Why can't government be more like business?

With the bottom line their constant judge, companies chase efficiencies and cut costs with relentless determination. But can their methods win similarly positive results for public services?

by Andrew Saunders
Last Updated: 09 Jan 2015

Just how business-like should government be? The question dates back at least as far as Margaret Thatcher's attempts to slim down the apparatus (and budget) of state in the 1980s, and it is currently dominating the thinking of our new coalition leaders, too.

For, as the UK labours to get out from under the burden of its historic deficit - set to hit £1trn next year - radical reform of the public sector is once again right at the top of the agenda. Cuts in public spending of the order of 30% to 40% over five years are expected in order to bring our enormous debt under control. And when it comes to the knotty problems of doing more for less, it's axiomatic these days that the soft, flabby and overmanned public sector needs some urgent lessons in efficiency from its lean, mean, fit-for-purpose oppo's in the private sector.

Who knows more about cost-cutting and efficiency savings, after all - Whitehall bureaucrats, whose profligacy is legendary and whose status is measured by the size of their budgets, or captains of industry, for whom every penny spent on overhead is one less to invest or put in the bank?

PM David Cameron's view on this is plain - when he appointed BHS billionaire Philip Green to cast his entrepreneur's eye over incompetence and overspending in the public sector back in August, the message to the nation's beleaguered public servants could hardly have been clearer.

'There's a new sheriff in town,' he might as well have shouted from the rooftops. Only instead of a ten-gallon hat, spurs and a six-gun, this one was sporting a calculator, a brash suit and a merciless eye for saving money.

Of course, it is undeniable that public spending is crying out for a bit of commercial rigour. What private firm would have signed up to the £12bn white elephant that was the NHS programme for IT, for example? Or all those PPP schools and hospitals, which we'll probably be paying for long after they have been knocked down and replaced? And would a profit-seeking service company really have been able to get away with claiming, as HMRC tried to recently, that there's nothing wrong with a system in which 6.5 million people have been paying the wrong income tax?

'There are large areas of public policy that can be quantified and objectified. In these cases, business principles can be applied very successfully,' says Lord Heseltine, who has experienced life on both sides of the divide as founder of MT's parent firm, Haymarket Group, and during a career as a Conservative Cabinet minister for nearly all of the 18 years from 1979 to '97. 'If you are building a road, for example, comparative data is available and you should be able to work out how much it is going to cost you per mile.'

But not everything in government is as simple as that. When it comes to notoriously complex and multidimensional challenges such as providing healthcare and education, just how far will the commercial metaphor stretch? Are business and government really comparable? And how successfully do tried-and-tested tricks and techniques for oiling the wheels in the private sector fare when asked to do the same for vast, complex and lumbering machinery of state?

'There are huge differences between business and government,' agrees Heseltine. 'Business has a very clear discipline in the bottom line. And while companies do do things that are not directly related to maximising profits, the cost of these "non-essential" activities is clearly revealed by the management and accounting systems. It is all very simple. Government is not at all like that - the only bottom line is getting yourself re-elected. The thing that's missing in government is the absolute certainty of profit and loss.'

It's this certainty that enables good firms to develop clear and effective strategies and go after profitable new business. Trying to achieve such strategic clarity in government can be far more difficult - for one thing, the data is not often readily available. 'Politicians don't want to know the truth,' says Heseltine. 'There is no public sector system for revealing overall inputs and costs into any specific area. So proposals for change are always surrounded by claims of hardship.'

Objectives in the public sector can also be very different. Says Michael Kitson of Cambridge's Judge Business School: 'It's too simplistic to say that the private sector is the font of all good practice and that the public sector is run by a bunch of incompetent bureaucrats. The public sector is not driven by profit and shareholder value, it's more about service, equality and long-term prosperity for all. Things like health, education and security all have multiple objectives that are very hard to quantify and measure. You can't pursue them in the same way.'

And when business people do turn to politics, the results can be pretty mixed. Perhaps fixing the public sector is not quite the no-brainer it can appear from the outside.

Archie Norman is a man who knows more about this than most. After a stellar commercial career culminating in the rescue of Asda and its sale to Wal-Mart, he was elected Conservative MP for Tunbridge Wells in the General Election of 1997, with sights set on a Cabinet post. But after a brief and unsuccessful stint as shadow environment secretary, he stood down in 2005. Now chairman of ITV, he remains the only serving FTSE 100 chairman to have sat in the House of Commons.

