Where ‘running government like a business’ works — and doesn’t

By James Shaffer, Special to the BDN
Posted July 15, 2011, at 6:07 p.m.

In my last column on June 11, I wrote about the three main socioeconomic sectors in our economy: private, public and non-profit. Each serves a different role. Each has its strengths and weaknesses. And each contributes in different ways to our quality of life.

I posed the question: What happens when the values, assumptions and methods of one sector are applied to another? For example, Gov. Paul LePage has suggested that applying business principles to government is a good thing. This is true, to a point, but there are pitfalls in carrying business techniques too far.

The private sector — business — always has been good at deploying resources efficiently to accomplish a mission, which typically is serving a need for a profit. By a process of economic natural selection, businesses that serve needs inefficiently tend to die while efficient ones thrive. Accordingly, business schools teach about the definition of needs (markets) and efficient deployment of resources. Business planners are taught to consider benefit cost ratios and return on investment. That is, what do we get for what we invest?

On the other hand, governments often struggle with these concepts and sometimes spend — or mandate others to spend — expenditures disproportionate to benefits. So applying “business methods” might help us think more rationally about government spending and mandates. The winners could be taxpayers and job holders, but the losers could be interests that benefit from ignoring economics. Maybe this would be a worthy trade-off.

Business systems also have been generally effective at creating accountability. True, there are occasional outrages, but — again by a process of natural selection — business operators that produce poor results usually face an eventual reckoning in the court of economic reality. In general, more businesslike accountability might make for better government.

However, there are three key areas where business methodologies fall short of the needs of the public sector. The first is the need to serve multiple constituencies; the second is the challenge of measuring social results; and the third involves the short-run bias of business finance.

Regarding constituencies and measurement, the private sector has it easy. While businesses’ customers come into the formula, as a means to an end, ultimately business results typically are framed in terms of the economic impact on one constituency — owners. Maximizing the wealth of the owners is simple, clear and measurable. On the other hand, government serves a hodgepodge of constituencies, and the compromises of the people often are driven by values and metrics that don’t relate to economics. So “results” are hard to measure and viewed differently by various factions. How do you measure “results” of policies to protect the environment, quality of life or welfare of future generations? So applying business techniques may not fit so well in an environment of multiple stakeholders.

Regarding the short-run bias, business finance makes the assumption that costs or benefits in the future are less significant than they would be today. There is a whole body of math involving the time value of money. For example, if money costs an investor or a business 10 percent a year, then a dollar saved, earned or spent in 10 years is worth only 39 cents today. Calculate this at 15 percent for 20 years, and the present value of any dollar in the future is only 6 cents today. So for most businesses, the future only one generation out does not factor into financial planning. Business literally discounts future events, good or bad. Perhaps this is OK for organizations driven by Wall Street, but it could be disastrous to let time-discounting planning drive public policy.

Interestingly, the private sector is starting to recognize that a focus on near-term profit may not be environmentally and socially sustainable and hence may cause near-term political problems. Ahh! Now business starts to see its problem. Spurred by nonprofit organizations, business schools and government, businesses are struggling to understand and apply “triple bottom line accounting” that attempts to measure environmental and social impact as well as economics. The University of Southern Maine School of Business teaches this, but it shatters one of the private sector’s traditional advantages: the simple, singular focus on one measure to one stakeholder. Our students ask: What’s this about three criteria? And other than to my conscience, to whom am I accountable for the other two parts of this bottom line? In any case, business is starting to recognize its problem and learn from the nonprofit and government sectors.

In short, the value systems and methods of the three sectors are becoming mixed in the vat of economic, environmental and social reality. Each sector, sometimes grudgingly, is learning important lessons from the others. Business techniques must be applied with caution.

Strengthening Maine’s future requires a robust, three-party integrative dialogue, rather than a one-way “lecture” from business to government.

James Shaffer is a professor and former dean with the University of Southern Maine’s College of Management and Human Service. He is a former media executive who served as the chief financial officer of the Los Angeles Times before coming to Maine in 1991 to be CEO of Guy Gannett Communications, which was based in Portland and had TV, newspaper and other media properties in seven states.

http://bangordailynews.com/2011/07/15/business/where-%e2%80%98running-government-like-a-business%e2%80%99-works-and-doesn%e2%80%99t/ printed on August 23, 2014