Performance Management in the New Zealand Public Sector

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1 Performance Management in the New Zealand Public Sector Business Research Project by Sarah Bonner In Partial Fulfilment of the Requirements for the Degree of Masters in Business Administration Victoria University of Wellington, New Zealand 2014 (Submitted October 29, 2014)

2 Acknowledgements: I would like to express my gratitude to my supervisor Dr Michael Macaulay for the useful comments, remarks and engagement through the learning process of this MBA research project. Additionally I would like to also thank the course coordinator David Stewart, for his assistance throughout this process. Furthermore I would like to thank the participants who have willingly shared their precious time during the process of interviewing and for providing me with their open and honest views. I would also like to thank my colleagues and employer at The New Zealand Treasury, who have engaged collectively and positively in allowing me to collect and utilise the Treasury quantitative data and provided me with support to complete this project. 2

3 Abstract This research seeks to understand Performance Management from a New Zealand perspective and answer the question What are the barriers to the implementation of Organisational Performance Management in the NZ Public Sector. An extensive literature review was undertaken relating to research on organisational Performance Management. The review identified that there were two key gaps in the research, (1) A contextual gap, and (2) a conceptual gap. Contextually; there is limited research about PM in New Zealand, especially in terms of the New Zealand public sector, and what was available was predominately from a practitioner view (Gill, 2011). Conceptually; the literature reviewed identified four broad barriers to implementation of PM; these were generally discussed in isolation to each other. However, analysis of these barriers suggests that there are inter-related and linked by an over arching barrier related to psychological attitudes, therefore they are co-dependent of each other: (1) organisational and managerial, (2) political, (3) cultural, and (4) psychological. Drawing on the identification of the above mentioned gaps the research sought to further explore theses gaps. From the contextual perspective within the New Zealand public sector, there are two PM frameworks in place The Performance Improvement Framework (PIF) and The Better Administrative Services Framework (BASS). The research used a case study approach to analyse results from both these PM frameworks, and identified that while 3

4 the performance measurement frameworks where valuable in their own right, they lacked contextual depth, and suffered limitations from duplication and fragmentation. The case study highlighted further emergent themes related to the conceptual perspective, confirming that there were indeed barriers associated with successful implementation of the performance information gained from these frameworks. These barriers aligned with those identified in the literature review; however, additional themes emerged. These were the lack of incentives to drive improvements, the impact of risk taking, fragmentation and duplication and the absence of a holistic system view of agency performance. These emergent themes interlink with the barriers identified and reiterate that psychological perceptions and attitudes are the core resistance to the successful implementation of performance management and should not be viewed in isolation. 4

5 Contents Acknowledgements:... 2 Abstract Introduction Literature Review Performance Measurement Performance Information The New Zealand Perspective The PIF Framework Background Administrative and Support Services Benchmarking Background Performance Management: a comparative perspective Barriers to implementation of Performance Management Methodology Research Methods Quantitative Data: Analytical technique Results and Findings Treasury Data Analysis PIF Data BASS Analysis Qualitative Data Analysis Discussion Conclusion and Recommendations References Appendix A Comparator data Appendix B State Services Commission Secondary Quantitative Findings PIF System Review Appendix C Treasury Quantitative Findings BASS Measurement Years FY2009/10, FY2010/ Appendix D Limitations and Caveats around Data Appendix E Guide for semi-structured interviews Appendix F Sample Request Letter Letter Request for a Personal Interview Appendix G Sample Consent Form

6 1. Introduction This research investigates the barriers and limitations to the implementation of Performance Management (PM) in the New Zealand public sector; and seeks to answer the question: What are the barriers to the implementation of Organisational Performance Management in the NZ Public Sector? The literature review identified that PM is a well documented topic, and there is a vast range of literature dedicated to the subject. The review highlights that there are two key gaps in the research; a contextual gap, and a conceptual gap. Contextually, there is limited research about PM in New Zealand, especially in terms of the New Zealand public sector. Additionally, the research that was available was predominately from a practitioner view (Gill, 2011). Conceptually, the literature reviewed identified four broad barriers to implementation of PM; these were generally discussed in isolation to each other. However, analysis of these barriers suggested that there were inter-related and linked by an over arching barrier related to psychological attitudes, and therefore they are co-dependent of each other. Further, emergent barriers were identified which required additional examination. To assess the emergent barriers relating to the New Zealand public sector, this research adopted a case-study strategy that allowed for the triangulation of secondary quantitative performance measurement data and primary qualitative interview data. 6

