Accountability and performance measurement

In a not-for-profit organisation the goal may be seen as the provision of �value for money�. Examples of this sector are Education, Health and Local Government departments such as Housing.

Accountability Agency theory considers the relationship between a principal and an agent. Berry, Broadbent and Otley cite the illustration of the owner (the principal) of a holiday bungalow who employs a local agent to handle sub-lets on her behalf. The problem is �how can the agent be motivated and monitored?�. The motivation may be achieved by the payment of a commission (the reward). The monitoring may be through the submission of regular accounts of income and expenditure (as a measure of performance).

The key requirements are that:

• the agent must have to give an account of performance to the principal; and
• the principal must be able to hold the agent to account.

In the corporate sector, the identification of the principal (shareholders) and agent (managers and employees) is relatively straightforward. In the public sector and not for-profit situations the relationship is more complex in that there are likely to be multiple principals. For example, in the Higher Education sector, principals may include the Government (as providers of funds) and students (as recipients of the education). The agent is the university management and staff. The achievement of accountability (holding the agent to account) is an important aspect of the relationship. Later discussion in this article examines alternative views of performance measurement and the benefits and problems associated with performance measures.

Accountancy as a distinctive discipline has a key (though not exclusive) role to play in the development of regimes of accountability. Management control systems have evolved using a range of quantitative and qualitative methods and principles. Consider the extent to which budgeting and standard costing and variance analysis, each applied in various ways, have been seen as providing control through quantitative and qualitative aspects of their use. Recent moves have been towards a proliferation of innovations including activity based costing (ABC), activity based budgeting (ABB) and total quality management (TQM) incorporating a continuous improvement ethos.

Accounting and accountability perspectives Accounting and accountability perspectives as the basis of management control may be seen to require:

Hard accountability via financial and quantitative results. There is an ongoing debate as to the most appropriate set of results. For example, what type of budgeting should be used? Are standards and variances too static and should their use be replaced by an increased focus on measures of continuous improvement both internal and external to the business? This hard accountability will require:

� Counting: i.e., converting activities and outcomes into numbers. For example, the number and percentage of new customers or the number and type of customer complaints.

� Accounted for: i.e., reporting on activities and outcomes and providing a discussion of how and why they occurred as they have. For example, management reports might indicate, �we achieved 20% new customers through promising a just-in-time delivery of orders (how) and 80% of complaints related to an inability to meet the JIT timetable because of internal failure of the �pull-through� system due to lack of a synchronised manufacturing system (why).

� Held accountable for: where the person or group or team who is counted and accounted for is responsible not just for the accounting but also for the events and circumstances leading to the records. For example, being responsible for failure to meet unrealistic delivery promises to new customers and for failure to institute action such as the purchase of new assets and the training of personnel in order to try and bring the promises to fruition.

Soft accountability through the recognition of human input and its role in shaping subjective evaluation, stressing human values and higher level goals.

� consider the construction of the �accountable person�. This aims at �self accountability� by employees who will ACT in a way which mirrors their role in the system.

� focus on the use and development of transferable skills such as communication, negotiation and motivation.

The degree of achievement of self-accountability is highly likely to be affected by the reward system. Individuals are likely to be motivated through financial and non-financial rewards such as their remuneration package and job-satisfaction respectively. The development of transferable skills in fostering self-accountability may be aided through a comprehensive training and development programme for all staff. It may also be fostered through the way in which employees are grouped in order to achieve specific business outcomes. For example, the formation of multidisciplinary project teams who will identify with the successful implementation of a specific project on behalf of the organisation. Also the concept of quality circles in a total quality environment where a group of employees are encouraged to discuss problems in the implementation of their range of tasks and ways in which improvement may be achieved.

Accountability may be seen as requiring the implementation of a number of steps as follows:

• choose and make public a range of accepted performance measures;
  
• ensure that the benefits of the performance measures have been identified;
  
• identify and understand possible problems in the use of performance measures;
  
• consider ways in which to counter perceived problems in the use of performance measures.
  

Alternative views of performance measurement Financial measures: traditionally organisations have focused on a range of measures such as those listed in Figure 1. Such measures range from overall measures of performance such as capital structure, market ratios, liquidity and overall ROI. Also greater analysis of costs and profit possibly by product, cost centre and geographical area . Such measures may be argued as being unduly inward looking, with a major focus on the achievement of monetary targets in conjunction with techniques such as budgeting and standard costing and variance analysis, with detailed focus on and analysis of deviations from the planned or target figures. Also using balance sheet and profit and loss statements as the basis of overall measures such as ROI, profit sales percentage and asset turnover ratios.

