Unproductive Uncle Sam

To boost performance, government needs to measure and set targets for its programs

By Nancy Killefer and Lenny Mendonca

The past decade has been one of America's finest in terms of productivity growth. Yet a crucial 20% of our economy appears to have been left behind: government. Despite numerous attempts at management reform and a panoply of opportunities to transfer best practices between the private and public sectors, government seems to have missed out on the productivity boom seen in the private sector. That's a shame, because while there are important differences between the public and private sectors, government does an abundance of grantmaking, procurement, property management, customer service, and other jobs ripe for productivity improvement.

So just how far behind is government? We can't say with any certainty because the Bureau of Labor Statistics, which used to measure its productivity, stopped in 1996. Our analysis shows that government kept up with the private sector until 1987, when a gap emerged. It went on widening until 1994, when the data ran out. We believe it has widened further still.

This public productivity deficit couldn't come at a worse moment. Americans today say they want to limit the cost of government, but they also want more homeland security, better-managed borders, more disaster readiness, extra help in the face of global trade, cheaper health care, and better public schools. These demands sit uncomfortably with our budget deficit and our natural desire not to pay more taxes. In short, we are stuck in a productivity bind: We want more output but no more input.

In a white paper our firm, McKinsey & Co., published this week, "How Can American Government Meet Its Productivity Challenge?", we map out an agenda inspired by lessons from the private sector. Having studied productivity growth around the world for over 15 years, the McKinsey Global Institute has shown that competitive intensity at the industry sector level is the prime catalyst for productivity growth. It forces managers to improve performance and allows innovation to diffuse quickly across the sector.

Make no mistake, government is a sector -- structured and regulated in ways that can foster or stunt productivity growth at its "firms" (agencies). And while it may not be possible to use competition in government to exert pressure to perform, Congress and the White House or state legislators and governors have plenty of tools to improve public agencies.

The most natural tool is the budget process, but the reality in Washington and many state capitals is that performance remains a secondary factor in budget decision-making. Congressmen fight for their district or their passions, and accordingly, agencies privately admit that you budget for what you can get, not what you need or deserve. Yet when government performance, or the lack thereof, is highly visible (witness the response after Katrina), everyone takes action.

That's why we think a radical new approach to transparency of how government programs are performing is required. Only this will push Congress to exert performance pressure on government agencies. First, government should measure public productivity again and set national targets for productivity growth against which everyone can be held accountable. Next, political leaders should create a body we call "Gov-Star," modeled after fund-rating agency Morningstar Inc. (MORN ), to provide completely independent measurement of government program performance; to develop comparable program data over time -- between programs, between governments, and with the private sector; and to make the data and their implications clear to appropriators and citizens.

But in government, pressure without support can yield demoralization and underperformance. So we also need to adopt key transformation initiatives: incentives that allow agencies to reinvest savings to the top line of programs; the introduction of chief operating officers at public agencies, to be appointed based on management experience in government or leading corporations; and a SWAT team of management experts at the Office of Management & Budget to help lagging agencies.

It's a long list. But if we want our government to do more and do better, we must take public management and productivity more seriously. Otherwise, citizen demands for effective government in the future will go unheeded.

Views expressed in Outside Shot are solely those of contributors.

Nancy Killefer, a senior partner at McKinsey & Co., is former Assistant Treasury Secretary for Management. Lenny Mendonca is a senior partner and chairman of the McKinsey Global Institute

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