The FGI's first take on the imperative for enabling disruptive innovation in government. It is not a silver bullet, but entirely necessary.

1. Innovation in Government
How do we make government adaptive?
June 19, 2012

2. Agenda
~5 minutes – Context of project
• Jayson to describe the context of the Chief of Staff conference and our role in the process
~35 minutes – The importance of disruptive innovation to government
• Clay / Max / Nikhil to discuss current project, observations, and assertions about
opportunities for innovation in government services and policy
~20 minutes – Discussion of next steps
• Open discussion of next steps
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3. Enabling disruptive innovation in government
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4. Enabling disruptive innovation in government
The United States - and much of the developed world - face unprecedented budget crises
Innovation has been touted as one of the mechanisms to address current problems
• Lack of silver bullet requires government to become more efficient, spur growth of tax receipts,
and cut excessive services
• Innovation is seen as one of the keys to government efficiency and improvement
The key to doing more with less lies in a specific type of innovation: disruptive innovation
• Unfortunately, government innovation tends to focus on sustaining instead of disrupting
existing models of service delivery
• Government intervention in markets can often, itself, lead to a lack of disruption
How can we enable disruption in markets where
public intervention is necessary?
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5. Our research agenda
What we hope to develop… What we are not developing…
• A framework to understand what is • A critique of governance models – the
causing disruptive innovation to not implementation of policy
occur in situations of government
intervention
• Guidelines on what policy • Comprehensive policy
prescriptions can help enable recommendations on specific issues
disruptive innovation in various
circumstances
• A best practice approach for objective • Opinions on subjective market issues
market issues such as public goods such as intra-generational transfers
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6. What is innovation?
Innovation is more diverse than most practitioners acknowledge
Categorization of tech innovation Categorization of competitive innovation
Incremental improvements to existing Innovations that integrate with the profit
technologies models of incumbent firms
Continuous
Sustaining
Integrate seamlessly with legacy formats Can be derived from either continuous or
discontinuous innovation
Example: Example:
• A traditional engine that generates 20% • A solar engine integrated into a Ford
more horsepower than its predecessor coupe and priced at a premium
Technological innovation that bypass the Innovations that do not integrate with profit
existing paradigm; often cited as a step- models of incumbent firms
Discontinuous
change
Disruptive
Often lower quality to existing products, but
Can or cannot integrate with legacy formats cheaper and more accessible
Example: Example:
• An solar engine that generates 20% more • An solar engine used to power a cheap,
horsepower than its gasoline predecessor around-town bicycle for city commuters
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7. Disruption, illustrated
Incumbents nearly always win
Product Performance
Entrants nearly always win
Disruptive technologies
Time
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8. Why disruptive innovation
What is allows firms to do The industrial impact
• Gain access to markets with new • Drives down cost in the market
technology and business models
• Increases access for consumers
• Avoid competition during early
growth • Opens budget for investment in
other activities
• Identify the optimal customers for
the product
“ ”
This process of Creative Destruction is the essential fact about capitalism.
- Joseph Schumpeter
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9. Disruptive innovations transform industries
Disruptive innovation Description Before After
Personal computing • In the late 1970‟s, companies arose to ~$120-160K1 ~$1.3K2
manufacture computers using existing,
modular, technical components, thereby
decreasing cost of production
Retail health clinics • Over the past 2 decades, retail health clinics $5603 $1103
have emerged to offer basic healthcare
services w/out expensive overhead of primary
care offices
Mobile digital learning • Educational platforms being developed to 100M w/out N/A
provide access to the more than 100M children access to
that do not attend school across the globe education
Disruption brings services to more customers by
dramatically reducing costs and increasing accessibility
1) DEC VAX 11/780 Computer Specifications. ed-thelen.org/comp-hist/vax-11-750. Accessed 6/15/2012
2) The Encyclopedia of Consoles, Handhelds, & Home Computers, pg. 19 the forum for growth and innovation 8
3) Comparing Costs and Quality of Care at Retail Clinics… Annals of Internal Medicine, Sept 2009, pg. 324

10. Why does this matter for the government?
At all levels, the public sector in the United States face increasing budgetary limitations
2nd Debt Ceiling Hit Outstanding US Debt Federal Unfunded Liabilities
Federal
Q4 2012 $15.8t $211t
California State Debt Illinois 2012 Deficit NY Pension Unfunded Liabilities1
State
$392b ~$6b $120b
Detroit Municipal Debt Defaults through March „12 O.C., CA Unfunded Liabilities2
Municipal
B2 & B3 21 muni‟s $20b
Government must learn to do more with less
1) Teachers and Local Workers unions – Empire Center projections
2) Orange County Register, http://bit.ly/MvECvS, Accessed 6/14/2012 the forum for growth and innovation 9

