Exceptional Proff 610

132 International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015

NEW PUBLIC MANAGEMENT: THE RIGHT WAY TO

MODERNIZE AND IMPROVE PUBLIC SERVICES?

Falko Walther

University of Giessen

ABSTRACT

This study discusses whether the customer-centered service and New Public Management

(NPM) approach is applicable to public services and can market-driven systems be implemented

in the public sector. NPM refers to a group of strategies and concepts for public administrations

to improve public services by implementing private sector and business approaches. Governments

in many countries have adopted NPM strategies and have implemented competitive market

structures, incentive schemes and radical outsourcing projects. Enthusiasm for such projects has

resulted in the rapid and uncontrolled implementation of these ideas and concepts, and increasing

numbers of countries are experiencing repercussions. This study presents an initial exploration of these challenges and recommendations for action to overcome these difficulties. The author of this

study shows that unlike purely NPM-focused approaches for enhanced and customer-centered

public services, hybrid approaches that adapt private sector systems, methods and theories yield

efficient administrative structures and high-quality public services.

Keywords: Customer-centered service, new public management, market-driven system

INTRODUCTION

Businesses tailor their services to customer needs to improve their services. They identify

target groups and align their products closely to these groups’ needs and demands. In contrast,

public service providers, administrations and governments face many difficulties and challenges

to improving their services. They cannot easily identify target groups or identify direct

customers. Are all citizens public service customers, or are only consuming individuals

considered customers? Must public service providers tailor services to the needs of consuming

individuals only, or must the needs of the general public be taken into account? In this case,

market-driven structures and private sector approaches cannot easily be implemented in the

public sector. Can public services be customer-centered without an awareness of target groups

and with the political goal of considering the needs of all citizens? Is it achievable and advisable

for governments to develop customer-centered services and administrational structures? The

author presents the following research questions: are customer-centered service and NPM

approaches appropriate to apply to public services, and can market-driven systems to be

implemented directly within the public sector? This study attempts to answer these questions

through a review of recent literature and case studies. The author presents studies that employ

different perspectives based on the literature to describe challenges and possible means of

overcoming them.

This study is structured as follows to answer the research questions. First, the research

area is specified, the framework conditions of a customer-centered public service approach are

described, and related research questions are presented. The article then presents a detailed

overview of related theories and approaches and the theoretical background. Theories,

approaches and themes are discussed at length to describe the identified problems and difficulties

International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015 133

based on a comprehensive literature review. All sources were identified through searches of

research databases and libraries. The search process involved a manual search of specific

conference proceedings, case studies, scientific papers and other related literature. Each source

was reviewed, and potentially relevant literature was identified. Analyzed theories, approaches

and identified problems and challenges are then presented and discussed, and possible solutions

are given. Finally, limitations and avenues for further research are discussed.

BACKGROUND OF THIS STUDY

To answer the research questions, the author describes relevant customer-centered public

service approaches and their evolution. Denhardt and Denhardt (2000) note that customer-

centered public services emerged as a form of NPM, which first appeared in the US in the 1990s.

The author describes NPM as a public administration effort to improve public services via

private-sector and business approaches (Denhardt & Denhardt, 2000). Clarke et al. (2007) also

attributes the first uses of customer-centered public services to a shift among public

administrations toward a more marketized and privatized form of service delivery.

Moreover, Clarke et al. attributes such developments to modern, customer-centered

interpretations of public services through the cultural and organizational development of

bureaucracy itself (Clarke et al., 2007). With these developments, states and administrations no

longer treated their citizens as ‘subjects’ by creating a consumer culture (Clarke et al., 2007).

Consumer culture dates to the 1970s and can be viewed as an aspect of postmodernism

(Featherstone, 2007). Societies began to question traditional institutions, and the first ‘bottom-

up’ decision-making approaches emerged (Clarke et al., 2007).

