Public Management Review

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Strategic management and public leadership

Jan-Erik Lane & Joseph Wallis

To cite this article: Jan-Erik Lane & Joseph Wallis (2009) Strategic management and public
leadership, Public Management Review, 11:1, 101-120, DOI: 10.1080/14719030802494047

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Published online: 15 Jan 2009.

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Abstract
STRATEGIC
As a new and flatter organization replaces the
traditional public organization, it would need MANAGEMENT AND
more of strategic public management. Key
decisions in team production relate to the PUBLIC LEADERSHIP
employment of outcome measures for both
monitoring of real activities as well as the
reform of the structuring of these activities. Jan-Erik Lane and Joseph Wallis
Only outcome measures could constitute the
starting-point for public sector strategic Jan-Erik Lane
management. A concept of strategic manage- University of Geneva and University of the South
ment for public services must include a Pacific
theory of public leadership, resulting from the E-mail: lane_j@usp.ac.fj
mechanism of credit and commitment on the
part of the team providing services. A theory Joseph Wallis
of strategic public management must take American University of Sharjah
into account the specific features of the United Arab Emirates
public sector as well as include the implica- E-mail: jwallis@aus.edu
tions of rule of law. Given the criticisms of the
rational decision model, a theory of strategic
management must pay attention to the
lessons from public administration about
bounded rationality and the possibility of
pathologies or organized foolishness in
public organization.

Key words
Strategic management, leadership mechan-
ism, new public organization, public
leadership, team production, asymmetric
information, contracting, politics–administra-
tion separation, organizational design, redun-
dancy, outcome efficiency

Vol. 11 Issue 1 2009 101–120

Public Management Review ISSN 1471-9037 print/ISSN 1471-9045 online
Ó 2009 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/14719030802494047
102 Public Management Review

INTRODUCTION

The concept of management originates in the private sector with the big enterprise. It
locates a sphere of discretion for top echelons in the firm, being situated in between the
shareholders on the one hand and the workers on the other hand. This decision making
is strategic to the extent that it concentrates upon goals and the selection of main action
alternatives with a view towards the future (Brown, Lamming, Bessant and Jones
2004). How relevant is this concept to the public sector?
We would argue that the concept of management fits well into public sector
governance, though there are still sceptics who argue that public administration is the
proper framework for the study of the execution and implementation of policies and
decisions in government. Public administration would underline the rule-oriented
nature of decisions within the public sector as well as the strong position of the
‘owners’, that is, the politicians in deciding upon ends and means. Strategic
management, on the other hand, presupposes that senior managers have autonomy
enough to engage in decision making for the future. The governance of the resources of
the public sector – employees, budgets and laws – towards the delivery of public
services requires the tools of management, if the ever-increasing demand for efficiency
is to be met. The vast public sector reforms of the last twenty years have, on the whole,
resulted in a so-called post-Weberian structure of public agencies that have increased
the managerial discretion of the leaders (Bouckaert and Pollitt 2004). Leadership in the
new public organization faces strategic choices when organizing for public service
delivery such as in-house versus outhouse production, long-term against short-term
contracting and hierarchy versus flatness of the internal organization – all issues that
may be resolved by means of strategic management.
However, public sector reforms have pushed the public sector in the direction of
management (Peters and Savoie 2000). Agency autonomy has increased, as
politicians concentrate upon goals leaving the implementation of policy to agencies
at arm’s length distance. Goals tend to be ambiguous and complex, leaving
considerable space for alternative ways of executing policies. Finally, technology has
developed increasing the degrees of freedom in choosing among alternative means.
What, then, are the typical choices that senior management would face in public
organizations?
The concept of strategic management has no established definition. One may wish to
remain sceptical towards it, as the question may be raised whether it is so similar to
concepts like strategic planning, comprehensive rationality and top–down management
that it will be so critiqued that it falls apart (Mintzberg 1993). Yet, strategic
management should rather be linked with the theory of the new public organization and
the theory of contracting under asymmetric information. This article explores the
functions of leadership or management in the post-bureaucratic organization with an
emphasis upon the management of teams of employees towards the achievement of
objectives by means of outcomes.
 Lane & Wallis: Strategic management and public leadership 103

