Student accountant articles: visit the ACCA website, www.accaglobal.com, to review the two articles on ‘not-for-profit organisations’.
1 Assumed knowledge
10 builds on your knowledge of performance measurement in not-for-profit organisations (NFP) from PM.
2 Introduction
NFP organisations display the following characteristics:
- Most do not have external shareholders and hence the maximisation of shareholder wealth is not the primary objective.
- They do not distribute dividends.
- Their objectives normally include some social, cultural, philanthropic, welfare or environmental dimension which would not be readily provided in their absence.
There are a number of types of NFP organisation:
There are a number of problems associated with performance management in NFP organisations; the first part of this will explore these problems and will also discuss possible solutions.
The second part of the focuses on the use of benchmarking in public sector organisations and its effect on strategic management and behaviour. It also discusses the issues surrounding the use of targets in the public sector.
- Problems associated with performance management in NFP organisations
Problem 1: Non-quantifiable costs and benefits
Introduction
Many of the benefits arising from expenditure by these bodies are non – quantifiable in monetary terms. The same can be true of costs. This is because:
- No readily available scale exists
For example, how to measure the impact of a charity providing a help line to people suffering from depression?
- How to trade off cost and benefits measured in a different way
For example, suppose funds in a hospital are reallocated to reduce waiting lists (a benefit) but at the expense of the quality of patient care (a cost).
Is the time saved enough to compensate for any potential additional suffering?
- Timescale problems
Benefits often accrue over a long time period and therefore become difficult to estimate reliably. For example, a school may invest in additional sports facilities that will benefit pupils over many decades.
- Externalities
Suppose a council decides to grant planning permission for new houses to be built. The new residents will increase the number of cars on local roads, resulting in greater congestion and pollution, affecting other residents.
Illustration 1 – Non-quantifiable costs and benefits
Non-quantifiable benefits
In 2001, the British government scrapped admission charges to some of the country’s most famous museums and galleries. The policy has attracted tens of millions of extra people to the nation’s great artistic and cultural collections. Subjects such as history, art and geography have been enlivened by being able to go to a museum or gallery and see and touch the exhibitions. However, it is difficult to quantify the benefits.
Non-quantifiable costs
A hospital has decided to save money by using a cheaper cleaning firm.
However, this decision may create problems in a number of areas:
- It may lead to the spread of infection.
- The general public may lose confidence in the quality of the cleaning.
- Medical staff may become demotivated because they are unable to carry out their work effectively.
However, it is difficult to measure these costs.
Test your understanding 1
In an attempt to improve people’s quality of life the UK government has introduced a range of performance measures to measure quality of life, including the following:
- the local bird population
- the stock of ‘decent’ housing
- traffic volumes.
Required:
A town planning office is considering whether to approve a plan to build new houses on farmland. Assess the plan by reference to the three indicators given.
Solution = cost benefit analysis (CBA)
Some NFP organisations, particularly in the public sector, attempt to resolve the above difficulties by quantifying in financial terms all of the costs and benefits associated with a decision.
Illustration 2 – CBA
Suppose a local government department is considering whether to lower the speed limit for heavy goods vehicles (HGVs) travelling on a particular road through a residential area. The affected stakeholders may be identified as follows:
| Stakeholder | Cost | Benefit | |||
| HGV operators | | Extra journey time | | Fewer | |
| | Potential speeding fines | accidents | |||
| Other road uses | | Extra journey times | | Fewer | |
| accidents | |||||
| Local residents | | Higher noise levels and | | Fewer | |
| pollution | accidents | ||||
| Local authority | | Cost of new signs, | | Fines collected | |
| speed cameras | |||||
| | Cost of enforcement | ||||
These costs and benefits then need to be quantified financially.