7 2. Literature Review Performance Management (PM) is a multidimensional concept, which is commonly distinguished into two forms: (1) Employee Performance Management and (2) Organisational / Business Performance Management. Employee performance management is concerned with Human Resource Management (HRM) and can be defined as the process of delivering sustained success to organisations by improving capabilities of individuals and teams (Armstrong and Barron, cited in (Cheng, 2007, p. 61). Business or Organisational Performance management is concerned with the concepts of Performance Measurement and the use of Performance Information to make performance improvements to organisational objectives or strategies. There is a progression from the collection of data, to measure the performance of an organisation, to incorporating the information collected and measured into management systems, which is then actively used to create improvements (Gill, 2008). For the purpose of this research, we are looking at PM in its Organisational form, which encompasses the concepts of Performance Measurement, Performance Information and Performance Improvement. 2.1 Performance Measurement Performance measurement is perhaps the most extensively investigated and commonly referred to component of the field of PM. Neely, Gregory and Plats(1995) define performance measurement as the process of quantifying effectiveness and efficiency of actions (Slavić, Berber, & Leković, 2014, p. 47). Behn (2003), Neely (2007), and Henri (2006) discuss the different purposes for measuring performance and the primary uses of performance information. There is also significant research 7

8 into how Performance Measurement feeds into management control systems, see Otley (1999) and O'Boyle and Hassan (2013). Henri (2006) categorises four primary uses for performance measurement systems; 1. Monitoring - organisational performance measures are used to provide feedback regarding expectations and to communicate with stakeholders. 2. Strategic decision making - performance measures are used as a facilitator to enable strategic decisions. 3. Legitimatisation - performance measures are used to justify organisational operations and strategies, and 4. Attention focusing - Managers use performance measures to send signals throughout the firm (Henri, 2006). Due to the vast range of performance measurement systems, selection of the right measures can be difficult. The Balanced Scorecard, developed by Kaplan and Norton, is the most globally recognised and popular performance measurement framework (Powell, 2004). Its popularity spanned a shift from the conventional finance only view to a more balanced view, which recognises the importance of inclusion of non-financial performance measures. This evolution in the field of PM is also evidenced by the development of performance measurement systems such as the Performance Prism; developed by Neely, Adams, & Kennerley and the Centre of for Business Performance, which expands on the customer based view that satisfaction of organizational stakeholders is directly correlated to organisational performance and success (O'Boyle & Hassan, 2013). 8

9 2.2 Performance Information Pollitt (2006:39) defines Performance Information from a public sector view, as systematic information describing the outputs and outcomes of public programmes and organizations whether intended or otherwise generated by systems and processes intended to produce such information. Gill (2011) emphasises the importance of distinguishing between data, information and knowledge. When a recipient gives meaning to the data collected it becomes information. Sense making occurs by applying analytical tools and techniques to the data collected. Knowledge occurs by using the data / information systematically to understand underlying relationships between different variables. 2.3 The New Zealand Perspective New Zealand was acknowledged as a pioneer in the development of systems to enhance performance management. The reforms of 1990 s which required public sector agencies to report on a combination of financial and non-financial information was a considered a major innovation (Gill, 2011). The objectives of the reforms centred on effectiveness, efficiency, accountability, transparency and consistency. The key development of the reforms was an increased focus on outcomes at the microagency level, with the launch of Managing for Outcomes initiative (Gill, 2008, p. 33). There was little advancement or improvements made in the availability, quality and use of performance information between the reforms until 2009, when the Treasury along with the Central Agencies (State services commission, and Department of Prime Minister and Cabinet) developed the Performance Improvement Framework (PIF). Subsequently in 2010, responding to Government demands for more efficient and effective public sector, the Treasury developed the Administrative and Support 9

10 Services Benchmarking (BASS) performance measurement framework. BASS measures back office functions Administrative and Support (A&S) services across the state sector. These two performance management frameworks will be discussed in more detail below: The PIF Framework Background The Performance Information Framework was developed in 2009 responding to identification of a major gap in the ability of the Central Agencies to improve system performance across the sector. This gap was attributed to the lack of a performance measurement framework and the ability to apply it to agencies to provide meaningful result. The PIF review looks at the current state of an individual agency and how well placed they are to deal with the issues that confront them in the medium term future (TeKawa; & Guerin, 2012). Moreover, the benefits of the PIF review are to promote transparency of the public sector and to improve the public s perceptions. Additionally the PIF review seeks to give the New Zealand public service a system-wide view of what is currently being done well and what systems can be improved. The Agency Model has two major components; Results and Organisational Management, under these there are six critical areas, which are supported by 17 elements and 28 lead questions. The lead questions are supported by 88 lines of enquiry. Since being established, 29 individual agencies have been reviewed. Figure 1 provides a visual overview of the Agency Model. 10

