McKinsey helps solve Public Sector Productivity Puzzle

Is the gap between public and private sector productivity set to grow?

• UK public sector productivity has decreased by about 20% since 1995.
• In contrast, UK private sector productivity has increased by 50% over the same period and, in the United States, by 150%.
• Looking ahead, given the rapid advancements in new technologies, including generative AI, the gap between public and private sector productivity may widen further.
• Currently, 65% of private sector companies report regular usage of gen AI in more than one business function, with many experiencing both cost decreases and revenue jumps in the business units deploying the technology.
• In contrast, only 37% of UK government bodies surveyed in 2024 had deployed any type of AI – and typically for only one or two use cases.
• On average, the public sector appears to be trailing significantly, and the gap seems set to grow.

Be aware of mindsets that may hinder productivity growth

• Governments would like to improve productivity — there have been and continue to be many well-meaning efforts to do so.
• However, in general, improvements in productivity at scale have been hard to achieve.
• Public sector leaders often put forward a number of reasons to explain why it is so difficult and perhaps not even worth the effort:

                      “Improving productivity really means spending less, so services will inevitably suffer.”

• The thinking in some government departments appears to be that any reduction in budgets must inevitably lead to a degradation in services.
• For this to be true, it would imply that agencies were operating at the frontier of efficiency or that the constraints they were operating under were so severe that there was no real opportunity for productivity improvement.
• Neither of these seems to hold.
• The answer may be (surely ‘is’) to anchor at least some productivity improvements on delivering more for the same budget or less.
• The right changes could improve service delivery and efficiency.

                       “We could save money by automating our service delivery, but customers unaccustomed to using                                        digital services would struggle to cope.”

• The simple answer to this problem is to provide a digital service for those who are comfortable with it – a growing majority of the population.
• This can improve customer experience, deliver better outcomes, and save money.
• The resources saved can then go towards providing a higher-quality, in-person service to customers who need it.

                 “We see the opportunities, and we do make investments, but we always struggle to deliver the benefits.”

• It’s important to be rigorous in making the business case when identifying and quantifying the expected benefits of an investment for customers, for employees, and from a value-for-money perspective.
• Accountability for delivery of the benefits also needs to be clear.
• It should lie with the function responsible for delivery.
• The targeted benefits – savings, improvement in service – should be hardwired into individual KPIs, from the top of the organisation down – and into departmental budgets.

              “Our annual budget processes make it very difficult to make even medium-term investments to improve                         productivity.”

• This is a genuine issue in many governments.
• Multiyear resource allocation, whether through programs or systemwide, may need to be more widely adopted, especially when there is a clear business case for productivity improvement.

Create a system that enables productivity growth

• The responsibility for creating and enabling higher productivity lies with central governments, as well as with individual departments and agencies.
• Some practical imperatives for leaders emerge:
  • Set a clear aspiration for improving service quality and outcomes for the public.
  • Commit to multi-year resource allocation to enable future investments.
  • Encourage spending proposals that include innovative ideas and push back on those that do not.
  • Hold departments and agencies accountable for delivering on their commitments, especially regarding benefits.
  • Emphasise the need for rapidly scaling proposals that are proved to work, rather than conducting endless pilots or proofs of concept.
  • Be thoughtful about leadership rotation, enabling leaders to stay in their positions long enough to deliver real improvements.
  • Invest in new capabilities by identifying talent, building skills, and attracting new talent.
  • Celebrate successes, accept failure and help spread best practices.

Look holistically for productivity improvements

• At the department or agency level, the first step towards pursuing productivity improvements is to review current activity.
• What should be stopped or reprioritised is the first step.
• This often unearths legacy initiatives and activities that no longer contribute to the delivery of the department’s priorities.
• Strategies include the following:
  • Deliver services targeted to the customer:
    • This includes segmenting the customer base, forecasting demand, optimising the use of digital and physical infrastructure, and delivering a more personalised customer experience as much as possible.
    • A Nordic country redesigned the care home application process and reduced the time required by 70%.
    • A British bank improved its customer experience score by 37%, boosted employee engagement by 29%, and saved more than $3.1 billion in costs by redesigning its customer journeys and transforming its organisation to deliver.
  • Use assets efficiently and get value for money from procurement:
    • Assets can include estates, infrastructure and property, and non-property asset management.
    • One Western European government saved up to 25% in costs and improved customer satisfaction by introducing category management.
  • Organise to develop and upskill talent:
    • Many organisations can simplify their hierarchy by reducing the number of management layers .
    • A British energy company also moved to cross-functional teams — each with clear objectives, resources allocated against those objectives, and performance-managed delivery — and cut the time for fulfilling procurement orders by two-thirds and reduced work backlogs by 30%.

Conclusions:

• The case for improvement in public sector productivity has never been stronger, and the opportunity has never been greater.
• A system-wide approach could establish the right conditions and enablers of success, allowing government departments and organisations to swiftly pursue changes in productivity.
• The starting point should be an aspiration to dramatically improve the quality of service and value for money delivered to the public.