Measuring Public Sector Performance - Essay Example

 Measuring Public Sector Performance Introduction This paper discusses the observation that profit-oriented organisations have a ready-made measure of performance – the amount of profits generated – and that it is more difficult to evaluate the performance of public sector organisations, for which suitable output measures are absent. This observation provides the hypothesis for the research paper that measuring the performance of the public sector is more difficult compared with measuring the performance of the private sector. The discussion has five parts. First, organisational types and the importance of performance measurement are linked together and discussed. Then, common models of performance measurement and how they were developed are investigated. Third, the public and private sectors are compared and contrasted to highlight similarities and differences in their functions, goals, and outputs. Fourth, key developments in private and public sector performance measures are reviewed and discussed to highlight the convergence in the efforts of each sector to address stakeholder expectations. The paper concludes with a set of observations that disprove the hypothesis by showing that performance measurement as a basis for financial accountability and management in both the private and public sectors has become more complex and difficult and provide challenges for everyone. Measuring Organisational Performance Any discussion of organisational performance begins with an understanding of the nature of human organisations and why they exist. Like the human beings who establish them, every organisation exists for a purpose, a set of goals or objectives that has to be achieved. By custom and for analytical convenience, organisations are classified based on their main purpose; thus, there are private-sector, public-sector, not-for-profit, institutional, voluntary, and mixed organisations. Table 1 summarises each of these organisational types, their specific purposes, and some basic examples of each. Regardless of the type, an organisation can be said to be successful if it meets the purpose(s) for which it is established, and with success comes its continued growth and existence. Otherwise, it would be better for an organisation that does not meet its purpose for existing to close down. This is where accounting as a management tool proves its usefulness because it helps provide public sector organisations with the means to measure performance (Jones et al., 2002). It helps any organisation determine whether it is meeting its purpose, and it is for this reason that management accountants have developed a growing body of organisational science around the notion of performance measurement. This was not, however, the case until in the previous century when increased globalisation and competition for limited resources pushed organisations to measure performance against their purpose for existence and in comparison with their competitors (Lothian, 1987; Fitzgerald et al, 1991). The term “performance” captures the notion of how an organisation operates in comparison to its purpose. Thus, performance measurement has been described (Neely, 1998; Kunz et al., 2002; Moullin, 2003) as an assessment of how an organisation performs and includes measures of productivity, effectiveness, quality, and timeliness. Productivity is measured by getting the ratio of the outputs and inputs of an organisation and is useful in determining its efficiency in utilising resources. Effectiveness compares the organisation’s outputs with what it is supposed to accomplish. Quality looks at the processes by which the organisation generates its outputs and is determined by various criteria related to the level of satisfaction attained by the end-users of those outputs. Timeliness is a measure of the speed by which the organisation’s outputs are generated. Depending on the type of organisation, these four measures may differ. Take one example of a private-sector organisation selling mobile phones. Its productivity can be measured by the number of subscribers (output) every sales staff (input) gets in a year; its effectiveness measured by the total growth in the number of subscribers (output) compared to its yearly targets; quality is measured by the level of customer service satisfaction; and timeliness by the speed and number of new services offered to customers. Each of these performance measures can still be specified further, such as age or gender of target markets, mobile telephone density, or average amount spent per subscriber. Factors that Influence Organisational Performance Measurement Although performance measures of all organisations find common ground in these four factors of productivity or efficiency, effectiveness, quality, and timeliness, they vary according to their organisational type. These differences are due to factors that can be summarised as financial vs. non-financial, quantitative vs. qualitative, organisational culture, and employee behaviour (CIMA, 2002, p. 5-6). Financial and Non-Financial An obvious difference is that, say, between a profit-seeking private sector organisation and a non-profit organisation, where the former aims to meet a public need in a manner that is financially profitable, whilst in the latter it is the delivery of the service that is paramount even if doing so need not generate any financial gain for the organisation. In this case, organisational performance may or may not include financial measures. Quantitative and Qualitative Another case where organisational performance differs is in the use of quantitative or qualitative measures. There are some aspects of an organisation that are difficult to measure, such as the level of innovation, the degree of flexibility in problem-solving, and so-called intellectual capital that captures the collective skills, creativity, and knowledge of the organisation’s people. These are organisational assets that are difficult to quantify and may have to be measured using qualitative