Home inFocus Ideas for a New Congress (Winter 2015) Disruptive Innovation in the Public Sector

Disruptive Innovation in the Public Sector

Audrey Vaughn and William D. Eggers, Laura Baker Winter 2015

With governments everywhere facing a sea of debt as far as the eye can see, taxpayers have been presented with a very unappetizing choice between higher taxes or radically curtailed public services — or, ever more often, both. This paper proposes an alternative path — a way to use innovation to make public programs radically cheaper without slashing services; a way to break the seemingly unavoidable trade-off between paying more or getting less. In short, a way to achieve that most elusive goal: getting more for less.

Outside of the public sector, we’ve grown accustomed to steadily falling prices for better products and services: auto rentals were transformed by Zipcar; air travel by Southwest Airlines; computing power doubling every 18 months, Netflix, and the $200 dollar smartphone are ubiquitous. In one major sector of the economy, however, prices seem to just keep going up and up, and without a commensurate increase in performance. And that’s government.

More money for the same product

“In retail, consumers are continually getting things bigger and cheaper than before,” says Tony Dean, former Cabinet Secretary for the province of Ontario. “But for public services, we just keep asking citizens for more money for the same product. That’s no longer credible. People feel as though they’re paying enough.”

This pattern can be observed throughout the public sector: higher education, K-12 education, security and defense, and health care among them. To be sure, performance has improved in many of these areas, but not nearly as fast as spending has gone up. What’s more, costs have risen faster than our ability to pay. The money just isn’t there to support the kind of rapid and sustained cost increases we’ve seen in the past decade or two across these sectors.

So why does the public sector seem so immune to the kind of innovation that allows us to get more for less over time? The lack of competition and profit motive in the public sector certainly plays an important role. As do the political incentives to increase spending and protect incumbents over upstart providers. But something else is at work, because industries outside the public sector also have seen little of the radical “more for less” innovation we see often in technology and other fields.

A solution in disruption?

The ultimate reason for this difference may be the presence or absence of a phenomenon called “Disruptive Innovation.” First articulated by Harvard business professor Clayton Christensen, Disruptive Innovation “describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market,’ eventually displacing established competitors.”

Disruptive Innovations start out less good but cheaper than the market leaders, but then break the trade-off between price and performance by getting better, and typically even cheaper, over time. Disruptive Innovation puts the lie to the traditional notion that you always have to pay more to get more.

Disruptive Innovation not only can occur in the public sector, but in fact it can thrive. Such an argument flies in the face of the conventional wisdom that the public sector is the last place you find really transformative innovation. While that may generally have been true in the past, it needn’t be now.

Creating the conditions for disruption will first require policymakers to view government through a different lens. Instead of seeing only endless programs and bureaucracies, the myriad responsibilities and customers of government can be seen as a series of markets that can be shaped in ways to find and cultivate very different, less expensive — and ultimately more effective — ways of supplying public services.

A New Way to Think About the Public Sector

You have to look pretty hard to find examples of disruptive innovation in the public sector and many would blame this on structural issues unique to government. To be sure, profit motives, competitive pressures, and other factors that propel disruptive innovation in the private sector are muted or absent in the public sector. Moreover, government rules and regulations often prevent the “less good,” potentially disruptive option from even entering the market for public services. Even so, the lack of Disruptive Innovation in government is not inevitable. Government actually has certain built-in advantages it can use to overcome some of its distinct structural obstacles and encourage and shape disruptive innovation. Let’s consider some important points:

Governments can shape the markets in which they operate

Government’s enormous buying power has the potential to shape and create markets in ways that can deliberately foster Disruptive Innovation. At $500 billion annually, the U.S. government, for example, is the world’s largest purchaser of goods and services. In dozens of economic sectors, from K-12 education to defense, from transportation infrastructure to health care, government is either a dominant or the dominant buyer in the market. The public sector already plays a major role in each of these markets, whether intentionally or not. Instead of simply supporting status quo approaches whose costs typically increase over time, public agencies can use their buying power to steer markets where they are a major buyer or deliverer toward more low-cost, disruptive approaches. This often means opening up the market to new, low-cost providers.

Thinking of the public sector as a “public service economy” with multiple market segments and, potentially, thousands of providers is a useful starting point in seeing opportunities for Disruptive Innovation.

Each government market involves trade-offs that drive up costs or reduce performance

Within each of the market segments of the public service economy there exist certain “trade-offs” or “constraints.” A trade-off defines the limits of what is possible at any given time. It forces you to choose between, for instance, a product that is very simple to use and one that might have far superior performance possibilities but is more complicated.

The most common trade-off in the public sector is between the “price” we pay for a public sector good and its performance. In education, for instance, it is generally assumed that better performance requires more teachers, smaller class sizes, and better facilities. Under the traditional model of schooling, reducing the number of teachers and increasing class size — as is happening across cash-strapped America today — is typically seen as harming performance.

The same perceived price-performance trade-off plays out across the public sector. Better intelligence capabilities require governments to spend large sums on expensive technologies such as satellites. Safer streets require more prisons. Greater national security means more bombers and more boots on the ground. Reduced traffic congestion requires more roads, bridges, and tunnels. Better performance and capabilities inevitably seem to involve paying more.

Other trade-offs exist as well.

  • A common one in government is the trade-off between convenience and quality.
  • Government stimulus spending exemplifies another traditional trade-off: that between speed and quality. The pressure to move quickly vastly increases the likelihood of fraud, waste, and abuse. Cost overruns, time overruns, cancelled projects, poor project selection, bid rigging, false claims, corruption, and kickbacks are just a few of the consequences of trying to move too fast to spend public money.
  • Access versus performance. From schools to policing to libraries, wealthy communities typically can afford to provide more and better public services than poorer communities. They often pay their teachers higher salaries, have more police officers, and offer residents better amenities.

