KEY SPEECH Creating and Sustaining Innovation Stephen Bartos Visiting Fellow, Faculty of Economics and Commerce, Australian National University Address given to the ‘Public Sector Innovation Summit — an International Conference’, Grand Hyatt, Singapore, 2002. Innovation is difficult, in any organisation, but no more so than in the public sector in a modern democratic state. For both ministers and bureaucrats, innovation carries high risks. If a new approach to policy or administration is adopted and fails, there will inevitably be criticism — and in the case of a failed initiative, this is perhaps understandable. Unfortunately the reverse does not apply to a successful innovation. More often than not the responsible minister or agency is criticised for not having implemented the innovation sooner or for having done so in the wrong way. There has been many a press conference called to announce an important organisational change or policy initiative where the first question from the assembled media is along the lines of: ‘if this is such a good idea, why didn’t you do it sooner?’. It seems that for the innovator, life was not meant to be easy. This is, however, nothing new. Niccolo Machiavelli expressed similar sentiments in his advice to public sector managers — that is, princes – in 1514: there is nothing more difficult to arrange, more doubtful of success, and more dangerous to carry through, than initiating changes … the innovator makes enemies of all those who prospered under the old order and only lukewarm support is given from those who may prosper under the new. His remedy was appropriate for his times: to resort to force of arms. A prince who sought to change the established order had to possess a strong and loyal army or militia to back up any innovation proposed. While this was an obvious and practical piece of advice in the sixteenth century, it is not something we could contemplate today. What then are contemporary ways to handle innovation, why does it remain difficult, and why in particular is it difficult in the public sector? I aim to examine these questions via a recent case study, but also base the presentation on some of my own experiences in public sector innovation over the past 20 years in Australia. I make no claims that these observations are unique, but do hope that you may find them interesting. There have been numerous definitions of innovation put forward in the management Australian Journal of Public Administration • 62(1):9–14, March 2003 © National Council of the Institute of Public Administration, Australia 2003. Published by Blackwell Publishing Limited Bartos 10 literature, generally variants around the theme of a change in processes or technology that creates value for the customer or firm. The definitions all attempt to distinguish innovation from mere change or novelty. In the public sector the measurement of value is a harder job, and I am therefore basing my approach to innovation around the following definition, which I suggest may be more relevant to the public sector: A change in policy or management practice that leads to a lasting improvement in level of service or quantity or quality of output by an organisation. I do not intend to canvass all the areas of government innovation in Australia — there have been many, at both Commonwealth and state level. Others at this conference have drawn attention to the creation of Centrelink, our job network arrangements, and organisational and management innovation in the Department of Defence. What I wish to elaborate in the case study is the work being done on financial management reforms, with which I have been intimately involved for many years. I will be concentrating on financial and budget management innovation because Australia has seen ongoing and extensive reforms in these areas from the 1980s to now. These reforms have provided the basis for the move to the current outcomes and outputs accrual based framework model that Australia adopted three years ago, but as I will outline, is by no means the only or even the most important of the innovations. Financial Management Reforms of the 1980s and early 1990s The first point to make about innovation is that it does not happen in an explosive and unheralded way — at least not in the public sector. Since the 1980s a number of key reforms has underpinned the ability of Australia’s government to foster a more innovative and flexible approach to resource management. These include introduction of a robust forward estimates system, running costs, performance reporting, and extensive budget disclosure and transparency. The reforms have sought to promote greater results orientation, managerial flexibility and devolution within the Commonwealth. If it were not for the underpinning provided by these past © National Council of the Institute of Public Administration, Australia 2003 reforms, the current innovation of accrual/outcomes/outputs budgeting would not be possible. The paragraphs following summarise several pages in the original intended as background for an audience unfamiliar with Australia. The key point to emerge is that any innovation emerges from past changes, and is therefore a cumulative process, reliant on building blocks already put in place. The most important of these past innovations was a system of rigorous and reliable forward estimates for the budget and three subsequent years. Forward estimates of outlays or expenses have been published since the 1983–84 budget, and for revenue since1986. They are the basis of all government budget decision-making and reporting One of the key elements of budget papers today is the publication of reconciliation tables showing what has changed as a result of government policy decisions and as a result of changes in the economic environment: allowing readers to assess the different factors which have led to particular budget outcomes. In 1987–1988 a new approach to providing salaries and other administrative resources to agencies was introduced: running costs. The key principle of the new running costs system was to give agency managers substantial freedom to allocate resources and to adapt to changing priorities. The result was to encourage a higher degree of innovation and experimentation within the bureaucracy as a whole, with considerable improvements in public sector productivity and effectiveness. The recent move to accrual based budgeting and the focus on outputs and outcomes built on these innovations of the 1980s and 1990s at the Commonwealth level in two ways: emphasis on outcomes rather than processes, and devolution of responsibility to the chief executives and staff of individual agencies rather than central control. It is a useful case study for a conference on innovation. I intend to outline how it happened in more detail, although it is not in some sense an innovation — accruals has after all been used in the private sector for the past two centuries. Nonetheless, its introduction and in particular its application to budgeting was a significant change for the Commonwealth of Australia. The move to accruals involved more than 160 government departments and 120,000 Creating and Sustaining Innovation people across the nation making it one of the largest change management projects ever undertaken in the Australian Public Service. It was also done in a record breaking time: while some in principle development work had been done in the years leading up to the first accrual budget in May 1999, the reality is that most of the detailed implementation and policy development to make it work only occurred in the six months following a government decision taken in the post-election period of 1998 to move to the new budgeting system. I am pleased to say there have now been three more successful budget processes on an accrual basis. Like all innovations, though, the initial years have not been without their problems, and I will be outlining later some of the initiatives we have considered for remedying those problems. It is also important to understand that the initiative had a political genesis rather than being brought forward as a bureaucratic initiative. The government made a commitment to move to accrual budgeting in its Coalition policy document launched during the 1996 election campaign. Following its election in March 1996 the government appointed a National Commission of Audit (NCOA). Among other things, the Commission recommended that an integrated accrual financial framework be implemented. The NCOA said that a full accrual accounting framework was an essential complement to the structural and cultural change the government was seeking by way of a more competitive, efficient and effective public sector. The theoretical underpinnings of the move to the new system suggested that parliament would appropriate funds to allow government to achieve its outcomes through ‘purchasing’ outputs from agencies. In practice, the system does not actually work in this way, and unlike the New Zealand system there are no formal purchasing agreements in place between ministers and departments. Agencies and authorities are however required to specify and set prices for the outputs they deliver and describe how the outputs contribute to government outcomes. The change to outcomes and outputs reporting was coincidental with the change to accrual accounting but the two were in fact not interdependent. It would have been possible to move © National Council of the Institute of Public Administration, Australia 2003 11 to accruals on the previous appropriation structure, and conversely, to move to outcomes and outputs reporting without accruals. Benefits of the Accrual Budgeting Framework The outcome/output/accrual framework has the potential to deliver a series of benefits to agencies, government, parliament and the community. The primary benefits are in the actual management of agency resources, through better planning and budgeting. The reporting framework was also intended to enhance accountability by allowing comparison of planned performance with actual (since the mid-1990s agencies’ annual reports had been done on a full accruals basis, opening up a gap between them and the budgeted cash forecasts). There have however been concerns that a reduction in the number of reporting points that accompanied the changes to the budgeting framework diminished accountability. These concerns will have to be addressed. It is worth noting though that the budgeting framework of itself was not a driver for a reduced number of reporting points. The new system in fact envisaged that reporting would be enhanced because outcomes would largely parallel the previous program structure and outputs would be added to the picture. An unintended consequence of devolution of responsibility for outcomes and outputs structures to agencies was that many took the opportunity to reduce the number of items on which they reported. Although in each case this would have been done in consultation with the relevant ministers, it seems this was a situation where the desirable result for government overall may not necessarily reflect the sum of individual decisions. Nonetheless, Australia’s outputs and outcomes reporting now meets international best practice criteria for transparency in government financial management which is important in terms of governance and international confidence. Current Developments As with all change of this magnitude, the shift to the accrual budgeting framework had its challenges and there were many lessons learnt. Bartos 12 Following the successful completion of the 1999/2000 budget, the secretaries of the Department of Treasury (Treasury) and the Department of Finance and Administration (DOFA) commissioned an independent review of the 1999/2000 Budget estimates production arrangements. Although it is normal practice each year for DOFA and Treasury to review the processes and procedures for preparing the budget estimates and documentation the introduction of the accrual budget warranted a higher level of review. The review concluded that the delivery of the 1999/2000 Budget in the accrual based outcomes and outputs framework was a major achievement and that the new framework constitutes international best practice. The report focused on how to improve systems and processes, and how to maximise the benefits of the new framework. The recommendations of the report provide for enhanced consultation with agencies and recognise agencies’ discretion for implementing the recommendations within the context of their own accounting framework. Late in 2001, I chaired a taskforce looking at further refinements to the framework in the light of the experience of the first three years. I interviewed most departmental secretaries and with a team comprising officers from Finance and other agencies we surveyed all Commonwealth CEOs and Chief Financial Officers (CFOs) for their views. We also took account of concerns expressed by Senate committees about a reduction in the level of information available to them as a result of aggregation of agencies’ activities into sweeping and high level outcome categories. Since then a review of the framework by the Finance department was convened. It took account of that material and other inputs, and produced a report to government recommending further changes. These are now in the process of being implemented. The major effort to date in setting up the framework has meant that relatively little attention was paid to on the quality and nature of performance information. This will change if we are to meet the expectations of government, ministers and parliament in providing clear, appropriate performance information on the effectiveness of programs and the efficiency of delivery of outputs. The key lesson here is that successful innovation is not a one off effort, but needs to © National Council of the Institute of Public Administration, Australia 2003 be accompanied by review, fine tuning and correction of past mistakes. The new framework was not error free; but if we had tried to wait until we had a perfect system I doubt we would ever have implemented anything. Comparison Between Budgeting Frameworks in the Region The increasing recognition of the value of an accrual-based budgeting system by international agencies and governments with has seen a great deal of global attention focused on Australia’s move to the new outcomes and outputs based accrual budgeting model. A comparison is often made with New Zealand, which was very much a forerunner in the introduction of an accrual budgeting framework, and often the two are discussed jointly as ‘antipodean’ models of budgeting and financial management. The New Zealand approach bears many similarities to the Australian model in linking the specification of outcomes by government to the outputs produced by agencies, and a devolved and decentralised government structure with CEO’s having greater accountability and wide discretion to manage resources. There is, however, a fundamental difference between the two models in the means by which the government purchases outputs from agencies to meet its outcomes. In the New Zealand model a direct contractual arrangement between the minister and CEO forms the basis for the purchase of outputs. In this arrangement CEO’s of agencies are directly responsible for the delivery of outputs. The Australian model requires that parliamentary appropriations outline the purposes for which the parliament gives the executive authority to spend money (or authority for agencies’ expenses). In other words, Australia’s framework puts greater emphasis on outcomes, New Zealand on outputs. These are points of emphasis only, given both Australia and New Zealand think outcomes and outputs are important. It is certainly not the case that one emphasis is any better than the other, but instead this reflects the differences between the systems of government in the two countries. Australia has a federal system where the federal government has a very much higher proportion of its total budget devoted to outcomes achieved through Creating and Sustaining Innovation transfer payments and intergovernmental relations. New Zealand by contrast has direct national government responsibility for areas such as education, roads and hospitals, and sees a higher proportion of its government effort in direct delivery of such outputs. In examining innovation in government then, it is vitally important to appreciate the differences between overall national systems in applying any new system or approach. For this reason I am cautious of approaching any presentation on public sector innovation in one country as a ‘how to’ manual for another with potentially different structures and institutions. Risk Management In any innovation, managing the risks is critical. However, we also have to manage the risks associated with NOT innovating. In a fast moving world, it is easy for any organisation to be left behind by developments in not only technology but in processes and policies. In the private sector, firms that are left behind are generally sorted out by competition. In the public sector, a failure to keep up with the environment can have less immediate consequences, but no less dangerous ones for public confidence in government and the public service. So in examining risks, we should always bear in mind that there can be risks in not taking action as well as those associated with taking action. In relation to innovation, the standard tools of risk management are applicable — that is, to identify the types of risk faced, their likelihood and their consequences. The sorts of risk faced are numerous; I don’t intend to provide a comprehensive list of all the potential risks faced by an innovative project or program, because each is individual. What I do recommend is that the managers responsible for the innovation consider those risks and systematise their management, whether it be through a standard likelihood/ consequences matrix, or through some other recognised risk management tool. Conclusions The well-known palaeontologist Stephen Jay Gould put forward the notion of a punctuated © National Council of the Institute of Public Administration, Australia 2003 13 equilibrium to characterise the process of evolution. I would like to borrow that phrase and apply it to the topic under discussion today. Let’s think about public sector innovation in Australia as a process of punctuated equilibrium. Since Federation, we have seen a pattern of either steady state or slow and incremental improvements in public sector management, punctuated by periods of intense reform. The latter include Federation itself, establishment of the Loans Council and other fiscal reforms in the late 1920s, postwar reconstruction and the postwar tax agreement which saw considerable responsibilities transfer from the states. More recently, we have seen a pattern of a phase of reforms following a change of government. The Coombs report (Royal Commission on Australian Government Administration), commissioned by the Whitlam (Labor) government, reported to the newly elected Fraser (Coalition) government in 1976. The latter adopted those recommendations that suited a conservative inclination to curb excesses of government and open it up to greater scrutiny. Thus the Fraser government introduced extensive administrative law reform including a Freedom of Information Act and the Commonwealth Ombudsman. The Fraser government soon lost its appetite for public sector innovation, although it commissioned other reports and inquiries into the subject. These and the unfinished business from Coombs in effect lay on the shelf until the election of a Labor government in1983, and many of the previously unimplemented recommendations found their way in to the seminal white papers Reforming the Australian Public Service and Budget Reform, both issued by the Finance Minister John Dawkins. More recently the election of the Howard government saw a range of public sector reforms aimed at commercialisation, contracting out, and greater competition in the provision of public services. Accrual budgeting was intended to complement this approach: in the words of the National Commission of Audit (1996) ‘a full accrual accounting framework is an essential complement to the structural and cultural change the government is seeking by way of a more competitive, efficient and effective public sector’. It is not only at a change of government that innovation occurs, but our recent exper- Bartos 14 ience has been that this provides innovation with an important opportunity and stimulus. Innovation though is not simply explained by the desire of a changed government to stamp its own mark on the public sector. There is a multitude of ideas for innovation available to a new government, from its own policy advisers, academia, the bureaucracy, consultants, pressure groups and so on; from this universe, what causes one specific change to be adopted over another? I’d argue that there have to be the following elements in place: · A coherent idea with credible theoretical underpinning; · Political impetus for adoption of that idea; · Bureaucratic capacity and willingness to implement the change; · High profile and committed advocates for the innovation at either or both of the political and bureaucratic levels; and · A reason for change that cannot be ignored for reasons of either political imperatives or national interest. When these factors all apply, there is a high likelihood of a punctuation mark occurring — some major innovation in the public sector being successfully implemented. In the case of outcomes/outputs/accruals budgeting all the elements were in place. There had been a long history of advocacy of the change by the Parliament’s Joint Committee on Public Accounts and Audit (1995), and it had support from a number of academics. Moreover, the New Zealand experience had shown it could work in practice. Significant sections of the bureaucracy were willing to make the change, although it continued to attract opposition from some. Most importantly, the change of government meant that at the political level there was © National Council of the Institute of Public Administration, Australia 2003 a desire to introduce what was perceived as a more ‘business-like’ approach to government financial management, aligned with the philosophy of the new government. The presence of each of the key factors is of course no guarantee of an innovation succeeding. Implementation is fraught with difficulty, and there are numerous references on change management to which we might refer. Certainly from my experience, in our implementation of the new framework Australian officials followed (even if not consciously) the steps recommended in Leading Change (Kotter 1996): although only time will tell whether enough work has been done to anchor changes firmly in the corporate culture (his last recommended step). References Christensen, Clayton 1997 The Innovators Dilemma, Harvard Business School Press, Boston, Massachusetts. Joint Committee of Public Accounts 1995 Report 338 — Accrual Accounting — A Cultural Change and Report 341 Financial Reporting for the Commonwealth: Towards Greater Transparency and Accountability, Australian Government Publishing Service, Canberra. Kotter, John 1996 Leading Change, Harvard Business School Press, Boston, Massachusetts. Machiavelli, Niccolo (tr Bull) 1961 The Prince, Penguin, Middlesex, England. Management Advisory Board 1997 Beyond Bean Counting, Australian Government Publishing Service, Canberra. National Commission of Audit 1996 Report to the Commonwealth Government, Australian Government Publishing Service, Canberra.