indicators. Some companies attempt to quantify these factors by measuring or gathering valuable information, such as increases in service quality or customer satisfaction, or the contribution of new products to the organisation’s growth in sales, but these continue to be discussed especially amongst management accountants as the manner of measurement and presentation need further clarification and universal acceptance Employee Behaviour Most employees behave according to how their performance is evaluated or measured, and if the measures are not aligned to the organisation’s objectives, this results in a fatal mismatch that leads to poor employee and organisational performance. Take two cases based on recent experience in the public and private sectors. Due to an emphasis placed on efficiency, American computer maker Dell’s customer service representatives delivered lower quality service that resulted in declining sales (Kirkpatrick, 2006). In the NHS, a recent report showed a similar problem where patients were processed according to when they joined the queue instead of the matter of urgency for immediate care (NHS, 2006). Thus, patients who needed critical care were neglected whilst those who could wait were given priority, resulting in low satisfaction levels that triggered a government investigation. What these two cases highlight is the need for performance measures to be aligned to the organisation’s purpose: for Dell, it was to sell computers at high satisfaction levels and for the NHS, to deliver quality health care to those in need, and not to improve the efficiency of customer-processing, a mistake for which these organisations paid dearly1. Organisational Culture Each organisation’s culture is different, and introducing a performance measurement system is not a simple task. In an organisation (not necessarily public-sector ones) where political skill, seniority or age are the basis for rewards, employees would not be motivated to perform at a high level, with negative consequences to organisational performance. In several universities, for example, faculty members are rewarded on the basis of how many articles they publish in scientific journals or on the quality of their research, neglecting aspects of an educator’s job such as teaching effectiveness. Thus, many professors may not be motivated to teach well, showing why developing measures of performance may require the adoption of the appropriate measures to develop and cultivate the culture that can support it (Haspeslagh et al., 2001). Common Models of Performance Measurement There is no shortage in the management literature of models of measuring organisational performance. The earliest seems to be the study by Berle and Means (1932) that linked corporate performance and managerial compensation. Since then, several quantitative, financial, and accounting-based performance measures have been developed, mostly linked to maximisation of shareholder value (Jensen and Meckling, 1976; Jensen, 2000; Banker et al., 1996) and executive compensation (Bebchuk et al., 2004; Jensen et al., 1990; Healy, 1985). As a reaction to these models of finance-based measures of organisational performance, other models took a more comprehensive organisational view. Amongst these were Values-Based Management (Bannister et al., 1997) that considered the culture and values of the organisation, the Performance Pyramid (Cross et al., 1992) that highlighted the hierarchical nature of organisations, and the Performance Prism (Neely et al., 2001) which took a holistic approach to stakeholder management. Several process-based performance measurement models were developed such as Benchmarking, which involves comparing internal processes with the best practices in the industry; Strategic Enterprise Management that promotes faster decision-making through the use of information technology and integrated management systems (Fahy, 2001); the European Foundation for Quality Management Model which adapts the Japanese Kaizen or continuous incremental improvement (EFQM, 1999); and Six-Sigma, where processes are compared against a stringent standard (Harry et al., 2000). However, the most well-known model that continues to be widely used in organisations of different types is the Balanced Scorecard of Kaplan and Norton (1992). The Balanced Scorecard The use of the Balanced Scorecard (BSC) framework was popularised by Harvard Business School accounting Professor Richard S. Kaplan and consultant David P. Norton, who argued that senior management in most companies are placing too much emphasis on financial performance instead of focusing on the factors that drive or directly affect performance. BSC aims to correct this unbalanced view of the reality that was taking place in the business world. In a subsequent work, Kaplan and Norton admitted (1996b, p. 272-273) that while a financial framework was valuable in the past when financial measures could capture most of the value-creating or -destroying decisions and plans of management, such a framework became more impractical as organisations found their performance affected by investments in relationships, technologies, and capabilities that could not be valued in financial terms. Organisations adopted BSC because whilst it continues to consider short-term financial results as important, it likewise recognizes the value of building intangible assets and competitive capabilities that are difficult to measure quantitatively. It is this ability to combine financial and non-financial, quantitative and qualitative, organisational culture, and employee behaviour factors that contributed to the popularity of the BSC in performance measurement. Appendix A contains more details on the BSC, whilst Table 2 summarises these different models of performance measurement. Comparing the Public and Private Sectors As could be noted in the previous discussions, the popular organisational performance models have been developed by the private sector as a means of monitoring and measuring progress towards the attainment of their organisational