Posted by Colin Weatherby                                                                                            1900 words

In this insightful paper published in 1973, Peter F Drucker looks at why public service organisations are less efficient than business enterprises. In it he reaffirms public services as being ‘load-bearing members of the main structure’ of modern society – a provider of services that are essential to society.

Despite this importance, he says the performance of public service organisations is unimpressive. They have large budgets and require ‘ever-growing subsidies’ but are providing poorer service. Citizens are complaining about ‘bureaucracy and mismanagement’ in the institutions that are supposed to serve them.

Why was that the case in 1973 and, more importantly, is it still the case in local government today?

To begin, Drucker says public service organisations have reacted to criticism by becoming more management conscious and adopting the tools and concepts of business management. Whilst he sees this as a good sign, it does not mean that the public organisations have understood the problems of managing themselves. Rather, he says it was a sign that they realised they were not being managed.

This is an important point today. Most councils mimic management ideas from elsewhere – management by objectives, evidence-based management, lean thinking and business excellence are all examples of councils looking for better ways to manage. No proven and accepted local government management model has emerged.

Drucker went on to identify examples of public service organisations that were performing well and he looked at what made them different. In doing so, he compared the public service to a business enterprise and noted that the challenges are similar in making work productive, its managers have similar work, and top management is structured similarly.

“Internally, it differs more in terminology rather than in substance.”

However, Drucker saw the public service organisation as differing fundamentally in its purpose – it has different values to a business enterprise. Performance and results are different and managing for performance differs significantly. He identified three popular explanations for the failure of public service organisations:

1. Their managers aren’t businesslike people.
2. They need better people.
3. Their objectives and results are intangible.

Drucker describes all three as ‘alibis rather than explanations’. This is an interesting idea.

An alibi is an explanation about where you were when something happened elsewhere. An explanation is a reason or justification given for an action. I guess he is saying that these explanations don’t explain what is happening (or not happening) as much as they say that management has been absent. If managers are not businesslike they should be something-else like. If they are good enough they should be standing up and doing the job. Objectives and results should be being made tangible so that stakeholders know what is happening.

Possibly for this reason, Drucker says that the belief that public service organisations would perform as well as businesses if only they were managed in a more businesslike way, as a wrong diagnosis.

“The service organisation has performance trouble precisely because it is not a business. What being ‘businesslike’ usually means in a service institution is little more than control of cost. What characterises a business, however, is focus on results – return on capital, share of market, and so on.”

He sees a need for efficiency because there is no ‘outward and imposed cost control’ as there is on a business in a competitive market. He says the basic problem of public service organisations is not their costs but their lack of effectiveness. In the paper he describes several organisations that have adopted more businesslike practices only to fail because services ‘essential to fulfilment of purpose’ were stopped to be more efficient, or they ceased asking who their constituents were because they saw the question as ‘political’ or ‘unbusinesslike’.

How often do we see the same behaviour today? Rather than explain the value provided and defend their prices (i.e. taxes charged), councils lack confidence and capitulate to focus entirely on cutting services and costs to contain budgets. It is easier but is not the only course of action available.

Mark H. Moore has eloquently described the challenges in understanding what constitutes public value and then providing it – this is neither ‘unbusinesslike’ nor ‘political’.   It actually makes business sense for a public service. Christopher Stone has shown that trying to be more efficient in the public service is not always about doing the obvious and popular.

Drucker goes on to discuss the ‘cry for better people’, describing it as historical and a constant demand of reformers since ‘after the Civil War’. However, he says public service organisations cannot rely on finding ‘supermen’ (and women, I assume) for their managerial and executive positions, any more than business enterprises can. He says that if service organisations cannot be managed by people of ‘normal endowment’, it cannot be done at all.

“Moreover, there is no reason to believe that the people who staff the managerial and professional positions in our service institutions are any less qualified, any less competent or honest, or any less hard-working than the people who manage business.”

He also says that there is no reason to think that business managers put in control of public service organisations would do any better than the bureaucrats. This is a good point to bear in mind in local government today. So many appointments from outside the sector have failed.

Finally, Drucker addresses the explanation that public service objectives and results are intangible. He describes it as being ‘at best a half truth’. In the paper he cites a number of business definitions that are intangible but this has not prevented concrete and measurable goals being derived from them.

