Municipal utilities: managing the paradoxes

In organisations of the municipal utility type, a wide range of contradictions, conflicts of interest and sometimes paradoxes are built into the daily decision-making and coordination processes. They are probably found in this quality and frequency in only a few other organisations. These phenomena place very particular demands on the organisation as a whole and on the actors involved.

This is made more acute by the fact that municipal utilities and their employees are strongly shaped by their long-dominant municipal background. At the same time, with the liberalisation of the energy sector, business logic has gained ever greater ground.

On one side are economic requirements, return expectations and business realities. On the other is the particular social and ecological responsibility. Decisions in favour of one often come at the expense of the other.

One example from the time when these ideas were developed is the question of whether a municipal utility should invest in a coal-fired power station. From a purely economic point of view, the expected return at the time spoke in favour, and a purely commercial company would very probably have opted for this option. From a political point of view, and the corresponding ecological one, the answer was more likely no. This form of energy generation is usually not viewed positively by the public, which can have an effect at the next election.

In such a case, a municipal utility faces a conflict between opposing requirements that has to be managed skilfully. On one side are the owners’ return expectations. On the other are compatibility with the prevailing political stance and the associated ecological responsibility.

A different kind of case illustrates the pattern. Politicians demanded that a somewhat remote golf course be connected to the local public transport network. A dedicated bus line was to be set up for this purpose, of which it was clear in advance that it would be little used and would run at a significant loss. At the same time, considerable savings were demanded of the local transport division. This is a paradox that initially cannot be resolved.

Municipal utilities are often under particular scrutiny from the media and in the public eye. In addition, politicians and supervisory boards often exert strong influence on municipal utilities. The current political situation has a decisive influence on decision-making processes.

If further shareholders or cooperation partners from the so-called private sector join this game, paradoxes and conflicts of interest are inevitable. They put the leadership constellations involved to tests of endurance that should not be underestimated.

In summary, the paradoxes that municipal utilities constantly have to deal with can be grouped around one tension: that between economic, social and ecological interests, objectives and requirements. The municipal utility stands at the centre of this triangle of economic, social and ecological aspects.

Two core questions keep coming up. How can the balance between economic, ecological and social aspects be maintained in decisions over the long term? And how can the tension between the demands of external stakeholder groups be managed skilfully?

This gives rise to the guiding questions of the following chapters. How can the paradoxes that have to be dealt with every day be explained, and what is their deeper background? Which explanatory models lend themselves to this? What conclusions can be drawn from the insights gained?

One possible explanatory model for the phenomena observed in municipal utilities is provided by the work of Niklas Luhmann, the social scientist and founder of modern systems theory. Luhmann constructs organisations as self-organising social systems. They develop suitable solutions for selected social problems outside themselves and find their reason for existing in doing so. This is how Rudolf Wimmer sums it up.

In this systems-theoretical understanding, organisations represent a special type of social system. It specialises in producing solutions to social problems whose successful handling requires organised cooperation between different kinds of expertise.

Organisations deal with problems and at the same time keep raising new ones. In doing so, they give rise to new organisations forming around these unsolved, externalised problems, as it were. Organisations therefore develop around social problems that can only be handled by organisations.

In most cases they are embedded in function systems of modern society. These function systems are not, as such, units capable of action and therefore need organisations. According to Wimmer, organisations gain their functional meaning in modern societies by offering solutions for dealing with problems in the respective function system.

Organisations derive their specific way of structuring themselves internally and designing processes from the characteristics of the services they provide to their environment. For companies, these are products and services; for research institutions, verified knowledge; for courts, developments in law.

According to Wimmer, what is decisive for these processes of service provision is that decisions can be connected to decisions again and again. Decisions are those specific communication events by means of which organisations reproduce themselves.

Luhmann assumes that in the course of the development towards modern society, largely autonomous social function systems have become differentiated. Each of them has specialised in very specific aspects of social reproduction. In their development, they orient themselves exclusively to this internal logic and no longer follow any overarching steering principles.

Luhmann counts among these function systems, for example, politics, the economy, science and law. None of these social subsystems has a determining relationship to the others. Neither the political system nor the economy occupies a central position, even though many people still attribute such a determining role to these function systems.

Organisations arise in the respective function system and usually offer a solution to a problem. Parties belong to politics, companies to the economy, universities to science, schools to education, courts to law and hospitals to the health system. The organisation is a social system with patterns of action and recurring processes.

According to Luhmann, society can only be viewed from the perspective of its function systems and therefore has no overarching representation. This is how Gunter Runkel and Günter Burkart describe it. In competition with one another, the function systems do not allow any super-representatives. They are fundamentally mutually autonomous and cannot replace one another.

Nevertheless, there are certain exchange relationships. Luhmann calls them structural couplings. Between law and the economy, for example, property and contracts form the structural coupling.

