US government productivity: The roles government plays

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For years, there have been discussions about how to improve the productivity of the US government. In previous work, we estimated the size of the US government’s productivity improvement opportunity at $725 billion to $765 billion, split between the federal level and the state and local level—or more than $2,000 per resident.1US government productivity: A more than $2,000 per resident opportunity,” McKinsey, September 5, 2023. Recently, high inflation, the cost of addressing the COVID-19 pandemic, constrained budgets, and talent shortages have intensified pressure on the US government to improve productivity.2The gathering storm in US healthcare: How leaders can respond and thrive,” McKinsey, September 8, 2022.

To capture this opportunity, it is critical for leaders to understand what roles the government can play to determine which interventions to pursue. The private sector’s efforts to improve productivity have always received more attention than those of government. These improvements manifest themselves at two levels: industry and organizational. Industry-level productivity improvements occur when consumers shift spending between competing organizations based on perceived value. This can result in organizations that are more efficient in the long term producing more volume, thereby boosting the productivity of an industry overall. In contrast, organizational-level productivity improvements occur when organizations improve internal operations to produce goods and services more efficiently. A good rule of thumb is that half of productivity improvements occur at the industry level, and half occur at the organizational level.3

In general, government organizations can play a role in both types of productivity improvements (exhibit). The first role—provider of goods and services—is generally associated with organizational-level improvements only, because in most cases, there are no competitors to establish an industry, such as the provision of driver’s licenses. The second role—enabler of innovation in an industry—allows government organizations to support the generation of industry-level improvements. The competitors in these markets tend to be private players, such as private payers that offer Medicare Advantage plans (and that will also be able to capture organizational-level productivity improvements).

Government organizations play multiple roles, including providing goods and services and enabling innovation in an industry.

In this article, we examine the roles that government can play and discuss how to measure productivity. In the next article, we will apply private-sector frameworks on how to improve government productivity and touch upon lessons learned from our experience with public-sector organizations.

We recognize and acknowledge that a variety of civic compacts shape how governments set priorities, and thus governments have fundamentally different imperatives than the private and social sectors. Government organizations may make productivity trade-offs in service of those institutional imperatives. Productivity is the focus of this article, but it is just one way of evaluating government activity.

What roles does government play?

Researchers have used various approaches to measure productivity. Our focus here is on operational efficiency, not policy effectiveness (see sidebar, “Why has it been difficult to measure government productivity?”). We ventured beyond a purely economic estimation of value because government is not necessarily measured in the way that private-sector organizations are. Instead, we looked at mission value, which includes economic and noneconomic components such as quality or population outcomes.

Take the US Department of Veterans Affairs (VA). In 2014, about 9.3 million veterans were enrolled in the VA healthcare system, and outpatient visits had increased 23 percent over the previous five years.4 While the organization’s challenges included financial components (for example, medical spending), VA also faced substantial nonfinancial issues, such as lengthy appointment wait times and a backlog of disability claims. In response, the organization adopted a multipronged strategy focused on three elements: transforming digitally and automating, optimizing organizational structure and governance, and enhancing processes. The strategy led to improved patient satisfaction—73 percent of VA primary-care patients said they were “always” or “usually” able to immediately get an appointment for needed care—and claims older than 125 days dropped by 61 percent.5 These improvements would have been invisible in a purely financial measure of productivity. Further, VA has continued over the years to pursue productivity improvement initiatives.

But there is no standard way of measuring mission value, in part because government plays multiple roles. First, government plays a main role as a provider of goods and services.6 In this role, government essentially creates an output in the productivity equation—an output that would not exist without government involvement. Given the lack of market competition in providing these goods and services, the focus should be on organizational-level productivity improvements. Within this role, government engages in two types of activities: direct provision of goods and services, and contracting them out on an ongoing or one-time basis.

Second, government plays a main role as an enabler of innovation in an industry. In this role, government is addressing the input price of the productivity equation to support the development of an industry and competition within it. This support can lead to the industry-level productivity improvements that occur when consumers shift from one organization to another for goods or services based on perceived value. There are also organizational-level productivity improvements, but those are accrued by the private player and not the government, because the government is not providing the goods or services itself.

