Numbers generated by the traditional financialaccounting system

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IntroductionDuring the last two decades, the challenges of measuring performance in both the public and privatesectors have been widely discussed (Behn, 2003; Carter et al., 1992; Hood, 2006; Johnson andKaplan, 1987; Kaplan and Norton, 2004; Neely, 1999; Pollitt and Bouckaert, 2004; Smith, 1995).Financial measures based on numbers generated by the traditional financial accounting system, suchas profits, have been found to be not sufficient and out of date in measuring organizationalperformance (Curtis, 1985). For example, during that period, within NHS (Sehested, 2002), operationscould not be performed due to lack of funding; there was widespread dissatisfaction with publicservices generally and the government was trying to reduce spending. Accordingly, organizations haveimplemented a number of non-financial measures to control their costs and improve their goods andservices (Kidwell 2002). Performance measurement has evolved from merely producing accounting-related to more comprehensive information that contains both financial and non-financial information(Wilson et al., 2003).

With the increasing pressures of citizens and legislation that demand more responsibility in spending ofpublic revenues and transparency in reporting on the achieved results, governments are demonstratinggrowing interest in the measurement of performance (Micheli, 2008). However, it is not easy andproblematic to effectively and efficiently evaluate the performance in the public sector.

This essay aims to discuss the problems of performance evaluation in the public sector and someprospective techniques developed to improve them. The first part will briefly illustrate the performancemeasurement in private sector. Then, in the follow part, the roles and challenges of performancemeasurement in public sector will be discussed. And finally, a conclusion will be drawn from what hadbeen argued.

Performance measurement in private sectorIn the private sector, such as the profit-oriented organization, the principle measure of successfulperformance is profit and the majority of performance measurement activity is still based on thefinancial statements. From these statements which mainly include income statements, balance sheetsand cash flow statements, we can easily know what resources were purchased, how they were usedand the cost of them in each business organization. The reason to use profit as an indicator to evaluatehow well a company performs is probably because within a competitive market, the prices of goodsand services can be easily and relevantly valued.

However, some companies are not operating within a competitive market, so the profit itself is notsufficient to evaluate the organizations performance. In addition, such financial measurementscontribute only little or nothing in helping an organization to achieve its strategic goals (Euske et al.,1993; Ghalayini et al., 1997; Jagdev et al., 1997; Kaplan and Norton, 1992; Nanni et al., 1992; Neely,1995). In response, Balanced Scorecard (BSC) was developed to overcome this limitation by Nortonand Kaplan (1992) which is a strategic performance management tool that links performance tostrategy using both financial and non-financial performance measures and generally used bymanagers to guide future competitive success (Kaplan and Norton, 1996).

The roles and challenges of performance measurement in public sector

Like the private sector, public sector organizations around the world face pressure to improve servicequality; lower their costs; become more accountable, customer-focused and responsive tostakeholders needs. There is an argument that performance evaluation processes within the publicsector organizations can be improved through using the performance measurement techniques ofprivate sector (Broadbent and Guthrie, 1992; Olson et al., 1998; Hoque and Moll, 2001), such as cost-volume-profit analysis, standard costing, and return on capital employed. However, since most of publicsector organizations aim to provide a service for the service users rather than earn a profit andservices provided free at the point of delivery and financed by taxation, the revenue cannot be used asa ideal measure to evaluate how well each service be received by its customers. Therefore, the amountof profit traditionally used as a performance measure in profit-oriented organizations is not suitable forthe public sector. Instead, this type of organizations typically publishes non-financial output measures.In addition, due to that the values of goods and services in public sector are more difficult to identifyand measure than the one in private sector, how to efficiently and effectively evaluate the performancein the public sector becomes problematic.

Elements of performance measurement in definitive governmentsMeasures of performance used in the public sector performance evaluation process include three basicelements: inputs (the resources consumed by governments and primarily be measured by using costsand non-financial measures), outputs (direct results of program activities and can be measured byusing non-financial measures), and outcomes (broad results of program activities and be evaluatedmainly by qualitative assessments such as questionnaires and interviews). The non-financial inputs,outputs and outcomes in this evaluation process are hierarchical; the lowest-level measures (inputs)are easier to measure but of limited relevance to the goal, while the highest-level measures (outputs)are more relevant but difficult to measure, so less reliable. For example, as for a secondary school,number of teachers as the input which is easier to measure but is not directly relevant to the goal ofschool; while the quality of school as the outcome is difficult to measure but is more relevant to theschools objective.

Since public sector organizations lack clear objectives, which make it become problematic to link theinputs to the outputs and outcomes (Johnsen, 2000). As a good and service provider, the public sectorwill be faced with the difficulties of quantifying their main performance measures such as customersatisfaction, and quality of service (Jackson, 1990); which also mainly rely on human resources whohave discretion over their efforts and hence need consistent monitoring and directing towards theorganizations goals (Neely et al., 1995). Moreover, public sector organizations are led by electedofficials who are voted into office and are accountable to their voting stakeholders. These stakeholdersmay not be the consumers or end users of public services, such as environmental protection, taxcollectors, motor vehicle registration, and immigration services (Battle, 1994).

