Further Aspects of Performance Management

Not for Profit Organisation

1. Not for profit organisations: One possible definition of a not for profit seeking organisation is that its first objective is to be involved in non-loss operations to cover its costs, profits only being made as a means to an end.

A not for profit organisation is '… an organisation whose attainment of its prime goal is not assessed by economic measures. However, in pursuit of that goal it may undertake profit-making activities.'    (Bois)

This may involve a number of different kinds of organisation with, for example, differing legal status – charities, statutory bodies offering public transport or the provision of such services as leisure, health or public utilities including water or road maintenance.

1.1 Objectives and not for profit organisations: A major problem with many not for profit organisations, particularly government bodies, is that it is extremely difficult to define their objectives at all. In addition, they tend to have multiple objectives, so that even if they could all be clearly identified it is impossible to say which is the overriding objective.

More general objectives for not for profit organisations include:

• Surplus maximization (equivalent to profit maximization)

• Revenue maximization (as for a commercial business)

• Usage maximization (as in leisure center swimming pool usage)

• Usage targeting (matching the capacity available, as in the NHS)

• Full/partial cost recovery (minimizing subsidy)

• Budget maximization (maximizing what is offered)

• Producer satisfaction maximization (satisfying the wants of staff and volunteers)

• Client satisfaction maximization (the police generating the support of the public)

It is difficult to judge whether non-quantifiable objectives have been met. For example, assessing whether a charity has improved the situation of those benefiting from its activities is difficult to research. Statistics related to product mix, financial resources, size of budgets, number of employees, number of volunteers, number of customers serviced and number and location of facilities are all useful for this task.

2. Performance measurement in not for profit organisations: Commercial organisations generally have market competition and the profit motive to guide the process of managing resources economically, efficiently and effectively. However, not for profit organisations cannot by definition be judged by profitability and do not generally have to be successful against competition, so other methods of assessing performance have to be used.

You might consider (partly depending on your political point of view) that it is therefore not necessary to measure performance in not for profit organisations. However, few would argue that such bodies should be given whatever amount of money they say they need to pursue their aims, with no check on whether it is spent well or badly.

(a) Without information about what is being achieved (outputs) and what it is costing (inputs) it is impossible to make efficient resource allocations. These allocation decisions rely on a range of performance measures which, if unavailable, may lead managers to allocate resources based on subjective judgement, personal whim or in response to political pressure.

(b) Without performance measures, managers will not know the extent to which operations are contributing to effectiveness and efficiency; when diagnostic interventions are necessary; how the performance of their organisation compares with similar units elsewhere; and how their performance has changed over time.

(c) Government may require performance information to decide how much to spend in the public sector and where within the sector it should be allocated. In particular, they will be interested to know the results that may be achieved as a consequence of a particular level of funding, or to decide whether or not a service could be delivered more effectively and efficiently in the private sector. Likewise, people who provide funds for other kinds of not for profit organisations are entitled to know whether their money is being put to good use.

2.1 How can performance be measured?

Performance is judged in terms of inputs and outputs, hence the value for money criteria of economy, efficiency and effectiveness.

Performance is usually judged in terms of inputs and outputs and this ties in with the 'value for money' criteria that are often used to assess not for profit organisations.

• Economy (spending money frugally)

• Efficiency (getting out as much as possible for what goes in)

• Effectiveness (getting done, by means of the above, what was supposed to be done)

More formal definitions are as follows.

Key Term: Effectiveness is the relationship between an organisation's outputs and its objectives.

Efficiency is the relationship between inputs and outputs.

Economy is attaining the appropriate quantity and quality of inputs at the lowest cost.

2.2 Problems with performance measurement of not for profit organisations

(a) Multiple objectives: As we have said, they tend to have multiple objectives, so that even if they can all be clearly identified it is impossible to say which is the overriding objective.

(b) Measuring outputs: Outputs can seldom be measured in a way that is generally agreed to be meaningful. (For example, are good exam results alone an adequate measure of the quality of teaching?) Data collection can be problematic. For example, unreported crimes are not included in data used to measure the performance of a police force.

(c) Lack of profit measure: If an organisation is not expected to make a profit, or if it has no sales, indicators such as ROI and RI are meaningless.

(d) Nature of service provided: Many not for profit organisations provide services for which it is difficult to define a cost unit. For example, what is the cost unit for a local fire service? This problem does exist for commercial service providers but problems of performance measurement are made simple because profit can be used.

(e) Financial constraints: Although every organisation operates under financial constraints, these are more pronounced in not for profit organisations. For instance, a commercial organisation's borrowing power is effectively limited by managerial prudence and the willingness of lenders to lend, but a local authority's ability to raise finance (whether by borrowing or via local taxes) is subject to strict control by central government.

(f) Political, social and legal considerations

(i) Unlike commercial organisations, public sector organisations are subject to strong political influences. Local authorities, for example, have to carry out central government's policies as well as their own (possibly conflicting) policies.

(ii) The public may have higher expectations of public sector organisations than commercial organisations. A decision to close a local hospital in an effort to save costs, for example, is likely to be less acceptable to the public than the closure of a factory for the same reason.

