Strategic Performance Management in Local Government - CiteSeerX

Management Accounting Research, 2000, 11, 231–251 doi: 10.1006/mare.2000.0130 Available online at http://www.idealibrary.com on

Strategic performance management: A balanced approach to performance management issues in local government Louise Kloot*‡ and John Martin†

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: financial, 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. financial 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.

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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: [email protected] *Victoria University of Technology. †Queensland University of Technology. Accepted 10 January 2000. 1044–5005/00/020231+21/$35.00/0

c 2000 Academic Press

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L. Kloot and J. Martin

1. Introduction ‘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 efficiency 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 efficient, 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 efficiency (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-financial 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-financial measures in addition to financial measures of performance has been increasingly called for in both the for-profit and not-for-profit 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 financial success. The remaining four are determinants of the success of these strategies: quality, flexibility, 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: financial, customer satisfaction, internal business processes, and innovation and learning. Kaplan and Norton effectively consider the three dimensions of quality, flexibility 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 classified as results (financial, 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-financial terms, non-financial performance measures are needed as conventional financial reporting will not fully capture performance (Guthrie and English, 1997). Guthrie and English

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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 efficiency 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 reflect 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 defining 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.

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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 financial 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 financial 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 difficult and if policies change over time longitudinal comparisons are impossible (Fitzgerald et al., 1991). Performance measurement in organizations is still largely focussed on financial 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 financial 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 financial measures: it is a complement. The four perspectives of the scorecard are financial, customer, internal business process, and learning and growth, which are consistent with Fitzgerald et al.’s (1991) results (financial performance and competitiveness) and determinants (quality, flexibility, resource utilization and innovation).


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Table 1 A Balanced Approach to Performance Management (adapted from Fitzgerald et al., 1991, Ballantine et al., 1998, and Kaplan and Norton, 1996) Performance Management Process Primary objectives or results to be achieved Financial Customers Secondary objectives or determinants of success Internal Business Processes Innovation and Learning

Questions to be addressed To succeed how should we appear to our shareholders? To achieve our vision how should we appear to our customers? To satisfy our stakeholders and community what business processes must we excel at? To achieve our vision how will we sustain our ability to change and improve?

Our research is concerned with the performance management systems of local government organizations. We are interested in the way councils monitor and integrate their performance across the organization for the purposes of planning and control. Clearly the concepts articulated above form an important framework for our research. The three models are very similar and have been combined in Table 1 to provide the basis for our research.

3. Performance management in local government The literature on performance management in government is starting to address issues of strategic linkages with operational performance (Atkinson et al., 1997) and this is consistent with the literature on performance management in general (Kaplan and Norton, 1992, 1996; Fitzgerald et al., 1991; Ballantine et al., 1998). However the literature on performance management in local government is less strategic in focus. It is still largely grounded in operational concepts of efficiency, with a lower emphasis on effectiveness. Palmer’s 1993 research provides evidence that organizations concentrate on measuring what is easily measurable and in local government this results in a bias towards measuring performance in terms of economy and efficiency, rather than effectiveness. Palmer found that the types of indicator most frequently used relate to costs, volume of service, utilization rates, time targets and productivity—all measures of economy and efficiency, not effectiveness. Increasingly there are many pressures on local government to plan for the future rather than adopt an incremental approach, which includes the tender process and competition; central requirements for formal plans and increased ‘customer’ focus (Flynn and Talbot, 1996). Flynn and Talbot further suggest that much of the pressure for improved performance in the short term may militate against strategic planning and strategic performance management. Budget constraints, cost reduction strategies, purchaser/provider splits and a focus on financial performance can fragment local government and prevent a strategic overview being adopted. Whether or not a strategic focus is evident, performance measurement and review is important in local government. It became important in British local government in

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Table 2 Ghobadian and Ashworth: Performance measurement systems • Multiple measures • Ongoing and evolving process • Capture both efficiency and effectiveness dimensions of performance • Qualitative and quantitative measures • Link measures to corporate objectives • Avoid measures becoming ends in themselves

• Identify trade-offs between various dimensions of performance • Enable management to plan and aid decision making designed to meet requirements of different organizational levels • Measures cannot be manipulated by managers being measured

