Attachment C: Limitations in Managing for Outcomes

This attachment outlines five limitations (1, 2, 3, 4, 5)  in Managing for Outcomes which need to be considered in further development of the Strategic Management Framework.

1. Service Delivery can not Solve Some Pressing Problems

Managing for Outcomes involves focusing the budget on government 'outputs' as a means to achieve desired outcomes for the community. This seems useful for those government responsibilities involving provision of public goods and services. But the most important outcomes of government involve maintaining or changing economic and social relationships within the community, which are not associated with significant outputs.

Government's core responsibility is 'governing' which concerns advancing the position of the community as a whole. This involves concern for security, law (ie social order and the creation of a constructive regulatory framework for economic and social transactions), and stimulating broadly based change in the community (eg social or economic development).

The limited relevance of 'outputs' to government's core responsibilities is illustrated below.

• Legal Framework: the regulatory regime is primarily a framework for transactions within the community itself, and its 'value' is determined by the effectiveness of those relationships. The knowledge base and networks which must be maintained in government agencies to make sure that regulation is appropriate is not related to any actual output (ie there may, or may not, ever need to be any output), and any measures of output bear no necessary relationship to the effectiveness of the regulatory regime.
• Economic Development: Concern about `value for money' in service delivery arises from a fiscal constraint identified by the Commission of Audit. However that constraint arises from economic weaknesses. 'Value for money' service delivery is a response to symptoms, not a solution to the problem. Also production of outputs (services) is not the key to eliminating the economic problem, as while outputs (eg infrastructure) will often contribute to economic growth, they are not central to developing the economy. And growth (unless associated with increasing productivity (say) through economic development) is unlikely to change the relationship between income and expenditure (ie unlikely to sufficiently increase savings to overcome fiscal constraints). This issue is detailed in Attachment D.
• Social Development: Similarly in dealing with rapidly increasing social tension the re-creation of social institutions may frequently be essential in finding solutions as well as service delivery, as outlined in Attachment E.

While it is possible to pretend that such responsibilities involve 'outputs', this confuses the issue and may distort outcomes (eg if the need to demonstrate 'outputs' forces the use of sub-standard methods). The Strategic Management Framework must recognize the fundamental difference between outcomes which result from maintaining or qualitatively changing relationships within the community, and outcomes resulting from government outputs.

A quantitative aspect of a social or economic system involves the number and size of its elements and the level of interactions amongst them. The qualitative aspect of a social or economic system involves the nature of the relationships amongst those elements - ie what is connected to what. For example, equity depends not on the quantity of income, but on whom it flows to. The qualitative character of a social / economic system is more easily expressed in language, than in numbers.

The most important government responsibilities may be those which are not measurable.

If the Strategic Management Framework stresses service delivery, and only achieving outcomes by programs with outputs, then current serious economic and social difficulties will not be resolved, and the fiscal constraint on government will escalate.

Furthermore, the costs of measures designed to ensure public security (eg fire, ambulance and emergency services) are justified in terms of capabilities to deal with situations which might arise, rather than in terms of actual outputs produced.

2. Problems in Specifying Service Outputs

Managing for Outcomes suggests that outputs would need to be specified in quantitative or qualitative terms (where the latter might cover: accuracy, completeness, accessibility, availability, risk coverage, legal compliance, and customer satisfaction).

However a recent paper by Marc Robinson (QUT), whose theme is outlined in Attachment F, suggested that past experience with program budgeting shows that it is often impossible to specify desired outputs. He argued that the problem is that outputs can not be defined or measured, because of the large number and complexity of government functions.

A similar argument was raised in The Contract State: Public Management and the Kennett Government (Alford J and O'Neill D (eds, 1994) whose themes are outlined in Attachment G. Key points were:

• requirements are hard to specify where there is uncertainty about actual work; information asymmetry (eg only provider understands the task); or complexity;
• employment contracts are more effective than price mechanisms where work is uncertain, but do nothing about complexity and asymmetry
• specifying work is hard in the public sector because outcomes are hard to measure, unpredictable and interdependent. Many can only be measured by abstracting from reality, and only really be assessed by the persons involved where information is assymetrical.
• while outcome objectives are often specified, indicators are usually only of outputs (which distorts action). Also it is easier to specify efficiency gains than service quality - again biasing action. And there is no way to specify long term outcomes, thus action is biased towards short term priorities.
• different stakeholders have different priorities, and no simple measure may exist on which all agree.