(iii) The performance indicators of public sector organisations are subject to far more onerous legal requirements than those of private sector organisations.

(iv) While profit-seeking organisations are unlikely in the long term to continue services making a negative contribution, not for profit organisations may be required to offer a range of services, even if some are uneconomical.

2.3 Solutions

2.3.1 Inputs: Performance can be judged in terms of inputs. This is very common in everyday life. If somebody tells you that their suit cost $750, you would generally conclude that it was an extremely well designed and good quality suit, even if you did not think so when you first saw it. The drawback is that you might also conclude that the person wearing the suit had been cheated or was a fool, or you may happen to be of the opinion that no piece of clothing is worth $750. So it is with the inputs and outputs of not for profit organisations.

2.3.2 Judgement: A second possibility is to accept that performance measurement must to some extent be subjective. Judgements can be made by experts in that particular not for profit activity or by the persons who fund the activity.

2.3.3 Comparisons: We have said that most not for profit organisations do not face competition but this does not mean that all are unique. Bodies like local governments, health services, and so on can judge their performance against each other and against the historical results of their predecessors. And, since they are not competing with each other, there is less of a problem with confidentiality and so benchmarking is easier.

In practice, benchmarking usually encompasses:

• Regularly comparing aspects of performance (functions or processes) with best practitioners

• Identifying gaps in performance

• Seeking fresh approaches to bring about improvements in performance

• Following through with implementing improvements

• Following up by monitoring progress and reviewing the benefits

2.3.4 Quantitative measures: Unit cost measurements like 'cost per patient day' or 'cost of borrowing one library book' can fairly easily be established to allow organisations to assess whether they are doing better or worse than their counterparts.

3. Value for money: Public sector organisations are now under considerable pressure to prove that they operate economically, efficiently and effectively, and are encouraged from many sources to draw up action plans to achieve value for money as part of the continuing process of good management.

Although much has been written about value for money (VFM), there is no great mystique about the concept. The term is common in everyday speech and so is the idea.

Value for money means providing a service in a way which is economical, efficient and effective.

To drive the point home, think of a bottle of Fairy Liquid. If we believe the advertising, Fairy is good 'value for money' because it washes half as many plates again as any other washing up liquid. Bottle for bottle it may be more expensive, but plate for plate it is cheaper. Not only this, but Fairy gets plates 'squeaky' clean. To summarise, Fairy gives us VFM because it exhibits the following characteristics.

• Economy (more clean plates per pound)

• Efficiency (more clean plates per squirt)

• Effectiveness (plates as clean as they should be)

 (a) Management should carry out performance reviews as a regular feature of their control responsibilities.

(b) Independent assessments of management performance can be carried out by 'outsiders', perhaps an internal audit department, as value for money audits (VFM audits).

Value for money is important whatever level of expenditure is being considered. Negatively it may be seen as an approach to spreading costs in public expenditure fairly across services but positively it is necessary to ensure that the desired impact is achieved with the minimum use of resources.

3.1 Economy: Economy is concerned with the cost of inputs, and it is achieved by obtaining those inputs at the lowest acceptable cost. Economy does not mean straightforward cost cutting, because resources that are of a suitable quality to provide the service to the desired standard must be acquired. Cost cutting should not sacrifice quality to the extent that service standards fall to an unacceptable level. Economising by buying poor quality materials, labour or equipment is a 'false economy'.

3.2   Efficiency: Efficiency means the following.

(a) Maximising output for a given input; for example, maximising the number of transactions handled per employee or per $1 spent.

(b) Achieving the minimum input for a given output. For example, a government department may be required to pay unemployment benefit to millions of people. Efficiency will be achieved by making these payments with the minimum labour and computer time.

3.3 Effectiveness: Effectiveness means ensuring that the outputs of a service or programme have the desired impacts; in other words, finding out whether they succeed in achieving objectives and, if so, to what extent.

3.4 Studying and measuring the three Es: Economy, efficiency and effectiveness can be studied and measured with reference to the following.

(a) Inputs

(i) Money

(ii) Resources – the labor, materials, time, and so on consumed, and their cost

For example, a VFM audit into state secondary education would look at the efficiency and economy of the use of resources for education (the use of schoolteachers, school buildings, equipment, cash) and whether the resources are being used for their purpose: what is the pupil/teacher ratio and are trained teachers being fully used to teach the subjects they have been trained for?

(b) Outputs; in other words, the results of an activity, measurable as the services actually produced, and the quality of the services.

In the case of a VFM audit of secondary education, outputs would be measured as the number of pupils taught and the number of subjects taught per pupil; how many examination papers are taken and what is the pass rate; what proportion of students go on to further education at a university or college.

(c) Impacts, which are the effects that the outputs of an activity or programme have in terms of achieving policy objectives.

Policy objectives might be to provide a minimum level of education for all children up to the age of 16, and to make education relevant for the children's future jobs and careers. This might be measured by the ratio of jobs vacant to unemployed school leavers. A VFM audit could assess to what extent this objective is being achieved.

As another example from education, suppose that there is a programme to build a new school in an area. The inputs would be the costs of building the school, and the resources used up; the outputs would be the school building itself; and the impacts would be the effect that the new school has on education in the area it serves.