| Factor | How to measure | |
| Time | | For HGV operators this can be quantified as |
| additional wages, overtime premiums, additional fuel | ||
| costs, etc. | ||
| | For other road users we need to quantify how much | |
| people value their time. One way this can be done is | ||
| by comparing the costs of different modes of transport | ||
| (e.g. coach versus rail versus air) to see the premium | ||
| travellers will pay to save time. | ||
| | Another approach is to compare property prices as | |
| they get further away from train stations as this will in | ||
| part reflect longer journey times. | ||
| Noise | | Cost of installing double glazing to reduce noise |
| levels. | ||
| | Difference in house prices between houses next to | |
| the busy road and those set further back. | ||
| Pollution | | Cost of cleaning off soot and other pollutants. | |||
| | Comparison of house prices near/away from main | ||||
| roads. | |||||
| Accidents | | Impact on insurance premiums for drivers. | |||
| | For victims of accidents the value of not breaking a | ||||
| leg, say, or not being killed, is estimated in many | |||||
| ways, e.g. the present value of future earnings | |||||
| affected. | |||||
| Once these have been quantified, it is relatively straightforward to | |||||
| compare overall costs and benefits to see the net impact on society. | |||||
| Problem 2: Assessing the use of funds | |||||
Introduction
Many NFP organisations, particularly public sector organisations, do not generate revenue but simply have a fixed budget for spending within which they have to keep. The funding in public sector organisations tends to come directly from the government.
The government will be keen to ensure that the funding is put to the best use.
However, it can be difficult to assess whether or not this is the case.
Illustration 3 – Funding
An ineffective or inefficient police force will not be closed down, but is likely to justify and obtain additional funding.
Solution = assess value for money
Value for money (VFM) is often quoted as an objective in NFP organisations, i.e. have they gained the best value from the limited funds available?
VFM can be assessed in a number of ways:
- by the analysis of economy, efficiency and effectiveness (the 3Es). This is the standard and most useful criteria for assessing value for money (see detailed discussion below)
- by using appropriate performance indicators/measures (see below)
- by benchmarking an activity against similar activities in other organisations. The organisation should seek out and then adopt recognised good practice where this can be adapted to the institution’s circumstances
- by conducting VFM studies (possibly in conjunction with other institutions) or through internal VFM audit work.
Using performance measures to assess VFM
When assessing VFM using performance measures, it is important to tailor your choice of indicators to the scenario given, focusing on the most relevant measures (for example, measures relating to the organisation’s mission or objectives). Once you have calculated the relevant measures you must be prepared to discuss the performance management response to each measure. Statements of which indicator have gone up or gone down will not be adequate in the exam.
Test your understanding 2
Maple Council is concerned about the performance of St George’s School, one of the primary schools within its jurisdiction and, in order to substantiate this concern, the Council’s Education Department has collected the following information regarding the last two years.
| 20X7 | 20X8 | |
| School Roll (no of pupils) | 502 | 584 |
| Number of teaching staff | 22 | 21 |
| Number of support staff | 6 | 6 |
| Number of classes | 20 | 20 |
| Possible teaching days in a year | 290 | 290 |
| Actual teaching days in a year | 279 | 282 |
| Total pupil absences (in pupil teaching days) | 2,259 | 3,066 |
| Total teaching staff absences (in pupil teaching days) | 132 | 189 |
| $ | $ | |
| Budgeted expenditure | 2,400,000 | 2,600,000 |
| Actual expenditure | 2,200,000 | 2,900,000 |
The data has been sent to the council’s finance department in which you work for analysis.
Required:
Calculate relevant performance measures for St George’s School for each of the last two years.
Based on your calculations analyse the school’s performance in terms of value for money and explain the possible management responses to your findings.
Value for money and the 3Es
Value for money is interpreted as providing an economic, efficient and effective service. Appropriate performance indicators should be chosen for each ‘E’.
Economy – an input measure. Are the resources the cheapest possible for the quality desired? For example, the organisation could measure the cost of buying equipment or the cost of staff.
Effectiveness – an output measure looking at whether objectives are being met. Different NFP organisations will have different objectives and therefore the performance indicators will have to be tailored to the individual organisation.
Efficiency – here we link inputs and outputs. Is the maximum output being achieved from the resources used? For example, the productivity per staff member may be measured and perhaps benchmarked against an average figure.
Test your understanding 3
Required:
Explain the meaning of economy, efficiency and effectiveness for a university, incorporating specific examples and performance indicators for each of the 3Es.
Test your understanding 4
A local government housing department (LGHD) has funds which it is proposing to spend on the upgrading of air conditioning systems in its housing inventory.
