How Effective are Budget Targets as Personal Performance Measures - Literature review Example

Running head: How effective are budget targets as personal performance measures How effective are budget targets as personal performance measures By ______________________ How effective are budget targets as personal performance measures Budget targets' effectiveness as seen from the perspective of performance measurement can only be analysed by looking forward to the present fiscal policies escorting budgets from the vantage of the past. Economic performance, however, lies ahead as performance measurement is always surrounded by uncertainty because it depends on inference rather than direct measurement and observation. "The amount of uncertainty varies with the lags between measures and their impact on economic performance, and the volatility of the business environment. This uncertainty notwithstanding, it is critical for firms to draw inferences about economic performance from the kinds of performance they can measure. Absent these inferences, firms would not know how well they are doing, and capital markets would not know how to value them. And absent these inferences, firms would be unable to improve their processes and, as a consequence, improve their economic performance". (Meyer, 2002, p. 24) Budget meeting its target as personal performance measure can be analysed in two broad categories: "First, a budget can be used as a financial plan, utilised by the finance department to ensure that the organisation stays within its operating constraints. Second it is much more widely used in most organisations as a tool of overall management control. Here budget targets are set for individual responsibility centers and their operating managers, so that operating performance can be monitored and controlled". (Neely, Business Performance Measurement) Irrespective of any category, effective budget targets must possess the following characteristics: Strategic planning with clear identification as what to measure and how to measure. "Strong incentives for departments and their partners in service delivery to plan over several years and plan together where appropriate so as to deliver better public services with greater cost effectiveness". (Budget-2006) Assessing key performance aspects of budget targets matching desired outcomes. Setting up of realistic goals with respect to the budgets performance throughout the fiscal year. "Data collection and analysis for performance measures are defined to establish a common understanding for the measure, to describe how and when the data will be collected and interpreted, and to ensure the quality and integrity of the data". (Budget-2006a) Performance measures further include the following steps: "Analysis of existing systems (like accounting and auditing) should be conducted in order to determine its performance-basis, if one expects performance data to be used in the system this means that systems that relate to other outdated budgeting approaches need to be replaced to accommodate performance based budgeting". (Andrews & Hill, 2003, p. 135) "The use of performance information can be increased by including it in the budget and clarifying how this is to be done so that budgeters cannot rely on the traditional methods of budget decision-making. Where decision-making methods have not been traditionally formalized and documented, governments should act to formalize them, introducing strategic roles for performance information when doing so". (Andrews & Hill, 2003, p. 135) "Roles within the budget process need to be defined and couched in terms of performance information requirements and performance responsibilities, not in terms of process and procedure. If old roles are maintained, new behaviors cannot develop". (Andrews & Hill, 2003, p. 135) Effective budget targets require clear and simple performance management systems with "well-defined processes that deliver the right information to the right people at the right time. Performance is not by nature standardized, and neither are performance information requirements if these requirements are supplied uniformly, then budgeting behavior will continue to reflect uniformity". (Andrews & Hill, 2003, p. 135) "Roles and performance expectations of budgetary decision makers need to be clearly communicated, and treated seriously as implicit or explicit contracts. Within these contracts decision makers must know their responsibilities, potential reward and redress for their results, and their range of authority". (Andrews & Hill, 2003, p. 135) New reforms should be 'managed' by progressive organisations that sell concepts, support implementation, and monitor behavioral responses while dealing with budgets. If there is no systematic evaluation of behavior, it probably will not change". (Andrews & Hill, 2003, p. 135) The factors which affect budget targets include politics as it affects the timing of budget and deadlines and submittals; the workload of the men and women who labor in the budgeting departments checking figures, performing analyses, budget justifications, and various levels of spending; and generally affects the budget proposals submitted to the manager. "According to the National Academy of Public Administration research 'Federal Budget and Financial Management Systems' is confronted with unprecedented federal budgetary problems. Let us take a look at these problems in