Detlef Krause formulates the consequence in his Luhmann-Lexikon: society can no longer be observed as a unity. It appears as a multifaceted functional unity of differences, different in each case from the perspective of the respective subsystems. Each function-specific subsystem exclusively takes on a particular function for society. In this respect it represents society, without being able to represent it as a whole.

Each subsystem uses a communication code. This is a binary schema with which a system distinguishes itself from the information processing of other systems. This code largely determines which communication is accessible and comprehensible to which communication.

The code can also be understood as a guiding difference. Everything that happens for a system takes place exclusively within the framework of this guiding distinction. The system observes itself and its environment on the basis of the distinction given by this coding. This is how Rüdiger Reinhardt presents it.

Following Krause, four function systems can be compared. Law eliminates the contingency of normative expectation. It facilitates expectations and regulates conflicts; its medium is law, its code is legal or illegal, its institutional core is the courts. Politics enables collectively binding decisions and implements them. Its medium is power, its code is having power or not having power, government or opposition. Its institutional core is parties and administration.

The economy reduces scarcity and satisfies needs. Its medium is money, its code is payment or non-payment, its institutional core is companies. Science generates new knowledge and makes it available. Its medium is truth, its code is truth or untruth, its institutional core is research institutions and universities.

It follows that society cannot be reduced to a single communicative reality. This makes solving real, overarching problems considerably more difficult.

Reinhardt illustrates this with the example of water pollution. In the scientific system, the aim is to find out why the water is polluted, whether it is polluted at all, and whether pollution is an appropriate description. Communications in the political system relate to the extent to which water pollution influences election prospects, and in which direction.

In the economic system, the main question is to what extent pollution or its avoidance can be expressed in terms of payment and non-payment. Finally, in the legal system, it can be judged whether and to what extent past legal decisions determine a current need for action.

What matters is that these function-specific communications cannot easily be translated into one another. A company can commission a scientific institute to analyse to what extent it itself contributes to water pollution. Whether this results in consequences in the form of decisions, however, does not depend primarily on the quality of the scientific expertise. It depends on the assessment according to the code of payment or non-payment.

The subsystems combine high sensitivity to certain issues with indifference to everything else. Every further development increases both sensitivity and indifference.

The highly specialised social subsystems such as the economy, politics and science each follow their own particular functional logic. In this way they provide services that are necessary for the reproduction of society as a whole.

Politics ensures that generally binding rules come about. The economy deals with the problem of scarcity and provision for the future by providing goods and services that are made accessible through payments. Science supplies society with new knowledge that withstands scrutiny by science’s own criteria. The health system provides professionally verified chances of healing.

To provide and further develop these services, the social subsystems usually draw on organisations. Through their primary affiliation with one of these function systems, organisations acquire their particular character and their characteristic contours.

Wimmer describes this for politics. On the basis of certain rules of the game, political parties compete for the share of political power that allows them, within the dynamics of government and opposition, to help shape generally binding rules according to their own ideas. The many organisations of public administration play a strong part in this process. Their main task, however, lies in handling these rules and implementing them in society.

This gives rise to the characteristic interlocking of the organisations of the political system with those of public administration. It both stimulates and hinders the development of these types of organisation.

Companies, as the typical organisational form of the economic system, concentrate on providing products and services. Because of their primary orientation, their concern in doing so is their own earning power.

In a similar way, other types of organisation such as universities, research institutes and hospitals can be assigned to other social function systems. Multiple affiliations can certainly be observed. They always confront the organisations concerned with a particular problem, because massive conflicts of objectives have to be handled constantly within the organisation.

According to Wimmer, organisations owe their existence to the fact that the economy, politics, science or the health system cannot act themselves. In their specialised provision of services, the function systems rely on companies, political parties, universities, schools, hospitals and public administration. These organisations compete for their own viability and their chances of continuation in a more or less orderly but ultimately unsteered network of cooperation and competition.

Organisations usually arise in the respective function system and from there offer a solution to social problems. In doing so, they each follow their own logic. Their communications have their own code, which is directly compatible only within the respective function system and can be used as a medium for information processing and decision-making.

What is special about the municipal utility as a type of organisation is that it cannot be directly assigned to a single function system. Municipal utilities are located on the boundary between different function systems, primarily between the subsystems of the economy and politics.

This means that the municipal utility as a type of organisation is, and must be, compatible with the communication codes of both subsystems. It must integrate and take account of both codes in its information processing and decision-making processes.

This is the source of the actual reason for existence and the social contribution of municipal utilities. Municipal utilities integrate the logics of the function systems of the economy and politics and balance the opposing interests associated with them. Only through the vessel of the municipal utility can local authorities ensure that balanced decisions are made that do justice to the tension between economic, social and ecological aspects.

Conflicts of interest arising from municipal and business logic are carried into the organisation. Its original task is to balance these conflicts of interest through established decision-making routines and thus arrive at balanced decisions. From this perspective, these are the actual achievements and the social justification for this particular type of organisation.