purpose. These performance measures were linked to shareholder and stakeholder satisfaction, strategic and operational management, and managerial compensation. In order to answer the question as to whether these models are applicable to other organisational types, it would be best to summarise the differences between private- and public-sector organisations. As can be seen in Table 3, these two organisational types have different purposes, organisational cultures, and modes of employee behaviour, the key factors that influence the manner of measuring organisational performance. However, rather than focus on the differences between the two types of organisations, what leads us to find a common ground that can form the basis of performance measurement is the number of similarities between private- and public-sector organisations: they exist for a purpose, some of these purposes are financial and non-financial, and their performance on several points can be measured quantitatively and qualitatively. Despite the differences in organisational cultures and employee behaviour, a common ground exists in that performance measurement systems can be used to change organisational cultures and employee behaviours. Measuring Public Sector Performance: Convergence Four events in the last quarter of the 20th century led to the convergence between private and public sector performance measurement (Gillan et al., 2000; Jensen, 2000; Osborne et al., 1992; Kettl, 1997). First, the growing population of educated, wealth-conscious, and cynical-minded baby-boomers began playing a more active role in society as employees, shareholders, and voters. These baby-boomers turned out to become stakeholder activists who began demanding more from their governments, their employers, and from the managements of companies whose shares they owned (and who dirtied their environment). Second, the number of service organisations in the private sector increased as developed economies moved away from agriculture and manufacturing. These service organisations had to formulate various strategies and techniques to be competitively profitable, giving rise to useful performance measurement models. Third, the cycle of economic recessions and scandals in business and politics highlighted the need for government reinvention and shareholder reform, and the development of stringent performance measures for both sectors. And fourth, the information and communication revolution allowed for greater participation, faster feedback, and the exchange of experiences within and across organisational sectors through benchmarking, These events pushed private sector organisations to look beyond profit and to monitor other performance factors, and likewise for the public sector to look beyond the efficiency of services delivery (how many patients are processed by NHS hospitals) and into cost efficiency, productivity, and improved service quality. In effect, private sector organisational performance became more complex as to include environmental impact, corporate social responsibility, and the adoption of more effective customer-centred strategies. Likewise, public sector organisations were pressured to become more customer-centred and financially and operationally efficient, i.e., to practice greater accountability in carrying out their mandates and in delivering quality services to their constituents (Popper et al., 2003). All these developments led some academics to point out that there are no considerable differences between measuring performance in the private and public sectors (Jackson, 1986). Whilst there may be no reason or simple method to measure public sector profitability, an equivalent financial measure such as “value for money” may be used in its stead. The public sector can also adapt the private sector’s service quality metrics (Parasuraman et al., 1985) to measure how it delivers services to its constituents. Prior to the 1970s, the lack of clear objectives in public sector organisations, multiple influences on decision-making, and the absence or neglect of accountability led some to believe that measuring public sector performance would be almost impossible. However, subsequent developments in management science primarily for private sector usage presented workable paradigms adaptable to the public sector that helped the latter use accounting tools to clarify objectives, improve the level of management, facilitate decision-making, and promote greater accountability (Boland et al., 2000). Another issue that performance measurement helped to address is that of human resource development in the public sector. Since performance measurement aligns strategy to organisational purpose and emphasises the importance of buy-in across the whole organisation for effective implementation, these models have proven useful in influencing the behaviour of employees. This is especially significant given the nature of most public sector organisations as service institutions whose performance measures such as service quality and customer satisfaction depend on how well the employees identify with purpose and strategy. Public sector organisations nowadays face continuous pressure to lower their costs, increase their accountability, stay customer-centred and responsive to their stakeholders, and to sustain and even improve quality service. These pressures are also faced by private sector organisations that use several models to measure performance. If the private sector can do it, why can the public sector not do so? Our evidence suggests that over the years, performance measurement in the public sector, more so in the U.K., have gained in practice and usage (Goddard et al., 2000; Chang et al., 2002). Most are using the Balanced Scorecard that allow the public sector to measure a broad range of performance indicators based on the assessment of activities, to move performance information usage from purely internal purposes and to gain greater external control and accountability, and to shift from informal performance evaluation to formal peer reviews. An