“Achievement is never possible except against specific, limited, clearly defined targets, in business as well as in a service institution. Only if targets are defined can resources be allocated to their attainment, priorities and deadlines set, and somebody be held accountable for results. But the starting point for effective work is a definition of the purpose and mission of the institution – which is almost always intangible, but nevertheless need not be vacuous.”

I believe that this statement from Drucker is highly pertinent to local government today. Councils have great difficulty selecting a small number of goals. As a result, goal diffusion reigns. The number of goals and actions in Council Plans spreads effort so wide that many are not attained.  The vague and generic vision and mission statements for many councils makes the setting of achievable goals difficult. Mark H. Moore puts mission achievement at the core of the public value scorecard – it must say why the organisation exists and what value they must create.

Drucker says that the one basic difference between a public service organisation and a business is the way that each is paid. Businesses are paid when they produce what the customer wants. Customer satisfaction is the basis for performance and results. In comparison, public service organisations are paid out of a budget allocation. Budgets are allocated from the general tax stream obtained from taxes and are not tied to what they are used to produce. At best, they are tied to the intent of whatever activity they are to be used for.

Interestingly, Drucker says that this changes the meaning of ‘results’ to mean a larger budget and ‘performance’ to mean maintaining or increasing the budget. How often do you see this in local government today? Success is increasing your budget because you have demonstrated the need through the labyrinthine organisational budget process.   Successful managers ‘defend and extend’ their budgets to increase their empire and their influence. Controlling ever-greater budgets is a sure pathway to promotion to a larger job or organisation!

Drucker says that efficiency and cost control in this environment are not really considered virtues, even though they may be ‘preached’. Not to spend the budget will convince the budget maker to cut the budget for the next fiscal period.

“Dependence on a budget allocation militates against setting priorities and concentrating efforts. Yet nothing is ever accomplished unless resources are concentrated on a small number of priorities.”

Drucker uses several examples to demonstrate that instead of setting clear priorities, public service organisations ‘try to placate everyone by doing a little bit of everything’, which in effect, means doing nothing. Welcome to local government today. He says that being ‘budget-based’ also makes it difficult to stop doing wrong or old and obsolete things. Hello. Unlike a business enterprise that will go out of business if it becomes unproductive and obsolete, for the public service organisations no such discipline is enforced. Therefore, the response to lack of results is often to increase the amount of effort and ask for even larger budgets.

I think this is one of the most relevant ideas in this paper. Our councillors, as politicians, draw us in to trying to please everyone (the last thing they want to do is say no) and we end up spread thinly over so many services and issues that we inevitably fail. This just adds to the image problem councils have in being seen as helpful but ineffective organisations. If most communities knew about the amount of time CEO’s spend managing the personal idiosyncrasies and dysfunctional behaviours of councillors, instead of applying themselves to running the organisation to provide services that effectively meet community needs sustainably, they would be amazed.

Drucker sees the motivators for public service managers as wrong. Instead of the motivation that comes from being paid for results, the public service organisation is paid for its intention to obtain results.

“It is paid for not alienating important constituents rather than for satisfying any one group. It is misdirected, by the way it is paid, into defining performance and results as what will maintain or increase its budget.”

He finishes the paper by listing the requirements for success:

• Ask ‘what is our business and what should it be?’
• Set clear objectives and goals derived from their definition of function and mission.
• Get managers who do their job systematically and who focus purposefully on performance and emphasis the right results.
• Think through priorities and to select targets, set standards of accomplishment, set deadlines, and make people accountable for results.
• Define measurements of performance and use them to provide feedback on efforts.
• Audit objectives and results to identify those objectives that are obsolete or have proven unattainable, performance that is unsatisfactory, and activities that are unproductive.

“The absence of market competition removes from the service institution the discipline that forces a business eventually to abandon yesterday’s products ‘- or else go bankrupt.”

Who can argue with this list? I would love to work for a council that embraced this list. Is that likely? I doubt it. The system militates against effective action to improve performance. There are too many hidden barriers to change. And there are too many vested interests in the status quo. Drucker’s last words have relevance for local government today.

“What now has to be learned – it is still largely lacking – is to manage service institutions for performance. For the remainder of the century this may well be the biggest and most important management task of all”.

Drucker, Peter F. 1973. ‘Managing the public service institution’, The Mckinsey Quarterly.

Moore, Mark H. 2013. Recognising Public Value.