STRATEGY AGAINST TACTICS

In the public sector the acting organizations are agencies or bureaux, varying in size
from minuscule to gigantic ones. In the literature, several strategies have been analysed,
including bureau expansion, bureau reshaping, bureau autonomy and bureau turf. In
public administration one finds a strong emphasis upon the self-centred interests of
almost immortal bureaux, making resistance to change and favouring established
procedures. With public choice came the focus upon incentives and the implications of
egoism with bureaucrats, driving bureaux towards inefficient levels of output and the
capture of slack. The policy network approach underlined the interdependency of
bureaux upon private partners in order to get the job done. New public management
(NPM) suggested a strong remedy against both bureau autonomy and bureau
inefficiency, namely outsourcing or contracting out. In Osborne’s version, reinventing
government entails undoing the classical institutions of bureaucracy, putting the
provision of services upon a system of short-term contracts. Today, there is a realization
of the limits of contracting out, as bureaux attempt to focus upon their core activities,
underlining the achievement of social objectives but not necessarily productivity (Lane
2005).
In a post-NPM assessment of strategic management, it is important to focus upon the
social objectives of public service provision. What matters first and foremost is the
effectiveness of the bureau in meeting its social obligations. The constant public sector
reforms have in many places led to a hollowing out of the State, meaning that
government can no longer provide essential services with no private provider replacing
the State. The provision of public services has strong distributional consequences, which
implies that state contraction leads to increased poverty. At the same time, public
sector reforms have increased the awareness of the importance of strategic choices
about how to provide public services. Markets may allocate services that we designate
as ‘public’ or ‘essential’. And there are several ways to contrive market allocation
through the employment of various tendering and bidding schemes.
The theory of strategic management should be seen as a normative framework with
no claim to describe ongoing practices. Whether and to what extent it occurs is an
interesting question, but strategic management is more about feasibility and public
sector reform: how to make public organizations more prone to engage in strategic
management, despite all factors that lead to myopia, slack and bureau autonomy?
The concept of strategic management when employed for the analysis of decision
making in the private firm is complex and perhaps not a very precise one (Mintzberg
et al. 1998; Stacey 2007). It engulfs a variety of different kinds of decision making: the
so-called ‘lowest’-level of strategy, operational strategy, deals with day-to-day
operational activities such as scheduling criteria. Business strategy would be the
aggregated operational strategies of a single business firm or that of an SBU (strategic
business units ¼ a semi-autonomous unit within an organization). It is usually responsible
for its own budgeting, new product decisions, hiring decisions and price setting.
104 Public Management Review

In a diversified corporation, business strategy refers to the way in which a firm

competes in its chosen arenas. Corporate strategy would then be the overarching
strategy of the diversified firm: ‘in which businesses should we compete?’ and ‘how
does being in one business add to the competitive advantage of the corporation as a
whole?’ Recently, dynamic strategy is said to portray firm strategy, both business and
corporate, embracing ongoing strategic change, and the seamless integration of
strategy formulation and implementation. These concepts of strategy do not sit well
in the public sector context, except perhaps for the incorporated public enterprise.
We would be inclined to suggest that a concept of strategic management be
constructed for the core services in the public sector, that is, law and order,
education, health care and social care, infrastructure and culture. Here there are no
business units for the simple reason that the value of different activities does not
come with a market price.

SPECIFICITY OF PUBLIC SERVICES

A public service is not merely a business area as with a multi-purposes firm in the
market. First, it is an activity undertaken by a political body, governed often through
democratic politics. Second, its provision is regulated in public law documents,
meaning that the civil servants or bureaucrats providing these services have to act within
the framework of rule of law. Third, many of these services are partly or wholly
financed by taxes, that is, by means of the budget.
Strategic management has to accept the restrictions that ensue from these three basic
facts about public provision of services. Given these, what would then strategic
management signify? Strategic management belongs to the rational theory of
organization and it shares with other approaches within this branch the weakness that
it cannot be said to be highly descriptively accurate. It is easy to point out that strategic
management is political, raises much resistance and may end in organized chaos. But let
us here focus upon the potentiality of strategic management, discussing what its promise
would be in a period of public sector reform.
Thus, strategic management would be constrained in the public sector. In public
organization, there is a double principal–agent relationship that has no real similarity in
private firm organization. First, the population at large, especially the citizens and the
taxpayers, is the principal of government, and thus the politicians are their agents.
Second, government hires lots of employees and contracts with numerous individuals
and enterprises in order to get the job done in providing for public services. Thus, the
Government becomes the principal and the bureaux, agencies and enterprises the
agents. Public organization may be analysed as a nexus of principal–agent relationships
that span from the top down to the so-called street-level bureaucrats (Lane 2005). Top-
and middle-level managers more and more handle the governance of the work
accomplished by either in-house or outhouse production.
 Lane & Wallis: Strategic management and public leadership 105

The legal framework of the public sector narrows down choice options in order that
rule of law may be accomplished. A most serious circumstance is the lack of any viable
or verifiable indicator on the value of public services outside of the 100 percent user
fees sector. Public services paid for wholly or partly by means of taxes do generate
value but it is not easily measured. The problem of strategic management would, to put
things simply, be to maximize value, given a number of choice constraints. But value is
not forthcoming automatically or unambiguously, as the willingness to pay of the
population for most public services is not revealed by means of demand revelation
mechanism like prices. Thus, the public manager must start from some proxy to value,
like for instance policy objectives or corresponding outcome measures, including
surveys of citizens’ utility from public services.
Besides the restrictions upon strategic management that derive from politics and the
rule of law, there are the more troublesome things to take into account when
calculating a strategy for the provision of public services. These restraints are very
difficult to operationalize, all deriving from the key insights into the way public
administration works in reality and resulting from either self-interest seeking tactics
(myopia) or confusion (ambiguity) on the part of participants.