the 1980s because of five interrelated factors: pressure from the central government and the Audit Commission; greater public expectation and consumerism; compulsory competitive tendering; changing culture and attitudes among local authority managers; and loss of confidence (Ghobadian and Ashworth, 1994). These factors are still prevalent in Victoria, where our research was carried out. The Victorian State Government introduced wholesale change in its system of local government in a very short time frame to refocus the emphasis on performance management across a State struggling under the burden of excessive public sector debt. In reviewing the development and use of performance measurement in British local government, Ghobadian and Ashworth (1994) suggest characteristics of performance measurement systems that are consistent with the principles underlying the balanced approach to performance management set out in Table 1. We believe that an integrated, holistic performance measurement system that did all of these things would, in fact, be a performance management system. Performance measurement information is influenced by who constructs the indicators and who does the measuring (Lawler and Rhodes, 1976 quoted in Palmer 1993). Palmer also notes that ‘utilization is likely to be highest when decision-makers are involved in these activities’ (p. 33). In the British experience approximately half of the respondents indicated that the introduction of performance measurement was not part of a coherent strategy (Palmer, 1993, p. 33). This is clear evidence that there is no overarching, holistic performance management approach in a significant proportion of U.K. local government. The preoccupation is with measurement for purposes of compliance and control. This is clearly an important point when we consider the myriad issues people in Australian local government experience as this industry faces significant, on-going change. Recent Australian research confirms that prior to the reforms of the 1990s performance measurement, let alone performance management, was not a high priority in Victorian local government (Kloot et al., 1997). Managerialist changes instituted by the State Government, consistent with managerialist changes in other Australian government sectors, New Zealand, the U.K., Canada and the USA (Dixon et al., 1998) now demand a focus on performance measurement. The most obvious managerialist change is the introduction of compulsory competitive tendering which requires performance information for the purposes of contract specification and management (Palmer, 1993). The primary focus in the U.K. was, as Palmer (1993) and Ghobadian and Ashworth (1994) report, on financial information, and as is shown below, this is the case in Australia. Another major driver for the establishment of performance information systems in Victorian local government was the legislative requirement for councils to prepare


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annual management plans containing measures and indicators, designed to increase accountability. Over the last few years councils have refined and improved the quality of this process as they provide feedback to stakeholders: councillors, council employees, the community and the State Government. The adoption of managerialist private sector practices by Victorian local government suggests that there should be an increased focus on performance management. Strategic planning, business re-engineering, customer service, quality assurance, performance management, risk management and accrual accounting all underpin managerialism (Dixon et al., 1998). The first five of these practices are central to the research reported in this paper linking as they do the concepts of Fitzgerald et al. (1991), Kaplan and Norton (1996) and Atkinson et al. (1997).

4. Research questions Using the framework developed in Table 1, two questions guided this research. First, how are balanced performance management systems developed and integrated within local government organizations for managerial and accountability purposes? Second, from our observations of local government in Victoria can a balanced model of effective performance management for Australian local government be developed?

5. Research methodology The framework developed in Table 1 was used to guide this research and was adjusted to reflect the differences between local government and the for-profit sector. To reflect how local government differs from the private sector, the emphasis in the financial performance category was changed to acknowledge how the council should appear to its stakeholders, rather than shareholders. The concept of ‘stakeholders’ is problematic when applied to Australian local government as there is a diversity of groups often with different interests, for example the state government, which provides funding and the legislative framework under which local government operates. Obvious stakeholders include the federal government (which provides some funding), ratepayers, the wider local community, consumers and clients of local government services, while employees, councillors and suppliers have significant interests in issues affecting local government. During data collection, the researchers and respondents acknowledged the multiplicity of stakeholders and the possibility of conflict between them. A second change was replacing customer focus with community focus. Local government decisions affect the broader community and not just those who use specific services. The emphasis on anchoring the performance measurement system within the strategic framework of the council was maintained by asking questions which related to both strategy and operational levels. Notions of efficiency and effectiveness were also impounded into the model. This research was undertaken in Victoria. This State was chosen as its local government sector has undergone arguably the greatest level of public sector reform in Australia over the last six years. These reforms have included the need to report

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using accrual accounting methods,1 the requirement to undertake corporate planning and report performance against the corporate plan, amalgamation into larger units,2 the introduction of Compulsory Competitive Tendering (CCT)3 and most recently the need to report a number of performance indicators determined by the State Government (see Appendix A). Changes continue to be imposed by the State. During the course of this research new ‘league tables’ were released relating to customer satisfaction surveys commissioned by the State Government. Councils were required to indicate how they would improve their performance against these indicators over the next twelve months. The research was conducted using a qualitative methodology. Over a full day in each council, councillors, the CEO, executive directors and managers were interviewed. This required a major commitment from councils so, on the basis of prior good relationships developed with management, twenty councils were approached to take part of which seven agreed. These seven came from four of the state government’s fivegroup classification of like councils: two inner-metropolitan; two outer-metropolitan; a regional city and a large (rural) shire. Only small shire councils were not represented. This was not considered to be a major impediment to the research as small shire councils are known from previous research to be still struggling with managerialist reforms. In total more than 80 people participated in the interviews for this study. The interviews were conducted in four groups in each council with up to 12 people in a group. The researchers took care to engage all participants in the process. Although there was a set of semi-structured questions the interviews were wide-ranging and many unexpected issues emerged. The data collection process was therefore highly interactive. Detailed notes were taken during the interviews by both researchers which were later compared and consolidated. The consolidated notes in raw form for each council were sent for comment to the council’s CEO, along with a brief letter on the initial findings.

6. Results Performance management in local government is concerned with both managerial and political accountability (Guthrie and English, 1997; Sinclair, 1995). These accountabilities impact on each other but to narrow the focus of this research we concentrated on managerial accountability. We interviewed many more managers than councillors. The results concentrate on managerial accountability and performance management systems required for internal management. However, when speaking of the ‘walk and talk’ community inputs they receive from going about their normal activities in the community, councillors referred to political accountability. Several mentioned that the ultimate measure of performance occurs every three years at the ballot box and they suggested that no other measures were needed. 6.1. Financial performance management In managing their financial performance councils are not merely concentrating on pure cost measures. The overwhelming response to the question ‘how should we appear to 1 Australian Accounting Standard 27 ‘Financial Reporting by Local Governments’. 2 210 local government units at the start of 1992 were reduced to 78 by the end of 1994. 3 50% of all local government costs (including depreciation) must be subjected to open tender.


