Generational Reform

Why the changing nature of work disproportionately benefits the private sector, and makes public sector reform necessary.

When I began my public service career, tenures were long. Many staff had 30+ years of experience in the organisation. As a young graduate, you were inducted into a team culture with its roots stretching back to before those people were themselves inducted. This ‘mid-20th Century’ cultural software once delivered some of the crowning achievements of our civilisation but has accumulated bugs over time and has largely failed to take advantage of 21st-century advances. The changes now underway open many possibilities for a more effective public sector, but also risks losing ‘load-bearing’ adaptations taken for granted by many senior leaders - particularly the induction of new members into an ethos of public service.

The generous pension schemes that encouraged long tenures within a single company are gone, replaced by state-provided retirement savings schemes ambivalent to place of work. With smaller families, globalisation, cheap transport, and remote working, employees are much more mobile than at any other time in history. Average tenure today is less than four years at an organisation, and this is skewed upwards by the few remaining from older generations. Those aged 25-34 stay an average of just 2.8 years.

1923 Opening of the Upper Nihotupu Reservoir, one of many built across New Zealand in the early-mid 20th Century in dense bush, rugged terrain, without modern machinery, and when the country had a fraction of today’s population.

Shorter tenures are not necessarily a bad thing. Employees shifting organisations help drive innovation as they pick up new skills, cross-pollinate ideas, and bring fresh energy to their new roles. Talented people also tend to want to work with other talented people, and switching means productive people end up in productive and growing firms where wages tend to be higher, improving the overall productivity of the economy. By contrast, Japan’s famous ‘salaryman’ culture, where employees routinely stay with a single organisation their entire careers, likely contributes to its chronic lack of productivity growth.

The benefits of shorter employee tenures accrue to two groups: consumers who benefit from lower prices and new capabilities, and those firms best able to attract and utilise talent. If a business fails to adapt, it is outcompeted or sidelined to selling some niche service or low-margin commodity. If a public body fails to adapt, it places a drag on the people it exists to serve in the form of higher taxes and poorer services.

The new dynamic poses considerable challenges for the public sector, which is usually, and properly, more concerned with stability (e.g. keeping the lights on) than driving change. A programme of reform is required to address these and take advantage of the opportunities modern technology and practices provide so that the public sector can effectively serve future generations.

Values, Culture, and Professional Standards

Long-established teams have cultures that are reinforced daily by the behaviours of senior members of staff. This includes things like standards of dress and expectations of professionalism (from break times to how you should conduct yourself when interacting with members of the public), as well as the guiding values that inform daily decision-making. Are contractual relationships transactional or interpersonal? These values evolved over long periods in response to local conditions, public expectations, and experience.

This period of long stability is unwinding quickly in the modern context where the seniormost member of staff might have only been with the team for a few years, and where, particularly post-Covid, staff may only be in the office a few days a week or less. Culture doesn’t collapse overnight of course, but in many ways, we’re quickly drawing down on the cultural capital accumulated over decades.

This is part of why organisational ‘values setting’ is currently in vogue. A new executive runs a survey, which finds staff don’t connect with or are unaware of the organisational values. Consultants then advise on a ‘values refresh’, resulting in the eventual release of slogans that are, at best, interchangeable with those of private sector companies. Kindness, diversity, and creativity are all well and good but are not terminal values. What purpose should creativity serve? Should major capital decisions really be significantly informed by kindness to other staff, or to contractors? These values inevitably fail to address what’s at the heart of effective public institutions: an ethic of service and the overarching goal of maximising public value.

Ungrounded in why people choose to join the public service (and what the community that pays their taxes expects), the new values are invariably not reinforced by leadership and senior members of staff. Due to the changeover in staff, the new values are soon forgotten, and the cycle begins anew. Executives instead need to be explicit about service and public value, and expect that wider leadership visibly reinforces those values through their decisions daily.