Hood (1991) describes NPM as a more general term that refers to a cluster of ideas dating

to the 1980s. He supports Martin and Nethercote’s view of NPM as a distinctive movement

toward customer-centered public service ethics and cultural traditions (Martin, 1988; Nethercote,

1989). Hartley (2005) similarly describes NPM as a change in the relationship between public

service providers and customers. Hood states that NPM is based on the development of ‘new

institutional economics’, on one hand, and developments in the realm of business

‘managerialism’, on the other (Hood, 1991). The emergence of ‘new institutional economics’

helped to generate efficient markets, expanding capacities for public service consumers to

consume services that they desired and promoting transparent services (Hunter et al., 1997).

Developments in the realm of business ‘managerialism’ increased organizational performance

through the implementation of professional management techniques in public administration

(Hood, 1991).

Dunleavy et al. (2005) summarized these interpretations and analyzed NPM approaches

from different perspectives. This article focuses on these authors’ NPM derivation and research

outcomes. Dunleavy et al. (2005) describe NPM as a two-level phenomenon involving a well-

developed theory of managerial change based on modern business practice implementation in the

public sector and public choice theory. Public choice theory refers to the use of assumptions and

methodologies of microeconomics to describe how officials and public administrations exercise

power (Rossi, 1998). Dunleavy et al. (2005) identified three main themes relating to the NPM

approach. Disaggregation – Public administrations implement flatter hierarchies with centralized

service points and modern information and communication systems. Moreover, flexibility with

regard to personnel issues, IT, procurement and other functions is enhanced (Barzelay, 2000).

134 International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015

Competition – NPM forms a market of multiple public service providers, which creates

competition among providers and diversifies the services provided (Dunleavy et al., 2005).

Incentivization – This involves implementing performance-rewarding structures and payment

regulations rather than a diffuse public service ethos with no incentives for increasing customer

service quality (Dunleavy & Hood, 1993).

The following analysis of the recent literature and best-practice cases on related themes

describes the strengths and weaknesses of customer-centered and NPM approaches in a

structured manner – disaggregation, competition and incentivization.

NEW PUBLIC MANAGEMENT AND ITS LIMITATIONS

As noted above, customer-centered services form a component of NPM strategies and

follow market- and customer-centered approaches with a strong customer service orientation

(Dunleavy et al., 2005; Hartley, 2005). Such strategies are designed to enhance service quality

levels and to improve service delivery processes (Denhardt & Denhardt, 2000). Moreover,

service providers strive to identify customer preferences to respond to their individual and

dynamic needs (Matthing, Sandén, & Edvardsson, 2004). Administrations increasingly address

citizens’ demands, and services must be cost efficient, competitive and entrepreneurial (Box,

1999). Countries such as the United Kingdom, New Zealand, Canada, the United States,

Australia, the Netherlands and Japan have employed customer-centered services and NPM

approaches, and initial challenges have emerged (Dunleavy et al., 2005).

Disaggregation

New Zealand attempted to reduce service delivery costs resulting from the management

of multiple service-providing institutions by employing NPM structures. However, the country

of 3.5 million residents now manages more than three hundred central agencies and forty

ministries in addition to smaller local service-providing institutions (Dunleavy et al., 2005).

Several of these service institutions were founded to provide services for various stakeholders

and their individual needs. This case poignantly illustrates why customer-centered approaches

are difficult for administrations and governments to implement in the public sector. Pegnato

(1997) states that governments overlook the interests of certain tax-payers by providing the best

services possible to certain citizen customers.

In this case, New Zealand attempted to develop a customer-focused service infrastructure

but at the same time spent considerable sums of tax money against the interests of certain tax-

paying citizens. James and Talbot present similar findings for the United Kingdom (James, 2003;

Talbot, 2004). The United Kingdom attempted to implement an NPM-based agencification

program to improve nearly five-sixths of the United Kingdom’s vital civil services. The authors

show that the program could only supply half of the required services, and improvements have

already been questioned (James, 2003; Talbot, 2004).

