The Public Sector, Disrupted

Government needs the kind of innovation that allows us to really get more for less.
by , | January 18, 2012
 

In October 2001, Apple introduced a little white box called the iPod. Today, the way consumers share, purchase and listen to music bears very little resemblance to pre-2001. In 1999, Netflix launched a subscription service offering unlimited movie rentals with a low monthly cost and no late fees. As a result, video-rental stores have become as rare as a bikini shop in Alaska. Airline travel was once largely unaffordable for many business travelers and most families. Then along came Southwest Airlines and other low-cost carriers, and now air travel is often cheaper than taking the train.

We consumers have grown accustomed to better services, improved technologies, and new and different ways of doing things, from renting cars (think Zipcar) to consuming media. Outdated technologies and companies quickly become distant memories. When was the last time you had a roll of film developed? It's a simple progression: Technology improves, prices drop.

In one major sector of the economy, however, prices seem to just keep going up and up without a commensurate increase in performance. And that's government.

Spending on Medicaid and Medicare has outstripped inflation for decades. The cost of K-12 education doubled in the past 30 years. Intelligence-gathering costs have more than doubled since 9/11. And thanks to college costs that have risen at twice the rate of inflation for decades, the cost of a four-year degree at a public university has increased threefold since the 1980s.

So why does government seem so immune to the kind of innovation that allows us to get more for less over time? The lack of competition and profit motive in the public sector certainly plays an important role, as does the protection of incumbent producers and programs. But something else is at work.

The primary reason for the difference may be the relative rarity in government of a phenomenon called "disruptive innovation." First articulated by Harvard business professor Clayton Christensen, disruptive innovations start out less good but cheaper than the market leaders, but then break the tradeoff between price and performance by getting better, and typically even cheaper, over time. Disruptive innovation puts the lie to the traditional notion that you always have to pay more to get more.

Where disruption is commonplace, consumers experience falling prices and performance improvements—think of computing, electronics and communications. In areas of the economy where disruptive innovation is absent—like government—prices and costs generally rise over time.

This is because innovation in these sectors tends to be mostly about sustaining innovation: Existing products or services do improve over time, but the improvements come with a higher price tag and greater complexity. Think about your last experience with airport security. Screening technologies have improved dramatically over the last 10 years, but the cost, complexity and inconvenience to travelers of these technologies has also risen.

Disruptive innovation is different. By breaking tradeoffs, these innovations offer a powerful tool for reducing costs while maintaining or improving services. The good news is that disruptive innovation can help cash-strapped governments realize these benefits.

Take incarceration. Electronic monitoring technologies offer the potential to break the tradeoff between building more prisons and having more crime. By putting low-level offenders under house arrest via monitoring devices such as ankle bracelets, instead of sending them to prison, electronic monitoring enables states and counties to dramatically reduce their spending on incarceration ($5 to $25 per day compared to $78.95 for prison).

K-12 and higher education also are ripe for disruptive innovation. Online learning can help break the tradeoff between price and quality and disrupt education's basic business model. For example, online learning enables many of the services colleges provide to be unbundled, allowing students to pay only for what they need. The average cost reduction from blending traditional classroom and online learning in higher education is a whopping 39 percent, with some course costs reduced by as much as 75 percent.

Budget cutting in government is typically an exercise in using the blunt instrument of across-the-board cuts—in other words, doing more of the same with less money. The inevitable result, however, is not more for less but less for less. To get more for less requires doing things differently. Needed are innovations that break traditional tradeoffs, particularly between price and performance. Disruptive innovation offers a path to accomplish this goal and in the process transform public services.

This article is adapted from the new Deloitte GovLab study, "Public Sector, Disrupted: How Disruptive Innovation Can Help Government Achieve More for Less."

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