11 Figure 1: PIF Agency Model, retrieved from: Core Guide 1: Understanding the Performance Improvement Framework Agency Model January 2014, The Treasury Assessment of the PIF Agency assessment is undertaken by lead reviewers, who review an agency over a period of two three weeks. Lead reviewers use the framework to draw on the six dimensions of system performance. The judgement of the lead reviewers on the agency s performance is based on a combination of reviewing documentation (such as strategic plans) and conducting interviews with management, staff and key stakeholders; which include Ministers and central agency officers. The PIF results are determined by the insights gained by the Lead Reviewers. The data compiled from the reviews is aggregated and summarised as traffic lights to provide a quantitative analyses, although the summarised data provides limited value on its own as the simplification and aggregation required to identify relationships 11

12 amongst the different elements discards a lot of useful information (The State Services Commission, Cabinet, & Treasury, 2013). Therefore the insights gained by the LR s from the interviews are considered to be more valuable; however, critique of this qualitative approach is that is considered as subjective Administrative and Support Services Benchmarking Background The Administrative and Support Services Benchmarking (BASS) performance measurement framework was developed in May 2010 as a pilot exercise; 14 Agencies voluntarily participated to measure six administrative and support (A&S) services. These functions were; Finance, ICT, HR, Procurement Corporate Services, and Property. The first BASS report proved a new level of transparency across a significant area of expenditure and management information, quality and scrutiny regarding State sector overhead spending. In December 2010 Cabinet decided to mandate an annual measurement exercise to all core departmental agencies and an expectation for large crown entities to participate. The purpose of the BASS exercise is to provide agency managers with management information to provide better understanding of the cost and quality of their back office services, in order to help them make better decisions around investment, resource allocations and identify opportunities for improvement and savings. In addition, the publication of a consolidated report aims to provide the New Zealand public sector with a consistent set of objective cross-agency performance results on expenditure, thus increasing system-wide transparency and responding to the demand from government for stronger performance management practices across the state sector (Treasury, 2012). The BASS measurement exercise is currently in its fifth year of measurement and considered to be a valuable tool for agencies. The identification of increased efficiency 12

13 by functions if they met targets against benchmarks highlighted the potential for sustainable gross savings. However, although there have been some performance improvements within individual agencies, there has been minimal consistent improvement at a system level. This leads to the criticism that although information from the report is useful, it does not necessarily drive performance improvement on its own. 2.4 Performance Management: a comparative perspective Performance management has been applied across a range of sectors in many different countries. Industry is no exception. There are many frameworks, and performance measurement systems designed to best suit different types of industry. For example the service industry is more likely to adopt a performance measurement system which balances financial and non-financial information such as customer and stakeholder satisfaction, using the Performance prism (O'Boyle & Hassan, 2013). The manufacturing industry identifies frameworks which measure time, and quality, for example Just In Time (JIT) or the Quality is Free philosophy s (Neely et al 2005). Other sectors or jurisdictions where case studies evaluated performance management include the UK Ambulance Service (Woollard, Lewis, & Brooks, 2003), Swedish Auditing Firms (Jonnergård, Stafsudd, & Elg, 2010), American Manufacturing firms (Cole, 1998), Czech Republic and the Slovakian public sector (Nemec, Merickova, & Ochrana, 2008), The Irish public sector (Conaty, 2012), Project - Managed based organisations (Mei, Andrew, & David, 2007), and US oil refineries (Broadribb, Boyle, & Tanzi, 2010). A comparative jurisdictional perspective of PM is identified in Sanger (2008) s evaluation of US state and local performance. The case studies found that cities performed better than states. This was attributed to factors such as, citizen 13