11. Municipal debt has grown by 17% in past 5 years
Municipal Securities (1996-2011)
4,000.0 300
280
3,500.0
260
Municipal Tax Receipt Growth
3,000.0
(Indexed to 100 in 2000)
Outstanding Value $B
240
2,500.0
220
2,000.0 200
180
1,500.0
160
1,000.0
140
500.0
120
0.0 100
1996 1997 1998 1999 2000 2001 2002 2003 2004* 2005 2006 2007 2008 2009 2010 2011
Individuals Mutual Funds Banking Institutions
Insurance Companies Other Municipal Tax Growth
Source: SIFMA Estimates, Holders of Municipal Securities. Accessed 6/14/2012. Tax receipt growth
estimated by US Census Bureau based on fourth quarter growth in property taxes the forum for growth and innovation 10

12. Despite burning platform, government tends to sustain
Case 1: The President’s Save Awards Case 2: Health Data Initiative
President Obama instituted the President’s SAVE Starting in 2010, the Health Data Initiative aims to
award for federal employees that present cost cutting release data to the public or qualified entities
Background
ideas • Through “Datapaloozas,” government got external
• SAVE has successfully generated over 56,000 constituents to engage in creating new products and
employee submissions related to cost cutting services using the data
opportunities within the federal government • In 2010, 20 apps and services debuted; in 2011, 50;
• Leveraging Eric Von Hippel and Karim Lakhani‟s and this year, 230 companies are set to debut products
work on crowd-sourced innovation
However, the SAVE awards generate sustaining Products and apps debuting though are sustaining to
recommendations government institutions
• Primarily identify excessive spending within existing • Data is primarily information, such as managing
In practice
operations asthma and quality of hospitals
• Past examples include • Provides consumers with better information
• Wasted medicine in Veterans‟ Hospitals • Puts pressure on providers through transparency
• Duplicative purchases within NASA
Data initiatives can enable disruption in the private
Does not reward employees for rethinking systems sector, but will have minimal impact driving near term
from the ground up (too impractical) cost out of public services
While valuable, sustaining innovations will not solve our
fiscal crises in isolation
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13. Why disruption doesn’t occur naturally
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14. Government intervention, itself, can stifle disruption
Government intervention, while necessary to solve various market failures, often stifles disruptive
innovation in the process
• This interference can be intentional, but often an undesirable byproduct of specific solutions
Why it would occur… …Example in action
To build industry and serve public Airline industry
• From 1938-1978 the Civil Aeronautics Agency heavily regulated US air
Intentional
interest, government occasionally
travel, limiting competition and access to routes
limits competition intentionally
• In the years following deregulation, hundreds of new airlines emerged
• New airlines engaged in various forms of business model innovation
• New activity also prompted a modernization of air traffic control systems
In intervening to address correct Legal Accreditation (The American Bar Association)
• To ensure that stated lawyers can appropriately represent their
Unintentional
market failures and protect
clients, the United States has required legal certification for hundreds of
consumer interests, government
years
often distorts the competitive • However, to overcome these asymmetries of information, the United
pressures that enable disruption States has recently relied on ABA accredited schools to screen students
unintentionally • The lack of competition for ABA accredited schools and the single tier of
certification is partially to blame for the lack of innovation in legal services
The question becomes, what is required for disruption
within public services and regulated industries?
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15. To promote disruption, services and regulation
must ensure eight conditions are satisfied
Structure Producer (Gov. /private) Consumer (Gov. /Taxpayer)
1. Ability to start a business 3. Incentive to start a 6. Ability to switch
business
2. Ability to sunset a 7. Benefit evaluation
business 4. Incentive to progress up-
market 8. Benefit internalization
5. Ability to progress up-
market
The fulfillment of these eight constructs creates an environment where…
• Consumer purchasing habits deliver product and service feedback
• Suppliers have an incentive to improve both technology and efficiency over time
• Businesses are naturally born, mature, and become obsolete over time
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16. Private industry adapts through feedback loops;
government services lack such information
Lack of “Opt-out” • At the federal level, public has no option to opt-out of government
from citizenship • At state and municipal level, there is threat of moving, though a certain amount of
stickiness creates a no opt-out effect
• Difficult to voice discontent through non-consumption
Minimal access to • Government interventions do not do a good job of establishing feedback loops to
customer adjust policies over time
feedback • Lack of CRM systems and incentive for customer learning
Low customer • With the taxpayer paying one lump sum, it is not possible to create accountability for
visibility into each spent dollar on a program by the public
service costs • Current tax system also hides the value of subsidies in the form of deductions
Singular issues • Votes, theoretically, represent feedback into policy and progress
cloud voting • However, singular issues tend to cloud feedback into service quality
decisions
Difficult to discern what is “good enough” service at any
level of cost given these issues
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17. Policy decisions can interfere with
ability to test new service models
Policy tends to interfere with disruption in
two distinct manners
Interferes with disruptive
entrants ability to enter Interferes with the ability of
new markets disruptive innovators to
• RFP policy, certifications, progress up market
