CHAPTER 9:
ISSUES FOR THE PUBLIC SECTOR AND NOT-FOR-PROFIT ORGANIZATIONS
Public sector and not-for-profit organizations face all the same external challenges as do private sector organizations – all the issues discussed in the earlier chapters of this book – but they have some additional challenges unique to themselves which require specific additional governance decisions.
Public sector organizations
‘Public sector organization’ is a term that includes a wide variety of organizational types, ranging from central government, through non-governmental organizations to local government and inter-governmental bodies. And these organizations are engaged in a range of activities, from policy making through government to health, defence, intelligence, education, social services and regulation. The public sector probably contains as wide a range of organizational models as does the private sector and, in many countries, the public sector employs a significant percentage of the population.
Four characteristics, in all this diversity, are common to the vast majority of public sector organizations:
1. Their organizational imperatives are political, not commercial – their whole purpose is to achieve a political objective, set for them (ultimately) by a politician – and their long term organizational survival depends on satisfying that politician;
2. The specific skills and competences of those politicians, the attributes that helped them climb the greasy pole and achieve office, are not necessarily the competences of a CEO or a senior executive of a substantial organization; successful politicians are unlikely to have acquired the organizational or financial management skills of successful corporate executives - yet they find themselves running very big organizations, responsible for spending very large sums of money – often on complex, multi-organizational, multi-year projects.
3. Their income is theirs by right – they are given the money that they say they require to fund the achievement of that political objective – be it reduced immigration, improved intelligence or better aggregate school leaver qualifications. They are not subject, at the individual transaction level, to competition – those who have to use the services do not have a free market alternative to which they can turn and, therefore, the public sector organization does not have to compete, transaction by transaction, with others for its income;
4. The vast majority of people who work in the public sector are motivated, to one extent or another, by a desire to serve their fellow human, to ‘put something back’; ambitious, self-interested people tend not to go into the public sector – at least, not until after they’ve established themselves in the private one, if at all. Individual career progression is not as ruthlessly determined, in the public sector, by commercial success (selling more and spending less); funding success (raising more money and then producing an auditable trail to prove it was properly spent) usually drives successful public sector careers.
None of this means that the public sector is a calm and relaxed place to work. Public sector organizations are a political hot bed: individuals scheme and plot to advance their organizational power base even more determinedly in the public sector than in the private. Individual power in the public sector is built, just as it is in the private sector, on the size of organization that an individual runs; the difference is that, in the public sector, head count and budget are the key criteria, whereas in the private sector, revenue and profitability are the important power numbers.
In the public sector, there are usually few prizes for those who fail to spend their annual budgets whereas, in the private sector, there are few prizes for those who succeed in spending theirs. The reason for this is simple: failure to spend a public sector budget is seen as a failure to spend money that was precisely calculated and committed to a specific political objective (something the politician believes matters to the voters) and must therefore by definition mean that the objective was not achieved; in the private sector, it is assumed that all spending budgets have padding in them and that achieving at least the agreed objective while spending less than the agreed amount is the least that should be expected of an ambitious executive.
Public sector organizations themselves don’t necessarily have longevity either: they come and go, depending on the current political winds; jobs are not safe (even though major public sector job culls are usually accompanied by substantial hiring elsewhere), targets change regularly and initiatives come in cycles as what was learnt by one generation of politicians is relearned by the next.
While the CEOs of private sector enterprises focus on leveraging their assets and improving their competitive position (improving the top line), public sector CEOs are largely focused on bidding for next year’s funding and providing solid evidence that they have done good things with this year’s funding. So, while it may be true that public sector organizations are not subject to Schumpeter’s ‘gale of creative destruction’, they certainly are subject to a storm of political opportunism.
Governance structures that have been evolved for the private sector do not transfer easily to the public one. The key difference lies in the fact that the public sector, however it is dressed up, bids for its money year by year and then has to spend it bit by bit, whereas the private sector scraps for its money transaction by transaction but commits to spending it year by year – on payroll, rent and rates, pensions, product development – and, of course, taxes.
The paymaster is always the customer: the difference in the directions in which the money flows (government to organization to consumer vs consumer to organization to government) is the first reason why public and private sector organizations must have fundamentally different business models. The public sector’s customer is the politician who determines their budgets; the private sector’s customer is the consumer (or business) who determines to purchase their product or service.
Private sector organizations are funded by shareholders, individuals who invest their own personal funds in the enterprise in the expectation of receiving a return – and with the understanding that, because ‘shares go down as well as up’, they might lose it all. Public sector organizations do not have shareholders and the argument, over the last ten years, that public sector ‘stakeholders’ are just as important in the make up of the public sector organization does not stand up to even the briefest on analyses: when the political paymaster pulls the plug on a public sector organization, the external ‘stakeholders’ simply get on with working with whatever its successor organization is – they haven’t actually lost anything.
And, unlike shareholders, stakeholders don’t have the power to appoint directors, to block re-structurings, or to take part in a buy-out; if the CEO’s remuneration appears to be out of proportion to the achievements, they can’t vote against re-appointment at the next annual general meeting.
But, while public sector organizations don’t have shareholders, private sector ones do have stakeholders: every employee, supplier and customer is a stakeholder in any private sector organization, with a real dependency on the survival of that organization for the availability of spare parts, for a continuing service or for employment. All organizations, in other words, have stakeholders – it’s just that public sector ones don’t have shareholders. And this is the second reason that public and private sector organizations must have different business models.
Given the reality of different business models, it is short-sighted to hope that governance models evolved (and still evolving) for the private sector will transfer largely intact to the public one – and then be of any real use. After all, the purpose of the private sector governance model is to ensure that the investor – who owns the company – isn’t defrauded by the executives who actually run the company, whereas the purpose of a public sector governance regime must surely be to ensure that the taxpayer’s money isn’t wasted by the executives who run the organizations that have been charged with spending it.
