Scrutinising Performance

1.  Scrutinising Performance  Peter Watt INLOGOV, July 2007 http://www.inlogov.bham.ac.uk/staff/wattp/

2. 2 Contents What is performance 3 Es, Performance improvement, Gershon Achieving performance improvement � information problems and performance indicators Making scrutiny of performance a success

3. 3 Fundamental performance objectives Why produce? To generate consumer/customer/user/client satisfaction/happiness Inputs ? Outputs ? Outcomes Labour, Home Listening Materials audio experience system Valuing production = Valuing contribution to consumer satisfaction Output x (marginal) valuation of output (quantity x price) (Or outcome x (marginal) valuation of outcome)

4. 4 The public sector production process � e.g. road repairs

5. Valuing public sector production

6. 6 Value of production Private sector Output x value of output = outcome x value of outcome Units x price not known x not known known known Public sector Output x value of output = outcome x value of outcome not known x not known not known x not known

7. 7 Why the emphasis on outcomes rather than outputs in the public sector? Outcomes are actually what is required Outputs are only a means to an end If productivity is measured via outputs then the nature of the outputs could start to change and lose their link with outcomes In the private sector this is prevented as each outputs has to be sold to a willing buyer

8. 8 Performance Improving economy, efficiency and effectiveness

9. 9 Economy Economy means acquiring the necessary resources (finance, staff, buildings, equipment, etc.) to carry out an activity at the least cost. Minimising the cost of resources used for an activity, having regard to the appropriate quality.

10. 10 Efficiency Efficiency means achieving maximum output from a given level of resources used to carry out an activity. The relationship between the output, in terms of goods, services or other results, and the resources used to produce them.

11. 11 Effectiveness Effectiveness means the extent to which the activity's stated objectives have been met. The extent to which objectives are achieved and the relationship between the intended impact and the actual impact of an activity.

12. 12 The local authority production process

13. 13 Performance measures related to health production process stages Economy E.g. Cost of drugs for a treatment Efficiency For given hospital facilities and standards of care, how many patients are being treated Effectiveness Did treatment lead to increased life years of a given quality? HM Treasury (2001) Choosing the right Fabric, http://www.hm-treasury.gov.uk/media/BB5BC/229.pdf

14. 14 Lets look at some of the economics of best value. Chapter 3 of the consultation paper defines the duty of best value. �The Government proposes legislation that will create a statutory duty on local authorities � to obtain best value by securing economic, efficient and effective services. That duty is one that local authorities will owe to local people, both as taxpayers and as the users of local authority services�. economic - about iinputs efficient - inputs to outputs effectiveness - are these the outcomes you want LOCAL CHOICES �The Government does not intend that the duty of best value should transfer decisions about cost and quality in local services from councils to the courts or auditors. The balance between cost and quality can be a complex judgment, and it is appropriate that decisions are taken, wherever possible, by locally informed, elected and accountable people� Rolls Royce or Ford Fiesta Lets look at cost and quality - authority X Baumol�s disease. Lets look at some of the economics of best value. Chapter 3 of the consultation paper defines the duty of best value. �The Government proposes legislation that will create a statutory duty on local authorities � to obtain best value by securing economic, efficient and effective services. That duty is one that local authorities will owe to local people, both as taxpayers and as the users of local authority services�. economic - about iinputs efficient - inputs to outputs effectiveness - are these the outcomes you want LOCAL CHOICES �The Government does not intend that the duty of best value should transfer decisions about cost and quality in local services from councils to the courts or auditors. The balance between cost and quality can be a complex judgment, and it is appropriate that decisions are taken, wherever possible, by locally informed, elected and accountable people� Rolls Royce or Ford Fiesta Lets look at cost and quality - authority X Baumol�s disease.

15. 15 Baumol�s disease Baumol�s disease � the problem of low productivity growth in labour intensive industries. ttp://nces.ed.gov/pubs97/97535/97535k.asp (Scroll down to section on Baumol�s disease) The original article by Baumol: Baumol, W. J. (1967). Macroeconomics of unbalanced growth: the anatomy of urban crisis. American Economic Review, 57, 415-426

16. 16 Gershon efficiencies

17. 17 Gershon efficiencies 2.5% per annum on 2004/5 baseline for 2005/06, 2006/07, 2007/08 Efficiencies defined as (E1) reducing inputs (money, people, assets, etc) for the same outputs; (E2) reducing prices (procurement, labour costs, etc) for the same outputs; (E3) getting greater outputs or improved quality (extra service, productivity, etc) for the same inputs; or (E4) getting more outputs or improved quality in return for an increase in resources that is proportionately less than the increase in output or quality.� Not Re-labelling of activity � e.g. reclassifying inspection as advice Cuts that result in poorer services for the public Increased income purely from higher prices in fees and charges to the public http://www.localegov.gov.uk/images/Efficiency%20Technical%20Note%20(ETN)%20for%20Local%20Government_229.pdf

18. 18 Gershon � cashable efficiency gains Cashable gains represent the potential to release resources for reallocation elsewhere. By contrast, non-cashable gains are achieved through such means as improved quality or additional outputs for the same level of resources. Procurement efficiency gains realised through greater economies of scale or lower prices are cashable. This includes instances where prices have been negotiated to below the level of inflation. Where higher quality goods and services are procured for the same prices (after allowing for inflation), gains are non-cashable; Corporate services will be cashable for those cases of less expenditure for the same outcomes, non-cashable where better outcomes are achieved for the same expenditure; Transactions follows the same approach as corporate services. In the case where improved output is claimed, it must be clear that the improved output is genuinely beneficial to the end user;

