Performance Measurement in the Public Sector Budgeting

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1 International Research Journal of Applied and Basic Sciences 2013 Available online at ISSN X / Vol, 7 (12): Science Explorer Publications Performance Measurement in the Public Sector Budgeting Mojtaba Ghiasi Department of Accounting, malayer Branch, Islamic Azad University,Malayer, Iran. Corresponding Author yahoo.com ABSTRACT: This article focuses on the use of performance measurement in public budgeting. The use of performance measurement in budgeting has been advocated at various levels of government. Efforts have been made to incorporate performance measures in reporting, management, budgeting, and strategic planning processes. Performance measurement is defined as the measuring of levels of activities and achievements through a range of indicators. Governments can use performance measurement in various stages of public budgeting. In budget preparation, central management agencies can use performance indicators in budget instructions to demonstrate desirable performance levels. In addition, performance indicators in executive budgets often demonstrate expected service achievements and are used as a basis for legislative negotiation. Key words: performance measurement, budgeting. INTRODUCTION Performance management is used in both the private and public sector. While many of the issues that arise in its use are common to both sectors, researchers studying the behavior of public sector organizations have recently drawn attention to the fact that the public sector is different from the private sector and therefore a public sector organization faced with a change in incentives will not necessarily behave in the same way as a private sector one. Dixit (2002) stresses two important features of the public sector. The first is that bureaucrats often serve several masters: these may include the users of the service, payers for the service, politicians at different levels of government, professional organizations. The second, a consequence of the first, is that the agency and so the bureaucrats who work in it often have several ends to achieve. For example, they are often expected to increase both efficiency and equity in the delivery of public services. These features are termed multiple principals and multiple tasks (or goals) respectively. These two characteristics mean that the incentives provided in the public sector should be less high powered than for the private sector. Even if we consider just one principal, there may be divergence from the predictions of standard agency theory in the public sector context. First, as Dixit points out, the standard agency problem assumes a risk neutral principal. However, at least one group of public sector principals elected politicians cannot diversify the effects of bad outcomes. This may make them very risk averse, which again means that the results from the standard theory will not apply. A second diversion from standard theory concerns the issue of moral hazard on the principal s side. For example, an individual may decide to make her career within the public sector, and make career specific investments to do so, only to find that her pecuniary and/or non-pecuniary benefits are worse than expected. Hence, ex post, her participation constraint may not be met. So the multiplicity of goals and principals implies that the provision of high-powered incentives are less likely to be suitable for the public sector than in the private sector where individuals may have to perform fewer, better defined, tasks. And, precisely because this is the case, the type of individuals found in the public sector may be more risk averse than those in the private sector. High-powered incentives may also not be necessary if it is the case that public sector workers are more motivated than those in the private sector by non-pecuniary benefits and other career concerns. Wholey and Newcomer (1997) have argued that performance measurement systems provide information that can be used to improve management and program effectiveness, improve policy decision making, and improve public confidence in government. This is accomplished by using performance measurement information for budget

2 formulation and resource allocation, employee motivation, setting goals and objectives, planning, evaluation, control, and for improving service quality and enhancing citizens trust (Wang, 2002; Wholey and Newcomer, 1997; Behn, 2003b). In discussing what performance measurement purports to contribute to the contemporary clamor for results in our social programs, Greene (1999, p. 161) expresses concern about four contributions often claimed by advocates of performance measurement: Agencies can easily make performance measurement information available to all audiences; Performance measurement systems are a concrete instance of documented program outcomes ; Because of their focus on outcomes and not compliance, performance measurement systems allow agencies to be innovative in their implementation of programs; A focus on outcomes provides communities (at all levels) with the opportunity for collective, shared deliberation about what constitutes valued outcomes from a given endeavor. Greene s concerns about these claims may be a reflection of the fear expressed by Perrin (1998) that in some instances performance measurement information could be destructive because it may give the appearance of rational decision-making when in reality the information has been distorted to support political goals. This fear is in stark contrast to the hopes of the earlier proponents of performance measurement and its predecessors who envisioned a management information system in which decisions would be driven by the information collected. This optimistic view of rational decision-making and the pessimistic view of performance measurement as solely a political tool both presume instrumental use of performance measurement. However, as Weiss (1988) noted in her related work on the utilization of program evaluation, what we may really see is a less direct use of performance measurement. In fact, performance measurement may have little direct impact on decision making and still be of value in enlightening various stakeholders. Current research reports an increasing number of public organizations saying that they have some type of performance measurement system (Berman and Wang, 2000). However, actual use of performance measurement information is not as common. On the contrary, research has shown that even when performance measures, and especially outcome