OBJECTIVES: THE RELEVANCE OF OUTCOME MEASURES

Typical of large private firms is that the owners leave a lot of scope for managerial
decision making, that is, managers’ discretion tends to be large. Given that the goal of
profitability is fulfilled, the owners would not interfere in the choice of firm strategies,
although owners would want to approve of major changes. In public organizations,
goals tend to be more ambiguous and complex, meaning that the Government would be
more hesitant to delegate much decision making on objectives to the agencies and their
top-level managers.
Politics in government and Parliament sets more restrictions upon agencies than
ownership boards in private enterprises. Since public sector activities tend to be
regulated by means of public law, the room for changes is more confined. Yet, agencies
are not merely orientated towards the technical aspects in fulfilling goals, handed down
from outside. Agencies participate in the discussion upon the selection of objectives,
both by evaluating existing goals and suggesting new future goals.
This is not to deny that much of strategic management at the agency level concerns
how to get the things done. Strategic management is operational, meaning that it targets
the structure of the main activities and how they are to be carried out. Whereas it used
to be the case that there was one mode of production of public services – bureaucracy,
it is now the case that the choice among alternative forms of provision calls for
deliberate strategic thinking.
The strategic managers face the problem of maximizing or satisfying a set of goals,
derived somehow from either within the agency or given from the outside. Failure to
106 Public Management Review

do so will elicit criticism with the risk of firing. This is a fundamentally outcome focused
perspective upon public management. It is only viable if outcomes can somehow be
measured and compared, meaning verified in a non-costly manner. The development of
the social sciences now allows for the employment of a variety of outcome measures.
Such outcome indicators may directly or indirectly target the following:

1 number of services produced;

2 quality of services;
3 satisfaction with services;
4 quantity and distribution of services;
5 unit costs.

The large number of indicators that may be used to measure the value of public
services is indicative of the basic difficulty that private services provision is not
confronted with, namely the fundamental lack of a demand revelation mechanism that is
strategy-proof. This has implications for strategic management, as strategic managers
would want to come up with goals concerning these outcomes 1–5. Such goals would
state the direction of change for indicators 1–5 that managers would wish to embark
upon in order to improve upon these outcomes. Often one encounters a paradox with
public services delivery, as better effectiveness may have to be bought at the cost of less
productivity, as higher quality in services may require the employment of more
personnel meaning higher unit costs (Boyne et al. 2003). In recent advances in public
sector outcome analysis, it is underlined that pure output measures such as unit costs
may not be a reliable measure of the results that public service provision promotes.
It is the outcome measures and their interpretation that should guide strategic
management in the public sector. Most core services are allocated without a price tag,
as they tend to be funded through taxation. However, the strategic managers would
need to have some kind of information about what value the public sector results in.
Only the use of outcome measures can tell what the citizens and other people really get
in terms of utility from the operation of these services, although outcome analysis is
never as crystal-clear in the public sector as within the private market based sector.
Outcome measures offer both benchmarks for the monitoring of activities and
suggestions to where improvements could be made. The agencies may wish to turn to
professional policy analysts or evaluation specialists in order to have this outcome
information. Without it, strategic management would fumble in darkness, choosing
alternative modes of organization without a key reference point.

PUBLIC LEADERSHIP

The puzzle of leadership in the public sector is truly intriguing. Although one refers often
to the need for leadership, the concept remains difficult to pin down. Yet, it is impossible
 Lane & Wallis: Strategic management and public leadership 107

to do without when one enquires into public sector productivity and efficiency. The
relationship between leadership and public sector productivity has, however, largely been
ignored by economics as a discipline and by that family of economic theories (agency
theory, public choice and the new institutional economics) that have had the most
significant impact on the design of public management reforms in many countries.
In any discussion about strategic management, the central place of leadership in
public sector service delivery must be emphasized. In a post-modern organization or in
a post-NPM regime, leadership becomes even more essential than in the bureaucratic
organization. How, then, does public leadership operate?