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our stakeholders?’ was that local government had to provide ‘value for money’ while maintaining service levels. ‘Value for money’ was variously defined including ‘provision of adequate services without wasting limited resources’ and ‘ensuring services are affordable’. Generally, ‘value for money’ has the same meaning for managers as Palmer’s (1993) joint concepts of efficiency (lowest cost per unit of output) and effectiveness (providing the right services at this lowest cost). There are two other common themes driving financial performance: explicit accountability to the community and implicit managerial accountability. This emphasis on accountability is consistent with other research (Guthrie and English, 1997). Explicit accountability drivers reported by respondents are: • evidence of transparency in financial transactions • demonstrated accountability and responsibility to council stakeholders • proper stewardship and probity in transactions should be apparent • equity in the provision of services across geographic areas and across social classes Managerial drivers are: •

debt reduction4 strategies to demonstrate responsible financial management: ‘never to be in the red’ • infrastructure and asset management • long-term economic and social sustainability A further set of accountabilities is to the Victorian State Government. Councils are required to calculate and monitor 21 financial performance indicators on an annual basis for the Victorian Office of Local Government (OLG) (Appendix A) designed to force local governments to become more cost efficient (Ballantine et al., 1998). Such requirements are consistent with Dixon et al.’s (1998) observation that monitoring bureaux become increasingly involved with the minutiae of administration and increasingly demand greater quantity and detail of reporting. These and other OLG requirements are seen as a burden by councils: financial systems do not provide information in an appropriate format for the OLG and developing reports which satisfy the requirements is time consuming and costly. One manager described the OLG indicators as superficial and dysfunctional unless they were interpreted in the light of specific council situations. They are seen as burdensome because they are not sufficient for appropriately managing financial performance. Managers use many other measures to ensure that they provide other stakeholders with value for money. Strategic considerations guide financial performance management. Councils develop long-term financial plans (three to five years) within the framework of their strategic plans, which anchor the annual budget. Three-year rolling budgets assist in financial management. Councillors generally receive quarterly financial reports on expenditure against budget and year-to-date, whilst managers receive at least monthly reports and generally have access to on-line reports as part of the performance management process. 4 There was an interesting dichotomy between those councils which had previously owned electricity authorities and which were, after compulsory acquisition by the state government, flush with ‘electricity money’, and those councils without such money. Those with electricity money had no need of debt reduction strategies.

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A common theme, however, was that financial information was poor: ‘A reporting nightmare’ was the description of one manager about the council’s reporting system. Another asked ‘how can you manage performance when the information is flawed?’ Instances of poor information which negatively impacted on performance management are: • •

Real-time cash flow information is crucial but may be unavailable. Each business unit requires its own full financial reports to manage its performance, but these are not generally available. The accounting and financial reporting systems are not yet focussed on units: they still report on ‘the big picture’. • Contract management requires reports for each contract related to its own time frame, not related to the council financial year. These are generally unavailable. • Managers may need to keep supplementary information on spreadsheets, or download financial information and manipulate it to assist in managing their finances. • Transfer pricing between business units is problematic. The conclusion which can be drawn here is that management accountants in local government need to be more proactive in developing and implementing good information systems to provide necessary financial information. To ensure probity under CCT, most councils have set up ‘clients’ who develop policy and purchase and manage services for ratepayers, and ‘providers’ who contract to provide the service (see Ballantine et al., 1998, for an extended discussion of these arrangements in the provision of public health services). Financial performance has different implications for the ‘client side’ and the ‘provider side’. Providers have some form of incentive to improve their financial performance as there is usually some form of gain sharing: if a unit has a higher-than-budgeted ‘profit’ this may be shared between the council, the unit itself (for example providing extra training and development for staff) and the unit employees. These incentives provide a process for managing performance and for driving down costs as far as possible while still providing appropriate service levels (Merchant, 1989). Clients have no such incentive: there is no reward for ‘beating the budget’. A common theme was that performance management is more difficult in the absence of such incentives: measuring and reporting budget variances of itself is insufficient to improve performance and minimize costs. Innovative ways of providing incentives for client side employees are needed to further improve financial performance. However, this can be difficult and is further discussed below in the section on innovation and learning. 6.2. Community focus management Local government corporate plans are strongly community focussed with the strategic imperative being related to satisfying community needs. Community and customer relations are areas which are generally well handled by local government—a common trend found across public sector services (Ballantine et al., 1998). Community satisfaction is another area over which the OLG mandates performance measurement. Its Community Satisfaction Measurement Program surveys community perceptions of overall leadership, image, customer service and service delivery performance by each council, and reinforces accountability to the state government. Councils need to manage how communities perceive their performance in two ways. First, they need to manage how the general community views their performance. Second, they need to manage how those who use specific council services as customers


