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Performance measurement forms a major component in the management audit system. Good decision making in planning and control requires reliable information on the performance of other sub departments in an organization, hence performance measurement becomes a very important factor in attaining an organizational mission, objectives and goals. Strengths and weaknesses of the management style and the financial health of the organization can be identified and determined based on information on performance to assists the management (Hongren et al, 1997).
More importantly, the significance of reliable information and financial reporting has been heightened in the corporate fraud crises for example WorldCom, Tyco Enron and Global Crossing, thus people have begun to question on accountability, transparency and corporate governance.
Performance measurement forms a foundation, a tool and a stepping stone to obtain the information needed to assess the financial health of organization. Performance measurement, particularly in the public service sector is more challenging to assess due to the absence of one single important factor, profit maximization. Although the measurement of performance in the public sector is relatively new, a substantial body of literature on performance measurement has developed since 1970s, about terms such as performance indicators, performance measures, performance appraisal and review, value for money and quality assurance (Boland et al, 2000).
Public sector organizations are differentiated compared with their commercial counterparts in the private sector. Basically, there is no profit maximizing focus, little potential for income generation and generally speaking, there is no bottom line against which performance can ultimately be measured. The massive majorities of public sector organisations still generates most of their income from the State and have to account several stakeholders. Consequently, it was once considered impossible to measure performance in the public sector (Boland et al, 2000). However, the impossibility is beginning to change to possibility in the past few decades.
Globalization increases awareness and heightens knowledge about successful management and transparency of public expenditure, controlled by governments. The internet is a powerful manifestation of globalization. Advancement in information technology allows unlimited source of information and exchange of ideas, thoughts and methodologies which inevitably encourage comparison of transparency and management of public money between countries (Riggs, F.W, 2000).
Figure 1.1: Malaysian Government Public Expenditure (1980-2010)
Source: Ministry of Finance Malaysia and Accountant General Department
In addition, the volume and the total amount of tax payers' money spent by the government begs attention and accountability. For example, the Malaysian government's public expenditure for development in 1980 was RM 7.2 billion but this has ballooned more than 500 percent to RM54 billion in 2010, as depicted in Figure 1.0. Taxpayers are beginning to question on the effectiveness of such huge expenditure.
In this regard, there is growing awareness that financial measures are no longer sufficient for planning and control purposes. Decision makers, especially in the public sector, need to look beyond financial measures and reporting to the wider perspectives of total performance. This is very important, because as an organization, which is not profit focused, financial measures and data pose a relatively significant but not complete influence in the performance measurement of the public sector. According to Eccles (1991), senior executives have recognized that new strategies and competitive realities demand new measurement systems. This signals a radical shift from treating financial figures as the foundation for performance measurement, to treating as one among the broader set of measures.
1.2 Terms and Definition
Performance measurement is a fundamental element in ensuring development and progress in organizations. As such, many managers in the corporate world and scholars have been pursing progress in performance measurement methods and this is clearly evidenced by new concepts and tools introduced to measure performance and thousands of literature materials dedicated to this subject. According to Ghobadian et al (1994), the very use of the word 'performance' is seen by several authors' as beneficial and implying action, dynamism, and purposeful effort and sorting out the good from the bad.
Performance measurement is the process of assessing progress towards achieving predetermined goals, including information on efficiency with which resources are transformed into goods and services, the quality of those outputs and outcomes, and the effectiveness of the organizational operations in terms of their specific contributions to organizational objectives Whereas public service sector is defines as a public organization, which has no profit orientation and is established by official community with the purpose of offering services to the general public (Amaratunga et al, 2001).
1.3 Research Objectives
The primary objective of this dissertation is:
To comprehend the progress, trend and current situation in performance measurement methods in the globalising environment.
To determine and investigate the current situation in the performance measurement methods practised in the Malaysian public service sector.
The ultimate objective of this dissertation is:
To assess the performance measurement methods practised by public service sectors.
To analyse whether Malaysia fall within the context of global practice.
For the purpose of this dissertation, the state of Penang has been chosen as a basis to complete this attempt.
1.4 Research Questions
What are the performance measurement methods?
How performance measurement methods are applied in the Malaysian public service sector?
How best to implement the performance measurement methods within the context of the model applied?
1.5 Scope of study
This study focuses on the performance measurement methods practised in the State of Penang, Malaysia. Penang is located in the north of Peninsular Malaysia and it is an island known as Pearl of Orient. The case study purely centres on this state and specifically to departments under the jurisdiction of the State Government.