In this role, government could enable innovation in one of three ways. The first is when government privatizes a market and establishes input prices that did not exist before. The goal, generally, is to reduce the total cost paid for the goods or services. For example, through Medicare Advantage, launched in the late 1990s, the government sets prices to allow private payers to offer health insurance plans to seniors. The second way is when government provides subsidies to assist a nascent industry. In this situation, the general goal is to increase the volume of certain goods and services. For example, the Inflation Reduction Act (IRA) provided support for electric vehicles and carbon storage.7 Finally, government may act to affect input prices in a way that results in market behavior changes. Here, the goal is generally to reduce the prevalence of a good or service. In 2013, California created a carbon market through cap-and-trade legislation, placing a cap on carbon emissions and then constructing a market for trading carbon credits.8

While both roles are important, in the remainder of this article we focus on government as a provider of goods and services.

What are the components of productivity?

When government acts as a provider of goods and services, it is essentially creating an output that would not otherwise exist. If a new output were created in the private sector, there would most likely be competition among organizations to produce it. This would spur industry-level productivity improvements as consumers shifted their buying to the most productive organizations, which would be offering the best value. However, in a government context, there is generally no market competition. For example, there is no alternative—and thus no pressure on output price—to the government’s provision of safety through a fire department or police department. Industry-level productivity improvements are thus not possible, and instead the focus must be exclusively on organizational-level improvements.

Based on our experience in the public and private sectors, there are three key components of tracking productivity when government is the provider of goods and services.

The first and most commonly tracked is cost efficiency, which estimates the total cost of inputs required to produce an output. These input costs can be either fixed or variable. For example, the United Kingdom used anonymized citizen data to correlate education paths with employment and earning levels to derive the economic return on investment in education spending.9 Given that the typical goods and services the government delivers are unique, methods such as time-driven activity-based costing may be needed to properly allocate expenses and understand the true variable cost of production.10

The second component is quality outcomes, which have gained more attention recently. These aim to measure not only the financial value but also the associated nonfinancial components of mission value. For example, leaders of a major North American airport realized that the airport’s signage was confusing. After analyzing different customer profiles (for example, international travelers or families), the team built signage that was more intuitive and accessible, resulting in a number-one ranking in customer service among peers.11Understanding the customer experience with government,” McKinsey, April 20, 2018. Consumer experience metrics and ratings provide an important mechanism to track whether productivity improvement efforts are having their intended effect. Given the importance of nonfinancial components in government, developing ways to measure total mission value to the consumer is critical.

The final component is service throughput, which estimates the efficiency of production in term of time or completion rate. In our experience, this component is usually tracked the least often yet presents the greatest opportunity. A common mistake is to associate service throughput metrics with cost efficiency, but the general aim is to focus more on the number of goods or services delivered by an input unit. For example, the Estonian government created e-Tax, an electronic portal that allows citizens to pay taxes with a single click. The team that built the portal focused on service throughput metrics such as a reduction in the time needed to file taxes. As a result, the time to file decreased to three to five minutes, and 98 percent of citizens filing taxes used the portal.12

As mentioned above, there is generally no output price when government is playing the provider role. Some have used this point to argue that leaders cannot measure government productivity. However, the components of productivity discussed here do not require an output price for estimation. Furthermore, no single component is sufficient to track productivity; most organizations should have a dashboard that includes all three components.

The US government’s productivity improvement opportunity, specifically efficiency of production, has been a topic of discussion for a long time. To improve the likelihood of success, it is important to break down the role government is playing and then measure all three components: cost efficiency, quality outcomes, and service throughput. If this process can become more systematic, governments and their workforces could capture some of the productivity improvements seen in the private sector, potentially leading to cost savings and a more satisfied citizenry. The next article in this series applies private-sector frameworks to provide interventions for how to capture this opportunity, as well as lessons learned from our experience with government organizations that have successfully improved productivity.

This article is the second in a series on the US government’s productivity improvement opportunity.

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