order to highlight the reasons for budget target being ineffective: The budget has grown 500 percent in twenty-five years. In all but three of the last twenty-five years, the budget has been in serious deficit; these deficits have proven to be permanent and structural, and there is no political consensus on how deficits can be eliminated. The total public debt has increased 600 percent in twenty years; in the last seven years alone, more than one trillion dollars have been added to that debt. The budget has become more 'locked in' as political leaders have less real discretion and far fewer policy options than they had even ten years ago. More than 85 percent of federal spending is now virtually 'untouchable': entitlements, commitments for national defense, other mandatory spending, and interest on the national debt". (Lynch, 1991, p. 32) The political nature of policy and decision-making necessarily hinders the effectiveness of budget forecasting and with current methods of forecasting deficits; the law is too ambitious in specifying point expectations for out-years. Generating deficit projections based on revenue and expenditure estimates makes the projections subject to substantial amounts of error. "Three feasible alternative approaches in this respect are: Change the point figures to a range of acceptable deficit levels. Forecast the deficits by a technique whose main driving force is not revenue and expenditure estimates but whose algorithm necessarily includes such estimates (such as a moving average technique) Simply set targets for the components of the deficit (revenues, budget outlays, and budget authority)" (Lynch, 1991, p. 34) "Kamensky (1995) suggests that even when organisations develop performance measures, the biggest challenge is to get them used. One explanation is that although the information can be used in a positive manner, as according to Kingdon, "there is some incentive to protect the existing program rather than to open it up to criticism and a possible Pandora's box of changes" (Kingdon 1995, 31). Similarly, Aristigueta (1999) finds real opposition to the idea of tying outcome measures to programs and to the budget process. This is evident in places where incentives include a greater flexibility in budget and personnel management and retention of up to 50 percent of unencumbered balances (Snell 1998). The disincentives, according to Snell, are greater oversight, more reduction of managerial salaries, and more restrictions". (Holzer & Julnes, 2001, p. 693) "As an organisational innovation, performance measures are expected to create uncertainty because of the risk involved. This uncertainty can lead to resistance and may substantially hinder adoption. It hinders adoption because, of the two stages of utilisation, it is the one that could be more effectively controlled by internal forces before its consequences become 'real' through implementation, the best example is budget cuts and personnel reduction. Empirical findings also support the view that continued success of performance measurement depends on the continued support of elected officials and the public. This is exemplified by a comment from a respondent in a municipal government: "Budget constraints and indifference from elected officials (contribute to the lack of use). The community must be willing to accept change and pay for it." (Holzer & Julnes, 2001) "It is indeed the best of times along with the worst of times when budget reduction is going on. But what happens when these two worlds collide, when the momentum of performance gathering runs smack into the realities of budget reductions Are jurisdictions able to leverage the information that is available through performance-based budgeting (PBB) and performance management to make thoughtful budgetary decisions in an era of fiscal constraints" (Craig, 2002, p. 57) "Performance measurement is not a new concept. If we look at the way back of 1950s and 1960s when getting result oriented performance measurement and performance-based budgeting was analysed to use on various performance data, the most basic rationale at that time was that departments can begin to measure the outcomes of the services they provide, which gave citizenry some accounting of their return on investment for their tax payments. But the seed of this basic performance idea today has given way to a veritable tree of knowledge: performance measurement data has been set up to be used all across governments to prepare program budgets, in program evaluation, for individual performance evaluations, and to develop performance- based budgets. Performance measurement has morphed into performance management. This rationale of measuring the outcomes of service delivery serves as the theory behind PBB funding decisions regarding programs can be made depending on what level of service delivery policy makers desire". (Craig, 2002) "Past analyses of both program and performance related budgeting relates problems with the institutionalisation of these budget reforms. For example, implementation may involve problems with: Leadership and commitment throughout the organisation; Continuity in the focus of reform across administrations; Resources to adequately implement the reform effort (time, money, personnel); Validity and reliability of measurements; Incentives to use or disincentives not to use the reform; and Grandiose expectations for success Often, budget