ACCA F5 Performance Management - 2010 - Study text

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Chapter 15: Performance analysis in not for profit organisations and the public sector

 In a similar way, the directors or senior managers of public sector bodies should

be accountable to the public. In practice, this usually means accountability to the

government, which in turn should be accountable to the public.

 The leaders of not-for-profit organisations outside the public sector should also

be accountable to the people who provide the finance to keep them in existence.

For a professional body such as an institute of accountants, there should be

accountability to the membership. For charities, there should be accountability to

the providers of charitable donations, which may include government bodies.

Within a company, there should be a system of performance measurement at all

levels of management. The same should apply to the management of public sector

bodies and not-for-profit organisations. Managers should be made accountable to

their bosses for the way in which they have managed the operations within their

area of responsibility.

Since the main objective of these organisations is not financial, the main

performance targets and measurements of performance should not be financial

either. Performance measurement should be related to achieving targets that will

help the organisation to achieve its objectives, whatever these may be.

1.3 Identifying performance targets in not-for-profit and public sector

organisations

You may be required in your examination to suggest quantitative targets for a not-

for-profit organisation. The selection of appropriate targets will vary according to

the nature and purpose of the organisation. The broad principle, however, is that

any not-for-profit organisation should have:

 strategic targets, mainly non-financial in nature

 operational targets, which may be either financial (often related to costs and

keeping costs under control) or non-financial (related to the nature of

operations).

Although there are no widely-recognised models for performance measurement in

these organisations, it may help to think of performance models for business entities

that include non-financial performance indicators, such as the building block model

of Fitzgerald and Moon.

You may be given a small case study in your examination involving a public sector

organisation, or a not-for-profit organisation, and you may be required to suggest a

number of suitable performance targets. To deal with this type of question, you

need to:

 Decide what the objectives of the organisation are

 Identify what the managers of the organisation (or area of management

responsibility within the organisation) must do to achieve those objectives

 Identify a suitable way of measuring performance to judge whether those

objectives are being achieved.

Example

The key objectives of a state-owned school may be set by the government. The

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government may also set specific targets that schools are expected to achieve: these

are likely to be related to the quality of education provided. In addition, the school’s

management may also set other objectives that they consider important for the

school.

Suitable performance targets may include the following measures of the quality of

education:

 target pass rate in examinations

 numbers or percentage of students going to university

 average class sizes

 ratio of teacher numbers to student numbers.

The school will also be expected to operate within the expenditure budget that is

allocated to it, and to raise the money for any additional expenditure by other

methods, such as obtaining money from parents of the school children.

The school’s management may also have an objective of survival for the school, and

to ensure survival there may be targets for the annual intake of new students.

Supporting these overall objectives for the school, management may develop more

detailed targets for particular aspects of school activity, or particular ‘departments’.

For example there may be an objective of developing the IT skills of the school

children, and performance targets that may be set include:

 Targets for the ratio of computers or terminals to schoolchildren

 Minimum time spent by children each week on computers

 Targets for the replenishment of existing software with more up-to-date

software

 Targets for annual spending on computer hardware and software.

1.4 Problems with measuring performance in this sector

A good performance measurement system seeks to monitor the success of an

organisation in achieving its objectives. To do this it must

 have clear objectives

 set targets which are linked to objectives

 measure performance against these targets.

However, there are several reasons why the problems with performance

measurement in the public sector are greater than those in commercial business

organisations.

Multiple objectives

An organisation in the public sector (and also not-for-profit organisations) may have

a number of different ‘main objectives’, and they are required to achieve all these

objectives within the constraint of limited available finance.

Chapter 15: Performance analysis in not for profit organisations and the public sector

When there are multiple non-financial objectives and limited finance, the various

objectives will come into conflict. It will be impossible to achieve one objective

without making compromises that could mean failure to achieve another objective.

It may be difficult to decide which of the conflicting objectives are most important,

or to agree on a suitable compromise between the different objectives. Conflicts

between multiple objectives are likely to exist in virtually every public sector

organisation. At a strategic level, here are just a few examples.

State schools:

 The objective of a state-owned education system should be to provide a high

standard of education for all children, with minimum targets for key learning

objectives such as standards in reading, writing and arithmetic.