14 engagement, the development of comprehensive ICT systems which aid performance management and driven leaders or champions. The performance of the states indicated that even with mandate, without strong leadership and unity among the local agencies, PM efforts are unrealised. 2.5 Barriers to implementation of Performance Management Barriers to performance management are documented extensively in the academic literature, from which four common themes can be discerned: (1) organisational and managerial, (2) political, (3) cultural, and (4) psychological. The organisational barriers identified include the expense of PM, selection of the performance measurement system, and attitudes of managers and decision makers within the organisation (Conaty, 2012; Henri, 2006). Performance measurement systems are costly to develop. New systems require significant managerial investments in measurement design and staff training for collection, use, and reporting (Bourne et al, 2002). Effort was also identified as an obstacle. Finding the time and the resources proves difficult for many organisations. In order to stay relevant, performance measures and reports must be continually refined and altered in response to changing goals and lessons learnt (Sanger, 2008). Multiple constituencies (including citizens) need to be trained in their use and value for purposes of ensuring that planning, operations, and budgeting rely on analysis of performance data. (Sanger, 2008, p. 77) These expenses are significant especially in times of fiscal constraints such as budget downturns, therefore investment in performance measurement systems are often avoided. This results in neglect of performance measurement all together, or the use of systems which are no longer relevant, which produce poor quality data. 14

15 Organisations face challenges in managing the fundamental processes of PM; from the design of the performance measurement system, managing measurement, to refreshing the measurement system (Powell, 2004). The challenge lies in choosing the right measures. The selection of the right performance management system and measurement indicators is critical to the success of effective implementation, (Bourne et al, 2003; Henri, 2006; Powell & Neely, 2004). The literature highlighted that the selection of the performance measurement system and identification of the right measures was difficult in itself. Various frameworks outline the key attributes which must be considered when developing a coherent structure for performance management systems (Bourne et al, 2003). For example, Otley s (1999) framework identifies five central issues; (1) The identification of key organisational objectives, (2) The process of formulating and implementing strategies and plans, (3) The process of setting performance targets, (4) The rewards system associated with the targets set, and (5) The type of information flows which are required to monitor performance and support learning (M. Bourne et al., 2003). Whereas Simons Levers of Control Framework (1993) identifies the key concepts to be considered as; Core Values, Risks being Avoided, Critical Performance Variables and Strategic Uncertainties (Simons, 1994). Ferreira and Otley (2009) expand on these frameworks with the 12 question Performance Management Systems Framework (2009), which focuses on providing a broader perspective of the role of control in the managing of organisational performance, and development of performance measurement indicators. Neely (2004) identifies that traditionally the problem with selecting performance measurement systems was that managers chose to measure what was easy, such as financial or historical in orientation. The problem now is that there is a desire for organisations to look like they have implemented PM measures, therefore there is a 15

16 tendency to measure everything. This also raises the question of whether the value of the PM activity outweighs the cost. To select the right measures requires organisations to identify not what they can measure, but what is absolutely vital to measure. Focus needs to be concentrated to those indicators which will provide rich performance information, adding value to their organisational objectives and strategies. Managerial issues contribute to organisational barriers. The lack of strong leadership and commitment was highlighted by authors as a barrier to the success of PM, Bourne et al (2002) and (Tesluk & Mathieu, 1999). Specific issues identified were the lack of accountability and responsibility of measures and results and ambiguous communication around the implementation of performance measurement systems (Henri, 2006). Moynihan (2008) describes the importance of mangers as the essential ingredient in developing creative solutions to foster process change and performance improvement (Moynihan, 2008, p. 189). Gill (2008) identifies political barriers as behavioural, and an issue of demand. He goes on to state that the degree of bureaucratic and ministerial relocation to engage in performance management may reflect the reality of the (NZ) Political system (Gill, 2008, p. 29). The barriers that are identified predominately relate to the lack of political demand, and practical use of the performance information. Contextual issues also impact the implementation of PM within the public sector. What works for one Government agency may not work for another due to the internal and external characteristics of the agency (Robert, 2002). Leadership teams of government agencies face a variety of different challenges, and must operate within a number of significant constraints. These constraints include, governance from 16

17 overhead agencies (in New Zealand s context these include the central agencies, State Services Commission. Department of Prime minister and Cabinet and the Treasury). Pressures from Ministers, internal and external regulators, stakeholder organisations and the perception of the public also influence the decisions that managers can make regarding their operations. Cultural barriers were identified by a number of authors as a barrier to performance management (Broadribb et al., 2010; Powell, 2004; Robert, 2002). Cultural norms in public sector bureaucracies can become entrenched to produce obstacles. Sanger (2008) identified that agency leaders acknowledged the discomfort and threat that many old line managers, accustomed to managing their operations in a conventional way, experienced when faced with PM initiatives. generally not used much to manage or budget. Unsurprisingly, measures are Accountability to new sets of performance outcomes and the possibility of sanctions, provide implicit motives for obstinacy or subversion. (Sanger, 2008, p. 77) Therefore the introduction of an effective performance measurement system and performance-based management frequently requires a culture change within the organisation. This requires a committed leader or champion to drive the change and break down traditional cultural norms (Behn, 2003). Barriers to implementation of performance management can also be psychological, and based on fear. Many of the possible consequences of measuring an organisations performance are not positive. It can result in restructures and re-organisation of departments and processes, and job losses often are a consequence of identifying performance improvement opportunities. The identification of performance issues, or gaps in an organisations performance generally results in change and thus has a direct 17