'Every one of my colleagues who are chairmen of FTSE 100 companies would say if you asked them that, yes, they could definitely bring something to government. But the reality is that only a small proportion of them could. The majority would simply die of frustration, because the pace of change in government is so slow.'

Even familiar commercial challenges can take on new and tricky dimensions, he says. Take customer service - best practice may be found more readily in the private sector, but the challenge in the public sector is greater, believes Norman. 'Tesco might know how many customers it has in every store, who they are and what they are doing there. But its customers are a distinct group of people.'

That's not true in government, which has to deal with everyone. 'If you're providing a health service, everybody is your customer, and their needs are all different. It's very diffuse,' he adds.

To this irreducible complexity add the often anti-competitive demands of politics. It would probably be cheaper to fill our defence requirements by buying off-the-shelf kit from around the world rather than making our own. But what would happen to national security as a result? Even Adam Smith's Invisible Hand wavers when faced with such challenges.

And then there is the weird, looking-glass world of the Whitehall bubble to contend with. 'The House of Commons itself is unlike any other place of work - in the world, probably,' says Norman. 'It's old-fashioned and steeped in protocol - the values and habits that are developed there are not comparable to those of any other walk of professional life, never mind to those of business.

'The focus of politicians is not on achievement or productivity - even their own individual performances are a matter for debate. So what they try to do is to create the impression of success even if they have not actually been successful. It's neither good nor bad, it just is.'

Public services have proved stubbornly resistant to one of the most potent weapons in the private sector's management arsenal - targets. 'Public sector management could certainly be better,' says Kitson at Judge. 'But targets are not always an appropriate way to achieve this.'

That's because targets distort behaviour and their overuse can lead to the creation of half a dozen new problems in the name of fixing an old one. Hospitals are the classic example of this - waiting-time targets result in patients being 'seen' by a triage nurse within the four-hour target, and then left on trolleys for hours before they receive any actual treatment. Targets are also why, when you call an ambulance these days, the first people to arrive are a couple of paramedics in a Vauxhall Zafira. They can't carry the patient to hospital, but they do make sure the Ambulance Service hits its numbers.

Kitson also cautions that attempts to significantly reduce the long-term size of public spending could be a Sisyphean task. 'As people get more prosperous, they want better schools and better healthcare for themselves and their families. And so public spending tends to rise. It's just economics. Attempts to reduce that spending are pushing against long-term trends; that's always very hard to do.'

Oh, and another thing. 'The state system is full of self-correcting mechanisms,' he warns. So you save money in one area - by, say, cutting jobs from a non-essential government department - only to find that you have to spend almost as much as you save on unemployment benefit for all the former public servants suddenly out of a job. 'Even Thatcher never managed to significantly cut the benefit bill,' he concludes.

But despite all these caveats, surely getting more bangs for our tax bucks is a goal worth pursuing? Norman still thinks so. 'The effort to bring business and government closer together is absolutely right. There's even a broad consensus within the Civil Service that it needs to be done. Many government employees are under-motivated, badly managed and have low productivity.

'The government knows that the way to get things done is to separate functions off into a delivery agency, put in some good managers and set proper goals and targets.' That's what has been done at the Passport Agency, he says, which is now very slick and efficient as a result. (And the fees charged for obtaining or renewing them a good deal higher, too.)

If well-chosen private sector tools will serve, a private sector mindset will not. 'The two cultures are poles apart. Underlying government culture is a visceral belief that outsiders do not understand what is done there. The first naive businessperson to cock it up will be greeted by whoops of joy in Whitehall. On the other hand, in business there is a breezy assumption that government is such a mess that anyone could march in and make it better. But in reality you can't just swan in from outside with an opinion and blow the cobwebs away.'

In other words, if you don't grasp the complexity, you will fall into one of the many elephant traps that await the unwary or ill-prepared.

If the public sector is to be successfully reformed, a proper understanding of the challenges from both sides will be crucial to tackling the deficit while maintaining an acceptable level of service. But government isn't business and it never will be.

Business tactics can help improve service delivery and reduce costs in specific areas. But, strategically, the operations of state and commerce will remain poles apart. By its very nature, Government will always be more complex, less controllable and vastly more subject to the law of unexpected consequences than business. That, after all, is why bureaucrats aren't entrepreneurs - and vice versa.

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