measures, have been developed they often remain unused by public agencies (Behn, 2002; de Lancer Julnes and Holzer, 2001). Defining Performance Measurement Much of the literature implies that performance is an objective phenomenon, consisting of a set of attributes of a program and its measurable impacts on society. It is as if performance was out there, just waiting to be discovered and documented through a set of measures or indicators. In reality, however, performance is a social construct. The interpretations and the measures of performance arises as much, if not more, out of an interactive process among individuals and institutions, as they do out of theories of programs, data generation and analysis. As Rob Paton writes, 'Performance is what those people centrally involved in and concerned about organizations agree, implicitly and explicitly, to be performance (Rob, 2003). Defining performance in this way, of course, detracts from the claim that performance measurement systems provide objective, reliable and scientifically valid evidence about what works and what doesn t in the public sector. Performance will always remain a contested and evolving concept. Securing agreement on what constitutes performance, especially successful performance, is made more difficult by the nature of public sector activity. Most public programs have more than one goal and the goal statements tend to be vague, changeable, and controversial and, at times, conflicting. Under these conditions, performance is a multi-faceted and subjective phenomenon. There are usually numerous stakeholders that is, individuals and organizations who can affect or are affected by public programs and therefore there can be widely divergent perspectives on what constitutes performance. Unlike private firms for which profits and returns on investment provide widely accepted measures of success, for public organizations the criteria of success are many and controversial. There is also a significant symbolic component to the actions of government, consisting of the language and images used to describe what is taking place and the public s reactions to those messages. Appearances matter almost as much as reality. The adoption of a performance measurement system, often accompanied by considerable fanfare, is itself meant to send the reassuring message that in the future government decision-making will be based more on objective evidence about longer-term impacts than on short-term political calculations. The implication is that we can get the politics out of program management, allowing design and delivery of programs to be based upon well-informed professional judgments. There is also a performance art aspect to performance measurement. Doing performance measurement can become a ritualistic activity intended to satisfy or impress significant others such as Treasury Boards, or funding agencies if outside organizations are involved. In summary, the performance captured by a particular set of measures will always be partial and contextual, reflecting the fact that the measures have been selected, analyzed and interpreted through the lenses 863

3 of the organizations and individuals involved with the process. This is quite different from the claim that performance measurement systems can provide objective evidence about how well an organization or program is operating. Given their inherently subjective nature, all measures should remain open to debate and possible replacement. When particular measures cease to be debatable, there are three possible explanations: the measures do not focus on significant dimensions of performance; or, a particular conception of the organization s goals and how to achieve them has gained dominance to the extent that debate has been stifled; and Or, the activity of performance measurement has become a reutilized, ritualistic part of organizational life which is not taken seriously. Regardless of which of these conditions apply, the result will be to impair organizational learning and improved performance. An acceptance of ambiguity, contingency, plurality, and controversy can be seen as signs of organizational health, not as signs of confusion, lack of clarity and poor performance. Finding an appropriate balance between confidence and commitment to a particular set of measures versus ongoing debate and revisions to the measures is an important part of the art of performance measurement. Two simplistic slogans appear frequently in the performance management literature. The first is that 'you can t manage what you can t measure.' If this were in fact true, the largest and most important parts of organizational life would not be subject to managerial direction and control. It is the softer, more submerged dimensions of organizational life which have been shown to be crucial to better performance. The second slogan exhorts leaders within organizations to manage by the numbers. Exactly how this is to be done is not made clear, nor are the dangers of doing so identified. Setting performance targets and basing decisions on performance results may cause organizations to do the wrong things well if they become too committed to a particular understanding of policy problems. Establishing Measures of Performance Setting objectives is generally only the first step. The next is to design measurements that provide information to policymakers and line managers that will allow them to evaluate their progress toward agreed-upon objectives. Although many government agencies collect a great deal of data, these data have typically focused on the activities of the agency rather than its results or broader societal consequences. Input and output measures are typically used by agencies, even though outcome and impact measures would be more meaningful in evaluating programs. Inputs represent the resources consumed by the operation of a government program; they are ultimately used to hire personnel, build facilities, contract for services, and so on. Inputs are easily measured, usually in terms of money. They are necessary for the achievement of objectives, but the question of how many inputs are required usually goes unanswered. Outputs are the results of an agency's immediate activities. Although these outputs may not be sufficient for the agency to achieve its objectives, they are often necessary in order for the agency to do so. These gauges of outputs are sometimes also referred to as activity, work load, or process measures. Unlike inputs, outputs are often impossible to translate into money because there are no markets for most government activities. Outcomes represent