It is intended that the upgrading should enhance the quality of living for the occupants of the houses.
Preferred contractors will be identified to carry out the work involved in the upgrading of the air conditioning systems, with each contractor being responsible for upgrading of the systems in a proportion of the houses. Contractors will also be required to provide a maintenance and operational advice service during the first two years of operation of the upgraded systems.
Prior to a decision to implement the proposal, LGHD has decided that it should carry out a value for money (VFM) audit.
You have been given the task of preparing a report for LGHD, to help ensure that it can make an informed decision concerning the proposal.
Required:
Prepare a detailed analysis which will form the basis for the preparation of the final report. The analysis should include a clear explanation of the meaning and relevance of each of (a) and (b) below and should incorporate specific references to examples relating to the upgrading proposal.
- Value for Money (VFM) audit (including references to the roles of principal and agent).
(6 marks)
- Economy, efficiency and effectiveness as part of the VFM audit.
(6 marks)
(Total: 12 marks)
Other methods of evaluating performance
In addition to assessing value for money and the 3Es the following approaches can be used to assess the performance of NFP organisations:
- The ‘goal approach’ looks at the ultimate objectives of the organisation, i.e. it looks at output measures.
For example for a hospital: Have waiting lists been reduced? Have mortality rates gone down? How many patients have been treated?
- The ‘systems resources approach’ looks at how well the organisation has obtained the inputs it needs to function.
For example, did the hospital manage to recruit all the nurses it needed?
- The ‘internal processes approach’ looks at how well inputs have been used to achieve outputs – it is a measure of efficiency.
For example, what was the average cost per patient treated?
Problem 3: Multiple and diverse objectives
Diverse objectives
As mentioned, NFP organisations are unlikely to have an objective of maximisation of shareholder wealth. Instead they are seeking to satisfy the particular needs of their members or sections of society, which they have been set up to benefit.
Illustration 4 – Diverse objectives
Diverse objectives in NFP organisations include:
- A hospital’s objective is to treat patients.
- A council’s objective is care for the local community.
- A charity’s objective may be to provide relief for victims of a disaster.
Multiple objectives
Multiple stakeholders in NFP organisations give rise to multiple objectives. This can be problematic when assessing the performance of these organisations.
Solution
The problem of multiple and diverse objectives can be overcome by prioritising objectives or making compromises between objectives.
Illustration 5 – The problem of multiple objectives
A hospital will have a number of different groups of stakeholders, each with their own objectives. For example:
- Employees will seek a high level of job satisfaction. They will also aim to achieve a good work-life balance and this may result in a desire to work more regular daytime hours.
- Patients will want to be seen quickly and will demand a high level of care.
There is potential conflict between the objectives of the two stakeholder groups. For example, if hospital staff only work regular daytime hours then patients may have to wait a long time if they come to the hospital outside of these hours and the standard of patient care will fall dramatically at certain times of the day.
The hospital must prioritise the needs of different stakeholder groups. In this case, the standard of patient care would be prioritised above giving staff the regular daytime working hours that they would prefer. However, in order to maintain staff morale an element of compromise should also be used. For example, staff may have to work shifts but will be given generous holiday allowances or rewards to compensate for this.
Test your understanding 5
Required:
Describe the different groups of stakeholders in an international famine relief charity. Explain how the charity might have conflicting objectives and the impact this conflict may have on the effective operation of the organisation.
Problem 4: The impact of politics on performance measurement
The combination of politics and performance measurement in the public sector may result in undesirable outcomes.
- The public focus on some sectors, such as health and education, make them a prime target for political interference.
- Long-term organisational objectives are sacrificed for short-term political gains.
Illustration 6 – Impact of politics
Politicians may promise ‘increased funding’ and ‘improved performance’ as that is what voters want to hear, but it may result in undesirable outcomes.
Increased funding:
- may be available only to the detriment of other public sector organisations
- may be provided to organisations in political hot-spots, not necessarily the places that need more money
- may not be used as efficiently or effectively as it could be
- may only be available in the short-term, as a public relations exercise.