Recruitment

When staff remain in the organisation for decades, managers make very few hiring decisions. A team of six staff might only have a vacancy every half-decade or so as people retire. Your job as a manager is relatively straightforward and low risk. Your first task is to either promote your best performer to the newly open senior position, or maybe from another team internally where this person comes highly recommended from a trusted person you’ve had a long relationship with. You probably won’t be hiring a star outsider, but you’ve got excellent information about the skills, work ethic, and team fit of the candidates. Finally, you backfill with a graduate based on your sense of how well you’ll be able to train and work with them. Mistakes are sometimes made, but the downside is generally pretty low¹.

Today, the same manager is hiring complete strangers twice a year, yet the systems and tools they’re using are unchanged, and any recruitment training they receive is probably counterproductive (see the section on risk avoidance below). Where previously recruitment was a small part of a manager’s job compared to helping grow a team, recruitment is now far and away the most impactful decisions managers will make.

Interview questions and methods are failing to keep up with the modern world where even grads can learn and practice the standard (e.g. what are your weaknesses?) interview questions. Candidates for more senior positions have often been through dozens of interviews throughout their careers. Having heard it all before, they can confidently fire off a canned response that shows how they’re aware of their shortcomings and have systems in place to turn those into strengths. So the signal hiring managers receive from these sorts of interviews is limited. Yes, they seem confident, but nothing is learned about how they cope with the sorts of novel situations you expect senior staff to be able to manage.

Part of what’s needed here is standardised testing for short-listed candidates, which provides a level playing field for talent to reveal itself. Hiring managers also need to become comfortable going off-script, asking unusual and revealing questions unlikely to be prepared for, and then digging into candidates’ answers.

The incentive structure for public sector hiring also needs to change. More time than ever is spent on hiring, and, given their own shorter tenures, public sector managers are more personally insulated from the downsides of their decisions. Thus, there’s a strong incentive to hire somebody from every process, even if the candidate doesn’t meet the expectations for the role that was sold to executive leadership when they approved recruitment. Most public bodies have yet to develop a review process to provide management with an opportunity to reflect on recent hires, identify trends such as persistent issues with low-quality candidates (perhaps suggesting the pay is too low for the field), and discover who are your top recruiters. Many modern successful organisations (e.g. Stripe, Amazon) have been making use of these people to improve recruitment. They receive specialised training and receive a bonus based on the performance of their hires. A ‘bar raiser’ not from the recruiting manager’s team is included on every interview panel and is incentivised to only support hiring the best candidates².

Ultimately, organisations of different sizes and role requirements will need to tailor their approach to their needs and areas of comparative advantage. Failure to do so is to guarantee declining performance in the face of the changing nature of work.

Difficulty of firing poor-performers

Unfortunately, poor hiring practices dovetail with a regime that makes it almost impossible to fire anyone for poor performance.

Stronger employee protections make sense in a world where robust social welfare systems are lacking, you’ve worked at a company for 19 years, your pension scheme is tied into your continued employment at the company, and it’s difficult to find new work late career (given the tendency to hire internally), and people are tied to a town their whole lives. In this context, laws preventing a new manager with a grudge from wiping out institutional knowledge and destroying livelihoods are not unreasonable.

We have a situation where public sector hiring managers have less incentive to hire well, but the impact of poor hires is much more keenly felt by society. A bad hire in the private sector will mostly be felt by the business, who might find themselves outcompeted if they don’t change their practices. The costs of a bad public sector hire are borne by society through increased taxes and poor public policy. The public has no option to patronise the cafe up the road instead, and ill-considered policy can have wide-reaching consequences (e.g. housing, climate change).

In the era of short average tenures, talented staff are routinely poached by other organisations, while poor performers comfortable with putting in minimal effort, remain. As it stands, chronic poor performers will stick around forever unless:

1. They’ve been making their manager’s life more difficult than if they weren’t around for a sustained period. Since managers have little incentive to reduce salary costs, the public value contribution of the individual typically needs to be sharply negative even before salary or opportunity costs are considered.

2. This fact is obvious not only to the manager but also to their manager and HR, who all need to support initiating an onerous and emotionally draining ‘performance plan’ process.