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view the council’s performance. Formal performance measurement is evident as councils undertake extensive market research to gauge community perceptions of their performance across both these dimensions. Surveys and focus groups are conducted by independent market research organizations on an annual basis. Other market research may be conducted by in-house groups much more frequently, for example monthly client surveys to judge the quality of services provision. To integrate performance outcomes with strategy and ensure secondary objective outcomes are consistent with primary objectives (Atkinson et al., 1997) extensive community consultation and collaboration exists in all councils. Consultation is directed at fulfilling community needs to achieve effectiveness of outcomes (Palmer, 1993). To incorporate community views in developing broad policies and strategies councils are increasing the direct participation of the public in the design, delivery and assessment of public services. Participation develops a commitment to the long-term improvement of council services (Pollitt, 1993). Examples are found in developing strategic and corporate plans, transport policies, economic development plans, health plans and environment plans. Consultation can take the form of public meetings, public membership of advisory committees, community workshops, special-purpose forums and public questioning and comments during specified attendance times at council meetings. Strong efforts are made by councils to educate and inform their communities. Managers believe that community knowledge leads to more accountability (Atkinson and McCrindell, 1997), and it also leads to a community whose perceptions are closer to the reality of services driven by limited resources. Heavy emphasis is placed on preparing press releases (up to 8 per week), articles and a regular page or column for local newspapers, quarterly newsletters to all households and businesses and annual community directories. Pamphlets and information bulletins on specific areas and services are available from councils. Councils may advertize on local radio stations. In recognition of technology changes most of the councils are developing a home page on the internet. In inner-city councils, disseminating information to those of non-English speaking background is problematic, when over 70 languages may be spoken in the local community. Despite these efforts managers and councillors believe that many in the community are ill-informed ‘if we are doing good things we have to struggle to inform the community of what we are doing’. The second focus of performance measurement is satisfaction of those customers who use council services. Business units undertake customer satisfaction surveys on a regular basis, often monthly, as they are part of service quality specifications under CCT. Both external contractors and internal providers were very supportive of the need to ensure they maintain good customer relations at all times. For example, a road building contractor (external) explained how he letterboxed all residents a week before disruption began in their streets. He detailed the work, the time it would take, and gave a phone numbers for queries. During construction, he visited a number of residents to gauge their reactions to the work. Councils are developing or have developed customer service charters to specify what ratepayers can expect of their day-to-day performance across a wide range of dimensions, for example how quickly the phone is answered or how long it takes to respond to a building permit application. These charters provide standards against which providers’ performance is measured. It is also suggested that charters should be designed to allow for consistent improvement in service delivery. Customer perceptions are a key input into the service charters.

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6.3. Internal business process Internal process reform is being driven by two factors: the need for cost reduction in a time of financial stringency and the need to perform to business standards (to be competitive and win tenders in a CCT environment). Consistent with the need to demonstrate financial accountability, there is recognition that services must be delivered in a cost-effective, high-quality manner. This requires significant reform of processes and systems to reduce costs, including cost-based performance measures. However, lack of financial information on specific processes and the effect of process change on costs hampers reform. Managers are uncertain about how to proceed when the effects of change cannot be estimated. Lack of information and performance measures is a critical problem and a recurring theme in all councils. Benchmarking, both formal and informal, is a popular method of process improvement. Formal benchmarking requires performance measurement whilst informal benchmarking may take place in informal networks without formal indicators being available. Informal networking and benchmarking is valuable for local government in exploiting opportunities to enrich management perspectives (Corrigan and Joyce, 1997). Again, lack of valid information for accurate benchmarking was a recurring theme, confirming earlier results from an Australia-wide Local Government Ministers’ pilot program on benchmarking (1995). Councils are largely following some form of business improvement program and system redevelopment. One council has a business improvement program based around documentation of processes, performance indicators and analysis of variances between target and actual performance indicators. Senior managers are emphasizing the need for process reform at all levels as a strategic priority, linking processes to strategy as suggested by Atkinson et al. (1997). Performance measurement in this council is leading process reform. This council was also undertaking a formal program of process mapping for continuous quality improvement. This is an important initiative which would be of benefit to other councils. Formal quality assurance (ISO 9000) with its associated performance measurement is not a priority. It is viewed as expensive and time consuming, with too much focus on process and documentation and not enough on the quality of the services as perceived by the end user. However, some councils are quality assured under ISO 9000 and believe the six-monthly audit assists in process improvement. Despite the lack of formal quality measurement in other councils an internal focus on quality of service was evident throughout the sector. As described earlier, councils are generally developing service charters, which requires analysis of internal processes and community perceptions of outputs. Writing contract specifications is a powerful process to review the way things are done and aids performance management. Recognition of the need to work towards customer satisfaction has led to new processes replacing those which don’t meet customer needs. Performance measures designed to enhance internal processes related to customer satisfaction include telephone answering performance and tracking the time taken to respond to letters. Modern business practices such as EFTPOS, Bpay and credit card payments5 are slowly being introduced in line with community expectations. 5 Until 1992, the old Municipal Accounting Regulations specified every procedure regarding accepting and banking of monies, and practices such as EFTPOS were probably illegal under the regulations.