Improved performance:
- may be to the detriment of workers and clients
- may come about as the result of data manipulation, rather than real results
- may be a short-term phenomenon
- may result in more funds being spent on performance measurement when it might better be used on improvements, e.g. hospitals under increasing pressure to compete on price and delivery in some areas may result in a shift of resources from other, less measurable areas, such as towards elective surgery and away from emergency services.
Test your understanding 6 – Long practice question on NFPOs Public versus private sector
The objective of a health authority (a public sector organisation) is stated in its most recent annual report as:
‘To serve the people of the region by providing high-quality health care within expected waiting times’.
The ‘mission statement’ of a large company in a manufacturing industry is shown in its annual report as:
‘In everything the company does, it is committed to creating wealth, always with integrity, for its shareholders, employees, customers and suppliers and the community in which it operates.’
Required:
- Discuss the main differences between the public and private sectors that have to be addressed when determining corporate objectives or missions.
(10 marks)
- Describe three performance measures which could be used to assess whether or not the health authority is meeting its current objective.
(3 marks)
- Explain the difficulties which public sector organisations face in using such measures to influence decision making.
(5 marks)
(Total: 18 marks)
- The use of league tables (benchmarking) and targets in the public sector
4.1 Introduction
A league table is a chart or list which compares one organisation with another by ranking them in order of ability or achievement.
Benchmarking will be used to rank the organisations in the league table.
League tables have become a popular performance management tool in the public sector in recent years, for example in hospitals and schools.
Illustration 7 – The use of league tables in schools
In 2016 the secondary schools league tables showed that London is the highest performing region in England at GCSE level (exams sat by students at the age of 16) with over 70% of pupils achieving the benchmark at GCSE of five A* to C grades including English and mathematics. This is a striking turnaround in the last 20 years. In 1997 only 29.9% of London pupils reached this level.
4.2 Advantages of league tables
- Implementation stimulates competition and the adoption of best practice. As a result, the quality of the service should improve.
- Monitors and ensures accountability of the providers.
- Performance is transparent.
- League tables should be readily available and can be used by consumers to make choices.
4.3 Disadvantages of league tables
Test your understanding 7
Required:
Discuss the disadvantages of using league tables in the public sector.
Test your understanding 8
A government has decided to improve school performance by the use of league tables with schools assessed on the following:
- percentage pass rates in examinations
It has been proposed that funding be linked to these measures.
Required:
Suggest some potentially negative outcomes of this system.
4.4 Benchmarking and league tables
As mentioned, benchmarking will be used to rank the organisations in the league table.
This is a key technique but is not without its problems:
- Dysfunctional behaviour – managers focus on achieving targets to the detriment of overall performance.
- Poor results may lead to users switching to alternative providers resulting in a downward spiral in the quality of the service provided.
- Benchmarking is often a measuring exercise, not a learning exercise.
- Benchmarking will not lead to improvements if pressure is not exerted by stakeholders.
Student accountant article: visit the ACCA website, www.accaglobal.com, to review the article on ‘benchmarking and the use of targets in the public sector’.
4.5 The use of targets in public sector organisations
Introduction
‘A performance target represents the level of performance that the organisation aims to achieve for a particular activity. Such targets should be consistent with the SMART criteria’ (Government and Audit Commission).
The results from the benchmarking process (discussed above) can be used to set attainment targets for public sector organisations such as schools, hospitals and the police force.
Advantages and disadvantages of targets
Targets should act as an invaluable tool for improvement:
- improving the efficiency and effectiveness of public expenditure
- reducing overall expenditure
- increasing accountability and transparency
- increasing responsiveness to stakeholder needs.
However, there are a number of issues associated with the use of targets:
- Central control – most targets are set centrally by government. It may be more appropriate for targets to be drawn up locally by professionals who are aware of the challenges faced in different parts of the country.
- Difficulty level – targets that are too difficult tend to debilitate rather than motivate and those that are too easy lead to complacency.
- All or nothing – not meeting the target can be seen as a sign of failure. However, if an aspirational target is set it may not be met but may still result in improvements and act as a motivator.
- Too many targets – there is a tendency to set too many targets to try to measure every aspect of service delivery. However, a manager responsible for service delivery will be unable to concentrate on more than a handful of targets at any one time.
