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Running Government like a Business

August 27, 2015
During the first half of my summer internship with the Office of Performance, Evaluation and Risk Management at the Department of Commerce, I’ve had the benefit of experiencing some of the federal government’s broader successes and more acute, daily challenges. Under Secretary Penny Pritzker’s “Open for Business” campaign, Commerce’s main goal is to help the American economy thrive through the cultivation of a better business environment.

By Tatum Gale, C’17

However, if there’s one message I have heard over the past five weeks in the Department of Commerce, it is that government workers want to run the state like a business itself. By taking a step back to look at the functions of the private sector, and then returning to governmental institutions designed to replicate it, we can begin to understand the successes and failures of the pursuit of this ambitious goal.

Let’s start by examining the basic strategic components of a corporation, using Chipotle as an example. Chipotle has a product to offer its customers: cheap, healthy and delicious fast food, from which it hopes to achieve one goal: to maximize profits. Sure, it has corporate social responsibility efforts (which actually play directly in with its product) but ultimately, the success of the business is based on high sales and satisfied customers. Chipotle reinvests in its business and takes risks to increase profits. The company reports on its activities on corporate dashboards and publishes its profit margins quarterly. If its market tests prove unprofitable, it accepts the minute revenue loss and reevaluates its investments. Suffice it to say, Chipotle’s product is popular – the company is pretty good at providing to its customers.

A model of efficiency

Despite what many businessmen-turned-politicians will tell you, the federal government is inherently different from the private sector. In the public sector, offices shy away from the use of the word “customer”, and for good reason: in many cases, public sector agencies don’t have a product to offer anyone. Instead, the public sector tries to meet the needs of its “stakeholders”: people to whom a given policy would matter. It is fairly easy to list all of the stakeholders of a government “product”, for example a new tax policy. In this instance, stakeholders would include tax lawyers, tax brokers and advisors, companies like TurboTax, Congress, and every single taxpaying citizen in the US. Different groups of people want different outcomes in this situation – the everyday taxpayer wants a simple process for filing taxes, but many of the other stakeholders would be out of a job if this were to happen. Product satisfaction varies from group to group, and as a whole the US economy may benefit or suffer from the product’s quality. While the government, like Chipotle, wants satisfied “customers”, the concept of satisfaction and the product which aims to achieve it are much more complicated.

Further, the executives in a business like Chipotle are privileged with a built-in incentive for improvement: the more money the company makes, the more success they enjoy. Money comes directly from the company’s customers, and is directly incorporated with the success of its business model, so that when Chipotle does things right, its upper-echelon decision-makers theoretically live better lives. If, for whatever reason, some bad decisions were made and Chipotle were to stop providing a viable product, it would start to fail and its executives would be in deep personal trouble. The government, on the other hand, derives its funds from tax revenue. Whether the various bureaus of the Department of Commerce do their job does not directly determine whether they will receive funding that year. In an organization like the National Oceanic and Atmospheric Administration (NOAA), weather patterns and fish stocks are tracked in an effort to better prepare the American people for disasters and to prevent shortages of resources. If individuals in NOAA do a particularly good job, there may be a massive benefit to business-owners across the nation, but employees (and even “execs”) almost certainly will not see a direct impact upon their salaries. If they do not do their job and NOAA fails, it is very likely that NOAA will continue to get funding and its workers will continue to have jobs. The American people benefit or suffer depending on the success of these workers, but largely regardless of this success their tax money will continue to fund the organization.

The fundamental tax issue is further exacerbated by an inherent accountability problem, one that could be considered an issue of “justice”: because taxes are taken, rather than transacted. No one makes a calculated decision to “spend” a certain amount on taxes, so the dynamics of their use are different from those of profits. Government workers have an implicit incentive to do what is just – because theoretically, part of the reason they’re working for the government is that they want to benefit society, and, perhaps more importantly, because if they don’t, they answer to bad press and a population of people whose money has just been squandered. Business runs on risk-taking, on making mistakes and correcting them quickly after small losses. Chipotle would never have learned that its sofritas (vegetarian tofu option) would be profitable if it hadn’t tested the waters, done promotion and taken the risk of investing its addition to the menu. Yet, partially as a result of this fear of misusing tax dollars and being held accountable by the American people, government has an acute fear of risk.