the broader goals of an agency. Outcome measurement should concern the extent to which the activities (outputs) of the agency have an intended effect. That is, they focus not only on the work performed, but also on the results of that work. Outcome measurements may cover activities that are largely under the control of program managers, or they may extend to an even broader set of measures (often called measures of impact) representing results that the agency the most important distinction stressed in this study is that between measurements of output and outcome. They are often confused, but an understanding of the difference is crucial to understanding the challenges to and the potential benefits of measuring governmental performance. This distinction is often clearest when considering specific measures related to individual government activities. The Aims of Performance Measurement Given their diverse origins, it is not surprising that multiple aims have been attached to the recently launched performance measurement systems. Often the aims are stated in highly positive terms. For example, the Kennedy School of Government at Harvard University begins its case for the use of performance measurement with the following statement: 'Effective performance management leads to better outcomes and strengthens democracy (Harvard University, 2001). As Table 1 indicates, the aims of performance measurement range from the narrowly managerial to the broadly political. Different purposes will require different types of measures. There is not one single magical measure or set of measures that will serve all these purposes equally well (Robert, 2000). For example, if the principal aim is to achieve budgetary control and productivity, the focus will be on efficiency measures such as the 864

4 costs of providing a certain volume of output on an annual basis. In contrast, if the aim is to promote public understanding and support for a program, it will be necessary to gather evidence of dimensions of performance about which people really care. Since performance measurement systems are costly to create and to maintain, there are practical limits on the number of dimensions of performance that can be measured on an ongoing basis. Also, the proliferation of measures can lead to information overload. Table 1. the Aims of Performance Measurement To help clarify organization goals, directions and expectation. To help organizations learn how to accomplish goals more effectively. To communicate the priorities of the organization. To support strategic/business line planning by linking broad statements of direction to specific operational outputs and outcomes. To support budgetary planning and resource allocation processes. To monitor the operation of programs and to make continuous improvements. To motivate public servants and to restore pride within the public service that it is making a positive contribution. To enable citizens to make better informed decisions in the use of public programs. To restore public confidence that they are receiving value for money in public spending. To assess whether the organization is achieving its goals. To strengthen internal administrative and external political accountability. Multiple aims means multiple potential audiences for performance information and multiple, subjective perspectives on what constitutes good performance (Robert, 2002). Citizens will naturally think about performance mainly in personal terms often based on how they perceived their most recent encounter with government or their general impressions of how governments work. Elected politicians often talk about using performance measurement to track general improvement in economic, social and environmental conditions. They are also deeply interested in how policies and programs affect various constituencies, not just of the territorial variety, but also economic and social in character. Performance measurement systems that fail to address distributional questions (who benefits and who pays) may not speak to these considerations. Public servants are interested in performance, but they also recognize the informal rules of the current accountability and rewards systems which operate in government. Ministers want error free government. When mistakes or just unforeseen and unwanted events occur, public servants are expected to provide a rationalization to minimize the damage to the reputation of the minister and the government. With increasing frequency individual public servants are named and blamed for untoward events, even if the problems in question arise from flaws in policy or resource limits which are ultimately controlled by ministers. More is said on the problems separating political from administrative accountability for performance later in this article. In summary, performance measurement has been asked to serve numerous purposes, which are both political and administrative in character. Not all of these aims are consistent and it is impossible for any single performance measurement system to serve them all equally well. Different users approach the issue of performance differently. The aims, focus, methods and uses of performance measurement reflect both political and bureaucratic considerations. Performance reports have the potential to set the agenda both inside government and in the external world of public debate. Poor reports can damage ministerial reputations and negatively affect the position and resources of departments and programs. In short, there are risks involved with the collection and the publication of performance information. These realities of the practice of performance measurement can be contrasted with the image of a rational and objective process presented in the official reports. Performance Measurement in the Public Sector Measures of performance are inherently different in the public and private sectors. In private-sector organizations, there is usually an agreed-upon measure of performance for the organization as a whole-namely profit. The greater the profitability of a private firm, the better it is performing. There is no such agreed-upon measure of performance for public agencies. Many government services are established because the market is felt to be giving the wrong price signals, either because of externalities or because the service has the characteristics of a public good.3 In the case of public programs, then, the "price" is not set by the market, and "profit" is not a relevant measure. Performance must be judged against the purpose for which a public program exists. This purpose differs from program to program, and there may even be disagreement about the precise nature of a program's mission. It is difficult, therefore, for public agencies to determine with any precision what they are trying to accomplish. In fact, government agencies have usually focused on measures of input and output-on resources used and activities Performed. An emphasis on performance requires more measures of outcomes-the broader results that are 865