- Targets not always appropriate – it is not always appropriate to set targets, e.g. if the activity is not within the control of the person responsible for meeting the target or it is difficult to quantify the outputs of the organisation.
- Cost – the cost of setting the target may outweigh the benefit.
- Lack of ownership of targets – each target should have a named person who is accountable for the performance and achievement of the objective.
- Gaming – there may be a tendency for people to ‘play the system’ rather than using the targets as a tool for improvement, i.e. people want to look good rather than be good.
- Conflict – conflict between targets may occur, e.g. a reduction in the number of children on the Child Protection Register may coincide with an increase in child abuse cases.
5 Exam focus
| Exam sitting | Area examined | Question | Number |
| number | of marks | ||
| Sept/ Dec 2017 | NFPIs, VFM | 3(a)(b) | 15 |
| Mar/June 2016 | VFM and league tables | 4 | 25 |
| December 2014 | VFM and performance indicators | 2(b) | 12 |
| December 2013 | League tables | 4 | 25 |
| June 2012 | Public sector benchmarking | 4 | 17 |
| Test your understanding 1 | |||||||||||
| The local | The stock of | Traffic | |||||||||
| bird | ‘decent’ | volumes | |||||||||
| population | housing | ||||||||||
| Improved quality of life | X | ||||||||||
| Reduced quality of life | X | X | |||||||||
| Reason | Fewer | New houses | New homes | ||||||||
| feeding and | should be | will result in a | |||||||||
| nesting areas | reasonably | higher local | |||||||||
| habitable! | population | ||||||||||
| and more | |||||||||||
| traffic | |||||||||||
| Test your understanding 2 | |||||||||||
| Measure 1 | 20X7 | 20X8 | |||||||||
| Possible pupil teaching days | |||||||||||
| (school roll × possible teaching days in the year) | 145,580 | 169,360 | |||||||||
| Actual pupil teaching days | |||||||||||
| (school roll × actual teaching days in the year) | 140,058 | 164,688 | |||||||||
| Actual to possible teaching days as a % | 96.2% | 97.2% | |||||||||
| Measure 2 | |||||||||||
| Pupils absences as a % of total actual teaching | 2,259 | 3,066 | |||||||||
| days | ––––––– | ––––––– | |||||||||
| 140,058 | 164,688 | ||||||||||
| Measure 3 | 1.6% | 1.9% | |||||||||
| Staff absences as a % of total actual teaching | 132 | 189 | |||||||||
| days | ––––––– | ––––––– | |||||||||
| 140,058 | 164,688 | ||||||||||
| Measure 4 | 0.1% | 0.1% | |||||||||
| Pupil teacher ratio | 502:22 | 584:21 | |||||||||
| 22.8:1 | 27.8:1 | ||||||||||
| Measure 5 | |||
| Pupil to non-teaching staff ratio | 502:6 | 584:6 | |
| Measure 6 | 83.7:1 | 97.3:1 | |
| Average class size | 502 | 584 | |
| ––––––– | ––––––– | ||
| (school/number of classes) | 20 | 20 | |
| Measure 7 | 25.1 | 29.2 | |
| 20X7 | 20X8 | ||
| Budgeted expenditure per pupil | 2,400,000 | 2,600,000 | |
| –––––––– | –––––––– | ||
| 502 | 584 | ||
| $4780.88 | $4452.05 | ||
| Actual expenditure per pupil | 2,200,000 | 2,900,000 | |
| –––––––– | –––––––– | ||
| 502 | 584 | ||
| 4382.47 | 4965.75 |
Comments
In certain circumstances, the schools performance has been fairly consistent over the two years. Staff and pupil absences as a percentage of total actual pupil teaching days have deteriorated marginally (but the fall may not merit investigation by management), whilst actual to possible total teaching days has shown a slight improvement (managers may investigate the reasons for this improvement and take steps to improve this figure further next year).
The major area of concern is the number of pupils on the school roll is roughly 16% higher than last year. This may have an impact on performance. Management must investigate the reasons for the increase and establish whether the trend is set to continue. Action may be taken if a link to a deterioration in performance is established, e.g. through the recruitment of more teaching staff, building additional classrooms and investing in extra resources such as IT resources and books. However, the increase in student numbers may actually indicate more efficient use of resources and hence value for money. Pupil to teaching staff, pupil to non-teaching staff, and average class size has worsened. Whether this is enough to effect the quality of provision is impossible to say without further investigation.