Kaplan and Norton (1992) devised the �balanced scorecard� as a way in which to improve the range and 1inkage of performance measures. Figure 2 on page 42, illustrates four perspectives � financial, customer, internal business and innovation and learning. These measures seek the answer to the questions as stated in Figure 2 which may be viewed as goals requiring measurement. The balanced scorecard adds to the traditional financial focus by seeking to monitor the internal business perspective in non-financial terms, to monitor change and improvement in products and methods and to provide an external focus aiming at ensuring customer satisfaction and continued or increased business from them. Lynch and Cross (1991) viewed business as a performance pyramid (Figure 3 on page 43). This four level pyramid links strategy and operations. Corporate vision is seen as looking forward through defining markets and the basis on which the company will compete. The basis of competing may include pricing policy, product innovation and quality features such as, quality of salesforce, after sales service, financial aid to customers and point of sale amenities. The pyramid views a range of objectives for both external effectiveness and internal efficiency. These objectives are to be achieved through measures at various levels. The specification for a business unit is seen as:

• it has its own distinct business concepts and mission;
• it has its own competitors;
• it is better off managing its strategies in an independent manner.

What Lynch and Cross call �getting it done in the middle� focuses on business operating systems where each system is geared to achieve specific objectives and will cross departmental/functional boundaries, with one department possibly serving more than one operating system. For example, an operating system may have new product introduction as its objective and is likely to involve a number of departments from Design and Development to Marketing. At this level performance focus will be on three areas. Firstly ensuring customer satisfaction. Secondly, flexibility to accommodate change (in methods and customer requirements). Thirdly, productivity looking for the most cost effective and timely means of achieving customer satisfaction and flexibility.

At the bottom level of the pyramid is what Lynch and Cross label as �measuring in the trenches�. Here the objective is to increase quality and delivery and decrease cycle time and waste. At this level a number of non-financial indicators will be used in order to measure the operations.

The four levels of the pyramid are seen to fit into each other in the achievement of objectives. For example, improved quality will assist in the achievement of customer satisfaction and hence growth and market position.

Fitzgerald et al (1993) and Fitzgerald & Moon (1996) consider performance measurement in service businesses. Figure 4 , shows their building blocks for dimensions, standards and rewards for performance measurement systems. They view the dimensions of performance in two sets, the results measured by financial performance and competitiveness and the determinants as measured by quality, flexibility, resource utilisation and innovation. Focus on the examination and improvement of the determinants should lead to improvement of the results. There are particular characteristics of service businesses which will affect performance and its measurement. These are:

• simultaneity (production and consumption of the service coinciding);
  
• perishability (the inability to store the service);
  
• heterogeneity (variability in the standard of performance of the provision of the service);
  
• intangibility (of what is provided to and valued by individual customers).
  

Value for money audits can be seen as being of particular relevance in not-for-profit organisations. The audit focuses on Economy, Efficiency and Effectiveness. Firstly on the economy and efficiency with which the organisation�s services are provided and then on the effectiveness of the organisation�s performance in achieving its objectives. This may be complicated by the inter-relationship of objectives. For example, in Higher Education the main objectives may be seen as �the provision of a quality educational environment in order that students obtain qualifications suited to their chosen careers and with skills relevant to the needs of industry and commerce�. Subsidiary objectives which will help in the achievement of the main objectives may include �a quality research environment for post-graduate students and staff and a consultancy provision to generate income and to develop staff expertise, fostering quality approaches to teaching and learning�.

The measures of economy, efficiency and effectiveness may be in conflict with each other. Economy may be seen as spending frugally.

For example, how best to minimise the cost per graduate in Higher Education. Efficiency may be seen as the maximisation of input/output ratio. In Higher Education this may be maximising the student: staff ratio. This will tend to mean larger class sizes, which whilst economical in use of teaching resources is not necessarily effective in creating the best learning environment.Effectiveness is the achievement of the main objectives and relevant measures will include the number and grading of degree awards and success in job placement of graduates.

Performance measures � benefits and problems Figure 5 shows a list of perceived benefits of performance measures (Berry, Broadbent and Otley). The preceding section on alternative views of performance measurement has raised issues relating to benefits 1 to 4 in Figure 5. Benefits 5 and 6 raise additional issues. Are there likely to be problems in using performance measures as the targets for the organisation and its managers? How will performance measures help provide accountability of the organisation and its employees to the stakeholders? Figure 6 shows a list of possible problems which may accompany the use of performance measures. This raises the question of the compatibility (congruence) of individual and organisational goals. Organisational goals have been discussed above. Individual goals may focus on financial and non-financial areas such as remuneration, promotion prospects, job security, job satisfaction and self-esteem. There may be a conflict for each individual between actions to ensure the achievement of individual goals and/or organisational goals. The list of potential problems in Figure 6 may be illustrated in the context of any type of organisation. The comments which follow are illustrated in the context of what could occur (although should not occur!) in a UK University.

Tunnel vision may be seen as undue focus on performance measures to the detriment of other areas. For example, efforts to ensure that an average student: staff ratio of 20:1 is maintained may lead to larger class sizes to the detriment of soft skills development in areas such as communication and teamwork.

Sub-optimisation may occur where undue focus on some objectives will leave others not achieved. For example, efforts to ensure high publication rates per staff member could lead to less focus on student learning and result in fewer first class and upper second class honours degree awards.

