the fact that it has gone up 3 times in value falls on deaf ears.

Therefore, people feel in their hearts that we are not as well off as before amalgamation.  Growth and proximity of shopping doesn't make people feel better.  The public officials have not told the taxpayer that they are measuring things improperly.  The tax bill speaks for itself.  Therefore, the taxpayer looks at the costs that come to them in the form of water, light, garbage and property tax.  If they are given another scale, they just might use it.

The Community as a Business

Can the Community be considered a business?  Yes, in most ways it can.  It has a product that brings and keeps people in the area.  It's main product is service.  It manages land, roads, community buildings, sports arenas and fields.  It has a house where doctors here for short periods stay.  It has now entered the Health Care Business with the building and long term care of Clinics. It builds libraries.  It is in the recreation business and the marina business.  It runs tourist camps and airports and courts big business and small. It increases police and fire protection to keep pace with growth. 

Just as a public business has stockholders, the Community as a Business has taxpayers and an elected Board of Directors who work part time.  It has open meetings at least every two weeks and produces an annual report and budget that can be examined and is audited..  It has the safety as a product with proper building of public areas.

Back to Economy of Scale

Southampton, Port Elgin and Saugeen Township are now combined.  It's a very large area, with diverse background and needs.  It's a big business.  If costs have gone down, then they are not reflected on the tax bills that are issued to the residents. 

The big worry of the elected officials is that the growth of the amalgamated communities is being measured not in efficiency, but in the tax bill.  It reflects one of the few things that can be measured, however, because it is so personal.

A business can grow too fast.  A town can grow too fast.  If you look at some famous examples that are now being studied in Business Schools, you have to look no further than AOL Time Warner which took a number of companies AOL, Time and CNN and combined them for economy of scale.  The combination has not resulted in increased efficiency and service to the customer.  Each of the three are weaker than they were before amalgamation.  The reason is that the only measure that was important in the past was growth measured in stock value and that did not improve.  Sheer size did not help

How has Saugeen Shores Done?

  • Purchasing and Bulk Buying  because Saugeen Shores does not buy single items in large quantities, they are no better off than before amalgamation.
  • Increasing Specialization of Managers The same departments exist as before the change.  The work load has increased on managers with about the same resources that were involved in the three entities.
  • Financial Impact via lower interest and ability to borrow  No improvement.
  • Marketing the Area The marketing of the area is about the same.  It is still a tourist, retirement and power based community with some farming.

An Answer to the Readers Question

Have you ever noticed how many fathers a successful project has?  The answer is many.  The converse says, a failure is an orphan.

Do you know anybody in the community, county or province who claims to be on the team that pushed amalgamation?  Amalgamation is an Orphan.\


For further reading consult the Harvard Business Review and The University of Toronto Press.