Rewiring government

Back in the 1930s, an economist named Ronald Coase was trying to figure out what explained the rise of huge, modern corporations when he hit upon a unique insight — one that eventually landed him the Nobel Prize.

Coase posited that the size of organizations is determined by the cost of gathering information. Large business organizations developed, he said, because of the transaction costs involved in creating, selling and distributing goods and services. Firms exist to minimize these costs. The higher the transaction costs of performing a given function, the more likely the organization was to do that function itself, rather than contracting with another firm to perform it.

At the time of Coase's observations, the difficulty of doing business between organizations was generally extraordinarily high — information and supplies moved at a glacial pace. As a result, companies built massive, hierarchical structures to gather, process, certify and store all the information they needed to take orders, make products, ship goods and sell to customers. Coase's theories helped explain the growth of hierarchical bureaucracy in government and the private sector.

Now, the Internet has reduced the cost of information to a fraction of what it once was. Along with e-mail and other communication technologies, the Internet has made communicating and collaborating with partners across organizational boundaries infinitely better, faster and cheaper. Traditional expenses of collaboration such as travel, meetings, document exchange and communications have dropped by many orders of magnitude. Modern technologies now allow organizations to seamlessly share data and integrate their business processes with partners outside the walls of the organization.

What is the impact of these and other innovations on the public sector? Government officials increasingly are seeking to minimize costs and maximize flexibility by acquiring services through partnerships rather than doing certain tasks within the organization.

These changes make technology networks both the metaphor for the new public governance and the facilitators of it. Public officials and public systems, buffeted by these changes, need to acknowledge the fundamental differences between hierarchical and networked forms of government and then alter their systems accordingly.

The changing shape of government

As networks supplant hierarchies, the way government officials deliver services and the shape of the public sector will change dramatically, too. Barriers between managers and workers, federal and local governments, and even between the public and private sectors will all become more permeable.

In our book, "Governing by Network," we profile dozens of creative government agencies that have exploited these changes to achieve policy goals and improve public services by forming networks of public and private players. Such "governance by network" typically includes measurable performance goals, assigned responsibilities for each partner and structured information flows across public and private boundaries.

The ultimate goal of these efforts is to produce enhanced public value exceeding the sum of what government or any of the other players could accomplish without collaboration. Public/private networks come in many forms, from ad hoc networks that are activated only intermittingly — often in response to a disaster — to channel partnerships in which governments use private firms and nonprofits to distribute public services.

Government by network entails vast benefits — specialization, innovation, flexibility, increased reach to name but a few — but also serious challenges that must be overcome.

One such difficulty, for example, is building the workforce capability to manage networks. A manager's job used to be relatively straightforward: Manage a program or service. You got ahead by advising on policy issues or excelling at managing government employees. Professionalism meant applying rules in a systematic, standardized and highly structured manner. By comparison, managing in a networked environment demands an entirely different set of competencies ranging from negotiation skills to the ability to manage across boundaries.

The structures of government, however, can test even the most talented public officials who try to administer a networked government. Government human resources systems often serve as a roadblock to success because they require hiring people who fit narrow bands, even though the ability to understand, create and manage a network of providers requires broad-based skills. So, while having a wide range of experience working both for industry and government employers is beneficial to this new governance, it's often difficult to achieve because of civil service practices and laws.

Current norms pose another problem: Today's systems and the officials who run them often push acquisition and procurement officials into narrow roles as enforcers of contract rules. What modern procurement officials really should be doing is searching for the right mix of components, harvesting ideas from key players inside and outside government, and making judgment calls every day in a constant effort to improve the situation.

A final problem frequently results from the fact that government officials often create static partnering systems, strictly enforcing outsourcing contracts without understanding the value of a more dynamic learning relationship.

A network rulebook

Overcoming these obstacles requires first recognizing that such vestiges of Industrial Age government are incompatible with today's complex, personalized and networked world. Networks fundamentally change the role of government. Yesterday's hierarchical structures must be transformed to create a new horizontal governmental model, one with more dynamic and nimble management and governance systems. This new governance model would enable and require creative and innovative public officials to:

* Organize complex systems in new and different ways. Recent technological advances strongly favor networked organizational forms. Military officials, faced with fighting far-flung networks of terrorist cells, are exploring the development of networked approaches for all facets of warfare. For example, officials at the Pentagon's Joint Forces Command are experimenting with ending the practice of setting up large battlefield headquarters, opting instead to send only a small staff into war zones. This group would use information technology to tap into a network of specialized civilian, military and contractor expertise back on the home front. Such an approach simply would not have been possible two decades ago.

* Jettison static structures. Governance structures also must incorporate procedures for capturing innovation and managing change. Vendors with direct, frontline relationships with clients will often see opportunities for improvements before their government managers. Because the essence of the network is its dynamic, not static, nature, the relationship must be structured to harvest innovative ideas.

For years, officials at the Corporation for National and Community Service (CNCS) awarded AmeriCorps grants on a peer-

review basis that judged applicants mostly according to how well they had written their applications.

