M.E. Sharpe, Inc.

http://www.jstor.org/stable/3381012 .

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

M.E. Sharpe, Inc. is collaborating with JSTOR to digitize, preserve and extend access to Public Productivity &
Management Review.

http://www.jstor.org
 COMPREHENSIVE PARADlGMS

Reinventing Government

DavidOsbome

else?
haveyou changedthathaschangedeverything
W1zat

Whenpeoplehear"reinventing government," theirfirstthoughtis thatI

amreferringto the federalgovernment. Butthesolutionsto ourcountry's
problemsarenot comingfromWashington,D.C.Theyarecomingfrom
stateandlocalgovernments allaroundthecountry.Theyarecomingfrom
the kindof peoplewho havewon ExemplaryStateandLocalawards.
Fiscalpainhasbeenintense,andthe sad thingis thatthe painis not
going to go away,even when we come out of this recession.The fiscal
problemsareduein partto therecessionandin partto spendingthatis out
of control.Twoof the largestexpendituresitemsin stategovernmentare
Medicaidandcorrections.Medicaidcostshavegoneup 20 percenta year.
Correctionscosts havenearlyquadrupledin the 1980s.The demandfor
theseserviceswill continueto growas ourpopulationandprisonsage.
Wearein fora decadeof excruciating painatstateandlocallevels.The
federalgovernmentis facinghuge deficits,yet it continuesto mandate
servicesat stateand local levelswithoutthe moneynecessaryto deliver
theseservices.
Thefederaldeficitthisyearis $3S0billion;nextyearit is projectedat
$400 billion.I thinkwe havelost sight of whatthatmeans.Indexedfor
inflation,this $400 billiondeficitwouldbe the size of the entirefederal
budgetin 1964.Theinterestpaymentson the debtareover$200billiona
year.ThatmeanstheaverageAmerican familyis payingmorethan$3,000a
yearin incometaxeson theinterestalone.Bytheyear2000it willbe $S,000
perfamilybeforewe get a penny'sworthof government fromWashington.
Thepublicis frustrated, angry,disgusted,andreadyforchange.A CBS
Newspoll in lateMayshowedthat51 percentof respondentsbelievethat
thefederalgovernmentneeds"fundamental changes"; another34 percent
believeit needs"acompleterebuilding. "Inotherwords,85 percentofthose
pol:ledbelievefundamental changeis neededin Washington.As a result,
everypoliticianin Americais desperateto find new ways to operate.
Providingmoreserviceswithfewerdollarsis whatproductivity is allabout.
REVIEW,vol. XVI, no. 4, Summer 1993 i) Jossey-Bass Publishers
a MANAGEMENT
PUBLICPRODUCTIVITY 349
350 Osborne

Government todayconsistsofa lotofverydedicatedpeopletrappedin

bad systems budgetsystemsthatprovideincentivesto wastemoney,
personnelsystemsand civil servicesystemsthat are cumbersomeand
providelittle incentive.Thesesystemsand othersmust be changedif
government is to improveits performance.
Butwhathasbeendoneinstead?Governments cut servicesthatare
politicallyvulnerable. Thatis similarto someonecuttingoffa fewfingers
andtoesinsteadofgoingona diettoloseweight.Unfortunately, atthelocal
levelwe arebeyondfingersandtoes:we areup to ourhandsandfeet,and
it is gettingverypainful.
Thetaskis to makegovernment moreproductive,do morewithless,
withoutcuttingoff our handsand feet. The firststep is to identifythe
underlying problem.Whydidgovemmentbecomeso bloatedandineffec-
tive?Theansweris fairlysimple.It has, of course,manyparts,but one
realityunderliesmostofthem,anditis acommonsense reality:wearedoing
businessin an outmodedway.
Remember thatthesystemswe arefrustrated with,publichousingor
public education,for example,actuallyworkedwhen they were first
created.Someworkedverywell.Butthatwasfiftyora hundredyearsago,
andtheworldhaschanged.Unfortunately, toooftenthepublicsectordoes
not change.
Thinkabout the way public institutionswere createdduringthe
industrial era.Typically, therewasabigproblemtosolve;apublicprogram
wassetuptosolveit;bureaucracy grew;civilservantswerehiredtodeliver
services.Allthiswasdonein a verytop-down,hierarchical fashion,witha
greatmanyrulesand regulations.The approachwas very impersonal.
Deliveringstandardized servicesto a mass market the same kind of
educationforeverychild,the samekindof welfarecheckforeverypoor
person was consideredthe rightway to do things,the fairway to do
things.
Professionals andbureaucratshadall thecontrol,andthepeoplethey
servedweredependenton them.Monopolieswerecreatedthathad no
competitors andtherefore beganto takeclientsforgranted.Clientsbecame
captives;overtimetheirneedschanged,butthe monopoliesdidnot.
Thisis a roughoutlineof thewaygovernment didbusinessin 1940.At
the timeit was the modernway;it washow the privatesectordelivered
services,theGeneralMotorsorganizational model.Todaythebureaucratic
monopoliesfunctioninefficiently.Envisionthesetop-down,centralized,
bureaucratic monopoliesin a periodof rapidchange.Thinkof thepaceof
change,thetechnologies wehaveallbecomeaccustomed to,frompersonal
computersand electronicmail to fax machines,automatictellers,and
cellularphones.Thesetechnological changeshaveanenormousimpacton
government.
Whenthepostalservicewascreated,theonlywaytocommunicate with
ReinventingGovernment 351

