February 8, 2017Doug Hadden
Governments around the world have implemented various performance management concepts. These are often known as results-based management or performance budgeting. There have been mixed results for government performance management initiatives. “Current systems for measuring performance in the public sector present some limitations because they are based only on efficiency, effectiveness and economy indicators, which are mainly financial that fail to measure the fulfillment of environmental and social objectives of the public organizations. (Mihaiu, 2014).”
Originally developed to overcome performance scheme challenges in business management (Kaplan, 2010), the balanced scorecard has been adapted in public sector organizations. “Although the Balanced Scorecard has initially been applied to the for-profit (private) sector, its potential to improve the management of public sector organizations (PSOs) is even greater. (Kaplan, 1999)”
The “balanced” notion of the balanced scorecard that combines financial, customer, internal process, learning and growth perspectives provides a holistic performance framework. This approach can overcome many of the difficulties associated with understanding and implementing performance management in government. It is through the exercise of balancing performance needs that makes the balanced scorecard compelling for government and other public sector organizations.
“A properly constructed scorecard is balanced between short- and long-term measures; balanced between financial and non-financial measures; and balanced between internal and external performance perspectives. The scorecard is a management system that can be used as the central organising framework for key managerial processes. (Mackie, 2008)”
Why is performance management harder in the public sector?
Corporate, or business, performance management is complicated. Many businesses fail to improve performance. Others impose performance measures that generate perverse incentives. The balanced scorecard methodology is designed to overcome many of the challenges in developing performance management systems by aligning performance incentives with organizational strategy. The balanced scorecard examines performance “from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:
- Learning & Growth
- Business Process
The result of of an effective balanced scorecard exercise is a simple structure that focuses decision-making on what is organizationally important. Public sector organizations are more challenged to develop effective performance measurements. The balanced scorecard can help overcome these performance management issues:
- No bottom line validation
- Organizational scope complexity
- Outcome scope complexity
- Accountability incentives
1. Governments have no bottom line
Business processes, funded by budgets, generates outputs such as products manufactured or customers contacted. These outputs generate outcomes like customer retention or market share. This provides a profit, or loss. Businesses can validate the quality of any management performance system based on this bottom line result. “In the private sector the key financial objectives relate to profitability and returns on investment. In the public sector financial considerations will have an enabling or restraining role but will not be the only criterion for assessing strategic options. (Mackie, 2008)”
There is no “bottom line” in the public sector.
- “Outcomes are much more difficult to validate in government because is not aligned to an objective bottom line like profit
- Budgets impose more controls on spending in government including restricted flexibility for managers to optimize performance whereas companies can increase spending to generate more revenue or cut costs to reduce expenditures
- Politics drives input-focused (i.e. spending in the politician’s district) decisions that are imposed on public servants
- Financials in the public sector is rarely operating on full accrual accounting, so standard private sector financial measurements like Return on Investment that could help determine effectiveness are difficult to calculate (Hadden, 2012)”
The balanced scorecard helps governments align outputs to outcomes and to strategy. This enables governments to select and test outcome measurements.
2. Organizational Scope and Complexity
Businesses operate fewer “lines of business” than governments. “Challenges for government performance management include:
- Scope and Scale: Governments run more “lines of business” than any business…
- Scope: Budgets must be tied to performance because governments run commitment accounting
- Scale: Cascading complex objectives through MDAs and divisions to individual public servants is complex because there are so many staff members (Hadden 2012)”
The many government “lines of business”, compared to even the largest business conglomerates, makes whole-of-government performance management difficult. Departmental and program related performance can also be challenging. This can create the problem “of information overload. For any given programme, a huge array of possible measures and evaluative information can be created, easily swamping the ability of users to deal with the information. (Mayne, 2007)”
Public sector organizations are budget driven. “As compared to commercial institutions, government agencies face a unique set of challenges when trying to manage performance and achieve their strategic goals and initiatives. Their mission and budgets are often decided externally …. Additionally, agencies face the uphill task of meeting their goals without direct control of shrinking budgets and resources. This furthers the need for managing performance at every step along the way. (Whittaker, 2003)”
The balanced scorecard enables governments to align ministry, departmental, agency and personal goals with strategy. This eliminates many potential performance indicators that are not material to meeting government goals.