There are several cases of less than optimal organizational outcomes that have been based

on NPM principles in public administrations (Brown, Waterhouse, & Flynn, 2003). The

implementation of new administrational structures and the disaggregation of prevailing

hierarchies has resulted in cultural clashes and insufficient consideration of politicization

processes and public sector cultures (Doyle, Claydon, & Buchanan, 2000; Jones, 2001).

Moreover, public administrations have employed centralized electronic services and modern

International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015 135

information and communication systems to disaggregate administrative structures and supply

customer-centered services.

Although electronic services have potential, administrations must learn how to harness

their utility (House of Commons, 2000; Pratchett, 2004). The United Kingdom Passport Agency

and Nationality and Immigration Directorate both executed failed public IT projects that wasted

millions of tax dollars (Collins, 1992). Al-Kibsi et al. (2001) state that public administrations are

not yet adequately equipped to deliver electronic services and that public administrations must

stop placing customers and their needs first (Al-Kibsi et al., 2001; Hazlett & Hill, 2003).

Competition

Public administrations and governments have also attempted to enhance public services

by promoting market-based government structures, market-driven service delivery systems and

competition between service-providing units and public private partnerships (Dunleav et al.,

2006; Kaboolian, 1998). Commenting on this issue, Hefetz and Warner (2012) state that

competitive market mechanisms function best in situations of high competition and low citizen

interest, contradicting the goal of providing customer-centered services that focus on citizen

needs.

Warner (2011) also shows that public administrations prefer cooperation (the service

delivery of several public service delivery units in cooperation) as a service delivery alternative

to privatization. Whereas privatization focuses on harnessing the benefits of competitive

markets, cooperation is more citizen- and customer-oriented in that it penetrates markets (e.g.,

higher-cost rural areas) and service areas (e.g., high technical or regional integration

requirements) that are less attractive to for-profit markets (Warner, 2011). This case shows that implementing competitive markets and mechanisms in public

service delivery systems can be inappropriate for public administrations and governments.

Bognetti and Obermann (2012) explain that the simple substitution of a public service delivery unit with a private one (operating in a competitive market) does not ensure better results. Peters

and Pierre (1998) also note that introducing competitive features to public services can be

problematic in that public sector units were not designed for competitive objectives but rather to

ensure legality and equality.

Incentivization

Public administrations and governments have attempted to apply agency theory concepts

and market sector practices to generate capital charge, interest and operating surplus retention

incentives or performance-based rewards for executives designed to enhance service quality

(Dunleavy et al., 2006; Pollitt, 2007). Implemented incentive systems have presented public

administrations with interesting means of offering and managing services in an efficient and

effective manner (Newberry & Pallot, 2004).

However, the challenges of resource erosion weaken service delivery capacities, which

may ultimately result in a loss of morale and in difficulties associated with attracting and

retaining staff (Hughes, 2008; Newberry & Pallot, 2004). Literature and case studies present

three main reasons for these negative outcomes of incentivization in public administrations

(Hughes, 2008; Newberry & Pallot, 2004; Dunleavy, 1994).

136 International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015

First, agency theory concepts cannot be transferred to the public sector without an

understanding of these concepts and without first adapting them to the specific structural and

economic features of public administrations and governments (Hughes, 2012). New Zealand

experienced fundamental challenges while applying agency theory concepts to commercial

accounting systems. The concepts and related incentives are based on overall objectives of

capital maintenance and growth (Eisenhardt, 1989). New Zealand’s experiences show that

capital maintenance and growth objectives are inappropriate for public administrations and

appear to achieve opposing results (Newberry & Pallot, 2004). Public servants who strive to

maintain public capital and enhance growth do not work in favor of citizens and public service

customers who seek lower taxes and customer-friendly services (Newberry & Pallot, 2004). It

appears that known difficulties related to agency theory may be exacerbated in the public sector

(Pollitt, 2010).