Formal and informal leadership

In a private firm, the leaders are singled out as the managers, especially the top-level
ones. They are contracted for the governance of the organization, and often paid
handsomely for their results or efforts. Although shadow leaders may exist in the
organization, the focus upon results and remuneration would tend to eliminate too
many discrepancies between the formal and the informal. Managers lead the work of
the other employees and the shareholders reward them. The basic difficulty in private
leadership is to find the reasonable level of remuneration, given the asymmetric
information advantage of managers.
Things are more complex in public organizations. Leaders do not have a single title and
are not clearly separable from other employees in terms of remuneration. What still
reinforces the formal–informal separation is the public law framework for public
organizations. Since in principle all decisions by a public organization can be contested by
means of the filing of a complaint of some sort, the confusion between formal and informal
leadership will be minimized. Yet, it is a more formidable task to identify the leaders of a
public organization, as it may have established a system of collegiality. Besides, many
different titles are employed for the identification of a formal ‘CEO’ in the public sector.

Political and administrative leadership

Known as the classical politics/administration distinction, the separation between

political leaders and non-political leaders remains a challenge in public sector research.
In relation to the delivery of public services, the leaders will include both politicians and
managers, the relation between them varying with alternative institutional arrangement.
The reform trend towards policy implementation at arm’s length from government has
strengthened the relevance of the principal–agent model for setting up delivery
structures. However, politicians may work closely with managers in some countries and
managers may even be directly elected by the population on a political mandate. In any
case, the work of public leaders includes both politics and technology, as they have to
108 Public Management Review

pay attention to the objectives put down somehow by the principal while searching for
the means to put these goals into effect. Since they may have to step down by both
failing to pay attention to political considerations and lacking the necessary tools to get
things done, any sharp separation between politics and administration is irrelevant to
present systems of service delivery, especially the post-modern organization with
considerable elements of NPM.
Whereas in the stylized form of private firm organization there tends to exist a neat
delineation of the different parties – the shareholders, the CEOs and the employees, no
such simple structure is to be found in public organizations. Yet, one may distinguish
between the principal and the agents, and among the latter between leaders, whatever
their name may be (minister, under-secretary, director, dean, chief executive officers,
president, etc.), and the team of collaborators, whatever their titles may be.

Leaders, teams and output

Delivering public services requires a lot of people, somehow contracted to contribute

to the output on a daily basis. These people, whether employees, self-employed,
privately employed, etc., form the teams, comprising the people who work together
towards the achievement of the objectives. Leadership emerges, as these teams need to
be recruited, instructed, trained, steered and evaluated. The governance of teams
involves a number of tasks, which the leaders should provide, inter alia:

1 Information: how to be informed about most recent and effective technology to

provide for the output of services?
2 Preferences: how to stay attuned to the wishes of politicians and voters for
changes in output?
3 Organizational psychology: how to get people motivated to work towards the
accomplishment of output goals?
4 Troubleshooter: teams are likely to face a number of problems along their path,
which the leaders will have to deal with.

One must not assume teleology, or that because teams need leaders, leadership is also
forthcoming. Many teams have bad or unsuccessful leaders and some leaders to do have
capable teams. Failure is a common theme in organizational analysis. How, then, will
leaders get the teams to work so that output is maximized or at least provided for in a
satisfactory manner? And how will leaders be recruited and remunerated so that they
try hard?
To illuminate this puzzle of public leadership, we will draw on some streams of
theory that have not been integrated and applied to make a contribution to the
literature on strategic management in public organizations. Leadership in public
organizations will be based upon a demand–supply mechanism (Wallis et al. 2007).
 Lane & Wallis: Strategic management and public leadership 109

The mechanism of leadership

First, there is the literature on blame-avoidance and blame-management (Fiorina 1982;

Hood and Lodge 2006). Public leaders will in some way weigh up the relative
advantages of ‘credit-claiming’ with ‘blame-shifting’ and give autonomy to other
institutions and actors when the expected advantages of blame-shifting exceed those of
credit-claiming. Hood and Lodge (2006: 53) argue that under the ‘directed agency’
form of a ‘public service bargain’, public servants undertake to be loyal to whoever
holds elected office at any time in exchange ‘for access to the confidential counsels of
those politicians and a measure of anonymity when it comes to public praise or blame’.
The trust relationships that are established over time through such arrangements may be
jeopardized were (1) the public servant to take credit for leadership of a successful
policy initiative, or (2) the politician to shift blame on to public servants for its
perceived failure. Responsibility for the leadership of a public service delivery team
would thus be assumed by politicians even if, in practice, public servants performed
important but nonetheless ‘invisible’ leadership functions.
Hood and Lodge (2006: 56) do, however, argue that in countries where there has
been a devolution or decentralization of authority according to NPM principles, public
servants will come to operate under a ‘delegated agency bargain’ according to which
political principals and public servants typically ‘agree on a framework, set by the
principal, within which a zone of discretion is obtained by the public servant, in
exchange for direct responsibility for outcomes within that zone of discretion’. Gregory
(1995) has argued that accountability for programme failures remains problematic
under these arrangements. Rhodes (2000: 77) has also contended that where public
managers use their discretion to forge delivery networks, the problem is exacerbated
since ‘accountability may disappear in the interstices of the webs of institutions and
actors that make up networks’. Hood and Lodge (2006) suggest that while the
devolution of accountability should allow public managers to claim credit and be subject
to blame for those aspects of programme outcomes that are under their control, there is
often considerable scope for ‘cheating’ under these bargains such that politicians
continue to claim credit for programme successes while shifting blame ‘downwards’ for
failures. The concept of blame management needs to be integrated with those of team
member ‘commitment’.

