Running Head: BUSINESS OF GOVERNMENT 1

The Business of Government: Can Private Sector Solutions be Applied to Public Sector Challenges? Sean M. Maguire University at Albany, SUNY

BUSINESS OF GOVERNMENT Abstract This paper will question the ability to run government like a business. This is a concept that has been evaluated and debated across a wide body of literature, ranging from academic journals, conference papers to blogs. Faced with a challenge to be as efficient as possible, it has been suggested that government should run as a business. It is assumed that since the private sector

operates, and measures its success, on its ability to generate a profit, government should consider a similar model that seeks to reduce costs and operate as cost effectively as possible. Over the 20th Century, public perception of public service has changed from one that considers the citizens role in the process to todays model that views the citizen as a customer or client who makes decisions based on market choices. However, to truly operate as a business, government would need to abandon its democratic model for an autocratic one where administrators are viewed as CEOs and not public servants. Since this fundamental worldview is unlikely to change in the contemporary democratic society, there are potential opportunities to use the private sector as a partner in service delivery while retaining the public discourse necessary in a democracy. This paper examines fundamental ideas associated with the politics-administration dichotomy, contracting, principalagent theory, and accountability. Keywords: Politics-Administration Dichotomy, Contracting, Principal-Agent, Accountability

BUSINESS OF GOVERNMENT The Business of Government: Can Private Sector Solutions be Applied to Public Sector Challenges? Public sector management and administration, much like anything else, goes through its own evolution, generations or eras. Since the establishment of public administration as an academic field, public management has been through a number of ears. For example, the Reform

era in the late 19th and early 20th Centuries; the Progressive era surrounding the years of World War I; and the New Public Management era which began sometime near the early 1980s during the Margaret Thatcher and Ronald Regan administrations in the UK and US (Beckett, 2000, p. 186). It is the last era where the strongest proponents for a business-like approach to government came to the forefront. This is still an important development in public administration, referred to by Kettl in Beckett (2000) as a global revolution in public management (p. 186). Arguments have often been made to run the public sector, government in particular for this case, like a business (Beckett, 2000, p. 186, Box, 1999, p. 19; Kettl, 1988, p. 10; Roper, 2002, n.p.). While there are many commonalities between government and business, there exists a significant departure in goals and standards (Kettl and Fesler, 2009, p. 33). Whereas businesses, or generally the private sector is concerned with meeting the expectation of shareholders or the ownership measured through profitability; the public sector is challenged with defining what it should do and how it should do it (Kettl, 1988, p. 13). To understand the changing perspective which suggests that government should be run like a businesses, look back to the very familiar inaugural address of President John F. Kennedy. In 1961, President Kennedy said, Ask not what your country can do for you - ask what you can do for your country. Mintzberg (1996) notes that Kennedys speech was not only talking about public service, but he was attempting to redefine the relationship between government and the

BUSINESS OF GOVERNMENT people (p. 77). Kennedy seems to acknowledge the change in expectations where people viewed themselves as consumers instead of citizens. Rather than simply consume public services, he challenges citizens to become engaged in the public decision making, reflecting a return to key

public values that have been slowly replaced by private sector ideas. Box (1999) affirms this trend by noting that running government like a business means that public managers increasingly regard the public as customers to be served rather than as citizens who govern themselves though collective discourse processes (p. 22). Today, the business of government has been clouded by those who seek to run government as though it were a business and those who would place the provision of public services in the private sector. Kettl and Fesler discuss some of those comparisons between the public and private sectors. While they note that from managing computer systems to processing fors, the basic work is often similar, the formation and execution of policy is part of the contrast between the public and private sectors (2009, p. 33). Roper (2002) expands on the idea further and suggests that the evaluation of running government like a business is not about the close analogies that exist between government and business, but it is about the proper roles of government and business (n.p.). Further, the public sector does not use the same benchmark for determining its level of success. Kettl (1988) suggests that the public sector has two goals which are running government programs effectivelyand accountability (p.9). He also notes that increasingly more services are being provided not by government officials, which public administration in theory and practice has tended to assume that government officials are the ones actually providing foods and services but by a variety of proxies who have become accountable for those public goods and services (Kettl, 1988, p. 9-10).

BUSINESS OF GOVERNMENT Considering these ideas, the question here is can running government as a business solve some of the challenges that exist in public administration. Can a private sector model address the politics-administration dichotomy, principal-agent conflicts, and accountability? Citizen or Customer To being answering the question about the appropriateness of running government as a business requires a fundamental understanding of the role of government and the role of business. Each works under a different set of foundational principles. Profit is the primary moptivator in business.