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Other methods which councils use to improve processes include formal monthly meetings to focus on process improvement and cost reduction, gainsharing of ‘profits’ in provider units and market testing. Market testing, whether or not formally part of CCT, requires full specification of services and thorough analysis and review of the processes through which they are delivered. Lack of performance measures has resulted in business process change being reactionary rather than strategic. However, business unit planning has been widely introduced and this is being undertaken within the strategic framework provided by the corporate plan. It is thus likely that process change will be more strategically oriented in future if suitable performance measures are developed. 6.4. Managing innovation and learning Continued organizational success depends on the ability of organizations to learn and to innovate (Senge, 1990) and managerialism requires a shift from a bureaucratic to an innovative paradigm (Dixon et al., 1998). Yet this is the very area in which performance measurement and management is weakest in local government. There are gaps between what is perceived to be needed and what is measured. There is little recognition of the need for innovation and learning in formal documentation and plans. However, a council outside the seven which were the subject of this research has incorporated innovation and learning into its corporate plan as a key result area, with appropriate performance indicators such as the number of organizational development programs conducted, participation in local government forums, the number of initiatives and innovations implemented, and the number of staff recognized for effective workplace innovations. There is some recognition of the importance of innovation and learning. One council has developed a formal recognition program to encourage new ideas. It awards $500 annually for the best new idea, and awards movie tickets and dinner vouchers for other innovations. Every new idea gains some form of recognition. To encourage innovation this council gives staff the freedom to fail: staff may try out new ideas, and fail, but they should not repeat mistakes. This is important: over-reliance on performance measures may stifle innovation (Sinclair, 1995). Some councils believe that recognition rather than rewards encourage innovation. The benefits and motivational effects of celebrating success are recognized although mechanisms for doing so are lacking. One comment made was that ‘if something goes well, the councillors get the praise’, indicating some disillusionment with recognition of excellence. Heavy workloads were suggested as a reason why there is a low level of innovation. Thinking of new ways to do things takes time which is not available. However, it was also suggested that there may be a need to train people to reflect on what they are doing so they can better manage their workloads. Focussing training on continuous improvement and human resource development is expected to lead to innovation. A relatively strong emphasis on learning by individuals was evident in most councils. Councils have formal staff development programs used as tools to connect individuals with organizational goals, by enhancing skills and knowledge to equip staff to achieve these goals. Programs also inform staff about organizational goals and objectives. One council identified a range of skill shortages and training needs such as managing work teams, holding meetings, and how to make decisions. Other training includes stress management, relationship management, managing the balance between home and professional lives, financial skills, budgeting skills, and using financial performance

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reports. However, budgetary constraints mean that not all training needs are addressed. Learning is also required to replace intellectual capital bought by the private sector following significant downsizing experienced by all councils due to the mandated reforms of the state government. The private sector has purchased the industry expertise needed to prepare tenders and bids for CCT. Empowerment of lower-level staff is necessary if government is to adopt a performance orientation (Dixon et al., 1998). Empowerment is viewed by respondents as an essential change to promote improvement and learning: ‘the more people are involved in decision making, the more they are committed to participate in future problem solving work.’ However, some councils have had mixed results, with hierarchical power structures still in evidence in supposedly empowered teams. Although empowerment is seen to be essential, gaining commitment from staff can be problematic. Staff may not believe that they are truly empowered: ‘managers believe they empower people to change processes, but they don’t measure this and don’t know’. The theme of lack of information was again raised and is seen as a barrier to full empowerment. Staff need information on their performance and on alternatives before they feel competent to make decisions. Although we did not intend to study organizational culture, participants frequently commented that cultural change is a precursor to continuous improvement and that cultural change programs are necessary. Several councils were undertaking staff attitude surveys, one on a six-monthly basis to map changes in attitudes. One council described the need to ‘identify where we are before we can develop change programs’. In different areas of the organization, ‘tribal, rules-based and consensus cultures’ are all in evidence. Although a change program for staff had been suggested by managers it had been refused funding by councillors. Cultural change needs vary within councils. Significant cultural change has occurred in provider groups which are now working in a business paradigm, competing against the business sector for the right to maintain their jobs. These groups are subject to performance measurement, being evaluated against outside tenders in the initial bidding process, and subsequently measured on a continuing basis to ascertain any profits which may accrue to the employees. By comparison, client groups are still largely working in the old public service paradigm. Their performance may be measured in terms of budget variances, but there are no rewards in getting it right and few sanctions for getting it wrong. It should be noted that in councils with a heavy union presence, performance rewards schemes (which may help in cultural change) are difficult to implement for any group. Unions were described as fighting innovation, being divorced from reality and not adding value. Councils which had experienced a reduced union presence reported increased flexibility and innovation. One council has implemented an organization-wide integrated learning and change program using focus groups and workshops. The issues discussed and resolved in these focus groups include the future structure of the council; how to be competitive; growing people in their jobs; and contributing to the planning process. Specific training needs (particularly financial training) are addressed as is encouraging managers and staff to challenge the status quo. This program is linked to the corporate plan so it is driven by strategic issues. In other councils change and learning seems ad hoc and unrelated to espoused strategy.