Second, incentivization cannot simply be employed in public sector agencies. Three

features must be examined closely: organizational structures, personal management systems and

the nature of resources and incentives. Even when all of these features merit the introduction of

incentive payment systems, other features, such multiple principals, measurement problems and

intrinsic motivations that are associated with the public sector, serve as barriers (decreased

intrinsic motivation, decreased cooperation, decreased equity and higher control) to the effective

functioning of these systems (Agrawal, 2013; Organisation for Economic Co-operation and

Development, 2005). Third, incentive types influence incentive system outcomes. In particular,

performance-related pay is more problematic in the public sector than it is in the private sector

due to the presence of multiple principals, multi-tasking features, difficulties in defining and

measuring outputs, and issues of workers’ intrinsic motivations (Burgess, 2003).

ADDRESSING LIMITATIONS AND RECOMMENDATIONS FOR ACTION

As described in the previous section, challenges must be considered and overcome to

deliver efficient customer-centered public services. The reviewed literature and analyzed case

studies illustrate how different public service providers, administrations and governments

struggle to implement customer-centered services. Furthermore, NPM approaches that are

considered central to customer-centered public administrations exhibit several weaknesses

(Dunleavy et al., 2005). Various studies have supported the adoption of expanded or adapted

NPM approaches that overcome these limitations (Dunleavy, 1994; Haque, 2007; Lapsley, 2008;

Scharitzer & Korunka, 2000). However, previous studies have mainly focused on only one of the

above-listed themes. These themes must be considered together to provide a comprehensive

picture (Haque, 2007). This section combines different approaches and solutions to overcome

these difficulties based on a literature review of analyzed case studies. In the interest of

consistency, the following discussion is structured in terms of the themes of ‘disaggregation’,

‘competition’ and ‘incentivization’, as in the previous chapter.

Disaggregation

Examples from New Zealand and the United Kingdom describe two main barriers to

public administrations’ application of modern and innovative administrative structures:

increasing complexity and a customer focus versus a citizen focus. NPM and customer-centered

public services generate complex and structured service delivery systems (Dunleavy et al.,

International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015 137

2005). Matei and Antonie (2014) explain that administrations and governments require highly

trained agents and internal as well as external feedback systems to implement NPM-based

service delivery systems. Matei and Antonie (2014) extend the NPM approach through the use of

complexity theory and related research outcomes. This approach allows for the monitoring of

NPM-related outputs and an increase in efficiency levels by offering strategies that improve

service quality and manageable complexity levels (Haynes, 2003; Matei & Antonie, 2014).

Other studies have examined ways in which public administrations can determine

whether to focus services on direct customers or on all citizens’ needs and demands (Walsh,

1991; Wright, Chew, & Hines, 2012). There is no single ‘correct’ way for administrations and

governments to determine how to focus their services (Pegnato, 1997; Ryzin et al., 2004).

Wollmann and Marcou (2010) and Simmons, Powell and Greener (2009) show that

administrations and governments increase service quality levels by focusing local services (e.g.,

local water management) on direct customer needs while directing governmental services (e.g.,

tax management systems) to the needs of all citizens. Services of a higher governmental scale

affect more citizens and must address a wider variety of citizens’ needs and demands (Clarke et

al., 2007; Wollmann & Marcou, 2010). Nevertheless, a public service will be viable only if it

does not undermine the principle that public administrations are grounded in public law and

follow a political ethos (Pegnato, 1997).

Competition

More public administrations and governments are adopting NPM approaches and

implementing competitive service delivery systems (Dunleavy et al., 2006). In moving away

from problematic traditional monopolistic models (the public sector was never designed to

promote private market objectives and competitive market-driven service delivery systems that

neglect citizen interests), customer-focused administrations have been favored (Hefetz &

Warner, 2012). As described in the previous chapter, Warner (2011) presented one means of

overcoming these difficulties that involves implementing cooperative service delivery structures

rather than competitive market-driven systems.