CNCS officials' data systems did a fair job of determining whether the thousands of grantees received the funds but failed to broadly capture information about quality, which would have aided both the next year's grant peer reviewers and the young adults interested in their programs. With more than 50,000 individuals enrolled in dozens of organizations, it was impossible for the contract monitors to keep up, let alone translate the experiences into contract modifications.

Changes now under way at CNCS that utilize better technologies will not only capture outcome information and integrate it digitally into the reviewer's files but also will allow participating individuals to publicly rate their experiences with the grantee. A contract monitor, armed with this information, will be able to intervene more quickly, modifying or canceling grants when the results are worrisome.

* Enhance visibility and transparency. Coordinating activities among disparate organizations cannot occur without shared visibility of each partners' processes. Better access to information produces better decisions, which then reduce risk. Greater transparency also allows government officials to monitor services by contractors with the same amount of clarity and immediacy they have when performing the service within their agency. They can accomplish this by sharing information and eliminating the asymmetry that exists when a vendor has a piece of information that the contract monitor does not have.

When Indianapolis officials rebid an abandoned-vehicle outsourcing contract, city officials wanted to be able to locate all towed vehicles immediately to respond to residents who wanted to know what happened to their cars. The solution: The city constructed an electronic pipeline into the contractor's vehicle-tracking system. The vendor's information system, which registered each towed car, the car's previous location, the car's current location and any planned moves, was available electronically to police department officials responsible for customer service.

* Organize around citizen needs. All public officials and their clients experience the frustration of convoluted problem-solving processes, which often require the input of many different agencies and their respective contractors. In the past, officials organized these processes for the convenience of the bureaucracy, not citizens. Officials made decisions based on the prerequisites of the agency without regard to the overall customer experience, driving up their costs and customer inconvenience. Outsourcing frequently confounded these problems.

That was the situation Theresa Shaw confronted when she became the chief executive of the Education Department's Office of Federal Student Aid. FSA spent more than $450 million a year on technology contracts, outsourcing more than 80 percent of the department's budget. And officials coordinated few of those contracts.

"We had a vendor here, a vendor there, a vendor here, all on different contract timelines, all on different contract terms, all with different technology platforms, all with different businesses," Shaw said. "They all had different everything, yet they all needed to exchange data. It made no sense to me."

Shaw was determined to rationalize this chaotic situation. "We layered all the contracts," she said. "The picture was very ugly." FSA officials couldn't see the big picture of how vendor contracts related to one another. The contracts did not have a controlling common purpose, a failure that resulted in millions of wasted dollars.

Shaw found, for example, that FSA paid one provider to collect and process student loan payments while paying others to collect on delinquencies. The fragmentation precluded any incentive to manage the entire life cycle of the loan. As a result, too many loans passed into delinquency and then default.

Shaw knew the department had neither the staff nor the funds to build a new system. She realized that a better approach would be to issue a request for proposals in which one or more vendors could propose to integrate the multiple contracts and vendors into a single contract. Five separate technology systems operated by multiple vendors were replaced with a single system to handle the life cycle of loans, including the office's direct loan servicing functions, loan consolidation processes and collection activities for the $100 billion in federal student loan obligations.

The new integrated network allowed Education officials to manage the larger issues of timely payment and delinquency avoidance as parts of the contracted performance criteria, rather than the more narrow criteria used in the separate contracts. Now, department officials can better manage credit risk, using new tools and information to locate students who might need credit counseling before default. Best of all, Shaw estimates that adopting this enterprise approach will save the agency about $100 million a year.

* Transcend yesterday's stale privatization debate. We have been at the center of privatization battles for 20 years. Yet, these battles are now increasingly irrelevant. In networked governance, the question is not whether a service should be delivered by a private or a public player, but rather how should the sectors, including the nonprofit sector, be arrayed and managed to produce the best services?

The road ahead

A complicated world in which citizens face highly complex, individualized problems necessitates a new approach to delivering public services and provides the necessary tools for the solution. Networked approaches produce not only serious management challenges but also abundant opportunities for substantial improvements in public services.

We found many talented and innovative leaders who built networks that produce enormous value. They redefined their roles by paying more attention to protecting important public values than protecting turf and by better defining their public mission. These public servants, the new face of the public sector, offer important lessons that others would be wise to follow because, increasingly, democratic governance will mean relying on networks to enhance the quality of life for citizens around the world.

Goldsmith is faculty chairman of the Ash Institute for Democratic Governance and Innovation at Harvard University's Kennedy School of Government. Eggers is a director of Deloitte Research, the thought leadership arm of Deloitte, and a senior fellow at the Manhattan Institute for Policy Research.

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Governing by network

Stephen Goldsmith and William Eggers wrote this article based on research for their book, "Governing by Network: The New Shape of the Public Sector," which is due to be published next month by the Brookings Institution Press. Here is the book's table of contents.

Part One: The Rise of Governing by Network

1. The New Shape of Government

2. Advantages of the Network Model

3. Challenges of the Network Model

Part Two: Managing by Network

4. Designing the Network

5. Ties That Bind

6. Networks and the Accountability Dilemma

7. Network Governance

8. The Road Ahead