5 achieved because of the activities of the agency. The differences between measuring public- and private-sector performance are less clear at the sub organizational level. The difficulty of measuring the success of such activities as personnel administration or research and development, for example, is shared by entities in both the private and public sectors. On the whole, public-sector performance measures are more subjective than measures in the private sector. This subjectivity has led to the development of more indirect methods to measure the worth and results of government programs (such as benefit-cost analysis) that attempt to find a measure in the public sector that is analogous to the profit measure. In addition, measures often need to be developed at the sub organizational level; they are often quite subjective for both private and public organizations. In the public sector, officials who seek to measure the effectiveness of a program must establish the purposes of government activity and then develop measurements of how well that purpose is being met. Either is a difficult task. The ability to measure performance is inexorably related to a statement of what the agency or program is trying to accomplish. The task of clarifying those goals is much more difficult for public-sector agencies than for private corporations. Public-sector agencies operate in an environment in which they are usually asked to respond to many actors, including legislative bodies, elected executives, and the general public. Not all of these actors agree on the objectives of the agency or program. For example, there is often disagreement about whether a program should be managed in a way that promotes efficiency (minimizing costs per unit of output) as a primary objective, or whether it should operate primarily to provide equal access to services to as many citizens as possible, with cost as a secondary concern. Both are legitimate goals, but they often conflict. Performance Measurement and Budgeting Interest in measuring government performance, and in using these measurements for budgeting, is not new. Elected officials, government agencies, and other concerned individuals have long been interested in linking funding to results. But measuring results in the public sector is more difficult than in the private sector. The success of public agencies cannot easily be reduced to one (or even a few) measures. Conversely, the ultimate success of a private corporation is often measured by its profits. The struggle to improve the measurement of public-sector performance, nonetheless, has spurred numerous attempts to establish management and budgeting systems that are aimed at this goal. Performance measures can play several different roles in the budget process, including those of resource allocation, financial management, and financial reporting. Performance measures may have many no budgetary uses as well. They may, for example, be used to motivate employees to improve their performance or productivity, or for other general management purposes. These uses are largely beyond the scope of this report, which focuses almost exclusively on the implications of performance measurement for the budget process. Prospects for Using Performance Measures in Budgeting The road to improving government performance and tying its measurement to the budget process is studded with obstacles. Legislation cannot always bring about lasting change, but it can assist in some areas, such as motivating agencies to measure results, increasing flexibility for program managers, and mandating that policymakers receive information on program performance. Commitment on the part of the executive branch, however, is crucial in making any real changes in agency management, by providing incentives for agency managers, improving information systems, and tailoring solutions to individual problems. Even if the legislative and executive branches were committed to improving performance measurement and tying those measurements to the budget process, two chief obstacles would remain. First, developing measurements that accurately reflect the performance of government agencies is difficult, given that the success of so many programs managed by the government is determined in large part by nongovernment factors. Second, there is not enough demand by policymakers to change the way policies are made so that they are more responsive to the measurement of outcomes. It is particularly important to recognize the limited payoffs that may come from a link between performance measures and the budget process, because using performance measures for allocating government resources implies a change from the current processes, which are heavily focused on inputs, to a system that is oriented toward outcomes. Real changes in the budget process could take place, however, if policymakers demanded information on the relationship between money and results. Reporting on the results of government programs in government financial statements can improve the capacity to create such information, in addition to developing a demand for it. But it will not be easy to create a demand or spur greater use of performance measures for allocating resources. Finally, the largest potential for real payoffs may be in the area of agency management of the resources once they have been provided in the budget process. 866