increasing number of public sector organisations are benchmarking themselves against the best-of-class in the industry, such as what the U.K.’s Royal Mail (recognised globally as the best public mail delivery service in the world) is doing by comparing itself to UPS, FedEx, and TNT (Royal Mail, 2006). In the U.K., the private and public sector reforms carried out since the last quarter of the 20th century has driven their convergence in performance measurement. The resultant improvement in public services may still be far below the expectations of many, but recent accomplishments certainly show that the myth about the difficulty of measuring public sector performance does not lie in the absence of profits or a bottom-line, but rather in the absence of models or knowledge about them that could be learned, adapted, and applied. Conclusions: Beyond Accounting to Accountability It is not coincidental that the drive to improve performance measurement in the public sector has been driven by the generation of baby boomers – the employees, managers, civil servants, and publics – that continue being a powerful demographic force in the world. As they grew older and wealthier, this generation has become amongst the primary beneficiaries of the reforms they initiated and that trickled their way to improvements in social services, pension management, health care, environmental health, education for them and their children, law and order, and public works. Although this paper looked at the hypothesis from a general viewpoint, it allows a deeper understanding of the conclusion that the performance of the public sector can be measured using methods developed by management accountants in the private sector which over the past decades have seen performance measured in ways that are similar to those of a public organisation. Unlike in the past when profit, stock price, and shareholder value were the main measures, private sector organisations now have to contend with corporate responsibility and citizenship, the value of intellectual capital, and service quality. People today can more easily and discerningly scrutinise the activities of the public sector as shown in the more aggressive and intrusive level of parliamentary scrutiny evident in the last decade, the widespread availability of annual reports and government accounts that could be accessed through the Internet, the existence of rating agencies and their assessments, the increased freedom of information and administrative investigations in aid of legislation, and so on. Confidence depends on transparency, accountability, and trust, and there is a global trend that public confidence in public institutions is declining. The demands for higher ethical standards, better value for money, and greater participation in the process of governance are but the tip of an iceberg-sized issue related to the question of national survival and security. When the institutions of the nation perform or fulfil their purpose the nation gains in strength and is more able to withstand the growing economic, political, social, and global pressures that could cause a weaker nation’s downfall. This is where the importance of the role of public sector accounting and the usefulness of adopting private sector accounting practices to measure performance can be highlighted. Whilst higher levels of subjectivity and complexity affect the public sector’s purpose of serving the public good, this is really not different from the way shareholders in the private sector have demanded from their boards, managers, and employees equally high standards of probity, equity, and service to the public interest. More and more, the managements of all public and private organisations are realising the need to be more accountable to the communities in which they exist. In turn, these communities need the assurance that the programmes and projects where their taxes are spent continue to have a clear and relevant purpose, that those programmes and projects are being run efficiently and effectively, providing value for money, and that the highest ethical standards are being maintained by those entrusted to administer them. The public and private sectors need to learn from each other’s best practices to build public trust and combine each sector’s core purpose: the generation of profits for the private sector and the improved quality and efficiency of services to the public good for the public sector. This is a complex challenge not only for accountants, auditors and managers in both sectors and the politicians who need to explain what is being done, but more so for the shareholders and publics to whom they are accountable. How these challenges are faced determines the fates of our nation and the world. Tables Table 1: Types, Descriptions, and Examples of Organisations Organisational Type Purpose Examples Private-sector Profit-seeking. Profits are partly retained by the firm and partly distributed to the owners. Vodafone plc Tesco plc Public-sector Government organisations that provide public services at the local, regional, and national levels. Most government ministries NHS DfT Not-for-profit Private organisations that provide public services and funded from private or public donations. British Red Cross Society Soroptimist International U.K. Charities Institutional Provides public services but have a long history and tradition. Universities Churches Hospitals Voluntary Association Temporary or special purpose groups that provide services to its members. Boy Scouts Greenpeace Mixed Combined private- and public-sector organisation that combine public service with business objectives. U.K. National Trust British Chambers of Commerce Some U.K. Universities Source: Duncan (1983) Table 2: Comparison of Organisational Performance Measurement Models Models Focus How Performance is Measured Shareholder Value Value of the firm Net present value of future cash flows; Stock market value of the firm. Accounting-based Accounting ratios Accounting ratios (Returns on Equity, Assets, Invested Capital, etc.) and