Expenditure per pupil has fallen but this is a function of the increased pupil numbers.
Overall, it is not really possible to arrive at a firm conclusion about the schools performance. This is partly due to a lack of data from the school, and partly because of a lack of data from other schools against which to compare it.
Test your understanding 3
Value for money for a university would comprise three elements:
Economy – this is about balancing the cost with the quality of resources. Therefore, it will review areas such as the cost of books, computers and teaching compared with the quality of these resources. It recognises that the organisation must consider its expenditure but should not simply aim to minimise costs, e.g. low cost but poor quality teaching or books will hinder student performance and will damage the reputation of the university.
Effectiveness – this measures the achievement of the organisation’s objectives, for example:
- The % of students achieving a target grade.
- The % of graduates who find full time employment within 6 months of graduating.
Efficiency – this focuses on the efficient use of any resources acquired, for example:
- How often are the library books that are bought by the university taken out by students?
- What is the utilisation of IT resources?
- What % of their working time does academic staff spend lecturing and researching?
Test your understanding 4
- Value for money audits may be seen as being of particular relevance in not-for-profit organisations where they are an important performance assessment tool. The VFM audit focuses on the achievement of objectives of the organisation in a way that ensures the most economic, efficient and effective manner. This may be complicated by the inter-relationship of objectives.
In the scenario the principal objective is the provision of the upgrade of the air-conditioning systems, ensuring that the quality of the system is satisfactory to LGHD. A subsidiary objective is to ensure satisfaction of the occupants of the premises with the quality and ease of use of the upgraded system.
An extension of the objectives is to ensure that the upgrade is seen to satisfy cost-benefit criteria, both in terms of the upgrade and the subsequent maintenance and operational advice to be provided by the contractors.
The principals are LGHD as the provider of funds and the house occupiers as recipients of the improved service.
The agents are the contractors who are tasked with the installation and maintenance of the upgrade plus the advice to users (occupants) during the initial two year period.
- The focus on the achievement of the objectives of the proposed improvements will benefit from consideration of the relevance of each of Economy, Efficiency and Effectiveness. The three Es are likely to be seen as possibly being in conflict with each other in terms of the achievement of objectives.
Economy will be seen as being achieved by aiming at minimising the average cost per house for the upgrade and subsequent maintenance and advice. This may be aimed at choosing the lowest quote per house for the proposed upgrades. A possible problem with this approach is that the quality of the work done may be compromised resulting in dissatisfaction of occupants.
Efficiency may be seen as the maximisation of the input/output ratio. In this exercise, this may be measured through maximising the number of houses that can have the air-conditioning upgrade with the funds available.
Effectiveness requires the achievement of the objectives (both principal and subsidiary) of the proposal. This may be measured by focusing on factors such as:
– The quality of upgrade obtained
– The level of improvement in air-conditioning achieved
– The extent to which external noise is eliminated
– Whether residents’ feedback indicates that the benefits will outweigh any inconvenience caused by the upgrading work
– LGHD considers that ‘value for money’ has been achieved.
Test your understanding 5
The stakeholders will include donors, people needing aid, voluntary staff, paid staff, the governments of the countries granting and receiving aid.
There may be conflicting objectives. Donors and people needing aid will want all of the funds to be spent on famine relief. Management staff may require a percentage of the funds to be spent on administration and promotion in order to preserve the long-term future of the charity. Donors may have their own views about how donations should be spent which conflict with management staff.
The charity may wish to distribute aid according to perceived need. Governments in receiving countries may have political reasons for distorting information relating to need. These conflicts may make it difficult to set clear objectives on which all stakeholders agree.
Test your understanding 6 – Long practice question on NFPOs
- The main differences between the public and private sector regarding corporate objectives are:
The objectives of a public sector body are usually set out in the Act of Parliament or legal document that brought the body into existence. They are therefore difficult to change, even as environmental conditions change around the body. The directors of a private sector body have more freedom in making up the objectives of the company as they go along, and can change the objectives rapidly in response to changing conditions.