 However another objective should be to ensure that there is a place available in

state schools for every child. If funding for state education is limited, it may be

necessary to accept that education standards will not be as high as they should

be and that privately-owned schools should be allowed to operate and take

some children who would otherwise have to be educated in state schools.

State health service:

 The objective of a state-run health service should be to provide a high standard

of health services to the population. However, given the limited finance and

resources available, spending money on some aspects of the health service will

mean less money for other aspects. Spending more money on hospitals could

mean spending less on mental health or on care for the elderly.

Expectations of different stakeholders

In the public sector, the interests of different stakeholder groups are often

important, and each group may have different expectations of what the organisation

should be trying to achieve.

Example

A school may have a variety of objectives. Employers and the government may all

require high levels of examination results and school management may require a

high intake of pupils. Pupils may aspire to develop their skills. Parents expect

schools to teach life and community skills. This leads to difficulties in identifying

targets.

 The main target may be the level of examination results. However, the success in

achieving this target will depend on the ability of the pupils in the school as well

as the skill of the teachers.

 Targets such as class sizes and ratio of teachers to pupils may impact on the

ability to achieve a good level of examination results but these are measures of

inputs into the school rather than outputs from the school.

 An attempt may be made to measure the value added to each pupil. This could

be done by measuring a pupil’s achievements on entering and leaving the

school. However there are many difficulties inherent in such a system. Only

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certain skills could be measured and it would be possible to coach a pupil in

these particular skills to ensure good results. There would be great pressure to

do this if performance of each school was measured on this basis and this

affected the number and ability of pupils sent to the school.

 A performance measurement system focusing on a narrow range of measures

can lead to other important objectives being overlooked. If targets are centered

on literacy and numeracy then other skills, such as musical and sporting ability,

may not be developed. This may de-motivate pupils and lead to a lowering of

overall performance.

Political influence

It is reasonable to suppose that with state-owned organisations, the government

should decide what the strategic objectives and targets should be. However in

democratic societies, the views of different political parties may differ, and if there is

a change of government, there may well be a change of priorities and targets.

Chapter 15: Performance analysis in not for profit organisations and the public sector

Value for money

 How can performance be measured?

 Benchmarking

 Quantitative measures of efficiency

2 Value for money

2.1 How can performance be measured ?

The performance of not-for-profit organisations or departments of government may

be assessed on the basis of value for money ‘VFM’. Value for money is often

referred to as the ‘3Es’:

 economy

 efficiency

 effectiveness.

Economy

Economy means keeping spending within limits, and avoiding wasteful spending. It

also means achieving the same purpose at a lower expense. A simple example of

economy is found in the purchase of supplies. Suppose that an administrative

department buys items of stationery from a supplier, and pays $2 each for pens. It

might be possible to buy pens of the same quality to fulfil exactly the same purpose

for $1.50 each. Economy would be achieved by switching to buying the $1.50 pens,

saving $0.50 per pen with no loss of operating efficiency or effectiveness.

Efficiency

Efficiency means getting more output from available resources. Applied to

employees, efficiency is often called ‘productivity’. Suppose that an employee in the

government’s tax department processes 20 tax returns each day. Efficiency would be

improved if the same individual increases the rate of output, and processes 25 tax

returns each day, without any loss of effectiveness.

Effectiveness

Effectiveness refers to success in achieving end results or success in achieving

objectives. Whereas efficiency is concerned with getting more outputs from

available resources, effectiveness is concerned with achieving outputs that meet the

required aims and objectives. For example, the effectiveness of treatment of a

particular medical condition will be improved if the proportion of patients who are

treated successfully rises from 80% to 90%.

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Management accounting systems and reporting systems may provide information

to management about value for money. Has VFM been achieved, and if so, how

much and in what ways?

Value for money audits may be carried out to establish how much value is being

achieved within a particular department and whether there have been

improvements to value for money. Internal audit departments may carry out

occasional VFM audits, and report to senior management and the manager of the

department they have audited.

VFM as a public sector objective

Value for money is an objective that can be applied to any organisation whose main

objective is non-financial but which has restrictions on the amount of finance

available for spending. It could therefore be appropriate for all organisations within

the public sector.

The objective of economy focuses on the need to avoid wasteful expenditure on

items, and to keep spending within limits. It also helps to ensure that the limited

finance available is spent sensibly. Targets could be set for the prices paid for

various items from external suppliers. Audits by the government’s auditors into

departmental spending may be used to identify:

 any significant failures to control prices, and

 unnecessary expense.