Possible explanations of these suggested difficulties in defining outputs might be that:

• the service provision roles which accumulate in government are those associated with market failures (eg those associated with externalities, or 'natural' monopolies). Services with large externalities might be difficult to define because of linkages to other functions. And some services (public goods) were seen as 'natural' monopolies precisely because they are hard to identify clearly enough to charge individuals for;
• the art of politics is, in some respects, the maintenance of balance between competing interests in society by maintaining that policy will suit all - which balance is possible only because policy is vague. It might be not conducive to an effective political system to define outcomes and outputs clearly;
• there is a high level of uncertainty about some public policy issues - where differences are a matter of core assumptions and perceptions and are unable to be resolved by logical argument but only by compromise. Outcomes and outputs linked to such compromises, of which current examples are numerous, are necessarily hard to define.

If required outputs can not be properly defined, it many be hazardous to try to do so, because it may lead to achievement of defined outputs, but not what is wanted.

For example, the Queensland Commission of Audit suggested that quantitative measures of education (student contact hours) should be complemented by a proxy for skills acquired (such as course completion rates). However a recent report criticized the lack of 'content' in Queensland education, a problem which arguably arises because participation (ie course competition rates) has been emphasized rather than whether real knowledge was acquired.

In Queensland, performance measurement has been part of a resource management system focused on the outputs and outcomes of programs since 1990 (Douglas D. 'The Queensland Government Experience with Performance Measurement', Conference on Performance Indicators in the Public Sector, Wellington, 1992). However in practice these appear to be seen as a formality, not closely linked to management processes. However output budgeting would require that measures no longer be just a formality.

Also despite the advantages of accrual accounting in managing financial assets, measurement difficulties have also been postulated by some observers (as have difficulties in performing the traditional role of accounting in avoiding deception).

Estimation of current market values is only a guess, where no competitive markets actually exist. Equity issues arise: where a current value is assigned to assets (and a rate of return charged) though the asset has already been paid for on an historical cost basis; or where both depreciation and repairs are changed against assets which will never be replaced. And charging for assets on the basis of current (rather than historical) costs may significantly increase government revenues without Parliamentary debate (Aiken M. 'Accrual Accounting Valuation and Accountability in Government', Australian Journal of Public Administration, December 1995)

3. Effective Strategic Planning

Managing for Outcomes suggests that outcomes and outputs should be derived from the elected government, or through a centralized strategic planning process. This is impractical (for the same reason that central economic planning is impossible - ie the complexity of the issues involved exceeds the limits to rationality).

Similarly Managing for Outcomes required government to ensure an appropriate level of investment in assets. It is not clear how these could be achieved by government as owner, except through the advice of agencies as providers. A 'portfolio' approach to asset allocation would not be adequate.

Also while the goal is said to be 'client focused' services, the centralised process whereby services are determined would ensure that they could not really be client focused. Centralised definition of outcomes and outputs, would be incompatible with requirements for improved productivity through increased customer responsiveness (see below in Section 5 of this Attachment).

A survey undertaken of Strategic Planning in Business and Government (24/3/97) suggested that strategic planning is now critical to the performance of organisations because of the rapid change to which they are subjected. However it also suggested that the 1960s-1970s approach which saw strategic planning as a means for determining outcomes or outputs had never worked in practice.

The 1960s idea of strategic planning which 'involved separating thinking from doing, and created a new function staffed by specialists ... has long since fallen from its pedestal', because the actual strategy making process (as compared with the mechanical programming of existing strategies) requires an ability to synthesis diverse information which involves far more than the 'hard data' available to planners (Mintzberg H., 'The Fall and Rise of Strategic Planning', Harvard Business Review, Jan-Feb 1994)

Now strategy is seen more as a 'learning' process through which capabilities to cope with future environmental requirements can be identified and created.

