Transforming Public-Private Enterprises: Introduction

It is difficult to transform a large enterprise.  Leaders of many private sector enterprises have told me that their toughest job is managing the enterprise they have while trying to create the enterprise they want.  Not surprisingly, the failure rate is very high, as illustrated by 200% turnover in the Fortune 500 in the past 25 years.

Much more difficult, however, is the transformation of large public-private enterprises such as healthcare, education, energy, and defense.  These types of enterprise are composed of large numbers of smaller enterprises that typically have conflicting interests and priorities.  Further, there is no one really in charge, so these many smaller enterprises cannot be commanded or controlled to do anything.

This posting is the first of a five-part series that will address the transformation of public-private enterprises.  Parts 2-5 will address healthcare, education, energy, and defense, respectively.  My intent is to find some common ground and perhaps a few good practices across these domains.

First, however, we need to define and discuss a few concepts.  The notion of a public-private enterprise reflects the reality that truly large enterprises have to seek some form of symbiosis with the governments that enable their operations.  Government licenses, regulates, and taxes commerce.  Government also legislates and, in the process, often strongly impacts the business environment.

But, government can be more than just an “externality.”  Government invests in education and research that business consumes in terms of employees and research results.  Government is also often a major consumer, ranging from Medicare and Medicaid payments to Department of Defense weapon system procurements.  Few companies really want the government to totally leave them alone.  At the very least, they want tax breaks for oil exploration and subsidies for agricultural production.

Another important concept is entitlements.  This term tends to prompt thoughts of Social Security, Medicare, and Medicaid.  There are, however, much mores subtle entitlements.  The agricultural industry acts as though it is entitled to subsidies for corn and cotton production.  The defense industry acts as though it is entitled to the production quantities originally planned for weapon systems contracts.

Both mandated entitlements and assumed entitlements tend to be enormous barriers to change.  Attempting to change Social Security or Medicare for current recipients of these benefits is likely to result in a firestorm of protests from retirees.  They will argue, quite reasonably, that their personal financial plans were totally premised on the promised benefits from these programs.  As a consequence, we have tended to make changes for future beneficiaries so that, in theory as least, they have time to adapt their plans to these anticipated changes.

More subtle are industries and companies whose structures, processes, and investments – their business models — have all been premised on the economic system operating as it has been since they made these commitments.  Fundamental changes of the economic system could obsolete many of these investments, putting people out of work and hurting shareholders.  It is not surprising that companies fight such changes.

If the Department of Defense were to stop buying military aircraft, for example, and instead lease them by the hour, the business models of defense contractors would be significantly disrupted.  Who, for instance, would put up the capital to buy the airplanes in the first place? Who would insure weapon systems quite likely to be destroyed?  In general, who would take the risks that defense companies have never had to take?

As another illustration, if Medicare decided to no longer reimburse costs – via fees for services – and instead just paid for outcomes, healthcare providers would find their business models very much disrupted.  Perhaps providers would only accept healthy patients.  What if Medicare only paid for unhealthy patients made well, or at-risk people whose risks were reduced?  It might then be worth providers paying high-risk people to avail themselves of their services because they could make so much off the risk reduction.

Not surprisingly, defense contractors would lobby against the “power by the hour” model and healthcare providers would lobby against “pay for outcomes.”  These changes would disrupt their business models and probably marginalize many of their investments.  This leads to a general principle.

When considering transformation of a public-private enterprise, first consider how changes being entertained will affect benefits seen as entitlements, people’s incomes, and companies’ business models.  The more disruptions these changes will create, the greater the difficulty of proceeding and the lower the probability of success.

3 Comments

  1. Hey, I read a lot of blog posts on a frequent schedule and countless blogs don’t have real material but, I simply wished to make a speedy remark to express GREAT website! I am going to be stopping by on a regular basis now. Continue the great work!

  2. Grant says:

    Certainly agree with just what you said. Your explanation was certainly the simplest to comprehend. I tell you, I usually get annoyed any time folks discuss issues that these people obviously dont know about. You were able to hit the nail on the head and spelled out the whole thing with out complication. Perhaps, folks could take a signal. Will likely be back to obtain more. Appreciate it

  3. It’s a shame you don’t have a donate button! I’d without a doubt donate to this brilliant blog! I suppose for now i’ll settle for book-marking and adding your RSS feed to my Google account. I look forward to fresh updates and will share this weblog with my Facebook group. Chat soon!

Leave a Reply