Myopia refers to short-sightedness leading to the neglect of longer term objectives. An example would be the need for staff to be heavily involved in consultancy work in order to boost short term departmental income. This could be to the detriment of longer-term goals such as new course development or innovations in approaches to teaching and learning.

Measure fixation implies behaviour and activities in order to achieve specific performance indicators which may not be effective. For example, the recruitment of less well qualified undergraduates in order to boost the student:staff ratio may result in ongoing problems of high student drop-out rates and associated counselling problems.

Misrepresentation refers to the tendency to indulge in �creative� reporting in order to suggest that a performance measure result is acceptable. For example, a statistic that 80% of responses indicated satisfaction with the organisation of a course, when only 10% of the students have responded to the question.

Misinterpretation involves failure to recognise the complexity of the environment in which the organisation operates. In Higher Education, the existence of multiple principals e.g., government, employers and students creates a complex environment in which the objectives of the principals may not coincide. The government may wish greater numbers of students into Higher Education where as wide a range of courses as possible is offered. Employers may wish to focus on obtaining a satisfactory number of graduates qualified in disciplines suited to their (the employer) needs. Students may wish a quality educational environment with considerable support through staff and services on offer.

Gaming is where there is a deliberate distortion of the measure in order to secure some strategic advantage. This may involve deliberate under performing in order to avoid higher targets being set. For example, restriction of departmental consultancy earnings in one year in order that the target for the next year will not be increased and/or to hold back consultancy possibilities which are �in the pipeline� in order to create slack.

Ossification which by definition means �to harden� refers to an unwillingness to change the performance measure scheme once it has been set up. A university example could be a standard set of questions in a questionnaire to test student satisfaction with a course. �Good� responses may simply indicate a poorly structured questionnaire, rather than a high degree of student satisfaction.

How to cure problems with performance measures A first step is to acknowledge that imperfection will exist in any scheme. A number of steps may be taken in order to minimise the impact of imperfections. For each suggestion which follows, the problems from Figure 6 which are most likely to be reduced are noted.

• Involve staff at all levels in the development and implementation of the scheme. People are involved in the achievement of the performance measures at all levels and in all aspects of an organisation. It is important that all staff are willing to accept and work towards any performance measures which are developed to monitor their part in the operation of the organisation and in the achievement of its objectives. This should help reduce gaming and tunnel vision.

• Be flexible in the use of performance measures. It is best to acknowledge that they should not be relied on exclusively for control. A performance measure may give a short term measure which does not relate directly to actions which are taking place in order to lead to an improved longer-term level of performance. To some extent it should be acknowledged that improved performance may be achieved through the informal interaction of individuals and groups. This flexibility should help to reduce measure fixation and misrepresentation.

• Keep the performance measurement system under constant review. This should help to overcome the ossification and gaming problems.

• Try to quantify all objectives � however elusive! The argument here is that efforts to quantify an objective will improve the efforts to understand and take action to achieve the intended output of the objective. Such actions should help to overcome sub-optimisation.

• Try to focus on measuring customer satisfaction. This is a vital goal. Without continuing and improved levels of customer satisfaction, any organisation is underachieving and is likely to have problems in its future effectiveness. Positive signals from performance measures earlier in the value chain are only of relevance if they contribute to the ultimate requirement of customer satisfaction. Once again tunnel vision and sub-optimisation should be reduced through recognition of this requirement.

Consideration should also be given to the audit of the system. Action may have to:

Seek expert interpretation of the performance measurement scheme. This should help in considering the likely incidence of any or all of the problems listed in Figure 6. It is important that this issue is considered at arms length and is not coloured by the views of those operating the scheme.

Maintain a careful audit of the data used. Any assessment scheme is only as good as the data on which it is founded and how such data is analysed and interpreted. This should help, in particular, to reduce the incidence and impact of measure fixation, misinterpretation and gaming.

It is also relevant to recognise key features necessary in any scheme. Once again, such measures should help to overcome the range of problems listed in Figure 6.

Key features will include:

• Nurture a long-term view/perspective amongst staff. This may possibly be difficult to achieve where rewards such as bonus or promotion are based on relatively short-term measures.
• Try to hold down the number of performance measures. Better to focus on the key events which are likely to result in customer satisfaction. Too many performance measures may simply dissipate effort and possibly lead to conflicting actions.
• Develop performance benchmarks which are independent of past activity. This refers to the need to focus on the way ahead and how by appropriate action to improve from whatever the current situation may be.

1. Berry, Broadbent and Otley, Management Control � Theories, Issues and Practices, MacMillan, (1995).
2. Fitzgerald, et al, Performance Measurement in Service Businesses, CIMA, (1993).
3. Fitzgerald and Moon, Performance Measurement in Service Industries: Making it Work, CIMA, (1996).
4. Kaplan and Norton, �The Balanced Scorecard � Measures that Drive Performance�, Harvard Business Review, January/February, (1992).
5. Lynch and Cross, Measure Up! � Yardsticks for Continuous Improvement, Blackwell, (USA), (1991).