Do Public-Sector Companies Innovate?
Public sector companies have special structures and organizational attributes that, in some cases, slow down or even block innovation.
In this chapter, we explore how innovation is different in public sector organizations and the factors that might affect the velocity and pace of their innovation efforts. We ask our leaders to point to the most ‘innovative public sector companies out there’ and share their thoughts on how to accelerate public sector innovation and even rethink public sector companies with innovation at the core.
Steven O’Kennedy, Enrique Dans, and Jesse Nieminen share their valuable perspectives.
Excerpt from 60 Leaders on Innovation (2021)
Steven O’Kennedy
Associate Director of Engineering — Global Centre for Innovation at Accenture
Every company innovates — even those who think they can’t, think they don’t, or fail because they are left behind by their competition; even public sector companies — which are often externally thought of as slow-moving and outdated. So, the key value to measure should not be “can a public sector company innovate”, but around their ability to innovate at speed and to innovate wisely.
Public sector companies can and do innovate — and can do so at speed — when the need arises. - Steven O’Kennedy
Firstly though, it is worth acknowledging that there are challenges in the public sector that are more prevalent than in other sectors and make innovation a challenging problem to approach:
- The size of the workforce. In the private sector, businesses are often classed by size into small (maybe <100 employees), medium (100–1,000), large (1,000–10,000), and very large (10,000+) and most companies are not very large. In comparison, it was estimated in 2020 that there were over 5.5M people working in the public sector in the UK, with ~32% of those (~1.76M)[1] solely working in the NHS. This is a staggering difference in scale even in comparison to some of the largest corporations in the world, for example, Microsoft (~166,000)[2], Volkswagen (~670,000)[3], or Amazon (~1,125,000). This huge volume of employees creates a change management problem of a scale undreamt of by 90%+ of other companies. It can also lead to problems with inertia and make the enactment of change and innovation programmes slow and unwieldy. The sheer size of the public sector bodies also necessitates large organisational structures, divisions, and sub-divisions which complicates communication and hampers the structuring of effective innovation programmes.
- A unionised workforce and a history of change made (or perceived to be made) for the wrong reasons. While this situation is not in any way unique or specific only to the public sector, it is common for public sector workers and their rights to be protected and watched over by one or more unions, or other collective bargaining agents, acting on their behalf. These unions play a necessary part in the fabric of the economy ensuring that the employees cannot be treated unfairly or be disadvantaged. In this environment, change and innovation can be difficult to achieve because the vested interests of the multiple parties on all sides often do not align. There can also be problems with perception around the reasons and goals of change. Public service bodies are not driven by profitability or market share in the same way as private companies, but they do share the key metrics of cost and value of service. Unfortunately, all too often change in the public sector has been driven solely by the former based on government budgets and policies. Because of this, a large number of changes or innovation programmes encounter resistance — they are perceived by public servants as changes that were motivated solely by the desire to cut costs[4]. This brings up additional concerns that should be taken into account when planning an innovation programme — how to protect workers alongside an innovation agenda and how to avoid this kind of perception.
- A unique decision-making structure. Private sector companies in the S&P 500 change their CEO on average somewhere around every 10.2 years[5]. Public sector bodies have a slightly different model, at least in democratic countries, where the public has the potential to change the key decision-maker every 4–5 years or so. This is also slightly more dramatic: when governmental power shifts, it often means that a new party takes over the main policy-making roles. Compare this to the private sector — how often does a private company replace its CEO and the entire board of directors at the same time? Worse, in some countries, e.g. U.S, some key public sector positions are politically appointed and may also change at the same time, possibly along with their staff — so the CEO, board of directors, and key senior management changing all at the same time.
This backdrop presents a reasonably unique challenge around long-term planning — as bodies are subject not only to budget and policy changes but also to change in leadership direction and goals. Achieving meaningful innovative change then potentially means [a] prioritizing and aligning the long-term objectives in early stages — to give some room for continuity, [b] keeping innovation programmes and goals small and incremental, [c] hoping that the need for change is so obvious that the direction will remain constant even when the hands on the wheel change.
But even in the face of all these challenges, public sector innovation, reformation and change remain possible and present. One only has to look at the recent COVID19 crisis to see ample evidence of rapid innovation coming from all aspects of public bodies around the world — from the initial mobilisation of personnel to monitor and attempt to slow the spread of the virus, through the creation of economic stimulus and support schemes for businesses and individuals to the largest simultaneous global vaccine drive in human history[6].
The COVID crisis provides ample evidence of innovation from public bodies worldwide. - Steven O’Kennedy
No one will argue that these initiatives have been perfect or perfectly executed — some will even go further and claim that things need to be better. But it’s not possible to argue that the public bodies have not succeeded in adapting, innovating, and evolving themselves in order to achieve what’s been done. And faster, perhaps, than was previously considered possible. So, public sector companies can and do innovate — and can do so at speed — when the need really arises.