18 impact on the employees of the organisation (Robert, 2002). It requires a change in behaviours of the individuals of the organisation, which for many public sector managers and employees this creates legitimate fears. These psychological barriers can limit the appetite for implementation of performance measurement systems. Political Cultural Organisational - Managerial Psychological Figure 1 : Diagram depicting overlapping Barriers to implementation of Performance Management. S. Bonner 3. Methodology This research adopts a Critical Realist Paradigm which assumes that our ability to objectively know reality is imperfect, and that claims about reality must be subject to wide critical examination to achieve the best understanding of the reality possible (Cohen & Crabtree 2006). The Critical Realists Paradigm sits between the positivist and interpretivist paradigms, as it use methodological strategies which combines qualitative data to produce more credible or rigorous qualitative research. These strategies can be implemented in ways that allow the researcher to develop a 18

19 richer and more complete understanding of the culture, social setting, event (reality) that they are investigating. The typical methodologies of a critical realist paradigm include: A combination of qualitative and quantitative methods. Research that is conducted in more natural settings and more situational or contextual data is collected. Incorporating methods to elicit participant s ways of knowing and seeing (interview, observation, text). Research designs provide opportunities for discovery (emergent knowledge) as opposed to operating by testing a priori hypotheses. (Bryman, 2003) A case study methodology was applied, focusing on the performance measurement data from the PIF and BASS measurement activities. The data was analysed at a system level using secondary data sources obtained from the Treasury s data repositories. Triangulation of the quantitative data with qualitative interview data identified emergent themes, which were cross referenced with the literature review findings to create a new framework for future research. 3.1 Research Methods The case study research method was the research strategy used to analyse performance management, across the NZ public sector. The case study approach requires a chain of evidence as discussed by Yin, (1989), by using a combination of both qualitative and quantitative methods. These research methods are detailed in the following sections. 19

20 3.1.1 The Chain of Evidence The nature of the data collected in the research was both qualitative and quantitative, therefore the chain of evidence framework was followed. This method provided triangulation of multiple sources of evidence to produce rich, comprehensive and well developed information (Yin, 2000). The method taken utilised five, of the six elements of the chain of evidence, as depicted in the diagram below. Documents Records Interviews Observation Survey Research Log Reports Publications Data Repositories Semi- Structured Contextual Interviews Observation of organisation Codify data Figure 1: Adaption of Chain of Evidence (Yin 1989) Documents and Records - Quantitative measurement data recorded and stored data repositories and spreadsheets. Secondary data includes comprehensive reports, information related to the PIF and BASS PM Programmes, and relevant literature identified through the literature review. Interviews and Observations Qualitative data obtained through respondent interviews and observation, and Research Log - A research log will be kept to codify the data collected 20

21 3.1.2 Quantitative Data: Quantitative data includes data records, reports and published documents and were accessed from data repositories which are stored at the New Zealand Treasury. This data focused on two performance measurement studies; the Performance Improvement Framework (PIF Review) and the Administrative and Support Services Benchmarking (BASS) exercise. Secondary Quantitative Treasury comparative aggregated data benchmark data was included a detail of this dataset is outlined in Appendix A. These studies are detailed further below: Administrative and Support Services Benchmarking Data (BASS). The BASS results from the last four reporting years (2009/10, 2010/11, 2011/12 and 2012/13) was analysed at a system level to asses back office performance measurement across the state sector. The Performance Improvement framework (PIF report) The PIF data collated by the Central Agencies of the individual agency reviews was relied upon. The individual reviews had been collated, aggregated and summarised, to tell a system story and to identify whether the PIF promotes transparency of the public sector and provides a view of what is currently being done well and what systems can be improved. The May 2011 and September 2012 reviews were utilised. Data post 2012 was not available. It is important to note that the PIF reviews were not set on a cyclic basis, rather they were undertaken in an ad hoc manner, generally upon request of a Chief Executive, or coincide with the Chief Executive Appointment rounds every 3-5 years Qualitative Data: 21

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