During the 1980s companies were judged on their ability to restructure, de-clutter and de-layer their organisations. In the 1990s they will be judged for their ability to identify, cultivate and exploit core competencies. It was once possible to point at markets and seek leadership - but with rapid change such gains are only temporary. Some companies have been adept at inventing new markets. They are the ones to emulate. NEC sought to exploit convergence of computing and communications, and established top management team to develop those core competencies. However US companies saw themselves as portfolio of businesses. Whilst concerned with price and quality of competition they were overwhelmed by speed with which Japanese could invent new markets. Core competencies are the collective learning of the corporation. The way firms are normally though of - as a hierarchy and as a collection of business units, is the main obstacle to developing core competencies. (Prahalad and Hamel, 'The Core Competence of the Corporation', in Lewis G. Morkel A and Hubbard G. Australian Strategic Management: Concepts, Context and Cases, Prentice Hall, 1993)

4. The Importance of Non Financial Performance Indicators

The Strategic Management Framework is intended to involve tools for the more effective use of financial, information and human resources.

However Managing for Outcomes only emphasises effective use of financial resources. This may need to be counterbalanced, given the increasing importance reportedly being placed on non-financial performance indicators (see Attachment H). Issues for consideration are that:

• financial indicators (except for assets) only measure an organisation's past results, not its future potential; and short term financial results can be improved by sacrificing the future.
• financial accounting measures evolved in an environment where efficient performance of one task (especially use of capital) ensured organisational success. Financial indicators can not easily measure information, which is now more important to performance
• the decline in the competitive position of US firms during the 1980s was often ascribed to the pursuit of short term financial performance, and has been corrected (in part) through the shift towards balanced 'scorecards' which allowed firms to be managed directly in terms of factors relevant to their strategies

Thus agency performance assessment should be not only in terms of the results achieved (eg outcomes and outputs), but also in terms of 'positioning' to achieve future outcomes and outputs (eg by measures of productivity, effectiveness of organizational processes, and the skill / policy knowledge base it possesses).

In particular intellectual assets (eg the knowledge base) are now often seen as more important to an organization's performance than its financial assets. Intellectual assets are thus in more need of capable management, as some firms are beginning to do.

Pacioli developed modern accounting systems (double entry book-keeping) in 1494, which provides coherent way to evaluate flows of goods and money through organization. However Professional Accounting organizations are now pursuing non-financial measures of performance, because the major components of costs are now typically R&D, intellectual assets and services - and old measures based on cost of material and labour doesn't tell much. Accountants are having difficulty measuring chief ingredient in modern economy - intellectual capital (skill, knowledge and information). Financiers no longer know what they are lending against, when knowledge is chief resource and result. The knowledge assets of an enterprise can be identified, management processes can enhance them, how they add value can be described and measured. Without such tools managers neglected intellectual assets which greatly exceeded (say by factor of 3-4) value of tangible assets on balance sheets. Intellectual asset managers have been created. Strategy can involve: define role of knowledge in business; assess competitors strategies; classify intellectual assets; evaluate worth; invest in more; repeat. The major challenge is to avoid 'losing the recipe' (loss of organizational memory). Some knowledge is structured (rules), while other is more general (wisdom, experience, stories). Intellectual asset management involves keeping track of people who 'know the recipe'. Intellectual assets are worth far more than tangible assets, and are the raw material from which financial results flow. (Stewart T. 'Your Company's Most Valuable Asset: Intellectual Capital', Fortune, 10/10/94)

Thus the Strategic Management Framework might usefully show how arrangements to increase `value for money' in service delivery can be used, while also increasing the value and effectiveness of government's knowledge assets. This is most relevant to government's `core' function of `governing' where performance depends mainly on a policy (and other) knowledge base. The Strategic Management Framework could perhaps be expanded to include reference to policy capability - particularly given the limitations (at present) of external institutions in Queensland able to contribute to serious policy development.

5. Identifying Outcomes and Defining Outputs with Competitive Service Delivery

The objective of introducing:

• competitive neutrality under national competition policy;
• corporatisation and commercialisation into the operation of government business enterprises; and
• a purchaser / provider split in service delivery

is to increase the productivity of the use of resources.

This increased productivity is heavily dependent on increasing the customer / client focus of service providers. Such customer / client focus contributes to productivity through increasing the chance that what is produced is what customers want (and what they therefore value); and that production is flexible enough to follow customers' needs as they change (so that resources are only applied to what is currently wanted).

However, as noted above, the proposed process which for determining outcomes and outputs, is to be based on political and central strategic planners criteria. The latter will probably not reflect the requirements of clients / customers.

Thus these expectations of increased productivity and centralized planning seem incompatible.