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The drive for reform in the public sector worldwide has focussed attention on the measurement of performance in public sector organizations. This is particularly true in local government. Local government has traditionally been concerned with measuring the delivery of primary objectives, or results, at the expense of secondary objectives, or the determinants of organizational performance. Current strategic management literature suggests that there should be a strong linkage between strategic plans and performance measures.

Kaplan and Norton’s (1992) balanced scorecard and Fitzgerald et al. ’s (1991) results and determinants framework can provide this linkage. This paper reports on research into performance management systems in local government using the four dimensions of the balanced scorecard: ? nancial, community, internal business processes and innovation and learning. It shows how the focus in this system of local government has been on the results of council work, ie. ?nancial performance and to a lesser extent on how the community views performance.

Local government performance measurement pays much less attention to the determinants, or means of achieving long-term, sustained organizational improvement in internal business processes, and innovation and learning. Whilst these issues are recognized as important, there are few measurement processes in place to manage performance in these areas. Strategic performance management demands an approach that recognizes the importance of a focus on both results and the means of achieving these results. This paper highlights a suggested framework for strategic and balanced local government performance measurement.

c 2000 Academic Press Key words: local government; performance measurement; strategic management. Address for correspondence: Associate Professor Louise Kloot, Department of Accounting and Finance, Victoria University of Technology, PO Box 14428, Melbourne City, MC Vic 8001, Australia. E-mail: louise. [email protected] edu. au *Victoria University of Technology. †Queensland University of Technology. Accepted 10 January 2000. 1044–5005/00/020231+21/$35. 00/0 c 2000 Academic Press ‡ 232 1. Introduction L. Kloot and J. Martin.

‘Value for money’ has become an important aspect of local government management and is one of the factors that have stimulated the spread of performance measurement systems in local government (Palmer, 1993). Greater expectations of all levels of government, with increased accountability to stakeholders and requirements for increased ef? ciency and effectiveness in government operations, have also increased the focus on performance measurement (Hood, 1995). Indeed, performance measurement and program evaluation have been central to drives for a more ef?cient, effective and accountable public sector (Guthrie and English, 1997).

Traditional performance measurement systems have concentrated on the development of indicators largely relating to economy (inputs) and ef? ciency (costs) due to the limited ability to measure effectiveness or outcomes in government organizations. This traditional performance measurement has been much criticized due to the exclusion of non-? nancial dimensions of performance from many sets of measures (see Ghobadian and Ashworth, 1994, for a comment on the British experience, Atkinson et al., 1997, for comment on the Canadian experience and Guthrie and English, 1997 for a comment on the Australian experience).

The use of non-? nancial measures in addition to ? nancial measures of performance has been increasingly called for in both the for-pro? t and not-for-pro? t sectors of the economy. For example, Emmanuel et al. (1990) argue that organizational success is a multi-dimensional concept which changes both over time and between stakeholders. Fitzgerald et al. (1991) suggest a performance model over six dimensions. Two of the performance dimensions are the results of strategy: competitiveness and ?

Nancial success. The remaining four are determinants of the success of these strategies: quality, ? exibility, resource utilization and innovation. Similarly, Atkinson et al. (1997) differentiate between primary objectives (and results) which are externally oriented and concerned with measurable deliverables, and internally oriented secondary objectives concerned with how services will be delivered. In another similar model, Kaplan and Norton’s (1992, 1996) balanced scorecard argues for performance measurement over four dimensions of performance: ?

Nancial, customer satisfaction, internal business processes, and innovation and learning. Kaplan and Norton effectively consider the three dimensions of quality, ? exibility and resource utilization in Fitzgerald et al. ’s 1991 model to be the single dimension of internal business processes. Kaplan and Norton’s dimensions can also be classi? ed as results (? nancial, customer) and determinants (internal business processes and innovation and learning). Ballantine et al. (1998) use Fitzgerald et al. ’s 1991 model to illustrate the links between strategy and performance management.

The linkage between strategy and performance is the cornerstone of the Kaplan and Norton (1992) balanced scorecard and has been acknowledged by Atkinson and McCrindell (1997) and Atkinson et al. (1997). When strategic concerns are impounded into performance then management, rather than the more limited concept of measurement, becomes the focus of performance. Performance management is the process by which the organization integrates its performance with its corporate and functional strategies and objectives (Bititci et al. , 1997).

In the government sector, given that objectives are often stated in non-?nancial terms, non-? nancial performance measures are needed as conventional ? nancial reporting will not fully capture performance (Guthrie and English, 1997). Guthrie and English Strategic Performance Management in Local Government 233 also suggest that in government, performance measurement is essential for choosing between alternative strategies and prioritizing activities. The purpose of this paper is to report on research examining how performance management systems incorporating strategic and operational issues are developed and integrated across local government organizations in the State of Victoria, Australia.

The aim is to understand how, in the local government environment, performance measurement systems are linked in an integrated, holistic way to a council’s strategic choices so that overall ef? ciency and effectiveness of the the council’s operations are improved. Our argument is that when this occurs across the organization a performance management system is in place. The paper explores the literature on performance measurement and how it has been applied to local government; describes our research; analyses the results and concludes with a proposed performance management model for local government.

2. Literature review The literature on performance measurement is much more extensive than the literature on performance management. The latter is often used to refer to individual performance management or appraisal schemes. The focus is disproportionately on the individual rather than the individual and the organization. The theme of the performance measurement literature, on the other hand, is preoccupied with the measurement process with less reference to the context within which measurement is carried out.

The concern is with the validity of the measurement system rather than how the information will be used to change and improve the way in which services are delivered. There is little discussion about the nature of performance information and an organization’s strategic choices. Governments need a better means of determining performance in relation to objectives (Atkinson and McCrindell, 1997). Performance measures have become too bountiful and too operationally focussed (Atkinson and McCrindell, 1997; MAV, 1993).

The result is performance measures that are overwhelming and do not always meet the needs of relevant stakeholders. Performance measurement in government is related to accountability (Broadbent, 1995; Sinclair, 1995; Guthrie and English, 1997), and inadequate performance measurement systems do not help in understanding what services are provided and to whom. When linking performance measurement and organizational accountability, several writers have made an important distinction between primary and secondary objectives (Atkinson and McCrindell, 1997) or results and the determinants of those results (Fitzgerald et al., 1991).

The strategic planning process begins by determining the organization’s primary objectives. It is through the development and articulation of primary objectives that governments establish the nexus between their organization and its stakeholders. Secondary objectives re? ect the organization’s strategic choices about how it chooses to pursue its primary objectives and the relationships it must have with its stakeholders to be successful in its strategic choices (Atkinson and McCrindell, 1997). This is an important distinction in de? ning aspects of performance management systems.

There is an obvious and complementary relationship between results (primary objectives) and determinants (secondary objectives). A focus on secondary processes for achieving primary objectives provides a tool for monitoring relationships with stakeholders. 234 L. Kloot and J. Martin A focus on stakeholders is evident in recent performance models. Kaplan and Norton’s (1992, 1996) balanced scorecard explicitly refers to shareholders, competitors and customers. Fitzgerald et al. ’s (1991) results and determinants framework also makes explicit reference to customers and competitors.

Atkinson et al. (1997) refer to environmental stakeholders: customers, owners and the community, and process stakeholders: employees and suppliers. Environmental stakeholders are concerned with primary objectives, which in the public sector is value-for-money service delivery. Process stakeholders are vested with the planning, design, implementation and operation of the organization to meet the primary objectives. The way in which this works in organizations is what Atkinson et al. (1997) call a strategic performance measurement system.

A performance measurement system’s coordinating role is to direct and focus the attention of decision makers on results and determinants or primary and secondary roles (Atkinson et al. , 1997; Fitzgerald et al. , 1991; Kaplan and Norton, 1992, 1996). In this way employees know what is expected of them. It is also clearer for external stakeholders to determine what the organization is trying to achieve. To explicitly link long-term strategic objectives with short-term actions Kaplan and Norton (1996) argue that their balanced scorecard introduces four new management processes that, separately and in combination, contribute to this linkage. We question that ‘translating the vision’, ‘communicating and linking,’ ‘business planning’ and ‘feedback and learning’ are ‘new management processes’.

The important point is that by using the scorecard managers are forced to use these processes in a way they have not done before. A preoccupation with ? nancial performance measures is widely regarded as less than satisfactory. Such measures lack the requisite variety to give decision makers the range of information they need to manage processes (Ballantine et al. , 1998; Atkinson et al., 1997; Kaplan and Norton, 1992, 1996;

Ghobadian and Ashworth, 1994; Fitzgerald et al. , 1991). Performance measurement systems based primarily on ? nancial performance measures lack the focus and robustness needed for internal management and control (Atkinson et al. , 1997). Financial measures are also dependent on choice of accounting policy. If policies differ between organizations cross-sectional comparison is dif? cult and if policies change over time longitudinal comparisons are impossible (Fitzgerald et al. , 1991).

Performance measurement in organizations is still largely focussed on ?nancial data for the purposes of coordination and control (Atkinson and McCrindell, 1997; Atkinson et al. , 1997). Making the connection between performance, strategy and organizational purpose is more challenging. Kaplan and Norton (1992, 1996) attempt to do this with their ‘balanced scorecard’. In fact their 1996 paper is titled ‘Using the Balanced Scorecard as a Strategic Management System’ (our emphasis). Fitzgerald et al. (1991) and Kaplan and Norton (1996) conclude that performance information wider than ? nancial information is crucial. Ballantine et al.

(1998) and Kaplan and Norton (1996) describe the need to tailor performance measures to strategy across a range of organization attributes and activities. Kaplan and Norton (1996) argue that their scorecard is not a replacement for ? nancial measures: it is a complement. The four perspectives of the scorecard are ? nancial, customer, internal business process, and learning and growth, which are consistent with Fitzgerald et al. ’s (1991) results (? nancial performance and competitiveness) and determinants (quality, ? exibility, resource utilization and innovation). Strategic Performance Management in Local Government.