The impact of performance management system in public sector - Essay Example

? The impact of performance management system in public sector INTRODUCTION The Public Sector is usually defined to include traditional non-profit and social entrepreneurial organizations which are believed to combine social and financial mission (Grimes, 2010). Recently, many public organizations have been under great pressure to increase their productivity, efficiency and quality of service. Performance measurement (PM) hence is part of the new public management (NPM) model which can help the organization to reform by setting goals for improvements in efficiency and effectiveness (Kaplan, 2001). In this paper, the performance measurement system is reviewed in order to better understand the development of performance measurement system in public sector and to investigate the factors affect the improvement of organization performance that lead to a development of PM framework for public sector. To achieve this aim and objectives, a literature review of the performance measurement in private sector and the review on the performance measurement system (PMS) adoption in public organisations are conducted. Then, the review on related theories will be provided to explain the performance measurement system (PMS) problems that have occurred in the public sector. 2 LITERATURE REVIEW In implementing PMS, an organisation needs to be clear about the requirements of stakeholders, how it can improve organisation performance, and how to evaluate the effectiveness of PMSs. The main areas of research that may have a significant impact on the outcome of this study can be summarized by the following: (1) definition of PMSs; (2) the Development of PMSs; and (3) PMSs in Public Sector. However, in this paper, due to word constraint and limitation of time, the literature review will cover only a few selected areas of PMS and their impacts on public sector. However, in this paper, due to word constraint and limitation of time, the literature review will cover only a few selected areas of PMS and their impacts on public sector. 1 Performance Measurement System In order to gain in-depth understanding of performance measurement system (PMS) in public sector, an academic review of the definition of PMS and its related concepts will be critically discussed. Internationally, the general consensus of researchers in this field would define performance management as a process of evaluating efficiency and effectiveness of organization by comparing actual results with organizational setting goals. (Brignall et al., 1991; Simons, 2000; Neely et al., 2005). According to Ferreira and Otley, (2009), PMS definition includes the uses of both formal and informal process to manage and control organisational performance. The main objective of PMS is to create continuous improvement in the organisation (Brignall, 2007; Grunberg, 2004), to encourage performance management, to identify the effectiveness of existing strategies and to act as a basis for reward process (CIMA, 1993; Neely et al., 1994). Moreover, PMS is used to evaluate satisfactions of stakeholders’ expectations (Ferreira and Otley, 2009). For PMS to succeed, the following conditions should be satisfied: the coherent between PMS and business strategy; a feedback and review of PMS; and the PMS must be comprehensive and get supported and enforced by the whole organisation (Brignall et al., 1999). 2 The Development of Performance Measurement Systems An understanding of the background and development of PMS is essential to study and analyze the measurement system in the public sector. To begin with, PMS was first established in private sector business enterprises and mostly based on financial indicators to evaluate company performance. Then, according to Brignall (2007), the development of performance measures was adapted from single dimension, financial, to multi-dimension PMS, which will be discussed in the following section. 1 Performance measurements The financial dimension was considered as the most important aspect of PMS for decades as to every organization faces financial constraints and required to generate more money to satisfy its stakeholders (Otley, 2002). Key business financial controls include cash flow, profitability and assets and provisions (Otley, 2002). Consequently, in the past, the financial ratios such as the profitability ratio and return on investment were the vital tools to evaluate the effectiveness of the organisation. However, according to Kaplan and Norton (2001), financial dimensions are inevitably based on past performance that could mislead the organization by more focusing on short-term performance instead of long-term performance; signals for continuous improvement and innovation (Neely and Hii, 1998). In the 1990s, a new performance measurement, namely economic value added (EVA), that employed the concept of residual income was introduced and successfully promoted it as a measurement for the whole company as well as a measurement for individual business units or projects (Otley, 2002). Thus, EVA became more popular because of its flexibility, encouragement of asset acquisition and disposal decisions (Otley, 2002). However, the demerits of EVA are not only the drawbacks of the financial dimension but it also fails to consider organizational competitiveness and may lead to uninformed decision in order to cover organization cost of capital (Simons, 2000) . Moreover, the applicability of EVA framework for public sector have been questioned, particularly the non-profit organization (Burgman and Roos, 2004). In the EVA concept, the financial performance should be positive, whereas in the public sector, there are many activities where the EVA figures will perpetually be negative, because the activities serve a wider social, security or economic purpose. Hence, other measures for social outcome need to be considered. Consequently, performance measurement for public sector organizations should not be based solely on financial indicators because there are other important indicators that could reflect organizational performance (Keegan et al., 1989). 