Examples from the United States and Spain also show that a combination of cooperative,

competitive, private and public service delivery systems (hybrid systems) increases

administrative flexibility, places less emphasis on competition and therefore increases public

service quality (Warner & Bel, 2008). Le Grand (2009) shows that competitive service systems

generally offer more structured incentives and are thus more likely to deliver high-quality

services, but they must be implemented with caution and by trained and experienced

professionals. This leads us to the last theme associated with NPM-focused approaches.

Incentivization

As noted above, challenges must be overcome for public administrations and

governments to implement effective incentive programs (Newberry & Pallot, 2004). Agency

theory incentive programs cannot be transferred directly to the public sector, appropriate

incentives must be chosen carefully and programs must be adapted to the characteristics

(organizational structures, personal management systems and payment system structures) of

public service agencies (Agrawal, 2013; Newberry & Pallot, 2004; Pollitt, 2010). However,

138 International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015

various studies describe successful public incentive programs and ways of overcoming these

difficulties. The theory predicts that low-powered incentive schemes (task assignment and work

organization) are optimal and may be employed in lieu of high-powered financial incentives used

in public administrations (Prendergast, 2002).

However, an ‘optimal’ incentive scheme for public sector agencies depends heavily on

the factors noted above (Agrawal, 2013). For example, if multi-tasking is a major issue, task

assignment may serve as an alternative incentive device. By pooling complementary tasks and

assigning them to one public agent, an administrative structure could limit opportunities for

dysfunctional behavior. Team-based rewards may also be preferred to individual compensation

schemes in cases in which cooperation heavily affects administration or government outcomes.

Case studies from the United Kingdom show that incentive systems that apply various incentives

tend to work best in public agencies (Burgess, 2003).

IMPLICATIONS

This study shows that NPM and customer-centered public services can positively

influence the relationship between citizens and public administrations, but these services must be

handled with caution. The NPM approach must be adapted, and future research efforts must

allow practitioners to implement NPM-based structures successfully.

RECOMMENDATION FOR FUTURE RESEARCH

Future research efforts should seek to identify specific factors that cause these difficulties

based on empirical evidence and data. Second, given its aim of generating broad analysis and

initial insight, this paper does not address the possible effects of cultural factors and of

differences among governmental structures and systems in different countries. Further research

must identify these factors to generate a more detailed understanding of these issues.

CONCLUSION

In summary, this study addresses the following questions: are customer-centered services

and NPM approaches applicable to public services, and can market-driven systems be applied to

the public sector? The literature review shows that public administrations and governments must

overcome various barriers to adapting and implementing NPM-focused structures and customer-

centered services. Moreover, various solutions and practical examples based on recent literature

and case studies on ways in which administrations and public service professionals may address

such difficulties were presented. Public administrations cannot transfer market-driven systems

and private sector methods directly to the public sector. Successful implementation requires the

participation of trained and experienced professionals who understand the advantages and

disadvantages of competitive markets and private sector theories.

Furthermore, the particular characteristics of public administrations must be considered

throughout the implementation process; local services and large-scale public services must be

handled differently. Moreover, hybrid competitive and cooperative service delivery systems and

incentive schemes exhibit greater potential than purely competitive public sector systems.

Combined approaches and adapted private sector systems yield efficient administrative structures

and high-quality public services.

International Journal of Business and Public Administration, Volume 12, Number 2, Fall 2015 139

This study offers initial insight into the challenges of private sector theory

implementation in public sector structures and administrations, but further precise empirical

research is needed.

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About the Author:

Falko Walther is a Business Consultant at BearingPoint and external doctoral student at the Faculty of Economics

and Business Administration, University of Giessen, Germany. He holds a Master of Arts in Business

Administration from the JLU Giessen University (GER) and a Bachelor of Arts in Business Administration from the

University of Applied Science Trier (GER). His main research interests include e-government (especially e-

participation), corporate and public management methods and foresight management.

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