6 Finally, however, the budget process is not likely to be changed substantially until and unless decision makers use information on program performance when making allocation decisions. Having this information--if good measurements of program results can be developed--is a necessary, but not sufficient, prerequisite to changing policymaking. Such a change is likely only to occur after the culture of performance measurement infiltrates the policy process. For this reason, the short run emphasis should remain on developing performance measures for agency management rather than for use as a tool for allocating resources. How Can Performance Measurement Affect the Budget Process? Many efforts to mandate improvements in performance measurement focus on the budget process. There are three possible advantages to linking performance measures to the budget. The first is the potential to use performance-based budgeting. That is, traditional line-item budgets could be replaced by a system granting program manager s greater flexibility in managing their resources, but holding them accountable for achieving program results. That is the goal of many who advocate performance measurement as a tool that can transform the government budget process. Second, even if government wide decisions on resource allocation are not affected, agencies may find measurements valuable for improving their management of a given level of resources, regardless of whether their use results in a significant shift of resources from one program or agency to another. Third, the government or particular agencies may use performance measures to report on their accomplishments. Measuring Government Performance and Applying the Measures to the Budget Measures of performance are inherently different in the public and private sectors. In the private sector, the primary measure of performance for an organization as a whole is profit. The greater the profitability of a private firm, the better that firm is performing. Public agencies have no such accepted measure of performance. Performance must be judged against the goals of a public program. Goals differ from program to program, and even within a program there may be disagreement about the precise nature of its mission. It is more difficult, therefore, for public agencies to determine with any certainty what they are trying to accomplish. In addition, once agencies have determined what they should be accomplishing, it is perhaps even more challenging to measure progress toward those goals. In fact, government agencies have usually focused on measures of input and output-resources used and activities performed. An emphasis on performance requires the use of more measures of outcomes the broader results that are achieved because of the agency's activities. The differences between measuring public- and private-sector performance are less clear at the sub organizational level. Conversely, entities in both private and public sectors share the difficulty of measuring the success of such activities as personnel administration or research and development. Even more difficult than measuring public sector performance is finding a way to apply these performance measures to the allocation or management of resources in the public sector. Budgetary linkages can be developed in three different ways. The first is by budgeting based on performance. That is, traditional line-item budgets could be replaced by a system in which program managers have considerable flexibility in managing their resources but are held accountable for program results. That type of system is the goal of many people who advocate performance measurement as a tool that can transform the nature of the government budget process. Second, even if decisions about government wide allocation of resources are not affected, agencies may find measurement valuable for improving management of a given level of resources, regardless of whether their use results in a significant shift of resources from one program or agency to another. Third, measurement may be used for financial reporting. In this case, the government or its agencies can use performance measures to report on their accomplishments. CONCLUSION Performance measurement is used in various stages of public budgeting in governments. It is evident that this much-advocated initiative is popular as an accountability tool among government stakeholders and as a managerial tool in monitoring and evaluating service delivery procedures. Government needs to develop technical capacities for performance measurement in budgeting. Governments seem to understand the fundamental purpose of performance measurement: the assessment of organizational goals. The use of performance measurement in budgeting is perceived to have positive impacts on organizational performance. Most public officials we interviewed had genuine enthusiasm about this approach. Performance measurement helps government specify organizational goals/achievement, monitor management practice, and in some cases, make budget allocation decisions. Many 867

7 professional organizations are making an effort to proliferate the use of performance measurement. If the obstacles to implementation are overcome, performance measurement can leave a positive mark in the history of budgeting reform. In addition, government agencies have widely varying experiences and abilities to measure performance. For this reason, reviewing past and current performance measurement practices can help to discover what government experience and the experience of other governments suggest about the possibility of performance measurement now in the government. REFERENCES Behn R. 2003b. Why Measure Performance? Different Purposes Require Different Measures, Public Administration Review (5): Behn R The Psychological Barriers To Performance Management: Or Why Isn t Everyone Jumping On the Performance-Management Bandwagon? Public Performance and Management Review 26 (1): Berman EM, Wang X Performance Measurement in U.S. Counties: Capacity for Reform, Public Administration Review 60 (5): De Lancer Julnes P, Holzer M Promoting the Utilization of Performance Measures in Public Organizations: An Empirical study of Factors Affecting Adoption and Implementation, Public Administration Review 61(6): Dixit A Incentives and Organizations in the Public Sector: An Interpretive Review, Journal of Human Resources, 37(4), Greene J The Inequality of Performance Measurements, (Evaluation 5 (2): Harvard University, Kennedy School of Government, Executive Session on Performance Management (Downloaded from Newcomer K Using Performance Measurement to Improve Programs, new direction for evaluation 75:5-14. Perrin B Effective Use and Misuse of Performance measurement. American Journal of Evaluation 19 (3): Rob Paton Managing and Measuring Social Enterprises. London: Sage, p. 5. Robert DB Different Purposes Require Different Measures (Paper presented to the Association for Public Policy Analysi s and Management. Seattle, November 2-4, 2000). Robert DB "The Psychological Barriers to Performance Management: Or Why Isn t Everyone Jumping on the Performance Management Bandwagon." Public Performance and Management Review 26, 1 (September 2002). pp Weiss CH Evaluation for decision: Is anybody there? Does anybody care? Evaluation practice, 9(1), Wholey J, Newcomer K Clarifying Goals, Reporting Results, and new direction for evaluation 75: