|Chapter 1 | Endnotes|
New Government for a
Transformative Technologies in Modern History
SOURCE: Newsweek Online: October 4, 1999.
But wait, there’s more. Some experts say mere e-commerce is already old hat. The next big thing will be “m-commerce,” or commerce via mobile, wireless links. In the near future, you’ll be able to perform many Internet services and tasks through cell phones, personal digital assistants, and other dedicated devices. Nokia predicts that by 2003, Net-enabled phones will outnumber Net-enabled PCs. You’ll use portable “smart phones” for everything from dinner reservations to stock trades. The research firm Dataquest predicts that within three years, more than 40 percent of all European e-commerce will be conducted with mobile devices.
How we work, how we buy, how we play, and how we govern—the Information Revolution is affecting everything. Take health care. The Internet is vastly increasing consumers’ knowledge of the health care options available to them. The demand for online health information is outstripping supply, and Internet usage for health-related applications is growing twice as fast as general online usage. The advent of the “e-health” consumer is transforming the health care industry. As one recent study put it, Americans:...are becoming engaged, empowered, energized e-Health consumers. They represent a vast force that is about to transform the health care world. And any health care business that is unprepared to deal with this force risks being left behind in its wake... Health care consumers are beginning to wake up to their power, and they are on the brink of toppling traditions and shaking up the industry in ways previously unimaginable.
Moreover, the rise of e-commerce is inevitably spurring consumer demand for many forms of online health care service delivery, from medical advice to drug purchases to insurance claims processing. According to the California Health Care Foundation, “patient education, compliance, and support programs will merge on the Internet.” In the near future, we will be able to perform many simple medical tests from home, and more doctor consultations will be online.
The Internet is transforming education as well. Online courses, which now constitute just $350 million of the $240 billion higher education industry, are expected to grow to $2 billion by 2003. The research firm IDC estimates that the number of students taking online “distance learning” courses will triple in the 1998-2002 period, from five to 15 percent of all college and university students.
Jones International University, the world’s first fully online university program, received full academic accreditation from the North Central Association of Colleges and Schools in March 1999. Jones International is based in Englewood, Colorado, but its “campus” and educational programs are as close as any personal computer, anywhere in the world. Just as ambitious is UNext.com, a $200 million Internet business university project that includes as its partners Columbia, Stanford, the University of Chicago, Carnegie Mellon and the London School of Economics.
These revolutionary changes in health care, education, and other sectors of the economy will have a profound impact on public policy. But it will take a thorough understanding of the new environment and creative leadership from state policy makers to truly capitalize on the positive effects these changes can have on Texas and Texas government.
The buzz in the stock market, on television, in Congress, and on the street is about the “New Economy”—where it’s going and what it means. But what is it? How is it different from the “old economy”? And what does it mean for our state and our government?
While no one can yet gauge the full impact of the seismic shifts IT is producing in our society, the new economy does have distinct characteristics beyond its obvious dependence on information technology. It is global, intensely interlinked, and relies on worker knowledge and skills. It is dominated by intangibles, such as ideas, information, and relationships. And it is dynamic, subject to continual flux and change to keep up with the lightning-fast pace of technological development.
A Global Economy
The new economy is fundamentally international in nature—the first truly global market in human history, linking the economies of seven continents and more than 190 countries. To thrive in this setting, Texas must find a place in the worldwide mosaic, not simply a national one.
In the last three decades, US exports have doubled in importance, from 5.6 percent of gross domestic product in the early 1970s to 11.2 percent over the last three years. Over the same period, Texas’ international trade followed an identical trend, rising from 6.8 percent to 13.6 percent of the gross state product (GSP). This growth, moreover, is not due solely to the North American Free Trade Agreement. While Texas’ exports to Mexico have soared by more than 70 percent over the last five years, Texas trade with other countries rose by nearly 40 percent during the same time.
The rise of globalization is being driven by a variety of factors. Trade barriers, such as tariffs and import quotas, have been reduced and, in many cases, nearly eliminated in the half-century since 48 nations signed the first General Agreement on Tariffs and Trade. The average tariffs imposed on imports by industrial countries have fallen from 40 percent 50 years ago to about four percent today, and other trade barriers have been similarly whittled away. Meanwhile, container shipping, heavy worldwide air traffic, and the Internet all have helped to minimize geographical barriers.
Texas deserves a government that will facilitate, not hamper, the global competitiveness of its private sector. It must create a climate that attracts investment and preserves the state’s unique combination of limited regulation and taxation with the efficient delivery of necessary services. In today’s economy, a computer programmer can work as easily in Austin as in Paris or Bombay. The decisions Texas policymakers make today will affect where companies choose to place these jobs.