distantpersonswasto senda letter.Thenthetelegraphwasinvented,then

the telephone,thensatellites,fiberopticcables,computers,andmodems.
Onepublicmonopolymanagingthatcommunications marketplace today
is unthinkable.Underthe competitivepressureof all thesetechnological
advances,publicmonopoliesarecomingapartat the seams.
Societyis beingtransformed not onlyby technologicalchangesbutby
social changesas well. Considerhow rapidlytwo-incomefamiliesand
single-parent familiesbecamethe pattern.Only27 percentof households
in the UnitedStatestodaystill fit the traditionaldefinitionof a family.A
generationago we werea masssociety.Peoplewatchedthreetelevision
networksand readthreenews magazines.Theylookedat and readand
talkedaboutthesamethings.Todaywe havebecomeusedto hundredsand
hundredsof choices.In the publicsector,however,one size still fits all.
Choiceis somethingthatmustbe addressedin the publicsector.
In this environmentof rapidchange,the old top-downbureaucratic
monopoliesdeliveringstandardized servicesarenot effective.Tobe effec-
tive todaysan organizationmustbe lean,faston its feet,responsiveto its
customers?capableof adjustingto corlstantchange,able to improve
productivitycontinually.In otherwords,it needs to be entrepreneurial
ratherthanbureaucratic.
doesnotmean"forprofit."Thewordis farbroaderthan
Entrepreneafrial
that.Anentrepreneur shiftsresourcesoutofanareaoflowproductivity and
minimalyieldinto an areaof higherproductivity andgreateryield.Is that
somethingpublicmanagerscando?Absolutely.Itappliesto publicsector,
it appliesto nonprofitsector,andit appliesto privatesector.It is exactly
the challengethe privatesectorhasbeenstrugglingwith forten years.
Tenyearsago,duringthelastrecession,thebookInSearchofExcellence
was published.It talkedabout restructuringa corporationto makeit
effectiveagainin a radicallynew environment.It launcheda decadeof
effort.Theexcellencemovementandthe totalqualitymanagement move-
mentwereintroducedas effortsto restructure corporations, to makethem
moreentrepreneurial, moreflexible,moredecentralized. Thatmovement
was designedto empoweremployeesintroducequalitycircles,measure
performance, andfocuson quality.
In the currentrecession,ten yearslater,we arebeginningfinallyto
wakeup to thenecessityof doingthe equivalentin the publicsector.The
toughquestionisshowdoyoudoit?Howdoyoutakeabureaucratic system
andtransformit into an entrepreneurial system?To answerthis question
TedGaeblerandI spentfiveyearstravelingaroundthecountry,examining
themostentrepreneurial publicorganizations we couldfind.Welookedat
stateagencies,schooldistricts,andpublichousingauthorities.Welooked
atpartsof thePentagon.Weaskeda verysimplequestion:i'Whathaveyou
changedthathasehangedeverythingelse?"
We foundten principlesthatunderscorehow publicentrepreneurial
352 Osborne

organizations structurethemselves
andmovefromcentralization todecen-
tralization,frommonopoliesto competition,frombureaucratic mecha-
nismsto marketmechanisms, fromfundinginputsto fundingoutcomesor
results.Alltenprinciplesneednotbepresentin oneagency;in factzusually
theyarenot.Inmostentrepreneurial organizations,however,we typically
foundat leastsix simple?commonsense principlesin practice.