Selective incentives and commitment

From the point of view of collective action theory, leaders can be seen as motivating
teams through a mix of ‘selective incentives’ and ‘inducing commitment’ (Olson 1965).
Through the design and implementation of ‘selective incentives’ and ‘monitoring
systems’, rewards or penalties for team members can be made contingent on the effort
they supply in performing the tasks allocated to them.
110 Public Management Review

There will, however, always be a discretionary unobservable component to effort

that cannot be monitored. Moreover, in the absence of effective leadership, this
discretionary effort will tend to be under-supplied. Positive externalities may be
associated with individual effort decisions so that members get only a fraction of the
overall return to the effort they expend and will expend less than the first-best level of
effort on the common endeavour (Hermalin 1998). Furthermore, even where they
derive utility from the attainment of the group’s goal, the ‘logic of collective action’
(Olson 1965) may dictate that they rationally free-ride on the efforts of others since
members calculate that their own discretionary effort will make a negligible difference
to the probability that this goal will be achieved.
Leadership is also related to the type of motivation that ‘revisionist’ economists (Sen
1977; Schelling 1980; Hirschman 1982, 1985; Sugden 1984; Rose-Ackerman 1996)
identify as ‘commitment’. They take their lead from Sen (1977), who challenged the
mainstream economic assumption that individual actions are shaped by a ‘single all-
purpose preference ordering’ by distinguishing ‘commitment’ from ‘sympathy’ in that
it involves individuals choosing acts that involve some sacrifice in personal welfare.
Altruists with interpersonal sources of utility (Collard 1975) or individuals who derive
‘in-process’ benefits (Buchanan 1979) from the process of striving towards the
realization of a group’s goals may thus be said to be motivated by sympathy rather than
commitment. Commitment requires the formation of ‘second order meta-preferences’
(Hirschman 1982) through which individuals evaluate their preference of what they
want to prefer. It may also involve an ‘intimate contest for self-command’ (Schelling
1980) through which individuals struggle to impose a ‘second order’ preference to keep
a commitment over first order preferences to break them.

Demand for leadership

The two concepts of credit claiming and commitment can be integrated in a model of
leadership: the reward for leadership is the credit given to leaders for inducing the
commitment from team members to the pursuit of publicly valued outcomes. A mix of
selective incentives and commitment will typically induce the motivation from team
members that is required for them to perform the tasks required to produce such a
response. In claiming credit for exercising leadership, a person will be claiming credit
for the commitment exhibited by other team members and, to the extent that this
commitment is sustained, will be rewarded by being given credit by these team
members for exercising leadership.
Such a claim is inherently a form of self-seeking, since leaders will be claiming credit
not for their own commitment but for that exhibited by other team members. We
propose that team members will be willing to let a leader take credit for successful
outcomes to compensate this person for his or her willingness to take the blame for
failures and for the risk inherent in relying on member commitment. Relying on
 Lane & Wallis: Strategic management and public leadership 111

inducing commitment is more risky than relying on systems of monitoring and selective
incentives since it requires the leader personally to trust group members not to break
their commitments. Moreover, to the extent that team members consider that the
leader is claiming more credit than his or her due, they may reduce their commitment
ex post so that the level of commitment relied on ex ante may not be sustainable. The
negative relationship between the ex post credit claimed by a leader and the level of
sustainable member commitment that can be attributed to their leadership implies that
as leaders seek to enhance their standing by claiming more credit, team members will
reduce their commitment at a rate determined by their tolerance for the leader’s self-
seeking.
This proposition can be graphically represented by the normal negatively sloped
demand curve shown in Figure 1.
First, notice that the leader’s reputation is treated as the ‘price variable’ on the
vertical axis. This is related to a particular level of commitment sustained by followers
that is measured along the horizontal axis. Second, the willingness of group members to
allow leaders to claim credit for successively greater levels of commitment decreases at
a diminishing rate. A movement down a downward-sloped convex-shaped demand
curve reflects this. Third, the position of the demand curve is situationally determined
by the challenge confronting the team. The leader may be the personal source of such a
challenge. The leader may thus promote a ‘vision’ that interprets that calls for increased
sustained commitment at least level of credit attributed to him or her so that the
demand curve shifts to the right. On the other hand, such a shift may also arise where
external factors cause increases in the commitment required to achieve output

Figure 1: The negative relationship between leadership credit and member commitment
112 Public Management Review

objectives. Moreover, a change in the public service bargain to one under which public
managers are expected to take the initiative in leading improvements in public service
delivery and given credit for these outcomes will also shift the demand curve to the
right since it will increase the leader’s reward at every level of commitment.