measures (Liquidity, Solvency, Current ratios, etc.) Value-based management Organisational culture Value drivers such as worker flexibility, attitudes to performance, innovation, etc. Performance Pyramid Hierarchy of Goals Top: Purpose of Organisation (profits, service, etc.) Middle: Customer Satisfaction-Productivity-Flexibility Bottom: Quality-Delivery-Cycle-Waste Performance Prism What stakeholders want Stakeholder satisfaction, strategies, processes, capabilities, stakeholder contribution Balanced Scorecard Financial, Customer, Internal Processes, Organisational Learning Perspectives, Objectives, Measures, Targets, and Initiatives are measured using core (lagging) and lead metrics European Foundation for Quality Management (EFQM) Continuous incremental improvement Enablers: people, policy, strategy, partnerships, resources, and processes. Results: people, customers, society, key performance. Benchmarking Best practices of other companies Compare organisational performance with best practice in other companies or industry sectors Strategic Enterprise Management (SEM) Faster decision-making through information and integration Combines Shareholder Value, Performance Prism, Benchmarking, and Balanced Scorecard. Six Sigma Get it right 99.999 percent of the time Costs cutting, incremental improvements, minimise rejection rates, etc. compared with a process standard Sources: Various (see Reference List) Table 3: Comparison of Private and Public Sector Organisations Private sector Public sector Organising principles Pursuit of profit, stability, or growth of revenues Enactment of public policies Organisational structures Firms of many sizes with options for new entrants Complex system of organisations with various, at times conflicting, tasks Performance Metrics Return on investment; now: social responsibility, environment, ethics Multiple performance indicators and targets Management issues Considerable autonomy, restrained by shareholders, governance codes, financial constraints, rewards successful managers generously Managers under high level of public and political scrutiny. Successful managers receive less rewards and benefits. Relations with end-users Consumer or industrial markets, firms vary in intimacy of links with end-users, extensive market feedback General public as end-users, traditionally seen as citizens Supply chains Most firms part of one or more supply chains, with larger firms organising these chains Typically dependent on private suppliers and is a very important market for many firms Employees Varied nature, fractious relations with management, low in loyalty, customer-centric approach, mainly motivated by financial gain Highly unionised, concerned with status and salary, mostly idealistic and service-orientated Time Horizon Short-term for most, long-term for utilities and infrastructure services Short-term: policy initiated and implemented within election periods Source: Miles, 2004 Appendix: On the Balanced Scorecard of Kaplan and Norton Perspectives, Objectives, Measures, Targets, and Initiatives BSC as a performance measurement tool has four linked perspectives: financial, customer, internal business (internal business processes), and innovation and learning (learning and growth). Financial perspective asks how the company should appear to shareholders as a financial success, and relates to profitability measured by, for example, operating income, return on equity, economic value added, sales growth, or cash flow. Customer perspective asks how the company should appear to customers to achieve its vision, and refers to customer satisfaction and retention, acquisition of new customers, customer profitability, market share targets, and value propositions. This can also include measuring the ability of suppliers to guarantee on-time delivery, or R&D to develop new products. Internal business processes identifies those activities where the company must excel to satisfy its customers and shareholders, and refers to those that have the greatest impact on customer satisfaction and achieving the financial objectives, which considers not only existing processes but also new ones, incorporating innovative processes that may be linked to emerging new needs. Organisational learning and growth concerns the manner by which the company can sustain the ability to change and improve how it attains its vision, and considers the infrastructure needed to create long-term growth and improvement in three principal sources: people, systems, and organisational procedures. Definition of Key Terms As the terms used are analogous forms of what we normally understand by the term objective or goal, there is a need to distinguish amongst the different concepts to avoid confusion. Objective is here understood in its strategic and long-term sense, and defines the manner by which the key question for each perspective is answered. Measures are of two types: core measurements are outcomes and are lagged measures of progress, while lead measurements are indicators of future progress. Core measures like employee satisfaction, retention, and productivity are influenced by lead measures such as development of staff competencies and technology infrastructure (Kaplan and Norton, 1996b, p. 129). Measures or metrics signify to management how the attainment of objectives can be made certain. It was Kaplan who allegedly said, “If you cannot measure it, you cannot manage it.” Targets are specific quantified goals that define each of the measures and signify to management how these measures for each of the objectives can be monitored. Initiatives are action plans to reach the targets. Put simply, the BSC shows at a glance a plan of actions to be carried out to meet measurable targets that will result in the attainment of the company’s objectives under each of the four perspectives in line with the company’s vision and strategy. Reference List Banker, R.D., S.Y. Lee and G. Potter (1996). A field study of the impact of a performance-based incentive plan. 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