CatalyticGovernment
Thefirstprinciple,probablythemostbasic we labeled;icatalytic govern-
ment."Itembracestheideathatgovernment shouldsteerratherthanrow.
In the old bureaucratic model,to solve a problem,a bureaucracy was
createdandstaffedbycivilservants,andtheydeliveredthepublicservice.
Thatis a fairlyexpensivewayto do business.
To do itsjob, thegovernment neednot alwaysraisetaxes,hiremore
people or delivermorepublicsenices. Therearealternatives. Weidenti-
fiedthirty-sixalternatives to traditional
publicservicedeliveryalreadyin
use in this country.To managea flexibleorganization, it is necessaryto
incorporate someof thesealternatives.
Itis verydifficultto changea bigorganizationif inefficientemployees
mustbe retainedbecauseof theircivilservicestatus.In thatsituation,a
businesswould becomecaptiveto a sole sourcesupplierfor its most
importantresource.No businessdoesthat andgovernments shouldnot
either.Government needsto separatesteeringfromrowingso thatthose
whoaresteeringhavesomeflexibility.

CompetitiveGovetnment
A relatedprincipleis thatof competitivegovernment, of injectingcompe-
titioninto servicedelivery.The old modeluses monopolies.The new
model,increasingly, usescompetition. Competition is a fundamental force
thatleavesthe organization no choicebutto heightenits productivity.
Oneof myfavoriteexamplescomesfromPhoenix,Arizona,wherein
1978,duringa taxrevolt,thecitycouncildecidedto contractout garbage
collection.Themanagerof the department of publicworks,RonJensen,
decidedhe wantedhis department to bid on the contractalongwith the
privatecarters.Competitionfromoutsidevendorswas the incentivethe
department neededto increaseits productintyandefficiency.
Managers beganby evaluatingtheirequipmentandfoundthatit was
outmoded.They experimentedwith one-drivertrucksequippedwith
automaticside arms that pickedup the garbage.Then management,
realizingthatdriversknewwherethe slackwas andwhereproductivity
couldbe improved,askedthe driversto redesignthe routes.Thedepart-
mentcreatedqualitycircles,labor-management committeesto improve
ReinventingGovernment 353

communications, andbonusandawardsprograms toprovideincentives.By

1988the departmentof publicworkswonbackthe contractandwasable
to providesanitationservicesforthe entirecity at halfthe 1978 cost.

Mission-DrivenGovernment
Thethirdprincipleis thatof mission-driven government. Publicorganiza-
tionsaredrivenbytwothings- rulesandbudgets.Wefoundthatentrepre-
neurialorganizations tendtominimizetherulesandfocuson theirmission.
Theyask verybasicquestions:"Whatis our mission?Whatis our goal?
Whatarewe tryingto accomplish?" Oncegoalsand missionsare clear,
managersare allowedto manage.Entrepreneurial organizationslet the
managersdeterminethe bestwayto accomplishtheiragency'smission.
Thetraditional line-itembudgetsystemincorporates rulesthatencour-
agemanagersto wastemoney.In the traditionalline-itemsystem,money
is cut up into manyparts,andit is oftendifficultto moveit fromone line
itemto another.If everypennyin everyline itemis not spenteveryfiscal
year,it is lost andless moneyis allocatedthe followingyear.Thebuilt-in
incentiveis to wastemoney.
Thereis averysimplesolution,which,to thebestofmyknowledge,was
inventedin Fairfield,California.With the passageof Proposition13,
Fairfieldlosta quarterofits revenueovernight.Outof desperation,thecity
decidedto changeits budgetsystem:Lineitemswereeliminatedandeach
agencywasassigneda budgetnumber.Agencieswereallowedto rollover
unexpendedmoneyfromone fiscalyearto the next. This changesaved
Fairfieldmillionsof dollars.
Anothervery positiveoutcomewas the changein the behaviorof
managersand employees.Empoweringthe managerand employeesto
designtheirownbudgetsenhancedmotivationandcreativity. Budgetssoon
reflectedthe mission and needs of the agencies;they were no longer
dictatedbylineitemsorbyindividualsfarremovedfromagencyoperations.

