One of the more popular witticisms has been “government should be run like a business.” While there is some truth here, very rarely does one see a similar claim that business should be run like government. An open look at the dichotomy of public/private financial operations and decision-making may be in order.
It is fair to say that we could learn from each other. While some may claim there is no measure of good in corporate greed or government buffoonery, those generalizations are off the mark. Cynicism aside, this article seeks to explore the lack of this “other side” of the debate. Should one not believe there is a lack of debate, consider a Google search of “business should be run like government” versus a search for “government should be run like business.” The former returned four hits. The latter? 183,000.
Why is this? Well, it is intuitively fair to believe huge bureaucratic functions to be systematically inefficient, operationally. Red tape is a means of self-protection, often as much as for the organization as proper control of taxpayer dollars. What is curious is that it is generally assumed the private sector is always more efficient, and the argument ends there. With a number of years in private-sector (manufacturing) operations analysis to support the claim, the reality does not always match the perception—after all, re-work is a private-sector term. More clearly, the lack of debate fodder is because the two sectors operate for different purposes; at its core, the debate is one of apples and oranges. The better discussion is: what can we learn from one another?
There are over 80,000 units of government in the United States, and according to census figures, more than 20 million small businesses alone. The elements of comparison between the two lay in the tools of analysis and performance used in looking at private-sector and public-sector organizations and the systems they both operate within. From a financial perspective, these differences are key.
Some assumptions: not all governments (local, district, regional, state, or even national departments) are corrupt. Not all businesses are vainly profit-driven. Both sectors are made up of hardworking, educated, caring people driven to do better.
The public sector must rightly focus its concern on how to best use constituent money. Misuse is unquestionably destructive to the public trust. Yet, the headlines are filled with government officials misusing funds or under-using government funds. For every dollar provided by the taxpayer, a community property right is established in its best use. Taxpayers invest in the military, police services and education, even though, from a consumer sense, they may never directly use these services. Examples of the value of such public goods are plentiful, but is there a private-sector equivalent?
Where public goods are coercively paid, consumer goods are voluntarily paid. What is confusing is the detachment of consumer concern to the stewardship of the exchanged good. This means a consumer often disassociates any responsibility of product development or corporate governance once they hand over the money. Odd? Whether it’s cosmetics’ use of animal research, examples of corporate greed destroying a company, environmental damage by oil companies, or national retailers almost exclusively purchasing overseas textiles, it is generally assumed these are not issues of the consumer’s standing.
Government accountability is measurable; public input to governance, product development and service delivery is largely prevalent—the proverbial “fishbowl” of government operations. Every function of government is annually and publicly reviewed by its board of directors during the budget process. While the private sector would rightly argue these mechanisms would impinge strategic advantage, let’s not assume with blanket discount its critical role in holding an organization accountable.
It may be the bottom line is that public sector work is by and large moral agency, one in which the funding demands accountability. Conversely, the quest for profit and external moral agency may, in the private sector, be at odds.
The private sector is better at trimming costs to make a profit. It must do this to remain competitive, or at least to protect its livelihood. However, another truism is this cost/profit link is closely tied to demand in the private sector. Public sector organizations must be concerned with continuity of service, which is often inverse to resource availability.
Take the current recession. Demand stayed level or increased in many areas of government service provision, yet resources shifted down by 10 percent or greater, almost overnight. The required response is to continue delivering only those services which are “core” to the government’s mission. But unlike the private sector, many governments are multi-purpose, so getting to the definition of “core” can be elusive. Elusive or not, though, continuous efforts must be made across all segments of government. Where in the private sector, product diversification allows for the company to avoid being overly leveraged in any one particular area, public sector agencies need take care not to be overly diversified. The effect of the latter is potentially diverting limited resources from critical programs or services. Public-sector governance must invest and keep running essential services; private-sector governance must diversify and invest in research and development to continue evolving.
Cost containment is most effectively driven in process design, another area in which the private sector shines. Process design in government is rare, and rarely tied to best practices of quality principles. Public-sector units should see this as an investment in lowering per-capita or per-transaction costs, and the public should be provided an understanding of public sector investments in these areas. It’s clever to state that public-sector organizations don’t make widgets, but it’s rarely true.
The public sector is still using 100-year-old methods. The private sector is constantly evolving. The private sector has a commitment to constantly reviewing and refining processes. Public-sector finance is a control-centered mechanism—rigid, ritualistic and cyclical.
It would seem that public-sector innovation is often stymied by control, demand for accountability, and the risk-averse nature of service delivery methods and the opportunity cost is potentially lower-cost operations. The tradeoff here is at times hard to swallow, but necessary. One wonders if the private sector is willing to support higher commodity costs to ensure for the concerned customer the proper use of consumer funds.
The composition of many private-sector governing boards is largely made up of industry specialists, business leaders or persons with specialized product, legal or sector knowledge. Their familiarity with terms, concepts and operational models make them uniquely suited for the position of governing a private organization.
The composition of many public-sector governing boards is largely made up of our neighbors, retired careerists, citizen volunteers and issue advocates. Their unfamiliarity with terms, concepts and operational models make them uniquely suited for the position of governing a public organization.
Each sector of governance is responsible for billions of dollars annually, but there is a clear contrast between the two. The two sectors speak such different languages; there are different accounting rules for each, different regulations for each, and different performance measures for each. One wonders: if either did act like the other, how would we know, other than via the chaos to ensue?
It’s in not knowing—the unfamiliarity—by which an elected official (whether mayor, county board chair, alderman, board member, trustee, etc.) provides transparency to the public. Given that citizen volunteers are often not professional bureaucrats or Ivy League finance experts, they have to work harder to understand the nuances of government finance. It’s their responsibility to bring information back to their constituents in a manner most elementary for understanding. Are those who sit in roles of private-sector governance as comfortable as an elected official speaking to the consumer of their products, about mission, direction and use of funds? Public-sector employees may approach those responsible with governing their livelihood at-will; may the same be said of private-sector executives? Even in how we review investments, the focus is frustrating. In the public sector, far too much time is spent on reviewing whether or not a budget line item was exceeded. The proper examination would be whether or not that line item purchased any results! The public sector does this from time to time, but not culturally, and not as systemically as the private sector.
The point is to highlight differences in how these two very different systems operate. Each has its advantages and disadvantages, and each must find its own way to meet customer/constituent needs and demands. In the end, there is little difference between the content of articles found in The Journal of Government Finance Review and Harvard Business Review. The textbooks for managing finance in corporations and managing finance in the public sector contain nearly identical content. As we’ve seen, it’s in the execution of our finance delivery where our differences lie, and even there, we have much to learn from one another. iBi
Erik Bush is chief financial officer of Peoria County.