1.6 Significance of the study
The significance of the study is to give an idea, understanding and overview of performance measurement methods in public service sector from global viewpoint. Besides that, it is also to help the management of public service sector in measuring the organization's performance. In addition, the researches in this area are beneficial as well to understand the patterns of performance measurement that is practiced in public service sectors.
Chapter 2.0 Literature Review
The literature review in this dissertation observes the thematic approach where the reviews are organized around subjects regarding to performance measurement. In addition, performance measurement in foreign development and Malaysia are compared to investigate whether the country fall within the globalizing environment. Books, researches and journals written by world's leading experts in the field of performance measurement have been chosen to assist this dissertation such as Kaplan, Norton, Neeley and Eccles. According to Marr et al (2003), who investigated which scholars predominantly influence the field of business performance measurement, Kaplan and Norton were found to be the most dominating authors. As such, a significant amount of their work has been used in this literature review.
2.2 Balance Score Card
There are many models and tools developed by experts and all had one common goal in mind, which is to evaluate the current performance measurement and ultimately to ensure better achievement by management.
According to Dabhilkar et al (2004), the Balance Score Card (BSC) is a new approach for strategy development and deployment that has entered the management scene during the last decade. In short, BSC is a multidimensional approach to measure performance and control management that is linked specifically to organizational strategy (see Figure 2.1).
FINANCIAL PERSPECTIVE How do we look to our shareholders?
CUSTOMER PERSPECTIVE How do our customers see us?
THE BALANCE SCORE CARD
INTERNAL BUSINESS PROCESSES PERSPECTIVE At what must we excel?
LEARNING AND GROWTH PERSPECTIVE How do we look to our shareholders?
Figure 2.1: The Four Perspective of Balance Score Card
Source: Kaplan et al (1996)
Kaplan et al (2002) explained that the different types of performance indicators could be broken down into what BSC practitioners call "perspective". Perspective reflects the different views that can be taken of an organization and the four perspectives of BSC are illustrated above. They point out that customer perspective captures the ability of the organization to provide quality goods and services, the effectiveness of their delivery, and overall customer service and satisfaction. To this effect, many organizations today have a mission focused on the customer and measuring how an organization is performing from its customers' perspective has become a priority for top management. They indicate that in a public organization model, the principal driver of performance is different from that in a strictly commercial environment, namely customer and stakeholder interest take prominence over financial results. In general, public organizations have a different, perhaps greater fiduciary responsibilities and focus than private sector entities (Kaplan et al, 2002).
Kaplan et al (2002) further explained that the business processes perspective is primarily an analysis of the organization's internal processes. They emphasize that internal business processes are the mechanisms through which organizational performance expectations are achieved. Customer based measures are important, but they must be translated to meet its customer expectations. Hence, this focuses on the internal business results that lead to financial success and satisfied customers.
As for the innovation and learning perspective, Kaplan et al (2002) also iterated that customer and internal business process measures identify the parameters that the organization considers most important for competitive success but the targets for success keep changing and intense competition requires organizations to make continual improvements to their existing products and processes. They stress that organizations must have the ability to introduce entirely new processes, which expand capabilities. In this context, innovation and learning perspective look at such issues, which include the ability of employees, the quality of information systems and the effects of organizational alignment in supporting accomplishments of organizational goals. Kaplan et al (2002) claim that learning and growth issues enable the organization to ensure its capacity for meeting customer needs, a pre-requisite for long-term survival.
As for the financial perspective, they highlight that financial performance measures indicate whether the organization's strategy, implementation and execution are contributing to bottom line improvements. They profess that it shows the results of the strategic choices made in the other perspectives and by making fundamental improvements in their operations, the financial numbers will take care of themselves (Kaplan et al (2002). According to Dabhilkar et al (2004), one of the major strength is the emphasis it places on linking performance measures and action plans at all levels with the business unit strategy. However, Chang (2001) argued that the BSC is primarily designed for use in profit-motivated firms. Kaplan et al (1996) agree the BSC model was initially designed for companies and private sector where operation is profit-driven. This factor has a significant impact in selecting VFM as the choice model for this dissertation.
2.3 Total Quality Based Performance Measurement
While some organizations measure performance along the same dimensions, using some form of balanced scorecard approach, other organizations monitor performance across different dimensions according to the process. Sinclair et al (1995) in their research paper have introduced a model for total quality-based performance measurement systems. The model integrates measurement within the overall management process (see Figure 2.2). The model consists of five levels, which are strategy development and goal deployment, process management and measurement, performance appraisal and management, break-point performance assessment, and reward and recognition system. The break-point performance assessment, which can be defined as the measurement of any performance criteria is intended to identify significant gaps in current performance and thereby motivate activities to improve performance so as to reduce or eliminate the gap (Sinclair et al, 1995).
