Tagged: NESTA

Market churn, innovation, and the experience curve

Churn

There are a lot of articles about savings in local government about how much has been delivered and just how much more can be done? Has local government really been innovative in redesigning services or is local government reflecting its journey along the experience curve and there just isn’t much more room to save more.

The other common topic today, economic development, might hold some clues. National and Local Government often measure the success of their economic development strategies on the numbers of startups that are created. If we build a new business park they will come. If we fund startups more employment will result. This will be good, this means more confidence in the economy. The presumption is that more startups means more entrepreneurs seeing opportunity, which means more jobs, which means the economy is growing. Or does it?

Research suggests that his approach mainly produces market churn and it is only a small number of businesses that create most of the jobs. New companies set up and create jobs and these displace jobs in other companies who are less competitive. Churn is a mechanism by which labour markets reallocate workers towards more efficient ends. In this way, the churning of the labour market contributes to growth in the potential output of the economy. Or at least it would if those businesses were in a growing market. It doesn’t mean there a more jobs, or even that disruptive innovation is happening and new models of business or services are being found. When the market is maturing, or even reducing, businesses learn to do things more efficiently. That generally begins with making successively larger improvements and then successively smaller ones.

The exception to market churn, those businesses that create more net jobs, are those that are innovative and disrupt exising markets. They do something radically new that is significantly more efficient and/or meets the market’s needs more effectively, or even creates a new market. Interestingly evidence suggests these businesses are also more resilient though a downturn.

But how does this apply to local government and the impact of austerity? Have we seen a similar journey in how local government has delivered savings. A lot initially and then they get harder to find. The experience curve begins to flatten. What we may be seeing isn’t the creation of anything really different, we are just seeing market churn that pushes public services along the experience curve. Its just getting cheaper to do what has always been done. Costs are going down, salaries below inflation, jobs are being deskilled though the introduction of technology and changing practice, systems and processes are getting leaner. Simply, people doing fairly similar things for less and probably for a different employer. Will this improve services? If improvement means cheaper then probably not. If it means reducing demands, finding better ways of doing things then maybe, but its not looking promising.

This isn’t to lay the blame on anyone. NESTA, in their study on innovation in Whitehall found, for many valid reasons, public services have typically not been subject to the same kind of creative destruction seen in some private markets. The risks are high, decommissioning services isn’t cheap, writing off sunk costs is hard politically, and considerable social harm would result from the breakdown of the public services. Service closures could push demand elsewhere, undermining the actual efficiency and legitimacy of any cuts.

A lot is stacked against radical innovation, and so transformation, in public services. Is it just too much?

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