Attachment G: One View of Problems in Defining Outputs

Based on The Contract State:
Public Management and the Kennett Government
(Alford J. And O'Neill D (eds), 1994)

From Chapter 3.

Specification of requirements runs into problem of:

• uncertainty about actual work (requiring employer to either anticipate this in detail, allow re-negotiation, or enter employment relationship);
• information asymmetry (where buyer can not tell whether goods and services are good or as agreed; or where workers suffer information deficiency); and
• complexity (because some goods require both specialisation and cooperation in production, and are thus team - rather than individual - goods. This potentially allows some to engage in 'social loafing' - leaving work to others).

The greater the uncertainty, information asymmetry and complexity, the greater the cost of using price mechanisms (ie the cost of organising through price is that of discovering what the relevant prices may be). The employment contract has a different logic to the spot purchase contract, and involves agreement to enter hierarchical relationship. This poses ongoing issue for employers about how to get maximum work - which traditionally involves both direction / monitoring by supervisors and sanctions.

Though employment contract deals with uncertainty, it does nothing about the problem of asymmetry and complexity. Employers use two methods to deal with this: casting work in output like terms; and providing variable material incentives (tying remuneration to productive targets of organisation - to align organisations goals with individuals). Underpinning this is the view that labour provider is motivated by material self interest. However self interest can undermine performance incentives - whether for piece work or for 'management by objectives' (ie by deliberately deceiving those who fix performance measures about what is achievable). If high standards are set, then risk for employee of failure increases, and high salary is needed to compensate. Something but self interest must motivate employees to get maximum performance.

The problem of specifying work, and relating incentives to performance is much harder in the public sector, where necessary conditions are often absent. Outcomes are often hard to measure, unpredictable and interdependent. Many public sector outcomes can only be measured by abstracting from reality (eg policy advice) - and can only be assessed qualitatively. Also outcomes are often dependent on actions of other people, or natural forces (ie influence can only be indirect). And information asymmetry is very high in dealing with policy analysis, research, professional work. Some have to make intangible judgements on behalf of society as a whole. Many jobs are interdependent - it being particularly hard to separate a manager's performance from the efforts of others. After 10 years of management reform in Commonwealth, many were concerned about the effect on teamwork, equity and morale. Performance measures can be counter-productive if this encourages employees to 'game' the system.

From Chapter 4.

While service agreements are likely to specify outcome objectives, indicators will usually be defined as outputs. However there are conflicting dimensions to public service accountability - to clients, and to Parliament (for resource use). Service delivery contracts seek to separate political accountability to elected representatives from managerial accountability to those who appoint them. Contracts require clear specification. However it is easier to specify efficiency gains than service quality. Many service measures relate to outputs, rather than to effectiveness of results. Also there is no way to specify requirements for long term outcomes (eg of a preventative health care program). Thus short term performance is emphasised. Where customers do not directly pay, a formula determines priorities.

In competitive markets, service quality is aimed at increasing demand by attracting customers, but for public services the problem is to restrain demand. Risk in making this competitive is that efficiency gains, and demand management are achieved by reducing service quality. Efficiency gains may not reflect priorities for equity and access. Corporate planning strategies experience the same problem. Also different groups will have different priorities, and there is no single basis (like profitability) for assessing performance. Value for money, raises question of value for whom? Service agreements between agencies create quasi markets dominated by professional suppliers, rather than by consumers. Such internal markets are also characterised by excess demand, requiring rationing, rather than competition for consumers on the basis of quality. Thus they are not more responsive to users. Central agencies still determine priorities, and efficiency measures are easier to identify than effectiveness. Structured or managed competition does not overcome the problem of monitoring. Quality is hardest to define for services, and in the public sector (eg in health and education, where specification of performance indicators is very hard). Consumers perceptions are based more on how service is delivered, than on what is provided. And those services provide public as well as private benefits. How are public interest objectives included in service agreements?