So how have we tried to mitigate these fundamental differences – of product, incentive and fear of risk-taking?

The answer, while quite complicated, can be broken down into several enterprises. First, the Office of Management and Budget, created in 1970, works with the President to evaluate existing programs and proposals of new ones in an effort to alleviate the incentive issue and distribute federal funds to worthy initiatives. Besides simply managing money, the OMB is designed to incentivize agencies to demonstrate good performance, similar to how a business must perform to stay afloat. Performance is further evaluated through the Government Accountability Office, created in 1921, which performs audits across the federal government to assess whether departments’ actions are aligned with their strategic goals and overarching mission. The GAO addresses the product issue, asking whether policies are truly satisfying stakeholders. To accompany the assessments and create a system of constant self-evaluation, legislators enacted the Government Performance and Results Act (1993) (GPRA), and the GPRA Modernization Act (GPRAMA) (2010), which mandate performance measures, and in essence provide guidance to the government on how it ought to measure progress. GPRAMA tells agencies that they need to measure performance as a business would: through frequent, quantitative and (as often as possible) automatically collected data that is shown to demonstrate correlative progress. The OMB Circular A-11 explains to agencies how exactly to implement its performance measures to align with GPRAMA. Together all these measures work toward a goal of higher government accountability and performance. In theory, their implementation and frequent attention would make all agencies more efficient and goal oriented – as close to functioning like a business as possible.

Yet, despite the installation of frequent check-ups and mandates, performance measurement is still a serious issue.

Secretary Penny Pritzker

First, the issue of how to measure success permeates just about all areas of government: burritos sold still cannot be equated with people satisfied by policy, and agencies’ struggles to find accurate performance measures continue five years after GPRAMA’s enactment. Many agencies are inclined to push for action-oriented data: how many meetings did you have with key stakeholders? How many international trade barriers did you knock down? Yet it’s very hard to justify actions as proof of effectiveness, and performance officers often push for results-oriented data: unemployment or export rates, for instance. Even with these, however, it’s often very difficult for agencies to take ownership of highly complicated data, and for the more specific stats it’s sometimes difficult to argue that trends necessarily implicate positive changes. It is one thing to mandate measurement, but quite another to decide what to measure.

Even when supposedly accurate measurements are determined, actually collecting and displaying them in a timely manner is another hurdle. Dashboarding, or the use of a frequently updated, aesthetically pleasing toolkit to display data, is a very common tactic in the private sector. While Secretary Pritzker has internally pushed for a dashboarding tool for a variety of data, and many agencies (such as Census) have seen success in implementing this sort of tool, the government has a long-established system of manual entry and quarterly (if not annual) reporting rates. To many people, suggesting a real-time, or even weekly or monthly data report is ludicrous.

Finally, in some instances the creation of extra incentives and regulation of processes in an effort to further performance has been counteractive, resulting in agencies taking fewer risks. In a recent cross-agency conference on business modeling in which I participated, we were asked to identify the most important goals for government workers and agencies. The resounding answer was that workers would like their supervisors and broader organizations to be less afraid of mistakes. This is easier said than done, especially in the light of the OMB’s practices for budget distribution, which provide funding based on goals that agencies set for themselves. The OMB incentivizes agencies to set goals slightly above, or, in many cases, directly equal to current operating capacity. Agencies, for fear of losing funding, elect to determine static state as a success, and are satisfied with seeing no improvement over time. The disincentive for stretch goals, combined with the aforementioned risk aversion due to public accountability, makes for a very conservative game plan.

While my summer has been spent in large part learning about the frustrations that derive from these inefficiencies and lack of innovative ideas, I’ve also learned that despite all the aggravating factors, policy-makers continue to push on and attempt to improve the systems in which they operate. My office’s major purpose is to help bureaus of Commerce more efficiently implement their practices in an effort to achieve long-term goals. My boss and my boss’s boss seek to create accurate performance measures, and to use existing legislation to leverage positive change in government. While the government may not run like the private sector, and probably will never be able to, attacking the issues of product, incentives and room for risk-taking will always be a noble task.

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

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RESOURCE SPOTLIGHT:

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