According to Sinclair et al (1995), the model allows for the introduction of an integrated performance measurement systems, whereby individuals at all levels of the organization and all measurements are focused on the continuous improvement of processes towards customer satisfaction. However, no attempt has been made to identify a prescriptive list of measures at each level of the model although the flexibility in the face of changing competition and customer requirements is vital if performance measurement is to remain supportive, and not become an inhibitor to organizational change.
Strategy Development and Goal Deployment
Develop a public mission statement.
Identify Critical Success Factors ("CSF").
Define Key Performance Indicators ("KPI").
Set targets for each KPI.
Assign responsibility at the organizational level.
Develop plans to achieve target performance.
Deploy mission, CSFs, KPIs, targets, responsibility and plans.
Process Management and Measurement
Identify and map processes.
Translate organizational goals, action plans and customer requirements into process performance measures.
Measure performance against process KPIs and compare with target performance.
Performance Appraisal and Management
Identify and document job descriptions based on process requirements and personal characteristics.
Formally appraise performance against range of measures developed and compare with target performance.
Break-point Performance Assessment
Identify the need for assessment.
Identify mode and technique of assessment.
Carry out assessment.
Feed results into the planning process.
Determine whether to repeat exercise.
Reward and Recognition Systems
Rewards are the financial consequences given as a result of measurably superior performance.
Recognition includes all non-financial consequences given as a result of measurably of superior performance.
Figure 2.2: Total Quality Based Performance Measurement
Source: Sinclair et al (1995)*
Best practice benchmarking, or benchmarking in short, is one of an ever-growing number of management practices aimed at improving organizational performance particularly in terms of strategic and competitive advantage. They claim that organizations that really succeed in using benchmarking to improve difficult areas of activity could be expected to gain wider benefits in terms of change management and organizational learning (Holloway et al, 1999).
According to Holloway et al (1999), their working definition of benchmarking is consistent with the definitions used by writers such as Camp (1995) which is the pursuit by organizations of enhanced performance by learning from the successful practices of others. Benchmarking is a continuous activity, where the internal processes are adjusted and performance is monitored. Then new comparisons are made with the current best performers and further changes are explored.
In theory, best practice benchmarking helps organization to improve strategically important processes (Cox et al, 1998). In practice, the efforts are frequently directed towards operational or easy to change processes. Particularly in the public sector "benchmarking" is often simply equated with locating one's organization in a league table of some prescribed performance indicators to focus on results rather than processes that drive them. Thus, this reflects the constraints imposed by working in traditional contexts where the financial "bottom line" is all that really seems to matter or accountability and choice is supposed to be enhanced in the regulated sector by the publication of league tables and the development of quasi-markets (Holloway et al, 1999).
2.5 Value for Money Audit (VFM)
With many models and concepts in the field of performance measurement, Kandasamy (2003), Deputy Auditor General of Malaysia, iterated that VFM auditing is a recent expansion in the scope of auditing. However, based on many written materials, the VFM auditing model has been around since the past two decades but only recently it has been given much notice in this region. This was further strengthened Parker (1986) who stated two decades ago that VFM audit is generally accepted as an assessment on function, management and organization performances with regards to economy, efficiency and effectiveness factor.
Economy may be defined as "minimizing the cost of resources used for an activity having regard to the appropriate quality". Economy relates to all types of resources such as physical, financial, human and information. The question of economy is relevant to the acquisition of resources, whether the resources have been acquired in the right amount, at the right place and the right time, of the right kind and at the right cost (Glynn, 1993). For example, over-staffed departments, over-qualified personnel for specific job and usage of over-prices facilities are indicative of departments, which are operating uneconomically.
The second element is efficiency refers to the relationship of inputs and outputs. It is also refers to the productive usage of resources. Efficiency occurs when maximum output is obtained from the resources in the department or alternatively, ensuring minimum level of resources used for a given level of output (Kandasamy, 2003). Examples of inefficiency are over storage or accumulation of stocks, absence of quality and service control, and wrong usage of appropriate performance information for planning, budgeting and controlling (Glynn, 1993). Jones et al (2000) aptly included that efficiency covers the application of good operational procedures, compliance to rules and regulatory requirements, avoidance of time wastage and right maintenance of sources. Economy and efficiency is inter-related with one another and is hard to be disassociated.
The last element is effectiveness, which defined as an end oriented concept that measures the degree to which predetermined goals and objectives for a particular activity or program are achieved. This also translates into the attainment of the right results from the usage of resources and organizational operations. Different authors, with different value systems have their own conceptions of effectiveness, but what brings them near one another is goal accomplishment or performance in meeting objectives (Kandasamy, 2003).
2.5.1 Application of Model - Value for Money Audit
What is achieved by producing services?
Figure 2.3: Input, Output and Impact Relationship
Source: Ghobadian et al (1994)
Economy, efficiency and effectiveness factor in the VFM audit is based upon a simple input, output and impact model of organization (Flynn, 2007). Input resources are generally thought of as physical, human and financial. Financial inputs are perhaps the most important acquisition of other resource and usually depend upon the funds available. Many measures commonly used in public sector organizations are based on derivatives of this 'economy' or input oriented perspective, usually expressed in terms of cost, budget and staffing totals. Comparisons can then be made across similar types of organizations. Example of generic measures used includes cost per case, cost per service type, numbers and categories of staff involved.
Any change in these performance measures basically reflects the 'economy' with which the organizations are using its resources and provides little information about the operational processes within the organization, apart from some basic benchmarking.
Whereas output can be easily measured in quantifiable terms, unfortunately, these tell us little about the real success or failure of the organization. It is mainly used to calculate ration of input to output, which is a measure of organizational efficiency. An increase in the number of outputs, for a given input, simply demonstrates how efficiently an organization is converting its inputs to outputs but provides little information about the effectiveness or value of the outputs (Boland et all, 2000). Lastly effectiveness is concerned with the extent to which outputs meet organizational needs and requirements and is therefore much more difficult to assess.
2.6. Performance Measurement in Foreign Governments
This section gives a snapshot of performance measurement issues and practices in some major economies around the globe. Local governments are called municipal governments in the North America context according to Holzer et al (2004). They are important as they constitute a significant component of the contemporary economies and contribute greatly to the quality of life of the residents in local communities. A research on the use of performance measurement has been undertaken in USA such as municipalities in Sunnyvale, Palo Alto, New York, Phoenix, Portland and Dayton. However, reviews of the extent of the performance measurement are rather mixed. Ammons (1995) noted performance measurement and monitoring rates as high as 70-80 percent but Poister et al (1999) found only 38 percent of the cities surveyed used performance measures, more consistent with the moderate use found in National Academy of Public Administration and Governmental Accounting Standards Board (1997) study. Document analyses by Ammons (1995), pointed out that the usage rates may have been overestimated in some surveys due to the inclusion of only large municipalities.
In Australia, Kloot (1999) reported a significant increase in the use of performance measures, both financial and non-financial, in the Victoria local governments. According to Ghobedian et al (1994), the measures have been tended to be low level input and output measures instead of the more desirable efficiency and effectiveness measures.
Nevertheless, Pollanen (2005) highlighted that Florida Commission on Government Accountability to the people in 1996 reported that a few state governments in USA such as Florida, Georgia and Hawaii have been adopted benchmarking as a total part of a tool to measure performance of state and local government activities (Pollanen, 2005).
In addition, Delancer's (1996) opinion corresponds with Hatry et al's 1992) that the two most common methods traditionally used in the USA to measure performance is simple analysis and regression analysis. Examples of simple analysis are comparison of revenue and cost, cost per unit, cost per quality and cost per revenue dollar. Performance measures based on these measures has various weaknesses and is subject to disputes.
2.7 International Developments
2.7.1 United Kingdom (UK)
Due to the calls of taxpayers and politicians for more accountability, UK has experienced a need for efficiency and VFM type audits in the public sector. The goal is to improve management procedures in Government agencies. The Audit Commission was established in 1982 at the local and health authority level of government in the UK and given the responsibility of appointing auditors and ensuring improvements in economy, efficiency and effectiveness are brought about not only through the audit process but also through VFM studies. In the UK, the recognition of VFM that is applicable to private sector companies can be traced back to 1984 following the implementation of VFM in the public sector in 1983 (Glynn, 1993). The Audit Commission also proposed a more refined model of VFM (see Figure 2.4). The Audit Commission (1986) proposal is considered of great significance because of the authoritative status of the body (Ghobadian et al, 1994).
Figure 2.4: Refined VFM Model - A Proposal by Audit Commission UK
Source: Ghobadian et al (1994)
The proposed four stages of performance review are measuring performance, assessing effectiveness and quality, monitoring and reporting and making it happen. Figure 2.4 shows the dimension or level at which measurement occurs. They are cost, resources, outputs and outcomes. It also shows the performance indicators and the relationship between measures, including service level and take up. The Commission considered that except for qualitative outcomes, the measurement was relatively straightforward.
2.8. Performance Measurement Methods applied in Malaysia.