Global trends affecting the public sector

Michael Barber Alastair Levy and Lenny Mendonca

The public sector faces a decade of radical and ongoing change. It will be shaped by ten global trends that are affecting governments and companies around the world. These trends — macroeconomic, social and environmental, and business — will not only determine new policies, but also a transformation in the way that governments and agencies are led and managed. In the past year, McKinsey has set out ing and practice; and ten global trends that will impact so- find new ways to compete against the ciety, and by extension business and to attract and retain the public sector, over the next ten scarce talent. years.1 We believe there are five main implications for the public sector: The nature and scale of these trends governments must radically increase make the coming decade a defining the productivity of public services; period for the public sector. Develop- change their relationship with citi- ing a reform agenda in response to zens to address their ever increasing these trends will require an increasing demands; redraw their organizational integration of political and manageri- landscape to deliver better services; al agendas for reform. It will require achieve a major cultural change that extraordinary leadership from both puts data at the heart of policymak- politicians and civil servants.

1 See McKinsey Quarterly articles by Ian Davis and Elizabeth Stephenson, “Ten Trends to Watch in 2006,” web exclusive, January 2006; Wendy M. Becker and Vanessa M. Freeman, “Going from Global Trends to Corporate Strat- egy,” 2006, Number 3; “An Take on the Top Business Trends: A McKinsey Global Survey,” web exclusive, April 2006. Articles available at www.mckinseyquarterly.com Global trends affecting the public sector 

THE TEN GLOBAL TRENDS 6. The social tradeoffs of the are coming under greater scrutiny. Governments and Macroeconomic business are facing increasing pressure to deal with issues of social welfare and equity — whether domestically or on global issues such as public health 1. Centers of economic activity are shifting, both or poverty. The agendas of government, business, regionally and globally. The proportion of world and nonprofit will become more aligned GDP that comes from Asia (excluding Japan) is set in tackling these issues. to increase from 13 percent today to 22 percent in 20 years, with China’s second only to the 7. Demand for natural resources is growing, United States in size. Among developed , as is the strain on the environment. Developed rates of growth will vary widely, between countries and developing countries alike are using natural and industries. As a result, key parameters shaping resources at unprecedented rates. Resulting the economic policy of developed and emerging problems — such as climate change — require economies will change. immediate, dramatic shifts in behavior. Innovation in technology, regulation, and the use of resources will 2. Demands on public-sector spending are be essential for balancing robust economic growth rising dramatically. The unprecedented aging of and a sustainable environment. populations across developed economies will lead to unsustainable increases in pension and health-care Business budgets. In emerging markets, people will demand greater state-funded protections, such as health care 8. Industry structures are rapidly changing. and retirement security. Across sectors, traditional organizational boundaries are being redrawn. Productivity gains are being 3. New consumer groups, with new needs and achieved by organizations with global scale, niche behaviors, are developing. Rising incomes in expertise, or the adaptability to work with flexible emerging markets will add almost a billion new networks of suppliers, producers, and consumers. consumers to the global marketplace in the next The conventional of government decade. In developed economies, consumer departments — characterized by large, siloed profiles will change as the numbers of single departments of state — is increasingly removed from households, households with working women, and private sector best practice. wealthier households grow. Across both developed and emerging economies, people expect their 9. Management is adopting data-driven techniques governments to deliver better services. and mindsets. Greater scale and complexity demand new tools to run and manage organizations. Improved Social and environmental technology and statistical tools have given rise to new management approaches. These approaches 4. Technology is transforming how we live and underpin the performance of leading organizations, interact. Developments in IT and other technologies whether public, private, or nonprofit — but they are will transform both the way that organizations work, still rare in the public sector. and the way that people interact with government, business, and each other. Norms of slow, distant, 10. The economics of knowledge are changing. paper-based communications with government Successful organizations are those using, and departments will increasingly be replaced with investing in, new and more varied sources of interactions that are rapid, personalized, and knowledge — be it proprietary research from electronic. Citizens will access and share data on specialist providers, open-access online resources, their governments as never before. or collaboratively produced knowledge. Public-sector organizations can draw much more systematically on 5. Rising tides of people will be on the move. internal and external best practice and benchmarks. Greater migration of skilled and unskilled labor will By externalizing their knowledge, they can also better place new demands on both receiving and sending inform and engage citizens and business. countries. In developed and emerging economies, organizations in the public and private sectors will These trends will impact public and private sector need to address shortages of skills and access new alike. In addition, many governments will encounter pools of labor. enduring threats to domestic and international security, which will shape multiple areas of domestic and international .  Transforming Government June 2007