The interlinked quality of the new economy is becoming increasingly evident in our everyday life. Obviously, the Internet is the most prominent example of this quality, but others are spreading as rapidly, from cellular telephones to global positioning systems to “just-in-time” inventory systems designed to automatically deliver products and supplies where and when—and only when—they are needed.
The growth of Texas’ communications industry underscores its central role in the new economy. The state’s communications employment rose by 64 percent in the 1990s, averaging an annual growth rate of more than five percent—about double the growth rate for the economy as a whole. In terms of output, the communications industry grew from 2.2 percent of Gross State Product (GSP) to 3.1 percent. Behind these statistics lie the vibrancy of the Telecom Corridor in Richardson, north of Dallas, and the rapid growth of bilingual phone centers in San Antonio and El Paso. These latter communities have capitalized on both their bilingual populations and Texas’ position in the central time zone, which allows one shift to cover much of the working hours of both coasts.
The new economy also has the potential to reduce the isolation that restricts economic development in many rural areas in Texas and throughout the country. John Moore, a consultant who has helped set up Web sites for areas in rural Texas, told us that the Internet can revitalize these areas by creating jobs, keeping young people from leaving and making it easier for companies to locate in rural areas.
The importance of connectivity and communication is a major factor distinguishing the new economy from previous waves of industrial change. Communications, which in the end is what the digital technology and media are really all about, is not simply a sector of the economy. Today, for instance, farmers can make use of global positioning systems, moisture detectors, digitized maps, infrared photos, and minute-by-minute weather updates. Truck drivers use routing software and the Internet to arrange their trips. Communication embraces and enhances the entire economy, influencing how all business is done and how we structure our lives.
Worker Knowledge and Skills
The new economy was made possible by a handful of brilliant, gifted people who had the in-depth knowledge and the vision needed to launch the IT revolution. To maintain this revolution, however, will require what a recent economic study called “very large numbers of literate and numerate people...to apply that technology in just about every area of the economy and work with it.” Currently our ability to supply those workers is in doubt.
America has every right to be proud of its universities and private research centers, which still lead the world in technical innovation. But this magnificent resource rests on a shaky foundation—a K-12 educational system that virtually everyone agrees is in need of radical improvement.
Similarly, businesses must make a serious, ongoing commitment to its workers to ensure that they receive the training and educational resources to remain on top of the technological changes sweeping through the economy. Successful employees of the 21st century will be obligated to update their job skills continually. The most successful enterprises, both public and private, will support their workers in this task, through training delivered on-site or online, often through partnerships with public and private educational institutions.
“The most robust empirical finding about the new economy is that the return on investment in human capital has risen faster than the return on investment in physical capital,” says US Treasury Secretary Lawrence Summers. “If investments in factories were the most important investments in the industrial age, the most important investments in an information age are surely the investments in the human brain.”
Achieving Cost Savings from E-Commerce
Cost savings from e-commerce generally come from better supply-chain management, procurement and inventory control. Driving down a little deeper, there are six ways that organizations can generally achieve cost savings from Internet business strategies.
First, eliminating numerous steps in the purchase order process involved in entering data, correcting for errors, and passing the paper order from person to person, will save money on processing costs. Microsoft estimates their average cost of processing each transaction falls from $60 to $5 by moving it online. In Victoria, Australia, electronic purchasing has allowed Victoria’s Department of Natural Resources and Environment to reduce purchasing costs from $32 to $5 per order.
Second, companies are able to reduce their average inventory and, therefore, their production costs by more efficiently managing their supply chain through the Internet. Cisco estimates it saved $695 million in supply chain management in 1999 from employing Internet-based business solutions. United Health Group, a Minnesota health-services provider, has achieved double-digit increases in productivity through reengineering business processes with IT while cutting costs by $300 million.37
Third, improving the flow of information between buyers and sellers makes markets more efficient by encouraging more competition between suppliers through online auctions and reducing the costs of doing business with the buyer. In this way, buyers may be able to obtain lower prices.38
Fourth, moving customer care calls to self-service web transactions saves upward of 90 percent for each call avoided. By moving customer service calls to a web-based self-service environment, IBM saved $750 million and Cisco Systems saved $506 million last year.
Fifth, by moving many employee communications and services to online self-service transactions, organizations can save money on paper, and reduce the number of people needed to serve internal customers. Cisco Systems is achieving savings of more than $8 million annually from recruiting employees online.