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7. Discussion This research has implications for performance measurement and management in local government on a number of levels. On one level, this research has provided evidence of the measurement of both efficiency and effectiveness (Palmer, 1993). There is no doubt that local government is extremely concerned with the measurement and management of cost efficiency. Given the Victorian State Government’s emphasis on reform to achieve efficiency, particularly through competitive tendering, this is not surprising. Studies have shown a tendency for the use of accounting controls such as financial performance measures to increase as the intensity of competition increases (Scapens and Roberts, 1993). Greater clarity around financial performance is essential in the drive for the efficient provision of value-for-money services in a competitive environment. There is also emphasis on managing effectiveness of outcomes, in terms of customer satisfaction, and in specifying outcome measures during the planning process. Significant community input into the planning stage ensures outcomes are much more in line with community expectations. Community collaboration in much of the local government strategic and other planning processes results in specifying and delivering services which meet the needs of the local community. There has been a change from government to governance, brought about by the interaction between government and society (Corrigan and Joyce, 1997). At a second level this research examined the issue of the comprehensiveness of performance management and its linkages to long-term strategy (Atkinson et al., 1997). There is evidence that performance measures cover the four categories specified in our model but they are not balanced over the categories. Overall, local governments have a range of measures which are used to manage performance across the financial and community focus dimensions (the results dimensions or primary objectives). These measures are also linked to strategic priorities where financial measures are tied to long-term corporate plans and where there is a strong sense of community input into long-term strategic plans. In contrast, whilst there are good examples of managing performance in the innovation and learning and internal processes categories, these determinant dimensions are much less well developed. In addition, they are generally not linked to corporate strategy (Ballantine et al., 1998). Financial performance is linked to the wider organizational context (Scapens and Roberts, 1993). It is strongly linked to long-term strategy, in that annual budgets are prepared in the context of long term financial plans which are themselves part of the corporate plan. The strategic implications of financial performance are enhanced by having financial performance as a key result area for performance-based bonuses for managers. Financial performance management is essential for long-term survival in a context of reduced revenue and increased community expectations. Performance management requires performance indicators but simply measuring performance is not sufficient for performance management. Some performance indicators required by the OLG are dysfunctional as they do not add to the information needed to manage. Preparing them requires time and effort which would be better used elsewhere. On the other hand, lack of useful financial performance information hampers the management of performance in a number of areas. Local governments are enhancing the role of the citizen in Victoria (Corrigan and Joyce, 1997). They are very aware of the importance of community perceptions of

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their performance, and of their accountability to the community. They are measuring and managing their performance in relation to community standards and taking a strong community focus with significant consultation and information provision to the community. It is also interesting that in this dimension local governments are managing areas such as community consultation which are critical to achieving effective outcomes. Community consultation in the corporate planning process further suggests that there is a strong strategic focus to performance management as consultation helps set strategic goals. There is a need for more integration of the strategic framework into internal process review. These processes ultimately determine the success of council strategies (Fitzgerald et al., 1991; Atkinson et al., 1997). Continuous internal process reviews are important in relation to the on-going emphasis on cost reduction and efficiency management (which are strategic priorities for all councils) and in reviewing service provision to customers in a customer-focussed environment. While process reviews are being undertaken lack of measures to determine internal process performance is a hindrance to managing them. The development of better performance measures may provide the impetus for councils to be more proactive in managing internal processes. Workload indicators are one way of measuring internal process performance. At the managerial level it may be that workload indicators are not perceived to be particularly important. A limitation of this research may be that insufficient evidence was gathered about the use of workload indicators at lower levels in councils. This might indicate that more emphasis is placed on internal processes at these levels. Process mapping is another way of assessing internal processes and there is a lead given by one council which has embraced this technique enthusiastically. Finally, innovation and learning occur largely on an ad hoc basis in local government, with few formal performance indicators or attempts at performance management at an organizational level. The managers and directors largely agreed that innovation and learning is important, but the creation of a learning environment is not formally addressed. However, there are guides as to how such an environment can be created: awards for innovation, heavy emphasis at senior levels on training and workshopping ideas and strategies for the shape of the council in the new millennium. More explicit recognition of the need for learning and continuous improvement is a prerequisite for enhanced performance. There is also a need to develop techniques to measure aspects of learning such as the number of awards given for new ideas, the number of staff attending training courses (particularly in areas outside their area of technical expertise), and the number of staff contributing ideas about the future shape of the organization. There is currently little linkage of innovation and learning to strategic plans (Ballantine et al., 1998). However, there are good examples for councils to follow: the specification of innovation as a key strategic area in the corporate plan; involving staff in workshops about the future shape of the organization; and providing management training for staff to ensure the client side will achieve strategic priorities. There is a third level at which the results of this research can be interpreted. Although this research did not set out explicitly to examine corporate culture (except in the innovation and learning sense of the balanced scorecard), it became apparent that the issue of corporate culture is crucial in performance management. Those councils that were best managing their performance were those in which management was actively engaging with employees: where there was a connection between the managers and the employees. There was a culture of openness and access in these councils.