The value of the output of a private sector body can be easily determined in an unbiased way, by looking at the sales revenue achieved. Such numbers can therefore be part of the objectives to be achieved. There is no easy way for determining the economic value of the output of a public sector body; placing a value on the achievements of a country’s Navy last year is almost impossible.
The mission statement of the company in the question recognises the role of the company in having responsibilities to different groups of stakeholders: shareholders, customers, the community at large, etc. Some public sector bodies appear to ignore the interests of certain stakeholders; you might for example be able to think of bodies that appear to be run more for the employees of the body itself rather than the public it is supposed to be serving. Private sector bodies that ignore stakeholders go bust and leave the marketplace. Failing public sector bodies often are rewarded with greater slices of public money to finance their inadequacies.
Private sector companies can attract finance in a free marketplace if they wish to expand. Public sector bodies are constrained by short-term cash limits set by the government depending on the state of the public finances. This acts against the construction of long-term strategic plans in the public sector.
The public sector has historically had little understanding of capital as a scarce resource. In the objective quoted in the question for the health authority, there is no mention of giving value for money to the taxpayers who finance the services. Private sector companies have to give value for money to their shareholders; otherwise the shareholders will sell their shares and the share price will fall, making future capital issues more expensive.
- In terms of the health authority’s current objective, three performance measures that could be used are:
Number of patients who survive serious surgery: this would give a measure of the quality of emergency health care provided, and could be calculated as an absolute figure and a percentage, and compared with the figures for the previous year and nationally. Length of time (on average) before an ambulance arrives after an emergency call is made: this could be compared with the figure for the previous year and for other similar regions of the country.
Length of waiting list for serious operations, i.e. the average time period between a patient being recommended for an operation by his doctor and the operation actually taking place: this figure could be compared with the figure for the previous year and with national figures.
- Decisions have to be made at both a local level (the tactical and operational decisions in running the public sector organisation) and a national level (mainly in terms of the amount of money to be made available to the service).
If insufficient funds have been made available to a health authority, the only way it can maintain standards is to let the waiting list increase. This might reflect badly on the local managers, but the responsibility for the problem really lies with the politicians who have decided to inadequately finance the organisation.
Similar problems exist in other public sector areas. Consider the police, for example. If they arrest more criminals, is this good or bad? Some people would say it is a good thing in that they are detecting more crime; others would say it is a failure of their crime prevention measures. If the statistical percentage of successful prosecutions brought was to be used as a performance measure, this might pressure the police to release on caution all those suspects against whom the police felt they did not have a watertight case. This is surely not in the public interest.
The recommended solution is for public sector organisations to rephrase their statements of objectives to bring more stakeholders into view, and then to construct a range of performance measures, which takes into account the wishes of each of these stakeholders.
Test your understanding 7
- Encourages providers to focus on performance measures rather than the quality of the service.
- Costly and time consuming.
- May encourage creative reporting.
- The value of any performance indicator depends on the quality of any data in the calculation. The data management systems in the public sector do not always provide quality data.
- Many of the outcomes valued by society are not measurable but many of the performance indicators have been selected on the basis of what is practical rather than what is meaningful.
- Differences between public sector organisations may make comparisons meaningless, e.g. a school in a deprived area will be at a natural disadvantage. This may result in employees being held responsible for things over which they have no control.
- A poor ranking may have a negative impact on public trust and employee morale.
- A poor ranking may lead to a worsening of future performance, e.g. gifted children are no longer sent to a poorly performing school and this results in an even lower ranking in future years.
Test your understanding 8
- Children with special needs/disabilities will find it harder to gain school places as they may be perceived as having less chance of passing examinations reducing school performance and funding. (The irony here is that schools which are willing to accept children with disabilities often need more funding, not less.)
- Truants are likely to be expelled at the school’s first realistic opportunity. This may result in the school performing better but only transfers the ‘problem’ somewhere else.
- Schools may focus on examination performance to the detriment of other educational goals, e.g. art, sports.
- Schools facing difficulties will receive less funding to help overcome those problems.
- There will be increased competitiveness and decreased collaboration between schools.