FIVE IMPLICATIONS FOR enormous efficiency savings if they are to retain any degree of fiscal THE PUBLIC SECTOR discipline. In the private sector, efficiency efforts have proved highly 1. Governments must be more successful in industries such as productive banking, retail, and telecoms, where labor productivity in the United The acute productivity imperative States — defined as output produced facing governments is simply put: for every hour worked — increased governments are being asked to do by more than 50 percent from 1995 more, do it better, and do it with the to 2003.4 In the public sector, such same amount of .2 efforts are often seen as controversial,

but in our experience efficiency and Aging populations in many countries effectiveness often go hand in hand: will require governments to expand initiatives to increase efficiency that already overburdened health-care are both successful and sustainable and retirement programs. The are typically those that improve scale of this challenge dwarfs the effectiveness and outcomes at the numbers associated with almost same time. any other sector of the economy. US government forecasts imply that on As an example, the German Federal the basis of current policies, spending Labor Agency — the 90,000- on public health-care and pension person organization responsible programs will double by 2040, for unemployment benefits and resulting in a potential fiscal deficit of workforce integration — embarked $3 trillion — 26 percent of GDP.3 on a transformation that reduced the overall spending on vocational But governments also need to training by 60 percent without losing do the same things better. Public impact; doubled the proportion of expectations are increasing, for frontline staff members’ time spent better schools and health care, on counseling jobseekers (rather than reduced crime, more effective on administration); and more than immigration, and social services. In halved waiting times. addition, there is a need to provide new services to support changing Achieving this scale of change household structures and build requires multi-faceted reform new skills in the workforce in the programs. Organizations must be face of globalization. As a result, reformed so that they have effective governments will need to improve strategic centers, fewer organizational their effectiveness significantly, which layers, and more effective means finding ever-more innovative . Frontline operations ways to deliver better public services. should be transformed, challenging assumptions about the way things How will this be paid for? The have been done in the past. Operating choices are not attractive: few environments need to be reformed to politicians want to increase taxes provide the right mix of pressure and or reduce spending, although support to transform performance; undoubtedly some combination of for example, by fostering competition these measures will be required. between providers (public, private, Many therefore will need to achieve or nonprofit). Leaders will need to

2 For more on public sector productivity, see Tony Danker, Thomas Dohrmann, Nancy Killefer, Lenny Mendonca, “How can American government meet its productivity challenge?” July 2006, www.mckinsey.com 3 “21st Century Challenges: Transforming Government to Meet Current and Emerging Challenges,” Government Accountability Office (GAO), 2005, www.gao.gov 4 60-Industry Database, Groningen Growth and Development Centre, September 2006, www.ggdc.net Transforming Government June 2007 Global trends affecting the public sector 