So why does this question arise in the first place? Where does the image of public sector bodies not innovating come from? Perhaps we should consider that innovation looks different from everyone’s perspective depending on what they are used to, what they want to do, and what they have to deal with. We should set our expectations for what innovation is, differently for public sector vs private sector companies because they face different sets of challenges and have different goals — in the same way that we set our expectations for innovation differently for an SME with moderate growth targets versus a technology giant with an $18.75M R&D budget[7].
Steven O’Kennedy is the Director of Engineering in Accenture’s Global Innovation Centre at The Dock in Dublin. After working on large scale system implementation and technical transformation projects for many years as a technical architect, he now focuses on incubating innovative products and services centred around modern software architecture, AI and cloud technologies.
Enrique Dans
Professor of Innovation — IE Business School
Public sector companies are usually not subjected to the same market forces that drive innovation in the private sector, and therefore, have more difficulties when justifying the investment to promote innovation. Besides that, most public sector companies offer lifetime employment, and that level of stability, in many cases, tends to promote a lack of innovation. Narrowly defined functions and a lack of focus on improvement make innovation in public-sector companies a true challenge that typically depends on individual initiatives.
To accelerate the innovation process in public sector organizations, it is crucial to establish a citizen-centric culture. - Enrique Dans
In order to accelerate the innovation process in public sector organizations, it is crucial to establish a citizen-centric culture, and make sure that innovation gets directed towards improving strategically designed metrics obtained from the users. Creating incentives to spur innovation is challenging in public sector companies, but not impossible, as is bringing actors from different departments together to collaborate through the innovation process.
Open data policies also improve innovation, making it visible throughout the process and making sure, via transparency, that innovation gets properly measured and perceived by all stakeholders. In many countries, the most innovative public sector agencies are those related to the ministry of finance and treasury: taxing citizens requires a huge amount of supervision and dynamism to stay informed about every new potential loophole. Combined with extremely clear and straightforward metrics, this provides a strong foundation to try to establish a culture of innovation.
Enrique Dans is a professor of innovation at IE Business School since 1990, and Senior Advisor on Innovation and Digital Transformation at IE University.
Jesse Nieminen
Co-founder & Chairman — Viima
If innovation is difficult for large corporations, it’s usually even more so for public-sector companies. Public sector organizations are often more complex with even more stakeholders, interests, and metrics to consider — it isn’t as simple as just making as much money as possible. In addition, many of the decisions being made can be political by nature. I do personally consider the majority of politicians in most countries to be well-intentioned, but unfortunately, they aren’t usually known for their ability to run organizations effectively. Plus, traditionally the public sector hasn’t necessarily been the employer of choice for dynamic and ambitious innovation-minded people.
In this sense, many public sector organizations don’t necessarily have the ideal prerequisites for innovation. But that isn’t to say that the public sector couldn’t innovate — on the contrary! It is exactly because there’s been so little innovation, that many of these organizations are actually ripe for plenty of innovation and positive change. It all starts by first clarifying the priorities for the organization: what are your true goals, how could you create as much value as possible for citizens and taxpayers with as little resources as possible? With that clarified, it usually isn’t too difficult to come up with a large number of ideas and innovations that could help move the organization in the right direction. Then once you’re off the ground, accelerating innovation happens just like it does in any other organization: by creating a systematic process of identifying the most promising ideas and making as many of those into reality as quickly as possible.
In my experience, many public sector organizations, just like other large companies, are organized in functional silos. While in theory, this can be a more efficient way, it usually leads to a lot of communication problems, misaligned incentives, and increased complexity in decision-making. The way to solve this is by reorganizing at least the most important parts of the organization in order to best serve the interests of the client — in this case, the taxpayer. By ensuring that all the key skills and capabilities are included in each of these units, you will get an organization that is more effective in creating value — and this is what innovation is ultimately all about.
The best example of public sector innovation would have to be Estonia at large. - Jesse Nieminen
I am aware of a number of public sector organizations that have done a pretty good job with innovation, for example in the UK and Finland. Still, the best example would have to be Estonia at large. The country has systematically embraced digitalization and hasn’t just adapted the same practices that the rest of the world seemingly uses. They’ve really approached the whole public sector with fresh eyes, and that’s led to some pretty remarkable results, such as their e-residency program.
Jesse Nieminen is the Co-founder, Chief Growth Officer & Chairman of Viima, and an entrepreneurial leader with a passion for building businesses and growing organizations to scale in the digital age.
[1] Public sector employment by parliamentary constituency — House of Commons Library
[3] List of largest employers — Wikipedia
[4] Public service perceptions (irishtimes.com)
[5] New Thinking Emerges on Optimal Tenure for a CEO — WSJ
[6] Inside the Mammoth Undertaking of Global Vaccine Distribution (who.int)
[7] The Critical Role of High-Tech R&D in the COVID-19 Era | Technology | TechNewsWorld
Excerpt from 60 Leaders on Innovation (2021) — the book that brings together unique insights and ‘practical wisdom’ on corporate innovation. Created and distributed on principles of open collaboration and knowledge sharing: Created by many, offered to all; at no cost.
