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 management practice; and ten global trends that will impact so- find new ways to compete against the ciety, and by extension business and private sector 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 Executive 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 free market 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 organizations 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 economy second only to the 7. Demand for natural resources is growing, United States in size. Among developed economies, 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 organization 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 public policy. 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 taxes.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 governance. 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