Allen (2011) provides a timely example by highlighting that when a CEO may do the vest thing by laying people off [or] offshoring jobs, a president has to put people back to work (n.p.). At the risk of overgeneralization, private sector business is driven by its ability to generate profit for its enterprise and its market share whereas governments role is to provide for a variety of social needs, which in the case above means creating jobs in response to the markets failure to provide for employment. (Roper, 2002, n.p). As a result, business cannot work in a true democratic fashion as modern government is expected to. Roper (2002) continued to expand on this contracts noting that businesses, on the other hand, often operate in a virtually autocratic fashion (n.p.). This is an early point where separation between government and business starts and the public-private dichotomy begins to emerge. Applying a pure business model to democratic government also puts democracy at risk according to Roper (2002, n.p.). In referring to comments by GEs Jack Welsh after the terrorist attacks of September 11, Welsh indicated that if government were a business, combating terrorism would be much easier since a CEO can simply order something to happen in an autocratic fashion. However, in a democratic society, the variety of checks and balances create

BUSINESS OF GOVERNMENT inefficiencies that are must be accepted in a representative democracy (Roper, 2002, n.p.). The autocratic nature of business is critical for success in the private sector. Welshs comments as noted by Roper highlight another key difference in government versus the private sector: customers versus citizens. Beckett (2000) highlights the substitutions

that have been made in defining the end uses of public services under the government as a business concept; owner replaces citizen and customer replaces client (p. 186). The difference between the citizen and customer are important because each plays a different role, mostly based on how decisions are being made. In the private sector, customers do not actively participate in the decisions that may impact them but rather make market choices that business then responds to. Business reacts after it determines how the market is responding. In contracts, the citizen is expected to be an active stakeholder and part of the deliberative process. It can be reasonable expected the citizens help determine policy direction and service delivery before responding to the service as a customer would do. Box (1999) notes that running government like a business means that public managers increasingly regard the public as customers to be served rather than as citizens who govern themselves through collective discourse processes (p. 22). Further, private sector decisions are made autocratically in a manner that considers the bottom line of profit and not necessary with regard to the customers wants or needs. VonMises (1944) contrasts this by stating that the public enterprises duty is to render useful services to the community (p. 60). While some businesses may make socially responsible choices in their practices, if private enterprise were to only consider rendering useful services without consideration of profit, enterprise is doomed to fail (VonMises, 1944, p. 61).

BUSINESS OF GOVERNMENT Citizens are not simply customers, consumers or clients of public service. It is essential that citizens be and remain actively involved in the public discourse and not simply allow for choices to be made based on perceived or realized market forces. Roper notes Velazquezs contrast in decision making process, indicating that citizens have a right to participate in the political decisions that affect them. (Roper, 2002, n.p). Transforming government into a model that runs like a business puts many fundamental

values at risk. While good service may be a benchmark and a goal for the public sector to achieve, government rights and freedoms are a conflict for private sector business. Public rights and liberties are at risk if government were to run as a business (Roper, 2002, n.p.) Contracting So, if is not in the governments best interest to operate as a business, perhaps there opportunities to implement certain private sector strengths to improve effectiveness and remain accountable. Those opportunities potentially exist through contracting with the private sector. Certainly the profit motivations in the private sector can be used to combat the perceived waste associated with the public sector service delivery. VonMises (1944) notes that in the public sector, the solution to improve service delivery and effectiveness is to increase resources, or money, for the service since every service can be improved by increasing expenditures (p. 62). However, he highlights that these costs place a heavy burden on the public funds (p. 62). Contracting assumes that the private sectors efficiency and desire to generate profit will reduce the size of government and force the public sector to be more effective. Kettl (1988) points out that public-choice proponents typically assume that the self-regulating features of the market will solve any problems plaguing publicly administered programs (pp. 10-12).

BUSINESS OF GOVERNMENT However, contracting out does not eliminate the need for government in the provision of services. As Kettl (1988) notes, contracts do not administer themselves. To solve some of the principal-agent challenges such as accountability, government is necessary to oversee the outcomes and outputs of the private sectors work. Accountability A key question in public administration is Public administrators are under increasing pressure to become more efficient, evaluate programs and show results. In response, concepts such as performance measurement have been introduced to evaluate and document progress towards targets and goals. However, Kettl and Fesler (2009) argue that the match between private solutions and public problems as often not

been a good one, but that has scarcely deterred public officials from trying to borrow anything that may prove a good idea (p. 114). In New York State, for example, the latest buzz word has been efficiency. In 2007, Governor Eliot Spitzer started the latest trend in government efficiency. On April 23, he signed Executive Order Number 11 and created the New York State Commission on Local Government Efficiency and Competitiveness. In his order, the Governor cited multiple and overlapping municipal jurisdictions, a high local tax burden and low participation in government as some of the reasons for establishing this commission. This Commission completed its work in 2008 and during the next state budget, the legislature and Governor renamed an existing grant program focused on intermunicipal cooperation to the Local Government Efficiency Grant Program. Operating public purpose organizations, including government, as if it were a private sector enterprise has been criticized by others as well. Theorists argue against the practice noting that by taking a business-approach, citizens are treated as customers to be served rather than as citizens