Results-OrientedGovernment
With the eliminationof line itemscomesthe question,Howdo we hold
managers accountable? Theansweris that,to makethiswork,we mustalso
embracethenextprinciple:Accountability mustshiftfrominputs,suchas
line items,to outcomesandresults.We needa governmentthatmeasures
the resultsof whatan agencydoes,andties incentivesto achievingthose
results.
Most public agenciesdo not have the slightestidea what the real
outcomesof theireffortsare.Theycannottell whattheyarebuyingwith
theirmoney-how muchstudentsarelearning,howcleantheirstreetsare,
whatimpact"environmental protection"is havingin the world.
354 Osborne

Entrepreneurial governments havelearnedtomeasuretheoutcomesof

whattheyspend-how cleantheirstreetsare,howmanyjob traineesget
jobs,andwhattheircareertrackslooklike.Theyhavelearnedto measure
howsatisfiedtheircustomersarewiththetransitsystem,theparks,andthe
schools.
Sunnyvale,California,in the SiliconValleyand full of computer
experts,is an exampleof a citythathasput all theseprinciplestogether.
Theystartedabouttwentyyearsagoto measureeverything, andtheyknow
theefficiencyandcost-effectiveness of everything
theydo.Asa result,the
citycouncilno longerhasto voteon lineitems;theyvoteon servicelevels.
Theydecidewhatservicelevelto buy.
Take,forexample,streets.Supposeone-thirdof thestreetsarein bad
conditionanda thirdofstreetsarein faircondition.Councilmembers want
to gethalfof thestreetsin goodconditionin thenextbiennium.Theyask
thestaff,"Howmuchwouldthatoutcomecost?"Thestafftellsthem,and
theydecidewhetherto buyit andhowmuchof it to buy.
Orlet us saythattheyhavea customersurveyin which70 percentof
peoplegivepositiveapproval ratingstocityparksandrecreation
programs.
Theydecidetheywantto raisethatratingto 80 percent.Theyaskthestaff,
"Howmuchwouldthatcost?"Thestaffcomesupwiththenumberandthe
citydecideswhetherto buy.Nowan incentivehasalsobeencreated.
Ifyouarea managerwhoseunithasa certainperformance target,and
you exceedit, youareeligibleforup to a 10 percentbonuson yoursalary
thatyear.Thatis oneincentiveto dobetter.Butonceyouhaveexceededit,
thelevelyou hitbecomesyourexpectedbaseforthenextyear.Sunnyvale
thusconstantlyrationstheperformance upward.WiththissystemSunny-
valeincreasesitsproductinty4 percenta year,yearafteryear.Intenyears
theycancut the costof deliveringthesameservicesin half.Thiskindof
budgetingis spreading. Manyothercitiesaredoingit alloverthecountry.
ThePentagon is nowbudgetingthewaySunnyvale budgets,andexactlythe
sametrendcanbe seenin othercountriesas well.

Customer-DrivenGovernment
Thebestwaytotiespendingtoresultsis togivetheresourcetothecustomer
andlet thatcustomerchoosetheseruceprovider.Providers areforcedto
be responsiveto theircustomers,becausethey will be out of business
otherwise.Providers thatmustcompeteareconstantlytryingtolowercosts
andraisequality.Customersvaluea choiceof servicesbecauseall have
differentneeds.
Customers is a fairlynewwordforgovernment andcustomerchoice
soundslikea radicalnotion.Butthisis nota newidea.Arguably thesingle
mostsuccessfulsocialprogram in U.S.historywastheG1Bill.AfterWorld
WarII,a generationof youngmenreturnedhome.Thegovernment pro-
ReinventingGovernment 355

