Improving organizational health in the public sector: Achieving tangible impact

As some of the largest employers in the world, governments have a dual mission of serving both their citizens and their employees effectively. Civil servants worldwide¹In 2023, the global workforce totaled 3.63 billion people, an estimated 18.6 percent of whom (in OECD economies) are employed by the public sector. are tasked with ensuring citizens’ freedoms, providing effective and efficient public services, improving public health, and creating a favorable climate for stable economic growth. Another part of the government’s mission is to take care of civil servants by supporting their professional development, well-being, and job security (Exhibit 1).

Historically, it has been difficult for governments to achieve these goals consistently, as public sector entities tend to face a broader set of challenges than do most private companies. Not only do governments grapple with the macro trends affecting all organizations—such as exponential technology and skill evolution, evolving demographics and expectations, and increasing fiscal pressures—but they also tackle challenges that are specific to the public sector. These challenges include intense public scrutiny, growing citizen dissatisfaction with government services, political considerations, budgetary restrictions, and multiple competing priorities and stakeholders. All of these factors make it uniquely difficult for governments to deliver on their dual mandate.

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Organizational health may create better outcomes

For both public and private sector organizations, achieving tangible impact may depend on strengthening organizational health and effectiveness. Organizational health refers to how effectively leaders “run the place”—that is, how they make decisions, allocate resources, operate day to day, and lead their teams with the goal of delivering high performance, both in the near term and over time.

For more than 20 years, McKinsey’s Organizational Health Index (OHI) has assessed the strength of organizations and the management practices that build that strength. Our results have repeatedly shown that organizations with OHI scores in the top quartile deliver 3.9 times higher employee satisfaction, 1.5 times higher talent retention, and burnout rates that are 2.7 times lower than those in unhealthy organizations. While most of our work has focused on private sector organizations, our latest research shows that public sector entities could also benefit from OHI-based practices. In this article, we review some preliminary results of our survey of the current state of organizational health in public sector entities and what could be a new way of working for government agencies. Three broad capabilities form the underpinnings of the OHI framework (see sidebar “What is the Organizational Health Index?”):

• Alignment: align employees around the organization’s vision, strategy, and values
• Execution: prepare employees to deliver on their roles with the right capabilities and motivation
• Renewal: ensure that the organization understands, interacts, responds, and adapts to its context and external environment

What is the Organizational Health Index?

The Organizational Health Index (OHI) is a diagnostic that measures critical elements of a high-performing culture in an organization. The index draws from a proprietary database of more than eight million respondents across more than 2,500 organizations in a range of geographies and industries. The index aggregates employees’ and managers’ views on the management practices that inform an organization’s performance across nine dimensions, or outcomes. An overall score is assigned so companies can see how they compare with others in the database. The result is a detailed view of the health and internal-network dynamics of an organization (exhibit).

Launched in 2003, the OHI model is updated regularly to reflect advances in organizational science and changes in the state of organizations more broadly. The 2023 update includes factors—such as agility, resilience, inclusivity, and employee experience and well-being—that have become more pronounced in the wake of the global pandemic, macroeconomic shifts, geopolitical unease, and other global trends.

These three areas can, in turn, be broken down into nine outcomes that determine organizational health. Each outcome includes effective management practices (as of this writing, a total of 37 practices²Since we conducted this research, the OHI has been updated to include 43 practices. across the nine categories) that contribute to that outcome. For example, healthy innovation and learning are driven by top-down innovation and employee innovation, knowledge sharing, data-driven decision making, and capturing external ideas.

To gain a broader view of challenges specific to the public sector, we analyzed what differentiates the healthiest public entities from lower-performing private organizations. The intent of our benchmark research is to create a baseline for public sector performance and enable government agencies and leaders to understand and prioritize the changes that could have the greatest impact on improving organizational health. Our initial results show that public entities score lower than private organizations on the overall OHI (Exhibit 2).

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Coordination and control refer to the ability to consistently measure and manage both the business and risk and to address problems when they arise. These measures show the largest gap from the global median in the public sector, where a focus on multiple priorities and the need to foresee and mitigate risks complicate operational and financial efficiency and execution. Accountability ensures that individuals understand what is expected of them, have sufficient authority, and feel accountable for delivering results; this can be another challenge for governments, since ownership of outcomes may be diluted by the larger number of stakeholders/approvals involved and the difficulty of applying consequence management compared with the private sector. External orientation—the ability to engage effectively with important external stakeholders such as customers, suppliers, and partners—may require improvement, mainly in citizen experience. The smallest difference between the public sector and the global median is in motivation: among other reasons, it is possible that a deeper sense of purpose in the public sector attracts motivated employees (Exhibit 3).

