Camphill Village Trust (described here) is a poignant example of the damage managers do when when they focus on doing things right rather than doing the right thing. But in this CVT is far from alone: imagine the same effect multiplied many thousands of times over and you get an inkling of extent of the malady that is now crippling the entire public sector.

As it happens, that crisis is the subject of a report launched last week by Locality, a network of social and community enterprises, in partnership with consultancy Vanguard. Called ‘Saving money by doing the right thing: why local by default must replace diseconomies of scale’, it estimates at £16bn (conservatively) the savings that could be achieved not by hiring more people or building huge IT systems but by something much simpler: stopping doing the wrong things and doing the right ones instead.

As the report (disclosure: I helped edit it) shows, it’s a design problem. The wrong thing that the public sector obsessively pursues is a services model based on the industrial principles articulated by Adam Smith in his famous description of a pin factory in The Wealth of Nations. Smith calculated that by breaking the overall task down into many simpler ones (18 in the case of the pin), quickly trained workers using basic machines were up to 240 times productive than craftsmen who made the whole thing.

The big idea here is economies of scale: the more and faster you make something, the cheaper it is. Scale economies are irresistible to managers looking to cut costs and are almost never challenged. Yet their importance is constantly exaggerated, even in manufacturing. According to one accounting guru, ‘There is no longer any reason to rule out localisation of economic activity on the grounds of scale economies. Scale economy, beyond very small volumes, is a concept that should be discarded’. It is reported that under Prime Minister Tony Blair the No 10 Delivery Unit was commissioned to compile a report on economies of scale. It was never published, the strong inference being that nothing of interest was found – or nothing that chimed with the Treasury’s preferred narrative.

In fact, in services, as the Locality report makes plain, scale economies lead up a dangerous and costly blind alley. More equals less, and for two reasons. One, scale thinking blinds managers to the real costs of service. And two, they depend on standardisation, which is fine for pins but a disaster for service organisations. Unlike for pins, human demand for services is individual and infinitely varied. Force-fitting human-shaped needs into standardised pre-determined categories designed to minimise unit costs (think 10-minute GP appointments, 15-minute slots for home care or ‘Press 1 for X, 2 for Y’ etc) is doomed to jack up cost and multiply demand as people represent over and over to get their problem sorted.

The truly momentous finding of Vanguard’s research is that inexorably rising demand on A&E departments, GP surgeries, social care and even housing is a myth. On the contrary, underlying demand for most public services is both stable and predictable. All the ‘increase’ consists of what Vanguard calls ‘failure demand’, repeat calls caused by a failure to do something or do something right the first time. On analysis typically between one-third and two-thirds of all demand on services consists of failure demand – demand that shouldn’t be there.

Unfortunately managers focused on scale economies don’t see this, because they measure activity or unit costs: the cost of taking a call, making an assessment or performing15 minutes of care.

But unit costs are irrelevant to the real cost of service or care, which is from beginning to end. To minimise true cost, services therefore have to be optimised for end-to-end flow, too. There is a world of difference between the fragmented industrialised transactions that managers think of as care and what people need and want. As the report graphically illustrates – it is the first to do so – most of what people experience as care (and most of the work that service providers perform) consists of repeated assessments and referrals; sometimes clents never get beyond that, or only when their condition has become an emergency.

This is both grotesque and eye-wateringly expensive. In effect, we have the worst of all possible worlds: public and private-sector organisations competing to do the wrong thing better, with increasingly intrusive regulation struggling to prevent inevitable abuses. Commissioning for scale, as is currently encouraged, make things worse. Crushed between a rapacious private sector and state regulation of near Stalinist prescriptiveness social enterprises and charities like CVT struggle to keep a space free for diversity and innovationx. Private-sector prime contractors strip out most of the value, leaving crumbs for lowest-common-denominator subcontractors now detached from direct connection with their end-funders and commissioners.

However, like the myth of expanding demand, the other main finding of the Locality and Vanguard work also contradicts the conventional narrative of doom. It is that, as the report title suggests, doing the right thing is far more economical and effective than doing the wrong thing. It’s a secret well known to the quality movement but counterintuitive to those brought up on economies of scale: poor service is never as cheap as it looks and always more expensive than good, because lower unit costs are more than wiped out by the corrections, revisits and rework involved in putting it right.

Examples in the report demonstrate that effective, ie efficient service, is delivered one person at a time. The four design principles are:

• local by default, allowing people’s needs to be understood in context;

• help people to help themselves, fostering agency and responsibility rather than dependency;

• focus on value, not cost. Managing cost drives cost up; managing value – solving people’s real problems – strips away failure demand and brings overall costs down;

• accountability to purpose, not outcome. Measures related to outcomes and targets distort behaviour and hide failure. Measuring achievement agains purpose foster learning, improvement and innovation.

Redesigning service around these four principles as opposed to industrial scale economies reveals eye-opening truths. Rebalancing lives is often a matter of simple practical measures: a walk-in shower, better lighting and even velcro fasteners for buttons on clothes can be enough to restore confidence and dignity and snap faltering individuals out of the medicalisation process that currently leads to repeated A&E episodes with an inevitable end point in a care home.

When lives are put back on track, wonder of wonders, demand begins to fall. As the report demonstrates, a problem family is likely to be known to many agencies – schools, police, courts, housing, benefits, mental health, for example. Turning such family round has a demultiplier effect, reversing the vicious circle of increasing demand and turning it into a virtuous one. Getting children back to school may help obesity, alcohol and health problems. Bit by bit, whole communities can begin to regenerate themselves from within. Switching off demand is where the long-term savings come from, a powerful second whammy that follows from the simple, less costly solutions emerging from newly joined up service.

A community like CVT’s Botton Village has always instinctively worked to the guiding principles laid out in the report. Not perfectly, but in good faith it has over the years built up a sophisticated and delicately-balanced model of what the right thing looks like in terms of looking after other human beings. Perversely, it and other good organisations are now being pulled away from them and forced to do the wrong thing by current obsessions with scale and standardisation. Saving money by doing the right thing – isn’t that what the public sector should be about?