be far more focused on managing Put people at the heart of public performance, and on building services. Many governments are the capabilities, alignment, and already responding by providing motivation of their employees. greater access, choice and personali- The political will and leadership zation of public services. talent required to achieve this will be immense. The state of California has set out an aspiration to provide 24/7 access to all government services through a sin- Governments are being asked to gle Internet portal. Similarly, across the European Union, the proportion do more, do it better, and do it of basic public services that is fully with the same amount of taxes available online rose from 20 per- cent in 2001 to 52 percent in 2006.6 Education reform in Sweden has As well as being a fiscal and social brought in new providers and offered imperative, public-sector productivity much greater choice to parents. In the is also an important element of United Kingdom, the government is governments’ ability to increase the allowing people with long-term care productivity of their economies. needs to personalize their care, by This is especially true in countries giving them direct control over the such as France and Sweden, where way in which their allotted funds are the public sector represents a large spent across public, private and non- proportion of GDP. It will be equally profit providers. Initiatives like these important in developing economies, require a thorough and data-driven such as those in Africa, India and the understanding of people’s needs, cir- Middle East, where more effective cumstances, and preferences. public sectors have a vital role to play in and in Increase public accountability. alleviating poverty. Governments are facing more public and media scrutiny of decision mak- 2. A new relationship between ing, spending, and performance — all government and the citizen of which leads to greater account- is needed ability. An unprecedented amount of information is available through the The public is increasingly expecting Internet, from data on the perform- public-sector services to be compa- ance of in Norway and the rable to the best in the private sector. United Kingdom, to minutes of cabi- In the United Kingdom, for example, net sessions in Estonia that are made more than 50 percent of people ex- publicly available immediately after pect access to the services they need each meeting. The number of OECD in the evenings and on weekends.5 countries with Freedom of Informa- Across Europe, patients are demand- tion legislation has risen from 5 to 29 ing specific treatments not offered (out of a total of 30) since 1970.7 by their public health-care providers. Consequently, public sectors must Work with constituents by encour- build new kinds of relationships with aging “co-production.” There is a their citizens. whole range of issues where govern- ments can achieve their objectives

5 “People’s Panel Survey,” conducted by the UK Cabinet Office, 2000, http://archive.cabinetoffice.gov.uk/service- first/2000/panel/wave4/summary.htm 6 “Online Availability of Public Services: How is Europe Progressing?” Capgemini, June 2006, p.8 7 “Modernising Government,” OECD 2005; and German Federal Commissioner for Data Protection and Freedom of Information, http://www.bfdi.bund.de/cln_030/nn_672634/IFG/Gesetze/Gesetze_node.html_nnn=true  Transforming Government June 2007

Exhibit 4 Need to break down barriers across government only if people change their behavior. To achieve that level of co-produc- A new institutional framework FUTURE CHALLENGES tion, governments should look to is needed behavioral science to develop innova- Benefits tive approaches that balance the use of mandates, incentives and measures Health Employment that enable and inform citizens to Integrationof... take different decisions. Strategy Management and operational Education For example, encouraging more peo- processes ple to save for retirement will require Accountabilities Childcare not only some mandatory element Frontline roles and tax breaks but also financial Housing Data systems education. Reducing carbon emis- sions will require not only regula- tory changes and incentives, but also Child support persuading people to make decisions The postwar response to the “Five that are economically rational but Giants” set out in the UK Government’s often overlooked because of force of landmark 1942 Beveridge Report habit or short-term cost consideraSou- — Want, Disease, Ignorance,veridge RIdleness,eport,” 1942; McKinsey team analysis tions (an example being energy- and Squalor — was to establish efficient lightbulbs). In health care, separate, largely independent governments will need to focus as government departments to address systematically on prevention (that each issue. Governments, in developed and emerging economies, increasingly is, changing behaviors) as they do recognize the need for a much more on treatment (providing services). integrated approach. Some governments have succeeded in inducing behavioral changes on a large scale: unprotected sun-bathing deal with future challenges. Many in Australia and drink-driving in the of the most important issues facing United Kingdom have been signifi- governments around the world, such cantly reduced through measures to as poverty reduction and homeland influence cultural norms. security, require effective and coordi- nated responses across organizational 3. The organizational boundaries. In welfare reform efforts landscape of the public in Australia, the United Kingdom, sector must be redrawn and the United States, for example, initiatives across taxation, benefits, To respond to the ten global trends, education, employment, health care, the public sector must transform its and housing have been increasingly organizational landscape. integrated across government depart- ments and agencies. Boundaries within government. In many countries, the institutional Citizens require joined-up govern- framework of government was set ment too. For example, reducing the more than 50 years ago. Typically, number of times that people need to this involved the creation of mono- inform the state of changes of ad- lithic ministries focused on delivering dress or a bereavement will require a basic standard of universal provi- transforming operational processes, sion, whether in health, housing, or IT systems, and frontline staff skills. education. But this system cannot Some governments, as in California Transforming Government June 2007 Global trends affecting the public sector 

and New York City, have established In the United Kingdom, for exam- shared-services centers across mul- ple, the logistics company DHL UK tiple public-sector organizations, is poised to manage £4 billion ($8 thereby improving the quality of serv- billion) of spending in the National ice to their constituents while also Health Service, purchasing everything achieving efficiency savings. from beds to bandages.