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Our results show that the healthiest public entities can differentiate themselves by embracing new ideas to capture innovation potential. They can also create a sense of belonging in employees through leaders clarifying the strategic direction and transmitting personally meaningful values. Although the whole public sector lags behind private organizations on measures of employee recognition and meritocratic performance management, bottom-quartile entities struggle with them even more. Top performers feel unappreciated, see no opportunities for growth, and quit, while underperformers are not managed effectively (Exhibit 4).

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Opportunities to deliver better outcomes: What works, what doesn’t

Based on our global OHI analysis of around 400,000 public sector respondents from 2012 to 2023 (see sidebar “About the research”), we see the following key opportunities emerging for government institutions to achieve better outcomes:

• anchor vision on beneficiaries of public services
• establish balanced leadership
• implement meritocratic performance management
• accomplish governance with speed
• collaborate without silos

Anchor vision on beneficiaries of public services

A clearly communicated vision and strategic priorities enable government employees to focus on how they can benefit citizens and see the results of their work. High citizen involvement and transparency on vision, as well as making progress to realize that vision, create trust in government. One solution may be to define how an entity’s strategic goals contribute to the national vision. For example, in the United Arab Emirates, Saudi Vision 2030 anchors strategies for all public entities in the country, and in Belgium, Go Vocal (formerly CitizenLab) helps collect citizens’ ideas for improving areas such as urban planning. Outcomes may be less than ideal, however, when public employees’ focus is diluted or misaligned with strategic priorities, and when the public feels disengaged and perceives public sector impact on their lives to be low.

Establish balanced leadership

Inspiring leaders bring perspective and aspirational expectations, link them to values, and align them with expertise and execution on the ground. For example, it may be possible to introduce agency-wide on-the-job training to shift from management to holistic and “humane” leadership of self and others. The Canada School of Public Service offers training for public servants at all levels, with a focus on the latest trends in people leadership; the Australian Major Projects Leadership Academy helps project leaders transform culture, productivity, and sustainability. Outcomes can be diminished, however, when leaders work with external stakeholders to secure broad support but feel that their entities are too internally focused and have a low sense of urgency.

Implement meritocratic performance management

Performance management is successful when civil servants have high ownership, are rewarded for achieving results, and are supported even when underperforming. Not taking these actions may result in underperformers staying in an entity for years, while top talent leaves for the private sector. An effective strategy, among others, may be to leverage the gig economy and introduce fixed-term or temporary contracts to encourage performance and increase labor efficiency. The flexible forms of employment in Germany³“Flexible models of employment,” Germany Trade and Invest, accessed October 2024. are one example.

Accomplish governance with speed

Healthy public sector entities streamline processes through defined accountabilities and discipline, enabling clarification of escalation pathways that can achieve impact faster. They also move most government processes and services into digital mode to accelerate decision making. For example, Estonia⁴Estonia 2024 Digital Decade Country Report, European Commission, July 22, 2024. provides close to 100 percent of public services online, with digital signatures introduced as far back as 2002. Governments can slow down impact, however, if public servants prioritize process over outcomes and the burden of additional administrative work delays the delivery of results.

Collaborate without silos

Governments can achieve synergies when capacity and skills are activated from a network of partners within and across entities. Effective public sector organizations can leverage the skills, knowledge, and time of citizens to modernize legislation; for example, the Danish Parliament’s e-petitions⁵ “A new initiative from the Danish Parliament gives Danish citizens a direct role in the democratic process,” Danish Parliament, February 1, 2018. enable citizens to suggest new legislation. Silos within entities and across the ecosystem can prevent scaling and often require reinventing the wheel.

Improving and maintaining organizational health is a long-term task, but a holistic approach can help maximize impact. The unique challenges of government organizations call for tailoring solutions to the contexts of specific agencies. We suggest an approach that includes setting pragmatic goals based on positive socioeconomic impact and increased trust in government. Public sector leaders can start to drive change by creating a practical portfolio of organizational-health initiatives.