Public sector IT governance won’t really work without an act of political will – rather like public sector corporate governance. Even in the absence of government determination to pay more than lip service to the concept of governance, public sector organizations can still deploy a meaningful IT governance framework.
Guidelines for Directors:
1. You will probably need to recruit to the board – at whatever the cost – at least one IT savvy business manager who also understands the public sector - a role one might call the ‘non-executive IT director’;
2. Mandate this person to actively oversee and guide the board, the executive and the organization in designing and implementing an IT governance framework, and then be responsible for its ongoing oversight, monitoring and corrective action;
3. You may need to recruit – at whatever the cost – a CIO and IT managerial staff who understand that – and will contribute to the ICT strategy must be subordinate to the business strategy, and that the strategic objectives must be clearly articulated and understood before IT can make any contribution to the plan;
4. Mandate external IT auditors to assess, on an ongoing basis, the effectiveness of the organization’s information and ICT strategies and supporting infrastructure, and to report on this directly to the non-executive IT director and to the audit committee;
5. Ensure that, for all major IT projects, the IT governance arrangements are clearly thought through, fully articulated and understood by all concerned. In particular, ensure that the guidance on project governance is applied, especially
a. Releasing further funds only on objective evidence of completion of the preceding stage of the project, and
b. Empowering the non-executive IT director and the steering committee to ‘pull the plug’ on IT projects that are off-track and which cannot quickly be got back onto track. This single factor will save organizations substantial sums of money and improve the likelihood of a better thought through project emerging from the ashes;
6. Deploy best public sector project management practice (Prince 2) – which is only really effective if the business users of the system as well as its developers have been thoroughly trained in its methodology.
7. Good external contracts for system development usually involve clearly defined deliverables, a very specific timetable, thoroughly understood accountabilities and a practical mix of carrot and stick: substantial interim penalties for interim failure vs substantial completion bonuses for successful completion.
The biggest challenge for IT governance in the public sector, though, are the large, (sometimes multiple entity) multi-year projects that are centrally, politically inspired and to which far less enthusiasm is committed at the periphery than at the centre. Given that the essential pre-requisites for any successful IT project are informed, willing collaboration between the business users of the proposed system and its developers, and a pragmatic project plan that recognizes and accepts the speed of technology change and focuses on delivering usable components of the ultimate system as fast as possible, rather than lusting for the launch of a single, all-singing, all not-working system some years down the track, the IT governance arrangements for such projects must reflect three key principles:
1. Collaboration is essential; this means that – particularly for centrally inspired projects for which there might not be substantial local enthusiasm – users have to be educated on the benefits of the project, have to buy in, and have to contribute to defining the project requirements. In some projects, there might need to be several layers of user groups and the project board will need to include a majority of users, each of whom has the delegated authority to represent the real views of their ‘constituents’;
2. Project management must be ruthless: milestones, clearly articulated, fundamental and unambiguous, must appear early; early deliverables must include proofs of concept and usable core components; and subsequent stage funding must not be released until the current stage is signed off by the project board;
3. Transparency is the enemy of project failure, particularly in the public sector. The national sector and IT press should, therefore, be invited to project board meetings, have full access to project documentation, be invited to question user representatives as well as developers, and be encouraged to write freely about progress on the project. This step should be simple for those democracies that espouse corporate transparency and freedom of information.
Guideline for Directors: one of the biggest challenges with these projects is that their political sponsors usually see no reason to allow them to fail; this can make dealing with bad news when things go wrong (as they inevitably do) harder than necessary. Hire a project manager who has done it before, and who has demonstrable experience in bringing a tricky, similarly complex project in on time and to budget. If you can’t find one, reduce project complexity until you can match the project objectives with someone who has a relevant track record.
Voluntary sector organizations
The challenges for voluntary sector organizations are very different to those in the public sector. In a number of ways, they are more similar to the private (for profit) sector than they are to the public sector. They have funders – often multiple funders – whose funding is committed to the pursuit of a specific goal. The organization’s charter or constitution will usually mandate a governing council to have a high level of involvement in the organization’s activities and, often, individual volunteers will contribute time and effort to supporting the organization’s activity.
While a voluntary sector organization may have to compete for funds (its funders have other calls on that portion of their time and money they are prepared to donate), they rarely have to compete in the pursuit of their goals: they are more likely to collaborate with other, similar organizations than to try and win market share from them.
This sharp focus and intensely collaborative environment have to be taken into account when designing IT governance frameworks for voluntary sector organizations. Voluntary organizations will usually only invest contributors’ funds in new IT systems where they are seen as central to the organization’s mission, and ‘inessential’ updates and upgrades are not willingly pursued. Existing IT systems may not be cross-organizational and, as a result, there may be expensive hand-offs between different departments and systems. IT is quite often seen as a necessary evil, rather than as an essential value contributor.
Guidelines for Directors:
• Seek out, from amongst your supporters, experienced, IT-savvy volunteers to join the governing council, one of whom could take on the ‘IT non-executive’ role. Involve external, IT-savvy members at lower levels of the organization, so that both the funding constituency and the organizational users can co-identify IT benefits;
• Focus narrowly on how IT creates value for the organization, identifying and quantifying benefits in terms of improving contributions to achievement of the organization’s overall mission;
• Extend collaboration: involve users and IT managers together on committees at all levels, so that both current and proposed new systems clearly incorporate the needs and desires of users throughout the organization.
• Accept that the greater requirements for transparency and collaboration in the voluntary sector will slow down the rate of change; concentrate therefore on essential programs and services and enjoy ignoring the latest ‘solutions’ being peddled by IT vendors!