BUSINESS OF GOVERNMENT

who govern themselves through collective discourse processes (Box, 1999, p. 22). Box continues to note that there are negative aspects of treating public purposes as if they were private and notes the high-profile savings-and-loan crisis of the 1980s which deregulated these organizations to be on the same footing as banks without the regulation that banks are subject to (p. 29). While treating public purpose organizations as businesses as a rule is certainly questionable, it should not be interpreted that private sector business has not developed practices which can be adapted and used by the public sector.

Accountability The accountability of the public sector has been questioned in a government as a business type model. To understand the potential challenges that exist with accountability In a principal-agent relationship, like the public sector, accountability is often difficult to measure. One of the founding principles in public administration is the principal-agent relationship. Eisenhardt (1989) notes that according to Harris and Raviv, the principal-agent relationship can be applied to employer-employee, lawyer-client, buyer-supplier, and other agency relationships (p. 60). According to Box (1999), he notes Kettls finding that in New Zealand, public administrators are engaged through individual contract with compensation and dismissal tied directly to the performance of the administrator (p. 28).

Accountability RISK ADVERSE MORAL HAZARD

BUSINESS OF GOVERNMENT ADVERSE SELECTION Using performance measurement to addresses concerns with accountability in the principal-agent relationship is one private sector practice that has found its way into the public sector.

10

Decision Making and Strategic Management According to Mise

Managing and Motivating Public Employees Returning to the New Zealand example from Kettl as mentioned by Box (1999), the wellperforming administrator received performance-linked incentives for meeting or exceeding targets; whereas, the poorly performing administrators job is at significant risk for failing to meet the contractual performance measures (p. 28).

If the public sector were to focus solely on policy formation and execution, then to take full advantage of the private sector would likely involve an increasing use of contracts with private entities, either for profit or not for profit. Kettl and Fesler (2009) note several advantages to contracting out public services including: cost reduction, special expertise, avoidance of red tape, and additional flexibility (p. 387-388). However, contracting out also includes a number of challenges some of which are highly similar or identical to the challenges that exist in the principal-agent relationship. Kettl and Fesler

BUSINESS OF GOVERNMENT (2009) describe a number of problems that contracting out can present, summed up into two questions: How can contractors be selected and their performance controlled so that governments objectives are achieved? How can contractors preserve their independecend in the face of controls that the government attempts to impose? (p. 388).

11

Contracting Out It appears that the alternative approach to running government like a business is to utilize the ability to contract services out to the private sector.

Conclusion Based on the literature, it appears clear that government should not run purely like a business. There are significant conflicts which exist between the two, including motivation, accountability and the autocratic nature of the private sector. While there may exist a body of best practices in the private sector which have potential applicability, fundamental differences between business and government are significant barriers to successful and complete implementation of the running government like a business model.

As Von Mises (1944) stated, in the private sector, without profit, enterprise is doomed to fail however in the public sector a loss or a deficit is not considered a proof of failure (p. 61).

Works Cited

BUSINESS OF GOVERNMENT Allen, F. E. (2011). Should Government Be Run Like a Business? Forbes. Retreived April 26, 2011 from http://blogs.forbes.com/frederickallen/.

12

Beckett, J. (2000). The "Government Should Run Like a Business" Mantra. The American Review of Public Administration , 30, 185-204. Box, R. C. (1999). Running Government Like a Business: Implications for Public Administration Theory and Practice. The American Review of Public Administration , 29, 19-43. Eisenhardt, K. M. (1989). Agency Thoery: An Assessment and Review. Academy of Management Review , 14 (1), 57-74. Globerman, S., & Vining, A. R. (1996). A Framework for Evaluating the Government ContractingOut Decision with an Application to Information Technology. Public Administration Review , 56 (6), 577-586. Kettl, D. F. (1988). Performance and Accountability: The Challenge of Government by Proxy for Public Administration. American Review of Public Administration , 18 (1), 9-28. Kettl, D. F., & Fesler, J. W. (2009). The Politics of the Administrative Process (4th ed.). Washington, D.C.: CQ Press. Mintzberg, H. (1996, May-June). Managing Government, Governing Management. Harvard Business Review, 76-83. Roper, J. E. (2002, October). Should Government Be Run Like a Business? Paper presented at the 9th International Conference Promoting Business Ethics, Niagara University. van Slyke, D. M., & Hammonds, C. A. (2003). The Privatization Decision: Do Public Managers Make a Difference. The American Review of Public Administration , 33 (2), 146-163.