new public management | INLOGOV Blog

Lasse Oulasvirta & Ari-Veikko Anttiroiko

Business models in local government?

Since the 1960s a range of business management models have been introduced in the public sector, including accrual accounting, management information systems, activity-based cost management, human resource management, customer relationship management and the like, which in most cases are in line with the tenets of New Public Management (NPM). One of the newcomers in this list is comprehensive risk management, known as Enterprise Risk Management (ERM) in the private sector. This normative risk management model, of which the most well-known version is COSO ERM, developed by the privately run Committee of Sponsoring Organizations of the Treadway Commission (COSO), has been promoted widely to all organisations, local governments included. Using survey data, our article in Local Government Studies describes and explains the diffusion and adoption of comprehensive ERM in local government in Finland.

(Source: Kuntajohtajan johtajasopimus (”Director contracts for municipal chief executive officers”), a publication of the Finnish Association of Local and Regional Authorities, 2016, p. 20)

What explains local governments’ reluctance to buy the idea of comprehensive risk management?

Our survey results support the argument that if comprehensive risk management is not obligatory, it is not widely used in local government. Our statistical analysis reveals that financial constraints explain to some extent the existence of comprehensive management in municipalities, while structural factors such as the size of municipalities do not, even though risk management is slightly more advanced in larger cities than in smaller local governments.

This compels us to ask whether the slow adoption is because of the special nature of RM as a managerial innovation. Such considerations direct our attention to the kind of intuitive cost-benefit assessment public managers are likely to go through when evaluating the needs and preconditions for the introduction of a comprehensive risk management model. Our assumption is that as a managerial innovation ERM lacks immediate benefit when assessed against the efforts and costs of its introduction and maintenance. It seems that the risk environment and institutional characteristics of public sector entities, including persisting silo mentality, do not provide a particularly strong incentive neither for politicians nor public managers to pursue voluntarily the adoption of such a model.

A need for tailored solutions

The question is not only about the nature of comprehensive RM as such (and the COSO ERM model in particular). We claim that part of the slow adoption is due to the insensitivity of the developers of such models and consequently also their models and tools to the needs and realities of public sector organisations. Thus, if business management models are not sufficiently tailored to the factual needs of local governments, their voluntary adoption is likely to be meagre.

This observation relates to the interplay between developers, consultants and local authorities, and points to private sector parties in particular, who should do their homework before rushing their potential clients in the local government.

Local choice matters

Lastly, our research implies that providing a condition for proper local choice may produce system level benefits, for local politicians, public managers and the front-line staff are in the best position to assess the suitability and benefit of each business model. In the case of comprehensive RM, for example, representatives of local government may see that this particular models is not cost-effective or may even appear to be insignificant in terms of its added value. This hints that new business models and management tools should not be too lightly imposed by the legislature on local governments – spontaneous evolution is as a rule better for creating cost-effective and resilient solutions. We may conclude that local government organisations, when given a general competence to decide on the conduct of local affair, are generally more rational and selective in adopting business models than generally assumed.

Lasse Oulasvirta is Professor of Financial Administration and Public Sector Accounting in the University of Tampere, School of management. His research interests include public sector financial management, budgeting, accounting and auditing. He holds PhD (Administrative Sciences) and M.A. (Business Economics) degrees.

Ari-Veikko Anttiroiko is an Adjunct Professor based in the School of Management, University of Tampere, Finland. He holds a PhD (Administrative Sciences) and MPhil and Licentiate (Philosophy) degrees. His main research areas include local governance, local economic development, smart cities, creative cities and public sector innovations.

Tutik Rachmawati

It is common knowledge that in the study of public administration, initiatives for improving the performance of public organisations are very much borrowed from the private sector. In 1993, Osborne & Gaebler, for instance, established ten principles to reach entrepreneurial government. They offered ways to develop entrepreneurial, flexible and outcome-oriented organisations in the public sector.

Furthermore, the concept of New Public Management, which emphasises economic rationalism and private sector management practices, has also been adapted across nations. The implementation of information technology into business practices has also driven public organisations to launch e-government to transform the way they engage with citizens and business. Recently, under the ideas of entrepreneurial government and New Public Management, the duties of many public organisations have been commissioned to other parties, including in the private sector.

It can be argued that the principles of Mesh Economy can appropriately be applied in public organisation for several reasons. Firstly, the principle of partnership and other parties’ involvement. Strategic Commissioning in public organisations stresses the importance of partnership and involvement of other parties. It aims at reducing overlap and duplications, and further creating scope for efficiency and savings. This is an idea that is very much in line with Mesh Economy which highlights business operation through a collaborative approach to providing organisations with better ideas that then allows customers to receive flexible and more sustainable products and services.

Secondly, the principle of sustainability and the global anti-waste approach in the Mesh Economy is similar to the principle of sustainable management of services and assets demands in strategic commissioning. Strategic commissioning focuses on the quality and value for money – not necessarily at lowest cost- so that more is achieved with less in an environmentally friendly way.

Thirdly, consumer driven free economy in the Mesh Business is similar with co-production in strategic commissioning of public organisations. While the Mesh Business sends people recommendations and/or advertising messages based on their personal behavioural patterns, co-production service users know things that many professionals do not know – hence services can be produced more effectively. Co–production conceives the services users as active asset-holders rather than passive consumers. Therefore, both Mesh Business and Co-production empower and build trust in customers/consumers. Customers in Mesh Business build trust by disclosing personal behavioural patterns, while in co-production users, citizens, partners and voters build trust in the work of the public sector including the risks of losing the shared assets with other parties.

Sharing is the future business of private sector, and it will also be the future of public organisations as both share common characteristics. However, there are lessons to be learned for public organisations from the Mesh Economy.

Firstly, the mesh economy is based on strong relations with customers, as it is through more frequent contact with customers that a greater flow of customer data is produced which at the end makes the business successful by making more profit. Even though profit is not the raison d’être of the public organisation, it is still valid to have good relations with citizens. Public organisations also generate large amounts of citizen data which eventually will be useful to perfect the public organisation’s performance in providing public services. Public organisations need to learn from the Mesh Business on how to utilize the ongoing connections with citizens and to use citizen data constructively to serve citizens better.

Secondly is the issue of managing resources efficiently. The rule of thumb in mesh business is ‘ownership is out, access is in’. It means that mesh business can and does deploy assets they don’t own but can easily access. It is rightful for public organisations to apply this as the potential for efficiency and saving a huge amount of money is high. Learning from this will enable public organisations to channel their budget for the betterment of public service provision. Furthermore, as public organisations, governments and local governments suffer from financial burden, the need to share rather than buy and own is more appropriate.

Thirdly, public organisations will need to learn from the mesh economy on how to design a public services that is more resilient so that they could last longer even after multiple uses by different members or users. Every public service needs to meet the four criteria of mesh products: it should be durable (well-built and safe), flexible (accommodates different users), repairable (has standardized parts that allow easy repair) and sustainable (reduces natural resources waste).

To conclude, sharing as the core concept of the mesh economy should be applied in public organisation settings. Its core principles are needed for public entrepreneurs to level up public organisations’ performance.

Tutik Rachmawati is a PhD student at INLOGOV, University of Birmingham, and is a Japan-Indonesian Presidential Scholarship Awardee. She has research interests in public entrepreneurship and local economic development.

This post previously appeared on Puzzle Minds.