2.2.2 Performance measurement in Multi-dimension In early PMS studies the financial dimension was a dominant. More recently attention however has been paid to develop non-financial dimension (Otley, 2002). Brignall (2007) mentioned that many multi-dimensional performance measurement models have been developed in order to overcome the drawbacks of traditional financial measurement. To date, according to Anderson and McAdam (2004), many researchers attempted to develop multi-dimension measures, for example; performance measurement matrix (Keegan et al., 1989); Results and determinants model (Fitzgerald et al., 1991); Balanced scorecard (BSC) (Kaplan and Norton, 1992); Performance measurement framework (Ballantine and Brignall, 1995), Performance prism (Neely et al, 2001). Moreover, the other well-known multi-dimension performance measurement is the Malcolm Baldrige criteria, which are similar to the BSC measures and their measures, can be matched to each other (Evans and Lindsay, 2008). Amongst all of these models, the BSC has been widely used in many organizations across the world and it has been claimed to be one of the most important management tools of the last 75 years (Bourne, Neely, Platts and Mills, 2002). The original BSC model consists of four dimensions, namely, financial, customer, internal business processes and learning and growth (Kaplan and Norton, 1992). This measurement represented the balance between financial and non-financial measures; long-term and short-term targets; management and implementation of strategy (Kaplan and Norton, 2001). With this traditional BSC, many public organizations may experience some difficulties due to the fact that primary objective in public sector is not financial perspective, Kaplan and Norton (2001) however explains that the scorecard can be adapted to fit organizational interests by indentify the primary strategic themes as the fore front of the scorecard. According to Basu (2004), the BSC helps to transform the approach of performance measurement to management system; to translate strategies into long-term goals, to cascade high level measures to component and supporting measures as well as to explore the root cause of variation, and to implement a customized performance management system. However, according to Berry et al. (2008), problem occur in implementing the BSC as follows; inaccurate and subjective measures, ignoring future performance indicators, inappropriate benchmarks, changes in criteria and measures that might not support desired results and ‘lack of attention to informal controls and organization context’ (2008: 6). 2 Performance Measurement System in Public Sector Recently, public sector has employed PMS as one of tools to improve the efficiency of their services and production (Kloot and Martin, 2000). Evans and Lindsay (2008) stated that individual organization needs a specific PMS. Therefore the system design is essential for the organisation to ensure that the measures are aligned to strategy, and the system is working effectively in monitoring, communicating and driving performance. Hence, the characteristics of public sector may effect to the implementation of PMS which originate from private sector (Verbeeten, 2008; Brignall and Modell, 2000). According to Rantanen et al (2007), the finding in their study stated that four specific problems of PMS in public sector organisations: undefined goals and end products; too many stakeholders with conflicting needs; lack of ownership and lack of management skills. Therefore, a fundamental question amongst researchers is the applicability of performance measurement and the capability of improvement in public sector performance (Verbeeten, 2008; Heinrich, 2002; Brignall and Modell, 2000). Besides, to clarify the research boundary and direction, this paper will focus on motivation institutional theory for managerial purposes of using PMS in public sector organisations because using a single theory may result in incomplete and in some cases, incorrect conclusions (Merchant et al., 2003). 