Economy, Effectiveness and EfficiencySince there are some other factors affecting the performance of public sector, it is difficult to establishthe relationships between financial inputs and non-financial outputs and outcomes. Audit Commission(1986) emphasized two key measures of performance: efficiency and effectiveness. Service efficiencywas defined as the provision of specified volume and quality of service with the lowest level ofresources capable of meeting that specification. It is measured by the ratio: output/input and used tolink inputs (usually measured by monetary items) with non-financial outputs (measured by eithermonetary or non-monetary items). The greater the ratio, the more efficient the organization is.Effectiveness can be defined as providing the right services to enable the local authority to implementits policies and objectives. It is only concerned with outputs and outcomes, and say nothing about howmuch an organization spend to achieve a certain objective. Hence, effectiveness contributes little ornothing in improving the performance of organizations, mainly because when there is no restriction onthe budget almost all objectives can be satisfied. There is also a third element - economy, althoughincluded in efficiency, but specifically emphasized in the context of purchases from outside, defined as

the lowest possible cost consistent with the specified quality and quantity. It only concerns inputs butno consideration about the organizations objectives. Thus, it is meaningless if they operate alone.Sometimes a program could be very efficient but not effective, for example, you could do a wrong thingvery well. Besides, it is necessary to judge these three elements together because you dont want tospend public money on the cheapest inputs but not achieve the goals after all.

Challenges of performance measurement in public sectorThere are various challenges public sector organizations must face when they evaluate theirperformance. The first issue is about the measurement of costs, such as when the full costs are notrelevant within the organization, how to evaluate the performance. Additionally, a big part of costs arenot directly linked with outputs and outcomes, so it must involve some other factors that affect thecosts. Secondly, the non-financial output measures are less reliable than the financial ones mainlybecause just limited non-financial information can be controlled. Thirdly, although the non-financialmeasures may be easy to count and should be reliably measured, it is very difficult to establish therelationships between inputs, outputs and outcomes due to that most of the performance is beingmeasured only once, such as students cannot be educated twice for the same thing, and also theultimate objective is not clear at all. Hence, it is so common that there will have some unintendedoutcomes. Fourthly, non-financial output measures are not comparable between services and justfocus on very specific characteristics. However, as we all know, the more specific the focus, the moreuseful the measurement is. In addition, it is hard to trade-off between the demand of complex andsimple performance measures. Each type of measures has its own advantages and disadvantages.Last but not least, non-financial measures just focus on what the organizations can control, andconcern nothing about the links to inputs and the ability to be audited which required by accounting.

Problems with establishing the performance measurement techniquesIn order establish performance evaluation techniques in the public sector, social indicators, program-planning-budgeting systems (PPBS) and cost-benefit (C/B) analyses are mainly used. However, thereexist many problems with them. For the social indicators, the meaning of statistics may be questionedbecause of the method of data collection and also these indicators are too general to be applied inspecific areas. The main problem with the remaining two techniques is the measurement of outcome.For PPBS, it cannot convert the organizations objectives into measurable outcomes, while for C/Banalysis, non-monetary outcomes are impossible to transform into monetary ones. Therefore, thesethree techniques are not that useful in the real world (James E, Sorensen; Hugh D. Grove, 1977).

Methods for improving performance evaluation techniquesThe problems with performance evaluation techniques including social indicators, PPBS and (C/B)analyses mentioned above places emphasis on the role of outcome measures. To solve thoseproblems, monetary inputs should be related to non-monetary outcomes for specific programs in a costanalytic perspective. Cost-analytic techniques include approaches ranging from cost accounting andcost-finding for programs, units of services and episodes to techniques which link resourceconsumption to nonmonetary outcomes (James E, Sorensen; Hugh D. Grove, 1977).

There are two types of cost-analytic techniques, cost-outcome and cost-effectiveness (Quade, 1967;Goldman, 1967; Levin, 1974; Fishman, 1974; Yates, 1975). Cost-outcome refers to the programmaticresources consumed to achieve a change in a relative measure of performance, while Cost-effectiveness is the comparison of cost-outcomes to identify the most beneficial outcome to cost ofprograms, modalities or treatment techniques. According to James E, Sorensen and Hugh D. Grove(1977), cost-effectiveness analysis can be carried out, based on cost-outcome information.

Assessing outcomes turns out to be an even more challenging than costing for nonprofit services,because non-monetary outcome assessment is currently employed in nonprofit performance evaluation

process. In profit-oriented organizations, performance measurement is mainly based on the profitfigures. But in public sector organizations, there is no such comprehensive measure and there are fewgood ways of estimating whether additional inputs will generate coordinate extra outputs. The basicproblem is that there is no meaningful measure of output, and outcome evaluations are influenced bytime patterns, multiple outcomes, effects among different populations, simple vs. complex evaluationsand research design issues. As the conceptual approach and role of outcome assessment becomesclearer, improvements in the quality of the output side of the cost-outcome approach can be expectedto meet external and internal service accountability demands.

ConclusionWhile performance measurement in private sector is almost wholly limited to financial measures, publicsector mainly uses non-financial measures to evaluate. However, there exist some problems whenusing this type of measures. The basic one is the non-monetary outputs measurement. How toefficiently and effectively establish the causal relationships between financial inputs and non-financialoutputs and outcomes has been widely argued. Three types of performance evaluation techniques,which are social indicators, PPBS and (C/B) analysis, are found to have some problems in outcomemeasurements. Cost-analytic techniques are developed by using cost-outcome and cost-effectivenessmethods, to solve these problems and link the monetary inputs to non-monetary outputs and outcomes.However, the difficulties in the interpretation of cost-effectiveness measures cannot be underestimatedand it is still not easy to use them in the real world.

Numbers generated by the traditional financial accounting systemIntroductionPerformance measurement in private sectorThe roles and challenges of performance measurement in public sectorElements of performance measurement in definitive governmentsEconomy, Effectiveness and EfficiencyChallenges of performance measurement in public sectorProblems with establishing the performance measurement techniquesMethods for improving performance evaluation techniquesConclusion