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Information was freely available throughout the organizations. These results confirm Martin’s (1999) work on the impact of reform on the management of local government organizations and reinforce Dixon et al.’s (1998) contention that a public agency’s traditional ideals, norms and values must change if it is to inculcate a performanceoriented culture. The balanced scorecard/results-and-determinants model used here encourages a performance-centred culture. It emphasizes quality, adaptability, the leeway to make mistakes and learn from them and a commitment to stakeholders (Dixon et al., 1998). At the fourth level, this research questioned whether performance measurement per se leads to enhanced performance. Some aspects of performance may be measured but ignored in the management process due partly to conflicting accountabilities to different stakeholders. A number of measures required for accountability to the state government were ignored in day-to-day management, whilst other performance measures were clearly used to drive performance and accountability to the community. Conversely performance cannot be well managed without measurement: financial and community measures were measured and well managed but internal process and innovation and learning were not measured to the same extent and were less well managed. What is measured is visible and important in organizations, and what is not measured becomes invisible (Broadbent, 1995). These ‘invisibilities’ may be crucial to the continued success of the organization. Innovation and learning are invisible because they are not measured, but this is a dimension to local government performance that is essential to future viability. At the fifth level, consistent with the growing literature on government accountability, this research demonstrates an increased demand for accountability by all stakeholders of local government: the community, employees and state government (Atkinson and McCrindell, 1997). Perhaps the most interesting aspect of the increase in accountability to the community is that it is being driven by managers who want to be more accountable to the local community and who exhibit positive attitudes to those state government requirements which increase accountability to the local community (Sinclair, 1995). Improved performance measurement systems allow them to better demonstrate their achievements to the community and to the state government (see Guthrie and English, 1997). However, performance measures which do not contribute to the management process are considered to be dysfunctional.

8. Conclusion—a performance management model for local government? The comprehensive model used in this research to assess performance management in local government is a strategic framework for action which allows organizations to clarify and translate the vision and strategy; to communicate and link actions; to plan and set targets; and provide feedback and learning. Thus it is a concept of balance and integration, linking performance to strategic objectives. In the early 1990s the Victorian Local Government system was under considerable pressure to reform its structure to reduce the number of local authorities and improve work practices. The drivers for reform included the provision of significant financial savings across the State. Victorian Local Government had resisted previous attempts at major reform over the previous two decades. The parlous financial position of the State, at both levels of government, created greater urgency for microeconomic reform,

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Table 3 Strategic Choice in Local Government Performance Management Traditional Approach

vs

Performance-Oriented Approach

Top-down State Government and councillor-imposed, control-oriented performance measurement

vs

Strategic, collaborative development of a performance management system involving all stakeholders

Imposition of universal, industry-wide measures with less validity for specific councils

vs

In-house development of valid, council specific measures to be used for organizational improvement and benchmarking with like councils

Periodic reporting for the purpose of meeting control requirements of senior management, councillors and State Government

vs

Real-time, up-to-date performance information for all stakeholders to monitor progress, demonstrate accountability and manage outcomes

Piecemeal, myopic approach with a focus on the measurement process

vs

Integrated performance management system across the organization focussed on value-for-money service delivery and organizational improvement

Focus on financial measures only

vs

Focus on financial and non-financial measures: a results and determinants approach

and an emphasis on better financial performance. Financial issues drove reform and performance measurement resulting in a system which is out of balance in the councils surveyed in this research. The imbalance in contemporary, organization-wide approaches to performance management is similar to other research findings in public sector management (Ballantine et al., 1998). Although understandable in the reform context of this research, the preoccupation with financial measures and, to a lesser degree, community concern at the expense of internal business processes and innovation and learning, does not augur well for the long-term development and improvement of local government in Victoria. Can local government systems worldwide benefit from these findings and adopt an approach to performance management which provides for the long-term development of council organizations and the communities they serve? There are a number of strategic choices which affect this outcome, shown in Table 3. Although the performance management systems in this research are not fully integrated there is sufficient public involvement in local decision making to ensure that primary objectives reflect community concern. Councils’ current performance management systems reflect this. Other public sector organizations can learn from the focus on community collaboration and consultation found in this research. Greater emphasis on accountability and value-for-money services has demanded better financial management systems and more effective community involvement. They are far less focussed on understanding, measuring and managing the secondary objectives or the means to do this. A further lesson is that continuing reform of local government systems worldwide will demand accurate, timely and relevant information with which to assess council performance. Managers and employees are actively seeking better accounting and financial information systems to better manage performance. This is not enough. The


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challenge for policy makers is to recognize the importance of process measures and innovation and learning strategies for genuine, long-term quality improvement in the delivery of value for money services. Genuine improvement over the long term will only occur when managers and policy makers pay attention to the way people work and the attitudes and beliefs they hold while performing this work.

Acknowledgement The authors acknowledge helpful comments from participants at seminar workshops at Cambridge University, Queensland University of Technology, Brisbane City Council, participants at the European Accounting Conference Bordeaux, AAANZ Cairns, Jane Broadbent and two anonymous reviewers. We also acknowledge the research assistance of Ron Kluvers and funding support from the Faculty of Business, Victoria University of Technology.

