What Government Really Can Learn from Business

President Trump campaigned on running government more like a business. Now that he’s in office, what should he—and the department leaders he appoints—do to make federal agencies run more like America’s most successful companies?

It can’t be just about minimizing spending. Amazon became one of the most valuable companies in the world while spending feverishly, pumping its revenues back into the company.

It can’t be just about efficiency. Do you think Apple became the success it is because of efficiency? Do you think Kodak, Blockbuster or Sears stumbled because of inefficiency?

And it can’t just be about innovation. Lots of innovative startups launch every year, but only a few survive.

So what do leading businesses do? One of us (Manzi), in working with dozens of Fortune 500 companies over the last 20 years, noticed a common thread among the most successful firms: They embraced what we call “disciplined innovation.” That means they were willing to subject every new product or business program to a rigorous test. In business lingo, they always ran an A/B test.

For example, when Kohl’s was considering adding a new product category—furniture—many of the department-store company’s executives were enthusiastic about the revenue potential. Rather than simply going with their gut, however, they ran a test at 70 stores over six months. The results showed a comparative drop in revenue, as other products had less space in the test stores. It was big disappointment, but the initiative was dropped.

That type of discipline to test hypotheses is too rare, whether in business or government. Rather than conduct a rigorous test of an operational change, restructuring or expensive proposal, leaders often rely solely on their experience and intuition. But our guesses about what works and about causation are often wrong.

Luckily, not only have more businesses embraced A/B testing over the last decade, but more federal agencies have as well. It’s a trend that the Trump administration should embrace and catalyze.

The Department of Education, for example, runs a program to test field-generated ideas to improve K-12 outcomes. The Education Innovation and Research program not only gives larger grants for proposals backed by stronger evidence of effectiveness but also requires rigorous evaluation of all grants to determine if they actually improve outcomes. A similar approach is being used in a much different policy area, international development, through the Development Innovation Ventures program at the U.S. Agency for International Development.

Moreover, federal agencies are doing more randomized controlled trials—which is just another name for A/B tests—of their operations, producing useful insights quickly and cheaply. For instance, officials at the Treasury Department redesigned the letters it sends to encourage payment by people who owe debts to the government. They made the letters clearer and more personable, and they added a shorter URL for easier online payment. But instead of assuming that the revised letters were more effective, they tested them using a randomized experiment, sending several thousand people the new letter and several thousand others the old one.

Within a few weeks, they had the answer: There was no difference in payment rates between the two groups. What happened? Most likely, these indebted Americans had given up opening letters from the federal government. In other words, the department may have needed a better envelope, not just a better letter.

What will it take to see more of this disciplined innovation in government? Most importantly, we need department, agency and program leaders who do three things:

1. Subject their hypotheses and those of their organizations to rigorous testing, rather than relying on guesses, weak evidence or the loudest voices in the room, whether constituent groups or lobbyists. Congress could help by requiring and funding rigorous program evaluations.
2. Test those hypotheses using credible, reliable methods, such as randomized trials or well-designed quasi-experiments.
3. Act on the evidence that is produced.

For the Trump administration, one likely barrier to doing more disciplined innovation is that the Obama administration embraced evidence-based policy (a close cousin to disciplined innovation) with some fanfare. All administrations like starting fresh, but the Trump administration seems particularly allergic to anything the Obama team supported.

So here’s our advice to the Trump team: Don’t view evidence-based policy, or disciplined innovation, as an Obama thing. It is a business thing. What people call “evidence-based policy” within the public sector is simply what leading businesses call good management. By embracing evidence and disciplined innovation, government can produce better results for citizens and better value for taxpayers.

Andrew Feldman is a director in the public sector practice at Grant Thornton and also hosts the Gov Innovator podcast. He served as a special advisor on the evidence team at the White House Office of Management and Budget in the Obama administration.

Jim Manzi is founder and partner of Foundry.ai, a technology firm. He is the former founder, chairman and CEO of Applied Predictive Technologies, which became the world’s largest cloud-based predictive analytics software company. He is the author of “Uncontrolled: The Surprise Pay-Off of Trial-and-Error in Business, Public Policy, and Society.”