An Opportunity for Creative Destruction

The economic crisis has ushered in permanent changes by empowering managers to challenge assumptions.
by | October 21, 2009

Predictions from the National League of Cities' recently released annual report on fiscal conditions were not surprising: We can expect lower revenues and more budget cuts, possibly well into 2012. And cities, as the report notes, feel the effects of a downturn long after the economy has begun to improve, "even if the business climate turns around immediately."

But as with most challenges, there's a silver lining in the economic clouds of the past two years. Crisis creates opportunity. As economist Joseph Schumpeter posited in Capitalism, Socialism and Democracy , during tough times superior organizations use "creative destruction" to abandon traditional ways of doing things in exchange for innovation.

Bob O'Neill sits in a position where he can observe the very best in local management and the very worst in local finances. Today he looks at the bleak picture facing us but provides important opportunities that come from this worsening municipal funding problem.

- Stephen Goldsmith

Inertia and comfort with the status quo often mask many of the problems that impede programmatic success. Economic crises allow us to challenge assumptions in ways that would have been unthinkable in better times.

In "How It Plays in Peoria: The Impact of the Fiscal Crisis on Local Governments," ICMA analyzed preliminary data collected from nearly 1,500 local governments through our recent State of the Profession survey. We also culled anecdotal information from interviews with our members to get a snapshot of how local governments are weathering the economic storm and positioning themselves for future growth. Among the findings: Despite budget shortfalls surpassing those imagined by the majority of communities, city, town and county managers have employed a range of strategies to weather the economic crisis, and this recession has ushered in permanent changes to governing at the local level.

Adapting to a rapidly changing environment and implementing permanent change and innovation requires our organizations to:

Create alternative migration paths: The issue during a crisis is not how good our crystal ball is, but how quickly can we adapt to a rapidly changing world. Our departments and agencies must work together to visualize a series of alternative scenarios and create a stockpile of strategies that we can pull off the shelf when those scenarios -- whether financial, natural or man-made -- become real. How quickly we can adapt will be the future measure of our organizations' success.

The city of Richardson, Texas, for example, responded immediately to the impact of the economy on its budget by implementing an established plan to re-evaluate and adjust high-cost city services. The result was a "better business model" that ultimately benefits citizens and paves the way for innovative practices that become organizational standards.

Understand their risk profiles: Organizations with a long track record of successful adaptation are quick to adjust to changes in their environments. Those that have taken risks and failed, on the other hand, tend to be risk-averse and hunker down to weather the storms. As state and local leaders, it is important that we understand the history of our organizations and their profiles relative to risk and change so that we can help them adapt to new situations rather than avoid them.

Know what success looks like: Vision without execution is hallucination, Thomas Edison said. Successful execution without vision, however, is equally unrealistic. Attempting to move our organizations forward without a clear vision of where we are going is foolhardy at best and could do irreparable damage to our communities during these tricky economic times. Stakeholders -- including citizens and the business community -- know and can articulate what success looks like and can help our communities navigate through challenging times.

Determine the upside for stakeholders: Articulating the benefits of change to constituents is important during a fiscal crisis. Washoe County, Nevada, involved local citizens in the process of identifying community priorities so that they understood the upside of program and service reductions to them. The result? Citizens made clear what they were willing to pay for and what needed to be cut.

5. Reward innovation and protect the champions: In my July column, I talked about how, in every organization, 5 to 10 percent of our workforces will step up to lead the organization toward sustained excellence. We must ensure that these champions, leaders and, yes, risk-takers are adequately rewarded for their efforts, even in tough economic times.

Organizations and communities do not remain the same during difficult times; they either get better or they grow worse. In late September, I had the pleasure of recording a session with Frans Johansson, best-selling author of The Medici Effect. During our conversation, he noted that:

"...When you're in a time when budgets are cut and resources are slashed, everybody's willing to take a close, hard look at the options they have. They're willing to question their suppliers, their partners; they're willing to question all these things.

"Once you get out of the recession ... if you are doing the exact same thing you did before the recession, then you're not acknowledging that the world has changed, that people have moved on. But the world has changed."

It is during times of crisis that successful entities separate themselves from the pack. The secret lies in recognizing opportunities, creatively destructing old ways of thinking, and embracing a culture that fosters innovation and change.

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