Finally, the Internet allows organizations to reduce travel and training costs through videoconferencing and e-training. Moving 30 percent of internal training online saved IBM more than $100 million in 1999.
In the final analysis, the most important commodity in the new economy is information. This is perhaps the most fundamental distinction between the old and new economies. Traditionally, production of any product or service required “using up” scarce resources such as capital and labor. As these resources were consumed, they became even more scarce, increasing their cost. This relationship limited the potential of the old economy. Greater production requires more labor and more capital, and the cost of both rise as they become more scarce.
The basic resource of IT—information—is, in practical terms, infinite; it can be reproduced endlessly without diminishing its supply. Because the use of information does not diminish its supply, information-based production can be increased at a price that tends to decrease, rather than increase, as volume goes up. Phillip Evans and Thomas Wurster, the authors of Blown to Bits explain: “Information has perfectly increasing returns: spend the money to learn something once, and that knowledge can be reused at zero additional cost forever; double the number of uses and the cost per use halves.”
The Internet Age has turned notions of “scarcity” inside out. In the old economy driven by mass production, rarity tended to equate with value. Information technology, by contrast, only gains utility and value as it becomes more universal or common. This theory is often referred to as Metcalfe’s Law, named after Robert Metcalfe, the founder of 3Com Corporation. He observed that networks (telephones, computers, fax machines, telegraph, etc.) significantly rise in value with each additional user. According to Metcalfe’s Law, the usefulness of a network equals the square of the number of users, meaning the more people who use a particular software program, book, game or network, the more valuable it becomes. Not only that, but as the network gets larger, it also gets smarter.
IT Drives Innovation and Productivity
Mankind’s ingenuity—our ability to innovate—has always been the major factor in economic growth, from quantum leaps such as the transistor to the creation of new and more productive ways to organize work, such as Henry Ford’s assembly lines.
Estimated E-Commerce Savings by Industry
|SOURCE: Goldman Sachs.|
The private sector is making this large investment in IT because it will pay off in similarly large savings and higher productivity. In 1998, US businesses and nonprofit organizations saved around $15.2 billion in reduced or avoided costs by using the Internet, according to a recent report by Giga Information Group, a market research firm in Cambridge, Massachusetts. Giga estimates that such savings will rise to about $600 billion by 2002. The Organization for Economic Cooperation and Development (OECD) says that business-to-business electronic auctions and buying cooperatives could cut raw material costs by up to 25 percent. And, a Federal Reserve study attributes two-thirds of the average annual $70 billion in productivity gains achieved by US businesses in the last half of the 1990s to IT.
In one of the more sophisticated analyses of the economic impact of e-commerce, a recent Goldman Sachs report estimated savings from business-to-business e-commerce in 16 industries. The savings ranged from two percent in the coal industry to nearly 39 percent in electronic component manufacturing (see Table 1-2). The report states that e-commerce is causing a price and productivity “shock” across industrial sectors. For example, Goldman Sachs believes Internet-based procurement and sales could reduce the average cost of a car by $3,650 (14 percent). The overall economic effect of IT in five major western industrial economies will be an average savings of five percent across the board and a 3.6 percent average reduction in aggregate prices.
If all levels of government in the US could replicate the 20 percent average cost savings the private sector is achieving from web-enabling their systems and services, they could save $110 billion a year.
Finally, the new economy is based on “creative destruction.” Organizations are created, fulfill their purpose, and then transform themselves or simply end. Hundreds of new firms and dozens of new industries are created every day, and nearly as many will die without fanfare (see Table 1-3).
One factor driving creative destruction is what high-tech types call the “killer app”—a new good or service that establishes an entirely new market and, by being first, dominates it. Examples include the personal computer, electronic funds transfer, the first word processing program and, of course, the World Wide Web. Killer apps are both creative and destructive; they displace older offerings and in the process destroy and recreate whole industries. E-mail, a prime example of a killer app, is not only giving the United States Postal Service fits, but it also is redefining how people communicate with each other.
Another major factor driving creative destruction in the new economy is the fact that the Internet has made it much more practical for suppliers of goods and services to deal directly with the ultimate consumer. As more and more companies follow the business model of selling directly to consumers, pioneered by companies such as Dell Computer Corporation, the very existence of thousands of bricks and mortar intermediaries who previously served to bring buyers and sellers together will be threatened. This process, sometimes referred to as “disintermediation,” also will give rise to a whole new intermediary function—navigation which will provide expert guidance and shortcuts through the maze of choices and information offered in the Internet marketplace.