References

Atkinson, A. A. and McCrindell, J. Q., 1997. Strategic performance measurement in government, CMA Magazine, April, 20–23. Atkinson, A. A., Waterhouse, J. H. and Wells, R. B., 1997. A Stakeholder approach to strategic performance measurement, Sloan Management Review, Spring, 25–37. Ballantine, J., Brignall, S. and Modell, S., 1998. Performance measurement and management in public health services: A comparison of U.K. and Swedish practice, Management Accounting Research, 9, 71–94. Bititci, U., Carrie, A. and McDevitt, L., 1997. Integrated performance measurement systems: an audit and development guide, The TQM Magazine, 9(1). Broadbent, J., 1995. The values of accounting and education: Some implications of the creation of visibilities and invisibilities in schools, Advances in Public Interest Accounting, 6, 69–98. Corrigan, P. and Joyce, P., 1997. Reconstructing public management: A new responsibility for the public and a case study of local government International, Journal of Public Sector Management, 10(6). Dixon, J., Kouzmin, A. and Korac-Kakabadse, N., 1998. Managerialism—something old, something borrowed, little new: Economic prescription versus organisational change in public agencies, International Journal of Public Sector Management, 11(2/3). Emmanuel, C., Otley, D. and Merchant, K., 1990. Accounting for Management Control, London, Chapman and Hall. Fitzgerald, L., Johnston, R., Brignall, T. J., Sivestro, R. and Voss, C., 1991. Performance Measurement in Service Businesses, London, CIMA. Flynn, N. and Talbot, C., 1996. Strategy and strategists in U.K. local government, Journal of Management Development, 15(2). Ghobadian, A. and Ashworth, J., 1994. Performance measurement in local government— concept and practice, International Journal of Operations & Production Management, 14(5), 35–51. Guthrie, J. and English, L., 1997. Performance information and program evaluation in the Australian public sector, International Journal of Public Sector Management, 10(3). Hood, C., 1995. The ‘new public management’ in the 1980s: Variations on a theme, Accounting, Organisations and Society, 20(2/3), 93–110.

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Kaplan and Norton, 1992. The balanced scorecard: Measures that drive performance, Harvard Business Review, Jan–Feb, 71–79. Kaplan, R. S. and Norton, D. P., 1996. Using the balanced scorecard as a strategic management system, Harvard Business Review, Jan–Feb, 75–85. Kloot, L., 1995. Management Control Systems and Organisational Learning in a Changing Environment, Swinburne University of Technology, unpublished PhD Thesis. Kloot, L., Italia, M., Oliver, J. and Brooks, A., 1997. Management Accounting Systems and Organisational Learning in Victorian Local Government, Melbourne, Australian Centre for Management Accounting Development. Lawler, E. E and Rhodes, J. G., 1976. Information and Control in Organisations, California, Goodyear, (cited in Palmer 1993). Local Government Ministers’ Conference, 1995. Benchmarking Pilot Study Report, Melbourne, Commonwealth Department of Housing and Regional Development. Martin, J., 1999. Leadership in local government reform: Strategic direction versus administrative compliance, Australian Journal of Public Administration, November, 24–37. Merchant, K. A., 1989. Rewarding Results: Motivating Profit Centre Managers, Boston, Harvard Business School Press. (MAV) Municipal Association of Victoria, 1993. A Guide to Performance Indicators in Local Government, Melbourne, Municipal Association of Victoria. Palmer, A., 1993. Performance measurement in local government, Public Money and Management, October–December, 31–36. Pollitt, C., 1993. Managerialism and the Public Services, Oxford, Blackwell. Scapens, R. and Roberts, J., 1993. Accounting and control: A case study of resistance to accounting change, Management Accounting Research, 4, 1–32. Senge, P., 1990. The Fifth Discipline, Sydney, Random House. Sinclair, A., 1995. The chameleon of accountability: Forms and discourses, Accounting, Organisations and Society, 20(2/3), 219–37.

Appendix A Annual plan performance indicators required by the Office of Local Government.

Financial Performance Rating levels total rates and charges declared rates and charges per assessment rates and charges per capita rates and charges as a % of CIV (Capital Improved Value) rates and charges per median residential property value average residential assessment rates and charges as a % of CIV - farms rates and charges as % of CIV - commercial/industrial


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Dependence on rates and grants rates and charges as % of total recurrent value Financial Assistance Grants per capita Achieving financial plans recurrent surplus/deficit capital expenditure Financial health of the organization recurrent surplus/deficit as % of total recurrent revenue net assets total debt servicing costs as a percentage of rates and charges revenue working capital ratio - % of current assets to current liabilities Capital expenditure ratio of capital expenditure to total depreciation capital expenditure per assessment Funding capital expenditure recurrent surplus/deficit as % of capital expenditure ratio of total internal funding to capital expenditure Debtor management % of rates, fees and charges outstanding at 30 June

Comparative Indicators A further 47 comparative indicators are required in the areas of Town Planning (7), Waste management (5), Municipal cleaning and parks management (3), Public library and information services (8), Road construction and maintenance (6), Customer Service (1, based on state government community satisfaction index), Family, children’s and youth services (6), Environmental health/regulatory (4), Aged and disability services (4) and Administration (3). These indicators include costs (e.g. net cost of maternal and child health per consultation), workload (e.g. number of planning permits decided during the year) and quality/timeliness (e.g. average number of days to respond from referral to delivery). An annual performance statement is required to report on both sets of indicators. The report contains (for each indicator) actual result, target, variance against target, last year result, variance against last year, target compared to last year, three year moving average.