Opportunities for Disruptive Innovation: Cases in the Public Sector

Transforming criminal justice with electronic monitoring

For decades, politicians have offered voters a stark choice: less crime and greater safety means tougher sentencing laws and a great deal more money spent on incarceration. Fewer prisoners, in turn, were seen as equaling higher levels of crime.

This perspective has dominated criminal-justice thinking in much of the world, and nowhere more so than in the United States, which houses a higher percentage of its population behind bars than any other country. With less than 5 percent of the world’s population, America has nearly one-quarter of the world’s prisoners.

This rise in incarceration came at a huge monetary cost. U.S. state corrections costs now top $50 billion annually and consume one in every 15 discretionary state budget dollars. Prison costs now trump higher education costs in some states. California, for instance, spends 10 percent of its general revenue on prisons and only 7 percent on its higher education system of 33 campuses and 670,000 students. And the social cost for many minority communities, where a large percentage of the young men are now locked up, is staggering.

The technology with the greatest potential to break this trade-off and disrupt traditional incarceration originated as a way to monitor the eating habits of cows. For years farmers have used radio frequency-identification (RFID) tags to keep track of their cattle.

Today, the technologies involved in electronic monitoring include home monitoring devices controlled by radio, wrist bands and anklets tracked by global positioning systems (GPS), alcohol testing patches, and even voice recognition.

The criminal justice system uses electronic monitoring (EM) technologies primarily for offender tracking, confirming that offenders are where they are supposed to be or are prevented from approaching identified high-risk areas. For example, authorities can be alerted when a sexual offender approaches a school or playground.

In addition to direct savings, EM also creates significant savings in opportunity costs. The Pew Charitable Trusts estimates that “two-thirds of male inmates were employed and more than half were the primary source of financial support for their children” before beginning to serve their sentences. Placing these offenders behind bars, at an enormous cost to government, also removes them from their jobs. They are no longer providing tax revenue to their communities and can no longer provide for their families, increasing the demand for government resources.

Will EM disrupt how we think about incarceration for non-violent offenders? Only time will tell, but as governments are forced to seek cost reductions and innovative ways to use existing resources, EM is climbing the productivity curve.

Already, new devices including alcohol detection patches are augmenting EM by monitoring and thus discouraging specific behaviors, such as consuming alcohol or drugs. These technologies force the criminal “to monitor himself … effectively outsourcing the role of prison guard to prisoners themselves.”

Several governments have made concerted efforts to spur the more rapid adoption of electronic monitoring. The United States is believed to be the biggest subscriber to electronic monitoring. More than 20 different electronic monitoring companies provide monitoring for more than 100,000 offenders, according to best estimates. Other countries are moving rapidly in this direction.

K-12 education

Today’s students have more choices in classes, better facilities, and a wider variety of learning experiences than ever before. But the fundamental way in which most children are taught has not changed significantly in more than a century. And while education has become considerably more expensive, it has failed to achieve a corresponding increase in performance.

The trade-off schools have faced is between the kind of standardized teaching that occurs in most public-school classrooms and the more personalized instruction a student might receive from a tutor or at an elite prep school. Smaller class sizes, smaller schools, “schools within schools,” and other reforms all reflect attempts to move up the performance curve. The trade-off, however, is that such reforms typically are quite expensive.

Online learning, or a blended learning environment of digital learning and traditional instruction, may be capable of breaking this trade-off. How? By personalizing the learning experience according to individual student learning styles and pace, and doing so without increasing the number of teachers. Within five years, most learning platforms will have a smart recommendation engine similar to iTunes Genius that can create customized learning experiences, predicts Tom Vander Ark, CEO of Open Education Solutions. These new, customized learning systems typically are based in the “cloud” and accessible to students anywhere.

Health care, defense, development aid and emergency response are additional areas for Disruptive Innovation.

Fostering Disruptive Innovation: A Framework for the Public Sector

Disruptive Innovation has three principal components:

  • Focus: Identify what needs to be accomplished in the short and long term. How do you do the job today? What will change over time?
  • Shape: Decide how and where to start disrupting. What are the current trade-offs? How can they be broken? What is the enabling technology? What is your disruptive hypothesis (defined by Luke Williams as “an intentionally unreasonable statement that gets your thinking flowing in a different direction”)? This can get policy makers thinking in radically different directions.
  • Grow: Protect and nurture Disruptive Innovation. Start with an underserved market. Autonomy by providers is key here.

Conclusion: Getting More From Less

The deep austerity facing most governments around the Western world has become the new normal. In the wake of this, we hear a steady refrain from politicians and pundits to “do more with less.” Such exhortations tend to be met with deep skepticism — and often disdain — by the public servants charged with actually figuring out how to do this. The cynicism is not misplaced. Budget cutting is typically an exercise in using the blunt instrument of across-the-board cuts — in other words, doing more of the same with less money. The inevitable result, however, is not more for less but less for less. To get more for less requires doing things differently. This entails new business models, new entrants, new technologies, and the willingness to reduce or phase out existing practices. From homeland security to education, from health care to defense, what is needed are innovations that break traditional trade-offs, particularly that between price and performance. Disruptive Innovation offers a proven path to accomplish this goal and, in the process, transform public services.

William D. Eggers, responsible for research and thought leadership for Deloitte’s Public Sector industry practice, is a leading authority on government reform. Laura Baker is a senior consultant in Deloitte Consulting’s Federal Technology practice and an alumna of the GovLab Fellows Program. Audrey Vaughn is a manager in Deloitte Consulting’s Strategy and Operations practice and an alumna of the GovLab Fellows Program.