requirements, etc. can create • Process requirements can
barriers to innovative thinking eliminate disruptive services
in gov‟t from further progression
• Ex: Reimbursement for • Ex: Automation of legal
disease management vs. services
drug sales
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18. Examples of how we can enable adaptive government
Best practice What does it mean Example
Outcome-based • Process-based legislation makes assumptions about market • Fuel efficiency
legislation dynamics that must continue to hold requirements
• Outcome-based legislation focuses on the creation of feedback • Hospital
loops that allow for variation within methods for implementation readmissions
Process for • Legislation does a poor job of sun-setting itself when it has run • California water
sun-setting its course, leading sometimes to situations of hindrance supply
• Government agencies are often re-purposed instead of sun-set
after they become obsolete
Allow duplicative • Reliance on a legacy infrastructure prevents forward progress • Charter schools
infrastructure • The creation of duplicative infrastructure allows more efficient • Accreditation of
methods of product and service delivery to be developed online schools
Encourage • Rapid iteration and continuous deployment during projects • Lean government
experimentation development maximizes feedback, minimizes wasted investment projects
• Chinese SEZs
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19. For disruption to take hold, success of programs
must be appropriately defined
Discussion of objectives in policy often spurs charged, political, debate
• Issues surrounding wealth transfers, optimal scope of government, and safety nets generate emotionally
charged reactions
• Reactions can draw attention away from the benefits of disruption “in a vacuum”
To overcome this issue, we believe it is important to distinguish between objective responsibilities of
government and subjective responsibilities
• Legislators and executives can derive the benefit of disruption from objective examples
Objective responsibilities Subjective responsibilities
Government is objectively responsible for Government’s role is subjective where private
correcting private market failures where markets have not failed
possible (within capitalist countries)
• These subjective responsibilities vary from
• Private market failures occur where economic nation to nation and are heavily derived from
assumptions of competition fail cultural or historic expectation
• i.e., Informational • i.e., unemployment benefits, universal
asymmetries, monopolies, negative healthcare, public education, etc.
externalities, etc.
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20. How you get it done?
5
Balance costs
4 and benefits
Evaluate against • For remaining
3 criteria for options, compar
Develop innovation e costs and
2 spectrum of • Eliminate benefits to
Identify unit of solutions solutions which narrow list of
1 customer • List out various fail to address policy options
Define the analysis solutions on the the failed
problem • Identify the spectrum of conditions for
smallest unit of government innovation
• Evaluate the key intervention, fro
measure at
market failure(s) m no • Eliminate
which customers
requiring intervention to solutions which
can evaluate
government complete cause other
products
intervention takeover of the conditions for
• Ensure market innovation to fail
• Identify the failed
producers and
conditions for
can identify with
innovation
this unit of
measure
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21. Next steps
• Complete additional interviews of public servants, contractors, and constituents
• Prepare case studies on stifled and successful innovation at all levels of US
government
• Further develop framework for enabling disruption in policy and public services
• Meet with policymakers and academics to challenge findings
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22. Appendix 1: Research methodology to date
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23. Research to date
Interviews with thought leaders and public servants (including)
• Erika Poethig -- Deputy Secretary of Housing and Urban Development
• Mike Dimatta -- Former Deputy Director, OMB
• Roger LaRouche -- Former Deputy IG at Department of Interior
• Neil Kleiman -- NYU, Former Policy Director at Living Cities
• Neil Khare -- Director of Policy, Office of the Cook County Board President
Journal & literature research
• Industrial development theory
• Contract / Privatization theory
• RFP policy surveys
• Regulatory best practices
Survey of public facing innovation initiatives and competitions
• SAVE
• SC2
• Bloomberg innovation teams
• City Bid system
• Etc.
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24. Research goals
Conduct further review of innovation efforts within branches of government
• Review instances of successful and unsuccessful disruptive innovation in regulation / policy
• Review instances of successful and unsuccessful disruptive innovation in public services
Complete additional interviews
• Interviews with academics and public servants to collect additional information
• Notable candidates include: Larry Lessig, David Moss, Joseph Stiglitz, Tom Friedman
• Follow up with initial interviewees to discuss findings, frameworks, and recommendations
Develop framework and complete article for circulation
• Goal of “HBR style” article for practitioners
• Additional academic publication where relevant
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25. Unused slides
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26. More than 1/5th of US industry fails to benefit from disruption
Federal Spending
3500 60%
3000
50%
2500
Spending as a % of GDP
40%
Spending in $B
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30%
1500
20%
1000
10%
500
0 0%
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Education-fed $ billion Welfare-fed $ billion Transportation-fed $ billion
Defense-fed $ billion Health Care-fed $ billion Protection-fed $ billion
Pensions-fed $ billion Other Government as % of GDP
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