The dynamism of the new economy is particularly pronounced in Texas. In recent years, the state’s economy has been growing by about a quarter-million jobs annually. The number of jobs gained and lost each year, however—what economists call the “churn”—is much larger. Over the last 20 years, the Texas economy has created jobs at an annual rate of 15.7 percent and lost jobs at an annual rate of 13.2 percent, leaving a net gain of 2.5 percent in total employment each year. These figures imply a churn in Texas’ job base of nearly 30 percent annually—a huge number of jobs “changing hands” each year (see Figure 1-1). “Despite the fact we have been destroying jobs, we have been adding more,” Michael Cox, Chief Economist of the Dallas Federal Reserve Bank, told us.
How is government reacting to the enormous economic and societal changes we’ve documented? The short answer is slowly.
History tells us that significant change in government almost invariably comes in response to crisis: a scandal, a budget shortfall, or economic troubles. For Texas, such change is almost always difficult and painful, due partly to the decentralized nature of a government formed by hundreds of separate agencies, and partly due to sheer bureaucratic inertia: “We’ve always done it this way!”
Today, a booming economy has helped keep Texas’ finances healthy. But state government faces a new crisis—a crisis of rising expectations. The private sector is taking advantage of new technologies to deliver more goods and better service to customers at a lower cost, and as those taxpayers become accustomed to this kind of attention, they expect the same sort of performance from their government.
Texans want to be able to ask questions and receive prompt and accurate answers. They want to get the information they need without a dozen phone calls. They want to get their government business done quickly and conveniently. They want nearly everything the public sector does to be done faster. Increasingly they will demand choice and personalized service from government. And they want to be able to communicate and participate in crafting their government. They want to be heard.
Texas state and local government has a long way to go before it can live up to the expectations of the people it serves—people grown accustomed to a 24/7 business environment, to firms that can deliver goods to their doorsteps quickly, cheaply, and with a minimum of consumer effort. The hallmarks of the new economy are speed and innovation, a dizzying array of consumer options, vigorous competition, and a profound dedication to customer service. In contrast, the public sector still seems mired in the early 20th century, turning out mass-produced, “one-size-fits- all” services with a depressing lack of choice or quality control. When Texans think of their government, too often they still think of red tape, inflexible bureaucrats, long waits, and confusing forms.
Soon, they will come to expect and demand better. And the speed of change, by government standards, will have to be brisk. As The Economist puts it: “As increasing numbers of consumers become used to the quality of service offered by the best Web retailers and service providers, their willingness to accept slum standards in the public sector is coming under strain.”
Responding effectively to the increased expectations from citizens will require massive changes in Texas’ government structures, services and in the culture of state government. This will be the major challenge for state policymakers in this decade.
There’s another powerful motive for transforming Texas state government: some costs, such as health care, keep increasing seemingly beyond any ability of policymakers to halt the flow. “On the cusp of a new century, Texas is on the brink of spending $100 billion on state government’s two-year budget,” says Comptroller Carole Keeton Rylander. “That’s more than $5,000 for every woman, man, and child in the state.”
State spending more than doubled in the 1990s, from $23 billion in 1990 to nearly $48.4 billion in 1999 (see Table 1-4). That’s an average growth rate of 8.6 percent per year. Even after allowing for inflation, state spending rose by 6.3 percent annually.
But just what has caused state spending to grow three and a half times faster than the population it serves? And what can be done to slow or reverse this trend?
First, it helps to understand that state spending is largely concentrated in a handful of major programs (see Figure 1-2). Medicaid and the state’s share of the cost of public education alone account for more than half of all spending. State colleges and universities, highway programs, and prisons represent another quarter.
During the 1990s, health and human services (HHS) were easily the fastest-growing area of state spending, accounting more than 40 percent of the state budget in fiscal 1998 if all health care spending is included. Texas now spends more on health care and human services than on any other area of government (see Figure 1-3).
Principle Budget Drivers of Texas Government in 1990s
Not surprisingly, K-12 education has been another important source of rising costs. From a total of less than $6.3 billion in 1990, the state’s public education spending nearly doubled by 1999, to nearly $12.2 billion (see Figure 1-4). Public education increases are due to two causes—growth in enrollment and court-ordered funding equalization efforts.
In response to a Texas Supreme Court decision that the state’s school funding system did not meet state constitutional requirements, the Legislature created the equalized funding system known as “Robin Hood.” Because higher property tax rates are generally rewarded with additional state funds under this system, school districts regularly raise property taxes, nearing a state-imposed maximum rate. In an effort to keep local tax rates down, every legislative session since 1991 has seen large increases in state public education appropriations.