3 Institutional Theory on performance measurement A variety of research perspectives of PM in public sector has widely established over the past decades. However the researches by using an institutional theory are more dominated on this field (Modell, 2005 and 2009; and Van Helden et. al, 2006). In regard, public sector organizations have to consider more on the requirement and information needs of different stakeholders than those in the private sector (Lawton et al, 2000; O’Connor, Deng and Luo, 2006; Verbeenten, 2008; and Modell, 2009). According to Brignall and Modell (2000:288), ‘Institutional theory assume that primary determinant of organizational structure is the pressure exerted by external and internal constituencies on the organization to conform with a set of expectations to gain legitimacy and so secure access to vital resources and long-term survival’. In the past, the studies of PM based on institutionalism have been undertaken in the health care sector, universities and local government. Recently, however there is a growing number of empirical researches in central government (Modell, 2009). One of primary concerns of institutional effects is loose coupling which is ‘the separation of symbolic displays for external, legitimacy-seeking purpose from operation-level practice and action in organizations’ (Modell, 2009:281-282). Three main research topics in institutional theory are Multi-dimensional PM, Goal-directed PM and Relative performance evaluation (Modell, 2009). Recently, most researches in PMS that uses institutional theory focuses on pure public sector organisations less emphasises has been placed on social enterprise such as state-owned enterprises (SOEs) that promise both financial return to its shareholder (government) and marketing perspective in the sense of price and quality of service to its customers. Therefore, the further study using SOEs’ case study is required to understand and explain what factors affected the design and use of multi-dimensional measurement system. 3 RESEARCH PROBLEM In the last decades, public organization, particularly state-owned enterprises (SOEs) have been forced to improve their productivity, efficiency and quality of service. Therefore, the performance measurement system has been employed in order to ensure that public organisation can perform effectively and reach individual stakeholder’s expectation. The main objectives of introducing this system are to switch the focus of control, from action -based control to outcome-based control and to enhance organization efficiency. Accordingly, appropriate research is required to assist in explaining the development of performance measurement system in public sector and in identifying the critical problems and their impacts as well as better understand stakeholders’ perceptions and requirements in order to generate the solution that could increase the resilience of performance system in public sector. However, most researches in PMS using institutional theory are mainly on pure public sector as mentioned above which is not considered on social enterprise, such as state-owned enterprises (SOEs) that promised financial and social perspective to its shareholder (government) and marketing perspective in the sense of price and quality of service to its customers. Therefore, the further study using SOEs’ case study is required. The question that remains after the review is whether PMS can have positive or negative impact on public organization performance and what factors affect the design and use of multi-dimensional measurement system. 4 OVERALL AIM OF THE RESEARCH This research intends to understand the development of performance measurement system in SOEs and to investigate the factors that affect the improvement of organization performance that will lead to a development of PM framework for public sector, particularly SOEs. 5 RESEARCH OBJECTIVES Purpose of this research is to develop PM framework that suitable for public sector, therefore, the following objectives need to be achieved. (1) To examine past and existing performance measurement systems (2) To point-out the problems faced in design and implementing stages (3) To identify stakeholders perception of attitudes and requirements for performance measurement, and (4) To analyse the relationship of individual factors that might effect to organisational performance 6 POTENTIAL CONTRIBUTIONS OF PROPOSAL RESEARCH The contributions of the proposed research are as follows; (1) Theoretical contributions a. To test the institutional theory on finding a relationship exists between specific factors and the performance improvement. b. To understand a goal-setting theory and an institutional theory develop on the area of performance measurement. (2) Practical contribution a. To provide a PM framework for public sector, particularly SOEs b. To indentify the role of stakeholders especially government role to support SOEs regard to the performance improvement c. To identify stakeholders perception of, attitudes to and requirements for performance measurement d. To generate the solution that could increase the resilience of performance system in public sector e. To create sustainable development of SOEs’ performance which lead to the improvement of service quality, economics as well as society. 7 Conclusion The essence of this proposed research is to review the development of performance measurement system that applies to public organisation, the factors that impact on the improvement of organisational performance especially the research on state-owned-enterprises as currently there is a limit number of published research available on this topic. Moreover, contributions of this research will help to better understand on PM study area as well as to apply the suggested framework to improve the PMS in the real world situation. 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