Collaboration across countries. Just Private-sector and nonprofit organi- as business has become more glo- zations are also playing an increasing bal, so have many of the issues that role in addressing issues of public governments across the world need policy. International NGO progams to deal with, be it climate change such as the Bill & Melinda Gates or organized crime, immigration or Foundation’s work on public health avian flu. The need for international have, in part, been motivated by the collaboration between governments perceived inadequacy of international is not new, but it is extending beyond governmental organizations. Private- international relations to include sector organizations are also finding collaborative policymaking and innovative ways to enhance sustain- service delivery. Examples include the able economic development by creat- European Union’s efforts on mitigat- ing commercial opportunities in areas ing climate change or on sharing data of public policy such as water access, on criminal records. micro-finance, and the development of low-emission technologies. Manila Boundaries between the public, Water, for example, has overcome private, and nonprofit sectors.As the many obstacles to serving low-in- governments seek innovative ways come consumers by harnessing local to transform their productivity, we communities as a source of small- also expect to see the continued scale entrepreneurs, bill collection, growth of the and consumer education.8 between public, private, and non- profit providers of public services; This three-way engagement between and the greater role of private and public, private, and nonprofit, nonprofit organizations in taking requires public-sector leaders to on issues traditionally seen as the adopt a new mindset and capability preserve of public policy. to deliver through a wider network of policy and delivery partners.9 This mixed economy approach has long been prevalent in Germany and 4. Governments should trans- the United States, where for exam- form the way they employ ple nonprofit hospitals comprise a data in policymaking and third of the total. As it expands more management practice widely, it will provide sources of in- novation, shared risk, or access to the Three management practices will economies of scale of global provid- become increasingly important in the ers. Outsourcing of public services (in public sector. public-facing and support services) will increase in areas where it is cost- A greater focus on long-term effective and can be integrated into planning. Public-sector organizations public-sector governance arrange- must always respond to short-term ments (which has not always been political priorities. In addition, gov- successfully achieved). ernments face a range of important

8 See Christopher Beshouri, “A grassroots approach to emerging-market consumers,” The McKinsey Quarterly 2006, Number 4 9 For more on this topic see Governing by Network: The New Shape of the Public Sector, Stephen Goldsmith and William Eggers, Wasington, DC: Brookings Institution Press, 2004. 10 Transforming Government June 2007

long-term issues, such as climate CompStat, a data-driven perform- change, which require them to engage ance-management system, to gain in systematic and long-term planning greater visibility of crime at street for periods far exceeding electoral level, and its success led to its dis- cycles. Long-term planning must semination across much of the United become an integral part of decision- States. International benchmarking making processes. In the private of education across 60 countries sector, major oil companies, includ- by the OECD’s PISA program has ing Shell, have established long-term influenced reform in countries that strategy units that assess how the include Germany, Japan and Mexico. company should react to a range of In the United Kingdom, the Prime 30-year scenarios, and the companies Minister’s Delivery Unit has begun to use the output of this process as a instill a culture of data-driven public- filter through which near-term deci- sector reform across the , sions are assessed. and this approach is being replicated across the world. State asset-hold- Many public-sector organizations ing companies, such as Khazanah have for years had long-term plan- in Malaysia, Temasek in Singapore, ning units, or have commissioned and the Shareholder Executive in long-term reviews. However, in the United Kingdom, have applied too many cases they contribute data-driven management disciplines little to decision making. The UK to state-owned enterprises, providing government’s Stern Review on the transparency, among other things, Economics of Climate Change may to the costs and benefits of political provide a model for placing this type interventions. of long-term thinking at the fore- front of public policy, by creating a Greater use of data can be the foun- commonly accepted, systematically dation for productivity improvement. applied, evidence-based approach for During the German Federal Labor short- and long-term decision making Agency’s transformation, manage- across government. ment carried out a segmentation of 20 million jobseekers by their mind- A step change in the use of data to sets and needs, and used this seg- inform decisions. Many governments mentation to prioritize spending on lack a culture in which decisions training and work-based programs. It also improved the speed and quality Greater use of data can of service to jobseekers, introducing an Internet matching platform, for be the foundation for example, that brings together job- seekers and open positions through- productivity improvement out the country. These changes sig- nificantly contributed to €10 billion and performance are based on a in cost savings, while also improving clear understanding of the facts “on how the agency matched the needs of the ground” and the economic and both jobseekers and employers. operational drivers of performance. However, they are a prerequisite A more systematic approach to for reform. information management. Collect- ing, managing, and deploying infor- In the 1990s, the New York City mation is a core activity of many police department began using public-sector organizations in areas Transforming Government June 2007 Global trends affecting the public sector 11