Supply of leadership

It is proposed that the supply side of leadership is shaped by the choices leaders must
make regarding how much credit they are going to claim for inducing the commitment
required for achieving an output objective and how much they are going to give (with
the attendant enhancement of reputation) to their other team members. The ex post
response by leaders to having induced the commitment required may fall between two
extremes. At the one extreme, a ‘narcissistic leader’ will seek to claim all credit for
having induced this commitment. The supply curve at the leadership level associated
with this commitment will thus be vertical, reflecting perfect ‘price’ inelasticity. At the
other extreme, a ‘committed leader’ will transfer all credit back to followers as
expression of his or her commitment to empowering them to realize team goals. This
‘sacrifice’ may be shaped by the same second-order meta-preferences that shape
member commitment. A leader who lays his or her ‘leadership on the line’ (Heifetz and
Linsky 2003) in this way, taking no reward for the risk of inducing more commitment,
is, of course, also ‘leading by example’ (Hermalin 1998). The supply curve will be
perfectly elastic in this case as the leader uses his own commitment to expand the level
of team member commitment at a given authority level to meet the demands of any
situation. A more normal supply relationship would be intermediate between these
extremes.
In sum, it is proposed that: leaders will seek to be given credit for leadership, at an
increasing rate, to compensate themselves for the risk of relying on team members to
sustain successively higher levels of commitment. This proposition can be graphically
represented by the normal positively sloped supply curve shown in Figure 2.
Note that increments in leader reliance on sustainable follower commitment involve
movements along a positively sloped, convex, supply curve. Such a movement would
reflect a greater level of trust and therefore ‘risk-taking in relationship’ (Mayer et al.
1999) between the leader and followers. Since risk-taking increases at an increasing rate
with member commitment, the leader will have to demand more and more credit for
leadership to compensate for the greater risk associated with relying on more follower
commitment.
The inspirational dimension of leadership will be reflected in a capacity to counter
the accumulation of disappointment that can erode commitment and shift the supply
curve to the left. Such a shift can also occur where the shift to a delegated agency
bargain allows politicians to place the blame on public servants for failures in public
 Lane & Wallis: Strategic management and public leadership 113

Figure 2: The positive relationship between leadership credit and follower commitment as leaders seek
compensation for trusting followers to sustain commitments

service delivery. This may explain why reforming governments have been increasingly
willing to fund leadership development programmes designed to enhance public
manager behaviours associated with the inspirational dimension of leadership (OECD
2001; Wallis and Mcloughlin 2007).

Equilibrium credit and commitment

Figure 3 depicts the equilibrium between the demand and supply of leadership. In
equilibrium a sustainable level of commitment will be associated with a level of credit
that members and leader agree should be given to the leader as a reward for exercising
the leadership required to produce the outcomes they are seeking.
A comparative static analysis can thus be made of the impact on leadership credit
and member commitment of events that shift the demand and supply curves. A shift
from a directed to a delegated agency public service bargain should give public
managers the discretion to mobilize teams in pursuit of those publicly valued
outcomes that they will, under the new bargain, be held accountable for. Such
accountability will raise both the reward and the risk associated with inducing team
member commitment and will be reflected in a rightward shift of the demand and a
leftward shift of the supply curve shown in Figure 3. In equilibrium, team members
will unambiguously be prepared to increase the credit attributed to public mangers
for inducing commitment although the question of whether this commitment will
increase under the new bargain remains indeterminate in terms of this simple supply
114 Public Management Review

Figure 3: The equilibrium between the supply and demand for leadership

and demand framework. Questions though remain whether politicians will allow
public managers to take the credit their teams are prepared to give them for
exercising leadership in service delivery. Hood and Lodge (2006) suggest that the
incentives for public managers to exercise leadership under delegated agency bargains
may be weakened by instances of ‘cheating’ by politicians who continue to claim
credit for programme successes while making sure that their agents are blamed for
failures. As a result public servants may ‘act in highly defensive ways to avoid
blame – concentrating on achieving audit-proof political correctness and tightly
controlling damaging information rather than bold and open initiatives’ (Hood and
Lodge 2006: 187). In terms of Figure 3 politician cheating will cause both the supply
and demand curves to shift left unambiguously reducing the equilibrium level of team
member commitment. This suggests that state-funded leadership development
programmes may fail to have an observable positive impact on the inspirational
leadership behaviours of public managers if they question the credibility of political
undertakings to allow them to take credit for mobilizing team initiatives.
Since the insights of Chester Bernard, organizations may be approached as man-made
mechanisms for the co-ordination of team effort into the achievement of objectives
through the production of outputs. Public sector reform in the advanced countries have
promoted a new public organization that is in need of strategic management, which can
only come from the leadership function in the organization. The proper functioning of
the leadership function in any team varies over time, depending critically in the above
model upon the commitment of team members to their leaders. Leadership as strategic
 Lane & Wallis: Strategic management and public leadership 115

management involves taking key decisions about the structure of team provision of
services.