Public safety and corrections represent the third major factor behind the growth in state spending. Texas’ public safety and corrections agencies spent $3.2 billion in 1999, up from $1.2 billion in 1990. This was almost entirely due to the explosion in Texas’ prison population, which has risen from 44,000 at the turn of the last decade to nearly 147,000 in 1999, an increase that has required the construction of hundreds of millions of dollars’ worth of prisons, transfer facilities, state jail units, substance-abuse facilities, medical and psychiatric facilities, and work camps.
Another major reason for the prison boom was a 1974 class action lawsuit filed in federal court known as the “Ruiz case.” It required a complete overhaul of Texas prisons, improved living conditions for inmates, better access to health care and legal services, and a minimum amount of confined space per inmate. It resulted in hundreds of millions of dollars in voter-approved bonds to build more prisons.
Society Changes, Government Follows
Our economy and society has not experienced the monumental degree of economic and societal change since the 19th century, when steam and steel transformed America from a largely agrarian nation into an industrial powerhouse.
As the Industrial Age matured, the great manufacturers were forced to create huge organizations, tightly controlled by central offices. The era of “scientific management” and efficiency experts had arrived. In the US, efficiency expert Frederick Taylor pioneered time and motion studies to see how the workers could be more efficient. Businessmen of the time adopted Taylor’s approach, searching for the one best way of accomplishing any given task.
As the art and science of management progressed, methods developed in the business world were absorbed into government. The manufacturing philosophy of interchangeable parts and one-size-fits-all production worked well in making the Springfield rifle and the Model T. Now, it was applied to public enterprises, from bridge-building to education.
Government workers, each assigned to specific definable tasks, were organized into bureaus, divisions, and offices. Just as the new industrial society and mass production resulted in large, hierarchical enterprises, government’s attempts to address the problems of the new industrial society resulted in similarly large, hierarchical bureaucracies. The old practice of filling government offices with party loyalists and political patrons gave way to the concept of civil service with a large, trained corps of specialists who were better suited for the tasks of government. Civil service in the Progressive Era assumed a greatly expanded role in American society, in effect creating mass-produced, assembly-line government.
But, the management practices and organizational structures of today’s most successful private companies don’t bear much resemblance to those of businesses of 30 years ago, much less at the turn of the last century. Unfortunately, the same cannot be said of much of government. In many respects, the public sector is much the same as it was before World War II.
Principles of a “New Economy” Government
Just as government fundamentally changed in the 20th century in response to industrialization, it must change today to respond to the demands of the Internet Age.
No purpose would be served by trying to overlay a high tech veneer on an antiquated system. Sprucing up clunky business processes with the bells and whistles of a few new Web sites without reengineering the underlying systems and processes is like “putting lipstick on a bulldog” according to the authors of Net Ready.
Minor tinkering will not produce a workable Internet Age government. Texas’ systems and bureaucratic structures must be completely rethought and redesigned. In the next five years, the Internet and related technologies will not only transform the way most public services are delivered (and who delivers them), but redefine the fundamental relationship between Texans and their government.
As e-Texas E-Government Commissioner Ro Parra noted in an e-Texas hearing, the Internet can be “a tool for democracy, by rebuilding the frayed link between people and government.”
While compiling this report, the e-Texas Commission examined public and private sector “best practices”—or methods high-performance organizations use to excel in the information economy. We found some of these best practices in Austin, at companies like Dell Computer Corporation and Vignette, and in innovative state programs such as the Texas Incentive and Productivity Commission (TIPC); others in states across the nation; still others in foreign nations. Around the world, scores of governments are transforming themselves to meet the challenges of the new century.
Some intriguing examples include the following:
This evolution is hardly restricted to the US. A number of overseas governments are using new technologies to create fundamental changes in the way they do business. Perhaps the most advanced technology-based initiative of any government in the world is Singapore’s e-Citizen Centre, which allows its citizens to conduct virtually all of their interactions with the government online. Instead of being organized by government departments, the e-Citizen Centre is organized around “life events,” including birth registries, primary and secondary school services, job search and career services, housing aid, and retirement services.
The transformative initiatives reshaping the public and private sector seem to share a set of common principles that are essential to the creation of Internet Age government and may be used as key components for restructuring Texas government. The principles hold that government must be:
Each of these multifaceted components is important to the success of 21st century government, and each deserves further explanation. We have divided this report into two major parts. Part I discusses the principles of a New Economy government (Chapters 2-5), and Part II applies these principles in the largest budget areas of state government (Chapters 7-13). In Chapter 6, we describe the progress e-Texas has made actually implementing change since it was launched in November 1999.