The objective of efficiency focuses on the need to make full use of available

resources. The objective of effectiveness focuses on the need to use resources for

their intended purpose and achieve the objectives of the organisation.

Unfortunately, in practice government is often accused of wasteful spending,

inefficient operations and failure to get anything done – these are all the ‘traditional’

faults of an over-sized bureaucracy!

Example

State-owned schools may be given a target that their pupils (of a specified age) must

achieve a certain level of examination grades or ‘passes’ in a particular examination.

A VFM audit could be used to establish spending efficiency within a school.

 Economy. Was there any unnecessary spending? Could the same value have

been obtained for lower spending?

 Efficiency. Have the school’s resources been used efficiently? Could more

output have been obtained from the available resources? Could the same results

have been achieved with fewer resources? A study of efficiency might focus on

matters such as teaching time per teacher per week, and the utilisation of

resources such as science equipment and computer-based training materials.

 Effectiveness. The most obvious measurements of effectiveness are the number

or percentage of pupils achieving the required examination ‘passes’, or the

Chapter 15: Performance analysis in not for profit organisations and the public sector

grades of pass mark that they have achieved. Effectiveness is improved by

increasing the pass rate.

2.2 Benchmarking

Benchmarking is the comparison of performance against the best practitioners,

identifying gaps and seeking ways to improve.

Benchmarking may be a very effective method for organisations in the not-for-profit

sector to achieve improvements in performance as often they are not in direct

competition with other similar organisations.

Example

Local authorities provide many services to households in their geographical area.

These may include rubbish collection, road maintenance and social services. By

comparing performance statistics it may be possible to identify more cost effective

ways of providing services which can lead to an improvement in services for

everybody.

2.3 Quantitative measures of efficiency

Efficiency relates the quantity of resources to the quantity of output. This can be

measured in a variety of ways

 Actual output/Maximum output for a given resource × 100%

 Minimum input to achieve required level of output/actual input × 100%

 Actual output/actual input × 100% compared to a standard or target

Example

A hospital has an operating theatre which can be utilised for 20 hours per day. The

maximum number of operations that can be performed in any day is 40. If on a

particular day 35 operations were performed, this represents

35/40 × 100% = 87.5% efficiency

A local authority must ensure that the refuse of all residents is collected each week

for re-cycling. This normally requires 1,000 man hours. If in a particular week 900

man hours were used this represents

1,000/900 × 100% = 111.1% efficiency

Schools may have a standard pupil to teacher ratio of 27. If a particular school has

550 pupils and 21 teachers then the actual ratio is 26.2 which represents

27/26.2 × 1005 = 103.05% efficiency.

Paper F5: Performance management

Paper F5

Performancemanagement

CHAPTER

Performance measurement:

external considerations and

behavioural aspects

Contents

1 External considerations in performance

measurement

2 Behavioural aspects of performance reporting:

reward systems

Paper F5: Performance management

External considerations in performance measurement

 The nature of external considerations in performance management

 Stakeholders

 Market conditions

 Allowance for competitors

 Allowing for external considerations

1 External considerations in performance measurement

1.1 The nature of external considerations in performance management

External considerations are factors that arise or exist outside an organisation, and

within its external environment, that could have an impact on:

 the objectives that the organisation should try to achieve and the targets that it

sets for those objectives, or

 its actual performance.

The external factors that affect an organisation vary according to the type of

organisation and the environment in which it operates. Broad categories of external

factors include:

 Political and legal developments: new laws may affect what a company is

allowed to do or is nor permitted to do, and this change could affect its

performance

 Economic conditions and economic developments

 Changes in public attitudes and behaviour

 Technological changes

 Competition in the market.

The study guide for the F5 syllabus mentions three external considerations

specifically: stakeholders, market conditions and allowance for competitors.

1.2 Stakeholders

Stakeholders of a company are any organisations, individuals or groups with an

interest in what the company does and how it performs. It is often convenient to

group stakeholders into categories, such as shareholders, lenders, suppliers,

customers, employees, the government and the general public.

Public sector entities and not-for-profit organisations also have different stakeholder

groups.

ACCA F5 Performance Management - 2010 - Study text - Emile Woolf Publishing

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