3. The nature of the role means the standards of the performance plan can be objectively tracked. Poorly considered policy work, for example, is virtually immune, as long as it’s delivered on time.

4. Failure is egregious enough to justify dismissal.

5. Key individuals stick around throughout the process and understand the context of why the pain, social fallout from colleagues, union involvement, and personal grievance lawsuit the dismissal possibly will bring is worth the effort

6. The individual is ultimately paid out ~half a year’s salary anyway.

The alternative pathway is through a massive organisational restructure. These are almost always a complete mess. They can work for outright redundancies of senior management or bespoke roles, but are enormously disruptive to an organisation, usually have large unintended consequences, and struggle to touch some roles without creating openings for lawsuits. Restructuring a team of six engineers to remove an individual will usually involve disestablishing the entire team, creating five new roles with different titles in a separate part of the organisation, and hoping the five you wish to keep understand this isn’t about them without it being said explicitly. Opening a sixth role in the new team then can’t be done easily without opening the organisation to a potential lawsuit.

I cannot see the argument for how such a system can be justified in terms of the public interest. The entire system needs reform so organisations can skip straight to step six and pay the person out handsomely with a minimum of fuss.

Salaries

Advocacy groups like the ‘Taxpayers Union’ love to complain about the high salaries of top public service executives, but in the days of short tenure, you get what you pay for. Auckland Council has over 11000 staff, receives $6.7b in annual revenue, and manages $73b of capital assets. Those numbers alone make it one of the largest organisations in New Zealand. It’s also potentially the most complex to manage, given its extremely wide range of activities and the thicket of legislation and policy direction it must adhere to³. Despite this, the CEO’s salary is less than a third of what is paid by businesses of comparable size⁴.

Substandard pay attracts substandard performers. It also creates retention problems with talented people who recognise they could be paid more for work with far less public scrutiny in the private sector. Bonuses are low to nonexistent, so there’s little incentive to make hard calls that incur large social penalties (e.g. automation), even if these changes would be of great public value.

[Auckland Water and Wastewater CEO] Raveen Jaduram resigned in August 2020. Auckland Mayor Phil Goff said the new chief executive would start on a considerably lower salary than the almost $780,000 paid to Jaduram.

Jaduram told Morning Report there were a number of reasons for his resignation.
“The one thing that pushed me over the board was the unnecessary - in my opinion and my family's opinion - focus on my salary. It was a distraction for me but more importantly it was a distraction for Watercare.”

If we’re going to make it easier to let people go for non-performance, we should balance that by following Singapore’s example and paying public sector officials salaries indexed to that of the private sector. Officials can be expected to move out of the public sector during their careers, so we need to incentivise bringing top people back as well.

Risk avoidance

When you have staff that have been working at a task for years, having trained as a quasi-apprentice under an individual with thirty years of experience, you don’t need a rigid process to tell them what to do. Any process imposed by management would be quietly ignored anyway in favour of methods built on a mountain of experience. They know what’s important and what isn’t, and don’t bother wasting their time on ticking boxes, except to the degree that doing so is easier than not. Five minutes might be spent on something ‘pointless’ to avoid an awkward question from management, but these people routinely ignore more labourious processes they don’t see as adding value. Non-pathological organisations will hold people to account for outcomes like ‘% capital budget delivered’ or ‘does the community like that thing’ rather than whether a process was followed. So management tends to turn a blind eye to the idiosyncracies of consistent performers. Word gets out fast about what the real expectations are, and a defacto informal system of incentives quickly supplants the new formal process.

The informal system breaks during the transition to short tenures. Institutional knowledge is replaced with general knowledge, and sooner or later something contextually important is missed, and things break. The natural response (including for incoming managers looking to avoid being burnt again) is to implement a formalised process, both as a substitute for experience and as a method of mitigating risk.

A good process is a distillation of experience and good practice. Done well, good outcomes are repeated, with minimal additional or unnecessary steps. New non-expert managers lack understanding about what’s important and what is more effort than its worth. Consequently, they tend to design processes (usually informed by external consultants with poor incentives⁵) that attempt to address every possible risk. The result is a bloated inefficient process that substitutes for human judgement.