videdthemwithan education,andtheybecameproductivecitizens.The
governmentdidnot buildveterans'universities.Instead,it gavetheveter-
ans vouchersand permittedthem to select the collegesthey wantedto
attend.
In healthcare the governmentchose the traditionalroute. It built
veterans'hospitalsandassignedveteransto hospitals.The hospitalshad
captivecustomers.Considerthedifferencein qualitybetweentheveterans'
hospitalsystemandeducationunderthe GIBill.Youwill beginto appre-
ciatethepowerof puttingtheresourcein thecustomers'handsandletting
the customerschoose.
Thevouchersystemis notalwaysthebestway.Inpubliceducation,for
example,I do not thinkit is the bestway,forequityreasons.Butsimilar
resultscanbeachievedin publiceducationbychangingthefinancesystem
to equalizespendingperchild.Lettheparentspicktheschoolandhavethe
moneyfollowthe child.In essence,thatis whatSchoolDistrict4 in East
Harlemdid ten yearsago.
Community SchoolDistrict4 wasNewYorkCity'sworstdistrictin the
1970s.Only 15 percentof the studentscouldreadat gradelevel.Out of
frustrationanddesperation,thedistrictcreatedanalternative
schoolsystem
thatprovedverysuccessful.In 1982,it expandedto a fullchoicesystemat
thejuniorhighlevel.Parentscouldchoosewhatschooltheywantedtheir
childrentoattend.Suddenly,theschooldistricthadascorecard.Itcouldtell
whichschoolswereperforming, becausetheywerein demand.Schoolsthat
werenot performing werenot in demand.
Schoolswereforcedto competewithotherschoolswithinthe district
to maintainandincreaseenrollment.Thesuccessof thealternative school
systemcan be attributedto the fact thatthe systemis customerdriven.
Parents,as customershada choice.Themeasureof the district'ssuccess
is that,by 1989,64 percentof its studentswerereadingat gradeleveland
319 studentshadenteredselectivehighschools doublethecityaverage.
Thatis the powerof choice,of lettingthe customerdrivethe system.

EnterprisingGovernment
Thelastprincipleis thatof enterprisinggovernment-theideaof earning
ratherthanspending.About99.99percentof energyin mostgovernments
is focusedon decisionsaboutspendingmoney;.01 percentis focusedon
decisionsabout earningmoney.Whatwould happenif the incentives
changed?Whatwouldhappenif employeesweregivenabout1S percentof
therevenueforanynewearningresultingfromtheirideas,orif departments
kepthalfof anythingnew theyearned?I will giveyou one example.
Orlando,Florida,has manysmalllakes;it also has morehotelsthan
NewYorkCity.Eachof thosehotelshasa hugeparkinglot.Whenit rains,
the waterrunsoff theparkinglots, collectsgasolineandotherchemicals,
356 Osborne
and runs into lakes. The lakes thus accumulatea terribleamountof
pollution,requiringtremendous investmentin publicinfrastructure.
The
cityof Orlandocreatedan enterprisefund,"PublicStormWaterUtility,"
and fundedit with the fees collectedfromparkinglots the largerthe
impermeable surface,thehigherthefee.If hotelownersputin theirown
drainageandtreatment systems,thefeeis reduced.Throughtheenterprise
fund,thecityof Orlandocreatedanincentivefortheprivatesectortosolve
anenvironmental problem.Inaddition,Orlandodevelopeda wayto raise
money for the publicinfrastructure that was neededto solve related
problems.

Conclusion
Those are six of the principlesthat we found in our investigations.
Entrepreneurial governments arecatalytic,competitive,missiondriven,
resultsorientedcustomerdriven,andenterprising. Theotherfourprin-
ciplesareequallycommonsensical. Decentralizationmeansempowering
employees,pushingdecisionsdown fromone level of governmentto
another.Community-owned governmentpushescontrolout of bureau-
cracyandinto thecommunity.Anticipatory government stressespreven-
tionratherthancure.Finally,market-driven government explorestheidea
of changingmarketsratherthanalwaysusingpublicprogramsto solve
problems.
Theseten principlescan be used to addressmanyof the problems
governmentand society face. Incorporating these principleswill help
managersdevelopnewwaysto addressexistingproblems.Thechallenge
forleadersin the 1990sis howto restructuredysfunctionalpublicsystems
andmakethemeffectiveagain.Thereis muchthatwe cando. Myhopeis
thatwe will thinkseriouslyabouttheproblemswe faceandtheprinciples
I havediscussedandfindonenewthingthateachof us cando to become
partof thesolution.

David Osborneis coauthorof the highly acclaimedbook Reinventing Government.