as diverse as financial-services regula- and Western Europe are likely to tion, intelligence and security, crime become scarcer too. This challenge is prevention, and protecting vulnerable compounded by sensitivities relat- children. ing to the offshoring of public-sector jobs and data security, which make it For these and other organizations in likely that the public sector will make the sector, information and risk man- less use of offshoring than private- agement will become an increasingly sector companies. core competency. Data-mining tech- niques, for example, are used more Private-sector competition. The and more by governments to predict public sector will increasingly need individuals’ risk of unemployment managerial knowledge and exper- or disease. Applying these techniques tise as much if not more than policy will require new capabilities as well expertise, and will need to compete as the ability to alleviate concerns more directly with the private sector about data privacy and equity. for talent. US government agencies, such as the Department of Labor, 5. The public sector must the Postal Service, and the Securities improve its ability to compete and Exchange Commission, have for talent designed special programs to attract MBA graduates. The new joint Around the world, executives in both masters program being developed by the public and private sectors say their top challenge is locating high- The public sector will quality, affordable talent.10 Indeed, talent management is moving from increasingly need a sometimes overlooked support service to become a top priority. managerial knowledge

Aging populations. Labor pools will and expertise as much shrink as populations age. Roughly if not more than policy 60 percent of US federal employees, for example, will become eligible to expertise retire over the next ten years, leading to a huge drain of resources and ex- the Harvard Business School and the pertise.11 A very large proportion of Kennedy School of Government at teachers in many Western countries Harvard challenges notions of clear is nearing retirement, which raises divisions between public- and pri- a question of leadership succession, vate-sector skills. In many countries, and is likely to cause a shortage of the civil service has traditionally been supervisors. In the United Kingdom, able to attract very talented gradu- so many head teachers are close to ates. However, competing head-on retirement that a shortfall of experi- with private-sector employers will enced candidates is projected. require public-sector organizations to expand the pools of talent they Shifts in economic activity. The trans- recruit from, and to create more at- fer of economic activity to Asia, in tractive propositions to recruit and areas such as computing and medical retain people in terms of promotion diagnostics, also means that some trajectories, compensation, and lead- core skills needed by the public sector ership culture. in regions such as North America

10 Global Survey of Business Executives, McKinsey research data, 2005 11 “Issues in the Federal Workforce,” Testimony to Congress by Linda Springer, OPM Director, March 6, 2007, www.opm.gov/News_Events/congress/testimony/110thCongress/3_06_2007.asp 12 Transforming Government June 2007

A DYNAMIC DECADE AHEAD

Together, these ten trends and five implications will provoke a period of innovation and transformation that will make government an even more exciting environment in which to work and more responsive than ever to the needs of its citizens. Civil servants and politicians should there- fore expect to operate in a context of radical, ongoing, and accelerating change, which will require strong and courageous leadership, as well as clear and persuasive communica- tion of the case for reform. On the one hand, the scale of transformation required may seem daunting. On the other, it is a unique opportunity to attract and retain talented people, committed to the mission of govern- ment and ready to embrace a change that is ultimately at the heart of .

Michael Barber is a partner and Alastair Levy is a senior consultant in McKinsey’s London office;Lenny Mendonca is a partner in the San Francisco office.Alexander Nikiforov and Nandini Ramamurthy in the London office provided extensive research for this article. Copyright © 2007 McKinsey & Company. All rights reserved.