TEAM PROVISION OF PUBLIC SERVICES

To achieve objectives, the strategic managers as leaders dispose of a certain amount

of resources. These resources used to be counted as a certain amount of physical
and labour resources but today resources would be measured in terms of money,
allowing the managers to have more leeway as to the choice of production functions.
From the strategic point of view, the managers would face a few critical choices.
They concern: the size of the team; the composition of the team; and the allocation
of tasks between internal production and outsourcing. All three problems (a)–(c) will
be resolved one way or the other when the contracts are handed down and signed.
At the end of the day, strategic management is contracting. Performance and
remuneration constitute the essential elements of contracting in the public sector as
well as in the private sector (Milgrom and Roberts 1992). It will reflect the
bargaining power of the managers on the one side and the employees on the other
side. Contracting always involves uncertainties, unknown risks, insincere preferences,
tactical behaviour with guile and asymmetric information (Rasmusen 2007). Strategic
management can only reduce these limitations upon rationality with redundancy,
slack and duplication – the lesson from public administration (Landau 1969;
Wildavsky 1987).

Size of the team

If there was available a true algorithm for the size of the crew to bring on board when
sending out the air plane to deliver public services at some location, then strategic
management would calculate the exact number for the work force. Theoretically, the
optimal size of the work force is at the point where the marginal value product of an
employee is equal to his/her salary. However, in team production the exact equation
tends at any time not to be known or verifiable. The result is that teams will tend to be
larger than optimality and salaries will not be set at marginal productivities. Yet, for the
total value of the output (TV) as well as the total cost (TC) of the operations, it must
hold that TV 4 TC. If this inequality does not hold, the size of the team must be cut
back in order to avoid TV  TC.
New public management launched an attempt to disclose the basic parameters of
team production by somewhat aggressive outsourcing and large-scale contracting in.
However, there is a definitive limit to the usefulness of such forms of contracting, as
they lead to staggering transactions costs in relation to the making and enforcement of
all the contracts and tournaments. Yet, in team production, the equation of marginal
116 Public Management Review

value productivity set equal to wage is seldom fully known, due to principal–agent
difficulties (Rasmusen 2007).

Structure of the team

Providing public services is a labour intensive activity where only recently the massive
employment of information technologies is starting to change the structure of
organizations by empowering lower echelons to do more advanced work at the expense
of middle-level supervisors. New insights in organization theory, based upon the
evolution of technology, teach us that the old model of bureaucratic organization is no
longer as relevant as it used to be (Kernaghan et al. 2000). The relevance of strategic
management should be evaluated in the context of the post-Weberian public
organization, or the borderless structure.
The mechanistic structure, or bureaucracy, has been the traditional or classical design
in many medium- and large-size organizations. It was rigid with often clearly delineated
jobs, a well-defined hierarchy with a formal chain of command for decision making and
control. On the other hand, the organic structure is more flexible, adaptable to
participative forms of management. Organic organizations have a flat structure with
only one or two levels of management, that is, a decentralized approach to management
that would stimulate employee involvement.

Organizational design

Organization design is the creation of an organization’s structure: functional; divisional;

and matrix. Functions or divisions belong to mechanistic organizations, whereas in a
matrix organization, teams report to two or more managers. Matrix structures may
include functional and divisional chains of command simultaneously in the same part of
the organization, commonly for one-of-a-kind projects. Boundaryless organizations are
similar to flat organizations, with a strong emphasis on teams, where cross-functional
teams dissolve horizontal barriers and enable the organization to respond quickly to
environmental changes and to spearhead innovation. A boundaryless environment calls
for a learning organization to facilitate team collaboration and the sharing of
information, more able to adapt and respond to change than a hierarchical organization.
This design would empower employees to acquire and share knowledge as well as apply
this information to decision making (Kernaghan et al. 2000).
The so-called new organization, preferring the flat organization ahead of the
hierarchical one, would have to be governed somehow. If subordination in terms of a
formal structure is not to be used, then perhaps only strategic management can direct
the team towards the achievement of its objectives, to be evaluated in terms of criteria
on either productivity or effectiveness, or both (Baker 2007). No doubt, employee
 Lane & Wallis: Strategic management and public leadership 117