reforms fail because of inadequate understanding by budget actors of the usefulness of reform requirements to the budget process, and for technological reasons, such as inadequate linkage of the budgeting system with the accounting/financial-management system". (Melkers & Katherine, 2001, p. 54) If we talk in technical terms about capital budgets, "Non-cash charges in budgets do not impact directly on the fiscal framework. That may be because the national accounts use a different way of measuring the same thing, for example in the case of the depreciation of departmental assets. Or it may be that the national accounts measure something different: for example, resource budgets include a cost of capital charge reflecting the opportunity cost of holding capital; the national accounts include debt interest". (Budget-2006) "In the discussion of successful budgeting to learn, Forrester and Adams (1997) link the success of budget reform directly to an organisation's (government's) ability to absorb and then institutionalise new formats, processes, and systems. They encourage reformers to approach reform not from a traditional perspective (to budget correctly), but from an organisational perspective (to learn). Accordingly, "the success of the budgetary reform is dependent on individuals' acceptance of the reform as well as on their own willingness to change how they think and behave" (Forrester and Adams 1997, 472). "Performance-based budgeting also introduces a "rule" that budgetary decisions should be made on the strength of previous performance, not accepted process. Objective information on output achievement and implications for outcomes improves planning and decision-making at the legislative and executive levels, and facilitates accountability of representatives to civil society. Representatives and civil society can observe how the process towards outcomes is progressing, who is to blame for failures along the way (whether the problem is slow output production or poor planning) and how political representatives treat different levels of performance (whether rewards and redress are imposed, and whether funds are allocated for improved performance). In short, PBB institutions involving "contractual" commitments that bind executive and legislators to communicated outcomes and the provision of information about those outcomes and their generation, motivate executive and legislative decision-makers to more performance-oriented planning and allocation behavior". (Andrews & Hill, 2003, p. 135) "A good performance measurement system will assist budget department to monitor and report progress towards long term objectives along with cost effectiveness. Internally, performance information is integral to the process of management. Performance measures assist departments to communicate their key objectives and priorities, monitor the services they deliver and report what they have achieved. Externally, performance measures are vital for effective accountability. With appropriate information Parliament, members of the public and other stakeholders can exert pressure for improvements and can better participate in the development of policy". (Budget-2006b) References Andrews Matthew & Hill Herb, 2003. "The Impact of Traditional Budgeting Systems on the Effectiveness of Performance-Based Budgeting: A Different Viewpoint on Recent Findings" in "International Journal of Public Administration". Volume: 26. Issue: 2. Aristigueta, Maria. 1999. "Measuring Performance in State Government". In Handbook of State Government Administration, edited by John J. Gargan, 347-61. New York: Marcel Dekker Budget-2006, accessed from http://www.hm-treasury.gov.uk/spending_review/spend_plancontrol.cfm Budget-2006a, accessed from Budget-2006b, accessed from Craig John, 2002. "Performance-Based Budgeting in a Performance-Based Budget-Cutting Environment" in "The Public Manager". Volume: 31. Issue: 3. Forrester, John P., and Guy B. Adams. 1997. "Budgetary Reform through Organisational Learning: Toward an Organisational Theory of Budgeting". Administration and Society 28(4): 466-88 Holzer Marc & Julnes Patria De Lancer, 2001. "Promoting the Utilization of Performance Measures in Public Organisations: An Empirical Study of Factors Affecting Adoption and Implementation" in "Public Administration Review". Volume: 61. Issue: 6. Kamensky, John M. 1995. "Program Performance Measures: Designing a System to Mange for Results. Incompetent Government: Theory and Practice" in "The Best of Public Productivity and Management Review", 1985-1993, edited by Arie Halachmi and Marc Holzer, 239-46. Burke, VA: Chatelaine Press. Kingdon, John. 1995. "Agendas, Alternatives, and Public Policies". 2nd Ed. New York: Harper Collins. Lynch D. Thomas, 1991. "Federal Budget and Financial Management Reform": Quorum Books. Place of Publication: New York. Meyer W. Marshall, 2002. "Rethinking Performance Measurement: Beyond the Balanced Scorecard": Cambridge University Press. Place of Publication: Cambridge, England. Melkers E. Julia & Katherine G. Willoughby, 2001. "Budgeters' Views of State Performance- Budgeting Systems: Distinctions across Branches" in: Public Administration Review". Volume: 61. Issue: 1. Neely Andy, Business Performance Measurement < assets.cambridge.org/052180/342X/sample/052180342Xws.pdf> Snell, Ronald. 1998. "Reinventing Government Not Easy but Possible". State Legislatures 24(February): 34-7 Read More