Innovation by its very nature brings some degree of risk and for many organisations the fear of failure can be an innovation inhibitor. Unsurprisingly, one of the most common complaints about public sector organisations and other large organisations who struggle with innovation is that they suffer from risk aversion. However, perhaps we need to consider risk aversion as a symptom of two difficult conditions, namely organisational debt and flaws in organisational physics?

Organisational debt

The concept of organisational debt has begun to feature in discussions around startups by writers such as by Steve Blank. The concept is based on the experience in the software sector of technical debt, which is where quick fixes and shortcuts begin to accumulate over time and eventually, unless properly fixed, can damage operations.

Organisational debt is a similar concept, but instead of technological debts being accumulated, it is behaviours and structures which may have been fit for purpose at a time in the past which are the issue. These behaviours and structures have been allowed to continue, even when they are no longer optimal for the organisation. For example, a startup may be able to get away with relatively poor wages balanced by pioneering spirit and a close team ethic to retain key members, but as it starts to scale, there is a need to move the company to a more structured basis to ensure team members are properly rewarded and developed.

Our current government model was built in the 1850s with the Northcote-Trevelyan reforms of the UK's civil service and through aggregation and experience has developed a firmly embedded set of values and behaviours. Some of these, such as recruitment on merit, have stood the test of time. But others, such as an emphasis on process rather than outcomes, have become a problem.

For example, Government finds it very difficult to stop doing things. This can lead to the circular argument that we assume processes must be correct because they are what we have always done. Even when incremental innovations are introduced they often seek to replicate the previous process - digital government being a case in point. The digitalisation of a paper-based process to replicate the paper system is not something we would consider acceptable in the private sector. This is now being tackled through much better design and user interfaces, but legacy of the first generation of government IT will take time to reform. More importantly the need to re-imagine public services in a digital age creates huge opportunities for smarter, more efficient, citizen-centric public services, but can be seen a threat to the status quo and a challenge to long established procedures and values.

Outputs rather than outcomes are usually measured because it is easier to measure outputs. This often leads to systems and programmes which are designed to deliver what is easily measured rather than the appropriate outcome.

All of this helps to explain why the public sector can find it difficult to innovate. But, as innovation has a direct link to increased productivity, we see an increasing productivity gap between government and private sector. Analysis undertaken by Policy Exchange and based on national statistics found that, overall output per job in the services sector increased by 24% over the 15 years to 2012. For government services such as public administration, defence, education and health, output per job increased by just 9% over the same period. This would suggest that there is considerable scope for an improvement in public sector productivity.

As with any large organisation there is always a risk of waste and some fraud, and, of course, those should be identified and tackled. Banks have built intelligent data systems and controls to rapidly identify problems. In contrast our public sector is still too often dependent on old analogue systems. Every failure results in yet more guidance, building more layers and checks and controls in the hope of creating the perfect system where not one penny can be misspent outside the organisation.

Yet has anyone totaled the opportunity cost of these checks and controls as they attempt to wipe out fraud and waste? In comparison with leaner private sector counterparts, how much is government spending in staff time on controls and multi-lock systems? 

It may well be that unaddressed organisational debt not only creates waste and inefficiency, and may also be creating a burden of compliance that actively disincentivises change or innovation in a way that is perceived as risk aversion. 

Organisational physics

Public sector organisations are usually organised as pyramids with staffing and budgets allocated to business areas with specific corporate plan objectives. This has the advantage of clear accountability for expenditure against outputs. However, this often siloed approach to delivery can act as a disincentive to collaboration and innovation. Outputs may be defined against the resources available rather than resources targeted on the optimal outcome. In addition, because budgets and staffing have a linear command structure, information is directed up and down the line of command rather than across organisational boundaries. This is inadvertently inhibiting collaboration.

So what organisational design do we see in higher performing corporate organisations?

Research by Robert Simons of Harvard Business School found that large companies and organisations which manage to remain innovative deliberately create an ‘entrepreneurial gap’ where managers have an area of responsibility that is wider than their area of control. In such circumstances a manager who does not work across boundaries will fail to meet their objectives. To be successful, managers in these organisations must embody similar behaviours to CEOs of startups drawing on creativity, innovation and collaboration to meet their objectives. Rather than startup behaviours being lost, they are seen as integral to the health of the company.

In a startup risk and innovation are not optional. Standing still will mean, at best, being overtaken by competitors, so constant innovation and iteration is the norm. Innovation is understood at all levels as a 'must do' not a 'nice to have'. Startups also tend to lack capital and staff resources, but balance that with being nimble and making use of networks and collaboration to meet objectives.

This doesn't mean that large corporates can simply forget process and line of business activities and act like startups, but it does mean that they have learnt to create the space for innovation to happen.

Essentially these organisations encourage managers to become intrapreneurs, and Simons’ research would appear to indicate that this approach has clear benefits in terms of innovation and productivity across sectors (including the military).

But an approach which embraces the deliberate creation of entrepreneurial gaps is not without risk. Without shared vision, leadership, support and sustained investment it is likely to create stress and a dip in operational performance.

This analysis of the importance of organisational design is consistent with that put forward by the Beta Codex Network drawing on the work of Uwe Renald Müller. They map three aspects of organisation structures within organisations– informal networking structures, value creation structures and formal structures. Informal networks are a valuable first step in helping collaboration and some formal structure is necessary for governance, but the key to higher performing organisations is to place the greatest priority on value creation. This is the space for integrated teams which are focused on delivering against market pull.

In the case of public sector organisations, addressing ‘market pull’ can be seen as delivering optimal outcomes for the citizen. The challenge is that it is all too easy for formal structures focused on internal centralisation of command and control to focus more on internal compliance and discipline than on outcomes. This in turn may act as a serious barrier to change to the status quo or the introduction of any change or risk. 

How do we facilitate change?

There are no easy solutions to facilitating changes in culture and practices which have been embedded over 150 years, but there are some steps which could be taken to begin to address the issues of organisational debt and the organisational physics within the public sector.

Firstly we need to understand that ‘we have always done it this way’ is not a solution and that accretions of organisational debt can be a significant barrier to effective delivery that need to be recognised and addressed. A good start would be to get an estimate of the opportunity cost of organisational debt in terms of sub-optimal delivery and waste in some exemplar areas. These issues have been identified and addressed in some sectors of industry such as the use of lean methodologies in manufacturing or agile in programming.

Secondly, we need to recognise that a complete systems rebuild of the public sector is not an option, at least in the short to medium term. Therefore some space needs to be created for innovation and experimentation. A good start would be the development of outcome-based targets that cut across boundaries. These need to come with dedicated budgets and facilitated by teams that have capital, know-how and creatives. This is the kind of area where design thinking as championed the Policy Lab can add huge value.

In facilitating innovation it is important to create space for teams to drive change, and essential to provide them with top cover. This will need to be in parallel with much of the normal line of business work and will require leaders who are empowered to challenge the status quo in relation to internal rules and to ask for ways to allow emerging innovations to happen rather than reasons why to stop them.

I have tried in this blog to help define two of the issues which affect public sector organisations and can result in behaviours we tend to badge as risk aversion. The solutions proposed are not the most radical, but they are a start.