satisfaction has played a major role in the transition from the hierarchical model to the
flat one. Also technology has made it possible to empower lower-level echelons. But
strategic management also offers a tool for co-ordination of the activities of a public
organization that is less mechanistic and more boundaryless as well as learning.
As public sector reform has led to an increased focus upon results, accountability and
tough decision making, strategic management pushes public organizations more towards
‘boundarylessness’. If this is a requirement for firm success in today’s market economy,
then also public organizations may consider sweeping away artificial obstacles, that is,
hierarchy and turf that hinder improving service delivery performance. Actually, any
organization may go ‘boundaryless’, thus improving their ability to adjust quickly and
proactively to changes in the environment (Ashkenas et al. 2002). Such an
organizational form would emphasize individual rewards, as they give people the
incentives to achieve shared organizational goals.
In the theory of organizational design, there is much talk about the multi-level
structure of the public sector, which may be interpreted as a series of efforts to break
through various types of organizational boundaries – hierarchical (or vertical),
functional (or horizontal), external and geographic – to achieve more flexibility and
innovation (Hooghe and Marks 2003). Strategic management may employ tools away
from ‘command and control’, using instead methods that create shared mind-sets as
well as better access to information across boundaries, thus providing people at
different levels the power to make decisions, including competence-helping so that
people get a chance to develop the skills they need to succeed.

Monitoring costs

Strategic management, when reflecting about the size and structure of its teams, faces
the problem of mixing in-house production with outsourcing. In reality, this is a
contractual question involving two different types of contracts and their surveillance:

1 Long-term employment with monitoring.

2 Short-term employment with constant tendering/bidding.

When people are employed in teams, then the contract tends to have a longer duration
than conventional buy and sell situations. Thus, there arises the question of the
fulfilment of the contract, as the contract ex ante is one thing and the contract fulfilled ex
post another matter. The hiatus between the contract ex ante and the contract ex post may
be very large, raising all kinds of questions about verification and counter-measures.
Thus, from the fact that the contract ex ante tends always to be different from the
contract ex post, strategic management has to evaluate the comparative institutional
advantages and disadvantages of (1) and (2). Monitoring has been the classical tool for
minimizing this hiatus, involving at the end of the day the taking of disciplinary
118 Public Management Review

measures before a procedure of firing would be engaged. It comes, though, with a

considerable cost in terms of running surveillance and taking disciplinary actions.

Transaction costs

NPM suggests that switching contracts is a better method for minimizing the hiatus
between ex ante and ex post. Now, what is true: monitoring costs 4 switching costs, or
monitoring costs 5 switching costs? There are simply too many tactics that can be used
in monitoring, making it toothless – the view from institutional economics. Yet, public
administration would tend to favour monitoring, arguing that the costs of switching
from one team to another could run high. Two considerations pull strongly in favour of
using long-term contracts in combination with systematic monitoring, namely stability
in service provision and employee satisfaction.
It is true that some public sector reforms in the past have had a tendency to hollow
out public organizations. And a radical employment of NPM did not always meet with
positive employee responses. The good idea of empowerment of lower-level employees
could be simply tactics in order to facilitate public sector retrenchment. However,
strategic management does not have to result in stress and layoffs.

CONCLUSION

The concept of strategic management is an essentially normative one, which may be

critiqued for its lack of realist assumptions about how public organizations tend to
operate in general. It belongs to the rational approaches to public sector decision
making and would thus have to face up to the objections raised in public administration
towards the possibility of rational decision making (Joyce 1999).
Public leadership may involve both politicians and managers/bureaucrats. Whatever
principal–agent relationships have been set for a team providing public services, leaders
will be forthcoming to give direction about the accomplishment of objectives. Their
status is, we suggest, much connected with the commitment of the team members. The
leadership function in the governance of public service delivery, under alternative
institutional forms like long-term or short-term contracting, in-house or out-of-house
production, etc., includes both higher-level and middle-level managers. Understanding
leadership is crucial in a theory of strategic management, if it is to stay away from
organized foolishness – the risks of garbage can processes of public sector change
(Cohen et al. 1972).
Strategic management is not without relevance in the new post-Weberian
organization and should be a key focus when debating the direction of public sector
reform. As a normative concept, it complements the traditional focus of public
administration upon bureaucracy and the rule of law by emphasizing the achievement of
 Lane & Wallis: Strategic management and public leadership 119

objectives through organizational design and the handling of contracts with the team
responsible for public service provision. It fits well with the theory of the new flatter
public organization, using information technology massively – the boudaryless learning
organization. Such an organization would need to defend its rationale through goals
evaluation, done by strategic management with due respect for the constraints upon
management that come from rule of law.

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