Skin in the game is necessary. That means both being at risk, and collecting reward. Too often we assign risk without reward.

If one has a system whereby people are judged only by their bad actions, or by their worst single action, what you have is a system that condemns and is against all action.

-Zvi Mowshowitz, Asymmetric Justice

Risk risk-avoidant process is like a ratchet, since any new manager knows they’ll be liable if they remove a process element only for that thing to go wrong. Even if the overall consequence is efficiencies and savings, this information tends to be poorly captured in public organisations and is difficult to communicate to the public when they’re understandably upset about something going wrong. The manager will end up being cast as an incompetent cowboy who needs to be replaced by a ‘serious’ risk-averse manager. Meanwhile, the natural response to a novel failure is to introduce a new process component to address it. So there’s a natural tendency for ‘short-tenure’ public organisations to become more risk-averse over time.

The consequences can be extreme. I was told recently about Wellington Water’s⁶ design review process. Created to help drive efficiencies, it instead resulted in routine ~100m pipe replacements, previously the work of a day or two, costing $350,000 in design consultancy fees (before delivery and project management costs)⁷. The target was to deliver 100 such projects this year, but the organisation is unlikely to achieve more than 1/10th of that. Wellington routinely has over 1000 known leaks at any given time, many gushing water into the street for months at a time. Risk can be managed, sometimes to great benefit, but always at some cost. Unfortunately, this cost often appears ‘off the books’ in different budgets or lower quality service.

Breaking this risk ratchet requires political courage to empower and provide cover for competent management, asking to be judged on whether the leaks are fixed by the next election, rather than the eggs broken along the way. Longer-term, management incentive structures need to change to counterbalance risk and better reward efficiency.

Of course, these recommendations are not a panacea for all that ails public sector operations and delivery. I'd like to see a ‘generational reform’ also be a program of modernisation, of making far greater use of digital capabilities and AI, and perhaps even an attempt to create the sort of culture of innovation on display in the likes of Taiwan, and that even existed in the West in the time of our grandparents. Change is already here, so we should make the most of it.

1. Grads don’t take up much of your salary budget, and even if they don’t work out as you’d hoped when hiring you can usually load them up with routine and easily managed tasks.

2. This sort of programme can probably only work at organisations of sufficient scale where the prestige of being involved in the programme (and financial bonuses) can outweigh the social incentives of direct relationships. ‘Bar raisers’ need to be quasi-anonymous to the panel to enable them to be comfortable playing devil’s advocate and not feel pressured to sign off on people they don’t believe will be good hires in order to maintain a good relationship with the hiring manager. It goes without saying that this can only work in an environment where the HR department implementing the review process and programme is laser-focused on performance, rather than their own social incentives.

3. Consider that the CEO of Auckland Council must impartially grapple with the politics of local elections, that everything done by staff is subject to extreme public scrutiny (especially via Official Information Acts) and that many of its activities are subject to a vast array of everchanging legislation and policy directives from Central Government, and that many necessary changes and updates often need to go through costly official consultation procedures which create legal liabilities if an outcome is perceived to be predetermined.

4. Auckland Council’s chief executive earns $650,000pa. Compare this to the $2.2m in compensation paid to that of Spark’s (a telecom company), despite the latter only having half the revenue and head count.

5. While often unfairly maligned, advising consultants have very poor incentives here. They know they’ll be held accountable for project failures that the process doesn’t cover, incentivising them to create a bloated process that covers every minor risk. This also increases the likelihood that portions will need to be outsourced, meaning greater potential future revenue. Since the procuring manager is unfamiliar with requirements (hence purchasing external advice), they’re rarely in a position to say when something is unnecessary. Consequently, every incentive runs in the direction of a longer and more complicated process.

6. A water/wastewater management entity jointly owned by six local and regional councils in the region.

7. Another factor here is Wellington Water’s lack of competitive tendering, meaning approved design panel consultants simply charge as they please under a ‘trust-based’ model.