Municipal utilities have developed a particular organisational ability to deal skilfully with paradoxes, tensions and conflicts of interest and to arrive at appropriate decisions. In particular, the constant balancing of economic, social and ecological requirements is a unique achievement of this type of organisation that cannot be found in this form in any other company.

Recognising and accepting this is a significant gain in insight. Anyone who complains every day about the resulting challenges and difficulties and tries to reduce them misses the core. Acceptance opens up the opportunity to provide appropriate impulses for development.

Against this background, it seems extremely questionable to transfer business logics and the associated rational, often trivialising decision-making principles wholesale to organisations from other function systems.

Nevertheless, there were increasing attempts to introduce business logics and management techniques into such organisations. This affected the health system with its hospitals, public administration, politics with its parties, the judiciary with its courts and the education system with its schools and universities. In some cases this has led to serious aberrations.

With regard to municipal utilities, it is immediately clear that public services of general interest are not shaped exclusively by business logic.

According to the sociologist Dirk Baecker, a theory of management must start from a level abstract enough to understand the reference to the economic system as one possible option among others. If management has anything to do with entrepreneurial action, then according to Baecker this means being able to perceive and realise degrees of freedom while depending on economic references.

In this respect, organisations of the municipal utility type are very highly developed. Through evolution, they have already developed the ability to integrate different logics into their steering and decision-making processes. They do not follow business, political or any other specific logic in isolation.

This has far-reaching consequences for the demands placed on leadership in municipal utilities. Leadership must manage the paradoxes between the different interests driven by the different underlying logics.

This situation is further heated up when shares are held by companies that come from the business world and are therefore subject exclusively to a return-driven logic. This is not infrequently the case when municipal utilities cooperate with private partners.

A second insight follows from the situation described. The organisation needs communication routines and platforms in which the existing conflicts of interest can be resolved in order to arrive at appropriate decisions.

In the experience of transformis, the regular strategy review provides this communicative platform. There, the key top issues and decision premises are worked on continuously. Management and other key players from the organisation are involved. Key stakeholder groups from the environment are also taken into account, such as the city, the supervisory boards and the cooperation partners.

Regular strategy work is thus one of the most important communication vessels for balancing the various interests and securing the organisation’s future viability. It offers the communicative platform for feeding in stakeholders’ requirements and resolving the resulting conflicts of interest. At the same time, it serves to review and adjust fundamental decision premises.

Strategic commitments generate the central business policy decision premises. An organisation needs them in order to maintain the necessary focus and remain capable of action under uncertain and dynamic conditions.

At the same time, it is important to put precisely these decision premises to the test again and again at periodic intervals. The occasion for this is observable changes and developments in the organisation’s environments and in the demands of the relevant stakeholders.

Balancing the constant conflicts of interest and dealing skilfully with the associated paradoxes place particular demands on leadership. This applies to the organisation as a whole and to the managers involved. A particular focus is on the ability to manage paradoxes. Five areas of tension have to be held.

The first concerns closeness and distance. Managers must be able to associate, that is, be in community with others. They must equally be able to dissociate: step back, keep their distance, be on their own and also decide against others.

The second concerns reflection and action. What is required is self-observation and self-reflection and, at the same time, an orientation towards action: being active, asserting oneself and bringing things to a conclusion.

The third concerns order and freedom. Leadership structures processes and ensures order and rules. At the same time, it creates freedom that allows new things and thus questions what has been introduced and what exists.

The fourth concerns protection and openness. Managers look after their own area of responsibility, define its boundaries, protect it from irritations and ensure concentration and focus. At the same time, they feed in relevant disturbances from outside and remain open to the unusual from outside.

The fifth concerns exploitation and exploration. Existing knowledge and the available wealth of experience are deliberately drawn on for solving problems: getting to grips with things and using existing knowledge in a targeted way. At the same time, sensitivity is needed for all decision situations in which dealing skilfully with non-knowledge is what matters. Exploration means going in search and asking the right questions.

Municipal utilities often face occasions for organisational development that can only be mastered under two conditions. The organisation must be fundamentally developed further in its established structures and processes. At the same time, key actors in the company must increase their key qualifications with regard to the organisational changes. It is precisely this coordinated learning and development that is a critical prerequisite for success.

This always applies when far-reaching changes in important business processes are pending. Mastering them requires, on the one hand, entirely new patterns of cooperation in mutual coordination and, on the other, building up the actors’ competencies. In such situations it is essential to combine organisational change processes intelligently with qualification measures tailored to them.

The framework for this is the learning architecture. Every organisational challenge that requires both learning by the actors involved and a change in the existing processes, routines and structures can be dealt with effectively through a tailor-made learning architecture. It enables synchronous development on both levels: the level of the organisation and the level of people.

For municipal utilities, this brings us full circle to the requirements for leadership. Dealing skilfully with paradoxes is a key qualification that develops together with the structures in which it is needed.