19. 19 Gershon efficiencies 2.5% per annum on 2004/5 baseline for 2005/06, 2006/07, 2007/08 Efficiencies defined as (E1) Reducing inputs for same outputs (E2) Reducing prices (procurement costs, labour costs etc for same inputs (E3) Getting greater outputs or improved quality for the same inputs (E4) Getting more outputs or improved quality in return for an increase in resources that is proportionately less than the increase in output or quality Not Re-labelling of activity � e.g. reclassifying inspection as advice Cuts that result in poorer services for the public Increased income purely from higher prices in fees and charges to the public http://www.localegov.gov.uk/images/Efficiency%20Technical%20Note%20(ETN)%20for%20Local%20Government_229.pdf �having established the baseline savings ambition for the 2007 CSR period of 3 percent per year across central and local government, this Budget confirms that all of these savings will be net and cash-releasing, thereby maximising the resources available to improve frontline services and fund new priorities � HM Treasury, Budget 2007, March 2007, p. 139 [The 2007 CSR will set departmental spending plans and priorities for the years 2008-09, 2009-10 and 2010-11]

22. 22 Getting performance � the problem of agency The problem of getting someone, or some organisation to do something for you In return for payment, you want effort, results, outcomes, or monitoring information about what has been delivered: - an account

23. 23 Principal agent problems in the public sector Principal Citizen Politicians Central Government LA political leader Agent Government (Politicians) Staff Local Government LA staff

24. 24 Scrutinising for performance

25. Divergence of interestsPrincipal would like:

26. 26 Problems for the principal/scrutineer: information asymmetry: hidden information and hidden action The agent will often know better than the principal how suitable the are for the job (the adverse selection problem) E.g. the agent may know of a better agent than themselves, but can they be expected to tell the client that? The agent will often have better information than the principal on how well they are carrying out the task/how much effort they are making (the moral hazard problem) E.g. the agent may make less effort than they have led the principal to believe These are examples of information asymmetry The first problem is called adverse selection - the term adverse selection comes from the insurance industry � people who are bad risks will be attracted to policies that insure against those risks. The second problem is called moral hazard � once you have bought the insurance you may take less care than you would before. The first problem is called adverse selection - the term adverse selection comes from the insurance industry � people who are bad risks will be attracted to policies that insure against those risks. The second problem is called moral hazard � once you have bought the insurance you may take less care than you would before.

27. The problem of hidden information

28. 28 Some possible solutions to information problems do it yourself? trust? get independent information align incentives? competition? performance indicators?

29. 29 Controlling experts Separation of diagnosis and treatment Independent information - consultants Effective, but may be too costly if there are economies of scope Corresponds to the client-contractor split in local government Advantage � works against services being provider-led Disadvantage � may be too costly

33. Performance indicators Audit Commission advises that PI�s should be SMART (specific, measurable, achievable, relevant and time-bound) A SMART target might be �to ensure that between the hours of 7 am and 11 pm on Monday to Saturday, levels of litter and detritus in the central retail area do not rise above level B (as defined in BVPI 199), through inspecting levels of litter and detritus on an hourly basis�. Audit Commission Setting Priorities and Maintaining Focus, http://www.audit-commission.gov.uk/reports/accessible.asp?ProdID=04427960-AAE1-11d7-B316-0060085F8572

34. 34 Performance information HM Treasury advises that performance information should be FABRIC Focused on the organisation�s aims and objectives; Appropriate to, and useful for, the stakeholders who are likely to use it; Balanced, giving a picture of what the organisation is doing, covering all significant areas of work; Robust in order to withstand organisational changes or individuals leaving; Integrated into the organisation, being part of the business planning and management processes; and Cost Effective, balancing the benefits of the information against the costs. HM Treasury (2001) Choosing the right Fabric, http://www.hm-treasury.gov.uk/media/BB5BC/229.pdf

35. 35 Problems with performance measures Tunnel vision Suboptimisation Myopia Measure fixation Misrepresentation Gaming Ossification Smith, P �On the unintended consequences of publishing performance data in the public sector� Int Jnl of Public Admin, 1995

36. 36 Problems with performance management The �success indicator� problem:- �Another month�s production target successfully completed comrade!� A problem with output accountability is the general difficulty of measuring outcomes, and the possible operation of Goodhart�s Law (Goodhart, 1975) whereby �any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.� In other words, there is a danger that outcomes may be �faked�. Goodhart, C. (1975) �Problems of monetary management: The U.K. experience�, in: Courakis, A. S. (ed), (1981) Inflation, Depression and Economic Policy in the West Performance indicators as �signals�

38. 38 Performance indicators as �signals� �Leaping in impalas reduced flight speeds and was an honest signal of the performer's physical condition. Bounding was used by many species to clear obstacles. Stotting carried a time cost and it too signalled the prey's physical condition�. Ungulate Antipredator Behavior - Preliminary And Comparative Data From African Bovids, Caro TM, Behaviour,128: 189-228, Part 3-4, MAR 1994

39. 39 A springbok stotting or pronking

40. 40 Making scrutiny of performance a success issues Performance reports � comprehendability � need to evolve with member involvement Need for clarity in constitution on whether scrutiny has responsibility for performance Reports structured around achieving corporate priorities Time at beginning of meetings to agree approach � allocate tasks and roles Time at end to reflect on whether objectives have been achieved