3. Outcome Scope Complexity
Businesses operate within well-understood domains. Outcomes that drive profit are also well-understood. Public sector performance or results-based systems suffer from “practical measurement problems. Often, outcomes are difficult to measure directly (e.g., greater national security) or they are complex, for example, in the case where there are interlinkages between a number of different programs and subprograms (e.g., lower morbidity rates). (Diamond, 2005)” This makes it difficult to identify outcomes that are relevant to government strategy.
It is also true that “outcomes are by definition results over which organizations do not have complete control. (Mayne, 2007)” This lack of control often encourages organizations to measure outputs. These outputs may not be correlated to improved outcomes.
Governments also have a more complicated performance lifecycle than the private sector because of the link to the budget process and the need for transparency.
The balanced scorecard enables government organizations to add context to performance results. Extraordinary events can be described with impacts to outputs and outcomes described.
4. Accountability Incentives
Businesses often offer significant performance incentives for business units and employees. Accountability in the private sector can result in rewards for good performance. Government incentives that are tied to outcomes are difficult. “On practical grounds, output is generally what the agency can exert control over, but the ultimate outcome is often determined by external factors, usually of an unpredictable nature. (Diamond, 2005).”
Government organizations are typically managed based on compliance to statutory and budget rules. The introduction of management by outcomes can generate the “fear of unintended consequences. This element seemed to rank higher in instances where governments considered linking performance measures with incentives or sanctions. (Kamensky, 2012).”
Performance management using “an evidence- based outcome focus can require significant and often fundamental changes in how an organization is managed; in how public sector and non-profit organizations go about their business of delivering programmes and services (Mayne, 2007)”
The balanced scorecard enables governments to better communicate goals for performance alignment. The exercise of developing and implementing a balanced scorecard, when accomplished properly, acts as the nexus for organizational change management.
What are the advantages of the balanced scorecard in government?
The balanced scorecard provides governments with a more holistic performance management methodology. There are numerous examples of public sector balanced scorecards. Some add additional perspectives such as human resources. Important differences from the private sector includes the replacement of the customer perspective with the citizen perspective. Public sector organizations focus on the citizen perspective as result, rather than financial perspective.
Public sector organizations are budget driven. The balanced scorecard enables tying long-term government goals to annual and medium-term budget proposals. It improves program evaluation.
The balanced scorecard is an effective transparency mechanism for citizen and employee communications. It provides evidence of progress towards goals and validates policy.
Diamond, J. Establishing a Performance Management Framework for Government. Presupuesto y Gasto Público, May 2005. http://www.ief.es/documentos/recursos/publicaciones/revistas/presu_gasto_publico/40_Establishing.pdf
Hadden, D. Government Performance 2.0 FreeBalance, December 2009. http://www.slideshare.net/icgfmconference/1045-1200pm-government-20-perf-mgmt-in-pfm-transformation-doug-hadden-english
Hadden, D. Is Government Performance an Oxymoron? FreeBalance, April 11, 2012. http://freebalance.com/uncategorized/is-government-performance-an-oxymoron/
Kamensky, J. Performance Measurement: 3 Challenges Every Government Faces. GovExec, November 27, 2012. http://www.govexec.com/excellence/promising-practices/2012/11/performance-measurement-3-challenges-every-government-facing/59760/
Kaplan, R. The Balanced Scorecard for Public-Sector Organizations. Harvard Business Review, 1999. http://www.fetp.edu.vn/attachment.aspx?ID=43073
Kaplan, R. Conceptual Foundations of the Balanced Scorecard. Harvard Business School Working Paper, 2010. http://www.hbs.edu/faculty/Publication%20Files/10-074.pdf
Mackie B. Organisational Performance Management in a Government Context: A Literature Review. Mackie Public Management, 2008. http://www.focusintl.com/RBM064-0064768.pdf
Mayne, J. Challenges and Lessons in Implementing Results-Based Management. Sage Publications, 2007. http://journals.sagepub.com/doi/abs/10.1177/1356389007073683
Mihaiu, D. Measuring Performance in the Public Sector: Between Necessity and Difficulty. Studies in Business and Economics, 2014. http://eccsf.ulbsibiu.ro/articole/vol92/925mihaiu.pdf
Whittaker, J. Strategy and Performance Management in the Government. Pilot Software, November 2003. http://www.exinfm.com/workshop_files/strategy_pm_gov.pdf
—Balanced Scorecard Institute. Balanced Scorecard Basics. https://www.balancedscorecard.org/Resources/About-the-Balanced-Scorecard