TOPICS
TOPICS
The Business Model
If nothing else, the travails on Wall Street show the limits of the mantra of running government like a business. During the past decade, financial firms pushed products such as adjustable-rate mortgages, derivatives and mortgage-backed securities that proved too risky for the market to bear.
The 1990s mantra that the government is too risk-averse, that it should adopt businesslike practices that encourage innovation, comes to mind. Clearly, that mantra can be taken too far, especially when the risk that is encouraged is focused on short-term gain rather than long-term growth.
Many lessons will be gleaned as business analysts dissect the faltering economy in the next few months. But one lesson already is clear, for both federal managers and the nation's financial titans: More than ever, everything is connected.
As Treasury Secretary Henry Paulson and other political leaders attempted to deal with the increasingly troubled economy, they argued that the decline of the housing market that started in 2007 crossed over into the financial sector, which subsequently crippled the credit market, which furthered the financial sector decline, which could stifle the entire economy.
The economy is one giant system of systems with complex interconnections among all of them. Problems can travel easily across those connections from system to system. As those problems multiply, solutions become more difficult because the law of unintended consequences is so powerful in complex systems.
That fact seems obvious when you look at the snowballing financial crisis. The government's intervention in Bear Stearns, followed by the bailout of Fannie Mae and Freddie Mac, and the nonbailout of Lehman Bros., then the intervention in AIG, followed by the call for a $700 billion asset purchase program run by the government shows how each attempt by Paulson to solve the economy's problems got run over by the snowball. Forces beyond Paulson's control already were working their way through the system of systems. Unintended consequences lurked around every corner.
The government is, of course, one system in the economy's system of systems. Its revenues represent roughly one-fifth of the nation's gross domestic product. The system of government is extremely complex since it is subject not only to the rules of the economy but also to the rules of politics. Just witness the difficulty Congress and the executive branch had in crafting ways to deal with the economic crisis.
Federal managers are all too familiar with the frustration inherent in a complex system in which problems far away from their own operations - in Congress, for example - can have profound effects on their ability to do their jobs. Many will be struggling to operate their offices during the next six months at the same funding levels as last year, not because of anything they did but because Congress and the White House did not come up with new appropriations bills for nonsecurity-related agencies.
All this is a reminder that risk courses through both the economic system of systems and the government system. Instead of running government like a business, should business be run like government? Maybe the truth lies somewhere in the middle, where a healthy willingness to experiment is tempered by a realistic dose of long-range thinking about the good of not just one's own agency or business, but also of the country as a whole.
Brian Friel covered management and human resources at Government Executive for six years and is now a National Journal staff correspondent.
COMMENTS
- The real question should be, “Should government be run like a business or should government be run like a business run by the government?” All of the firms involved were in the business of maximizing shareholder value by maximizing consumer value through the brokerage of financial assets. At least until the government directed otherwise. Fannie and Freddie, the two business organizations run like government, are the ones that started this debacle because they were focused on maximizing consumer value with no regard to shareholder value once the government got involved. The creation of subprime instruments was not a business decision made by greedy Wall Street executives. It was, in fact, a reluctant business decision forced upon banking executives by a well meaning but business-ignorant government. In blissful, business ignorance government continues operating with the objective of maximizing consumer value with no regard to shareholder value, all the while claiming that business should really be run like government; after all, government hasn’t need to be bailed out by business (we can still raise taxes more, right?). If government were truly run like a business, with the objective of maximizing shareholder value by maximizing consumer value, it would be more streamlined and efficient. But what about “social justice”? The government can still use a business model. It’s called a non-profit. Tom Peterson Posted November 12, 2008 12:38 PM
- Outstanding points and insight regarding the systems of systems perspective. A system can be defined as a collection of processes with a common aim. A process is the action taken to achieve a result. Everything is done via a process. First time I can recall seeing the term "system of systems" used outside a military context. The intent of DoD's Joint Guidance on Effect Based Operations (EBO) is to assess an adversary's "system of systems" to identify and exploit vulnerabilities. In a non-military application, same approach can be/is applied to improve capabilities. The systems perspective is what W. Edwards Deming introduced to the Japanese after WWII and has been successfully applied by companies such as Toyota. A systems of systems assessment on the financial system would have identified the vulnerabilities. Would likely have also been fairly accurate on the time. Systems thinking is also referred to as strategic thinking, horizontal thinking and/or macro-level thinking as opposed to vertical or stove-piped thinking. Vertical thinking incorporates a "process" or more of a micro-level perspective. Thomas Barnett, author of the Pentagons New Map and the forthcoming book, Great Powers, contrasted the two perspectives: "There are types of people in the world: those who believe there are two types of people in the world and those who don't. I fall into the first camp. I believe the world is divided between vertical thinkers, or those who specialize deeply in certain skills and subject matters, and horizontal thinkers, or those whose essential skill lies in connecting the dots across various subjects and synthesizing new combinations." The challenge for what I refer to as Quality Leadership (successthroughquality.com/blog), includes leveraging the two perspectives to achieve the highest levels of quality. TimJClark Posted November 8, 2008 10:35 AM
- You have it all wrong. "Running government like a business" is not about taking risks. It is about using certified accounting methods, proactive customer service, refining processes based upon timely and meaningful feedback, a culture of collaboration versus petty fiefdom games, and aligning operations to achieve real, tangible, sustainable, and measurable outcomes. Many laws are passed and policies issued mandating these things, but government functionaries always find ways to avoid real change. Scot Faulkner Posted November 5, 2008 5:35 PM
