Benchmarking

Public sector organisations

Public sector organisations come in many shapes and forms. The most obvious examples are schools and hospitals, police forces and local transport providers, but there are many less visible organisations such as regulatory bodies. The objectives of public sector organisations are very different from those of commercial organisations, and this can make performance management more complicated. The following factors in particular differentiate public sector organisations from commercial:

1.    They have a broader group of stakeholders than commercial organisations. This can lead to greater conflicts. Commercial organisations are likely to be mainly concerned with shareholders, employees, customers and their lenders. Public sector organisations are likely to be interested in pleasing the providers of funding (the government), the users of the service and the taxpayer. In the case of schools, for example, parents would be happy to see more money spent on education – but, as taxpayers, they may not wish to pay more taxes.

2.    Customers do not pay directly for the services they receive, and there may be little relationship between the costs of providing the service and the amount it is used. Consider a subsidised bus service, for example. The daily costs of running the buses are likely to be largely fixed, and do not depend on the number of passengers using them – at least in the short term. This makes it harder to decide how much should be spent on the service.

3.    Many public sector organisations operate as monopoly providers. Even if customers are not happy with the service they receive, they cannot switch to an alternative supplier. In commercial organisations, this is generally not the case, and bad performance will lead to a loss of customers and, therefore, loss of funding.

4.    The output of public sector bodies is often difficult to measure. How do you determine how much work a police force has performed? Statistics such as the number of crimes reported may be used. If the police force is doing a good job however, and crime is falling, the number of crimes reported may fall. So the lower number of crimes reported would wrongly suggest that the police force is not working so hard.

There is a perception that performance in public sector organisations is poorer than in the private sector, both in terms of efficiency and quality of service.

Greater use of targets in public sector organisations

Since the early 1980s the governments of some countries – notably the UK,

Sweden, Australia and New Zealand – have undertaken reforms aimed at making public sector organisations become more accountable. These reforms

have been driven by the need to:

·           improve the overall efficiency and effectiveness of public expenditure

·           reduce overall levels of expenditure

·           improve accountability and transparency of the public sector

·           enhance the responsiveness of public sector organisations to the needs

·           of citizens.

Such reforms have been dubbed the ‘new public management’.

One of the key features of these reform programmes has been the increasing

use of performance measures and targets to evaluate all aspects of the performance of an organisation’s activities. Typically, objectives are identified based on the mission statement. Targets are set for each objective. Managers must explain any variances between actual performance and the targets.

The targets are normally based on some output of the organisation. Typical targets might be the number of patients treated by a doctor, or the number of passports issued by the passport issuing authority. Qualitative targets may also be used, such as the level of patient care, which could be measured using surveys of patients.

This highly rational approach to performance management has its roots in the

writings of Drucker and Argenti, who emphasised detailed planning and the use of quantified targets. They argued that this gives greater direction to the

management and staff of an organisation.

The use of and publication of targets also increases accountability. In the public sector, the managers are the agents, who act on behalf of the principal.

The principal would be the general public, although the role of principal is often played by the government on their behalf. Much discussion of accountability focuses on whether or not managers have acted ethically – ie have not stolen the funds provided to them, and can account for their use. An equally important aspect of accountability, however, is how well the agent has performed in terms of efficiency.

Linking reward schemes to targets

Performance-related pay schemes are usually introduced alongside the targets, whereby bonuses are paid if particular targets are achieved. In the UK, for example, the government introduced an incentive programme for doctors in

2004, whereby bonuses are awarded based on the achievement of 146 targets. These targets focus on a wide range of areas, including clinical care, practiceorganisation and patient satisfaction. The bonuses are on a sliding scale – so even if not all of the targets are achieved, some of the available bonus would be paid.

Having such reward schemes is designed to improve the motivation of the management and staff, and it is argued that this improves the overall performance of the organisation.

Difficulties of using targets in the public sector

The use of targets in the public sector is not without problems, however:

1.    The larger number of stakeholders makes it difficult to decide which metrics should be used. Often, governments focus on reducing costs. This has led to situations such as hospitals refusing to buy lifesaving medicines because they are too expensive, or police being removed from the beat to save money.

2.    There may be less of a direct link between effort and outcomes in the public sector. In a hospital, for example, mortality rates may depend on many factors that are outside of the control of the hospital. Individual targets may not be a fair measure of performance in such situations; however, using a range of targets may overcome these problems.

3.    It may be difficult to identify quantifiable outputs in the public sector. How does one measure the output of the local fire brigade, for example?

4.    If systems are implemented in a very rigid way, without giving consideration to local issues, or special situations relating to the organisations being measured, then this may lead to problems such as manipulation of data, tunnel vision, sub optimisation and so on.

5.    Many critics of targets in the public sector argue that their use has not resulted in lower costs or better quality of service. They claim that what has actually happened is that a higher portion of the organisation’s budget is spent on employing managers and accountants to set the targets and measure performance, and a lower portion has been spent on frontline services.

This final criticism does not appear to have been confirmed by the facts. In the

UK National Health Service (NHS), for example, the period from 1999 to 2009

saw a large rise in the use of targets. During this period, the average increase

in support staff was 3.6% per annum, while the average increase in total staff

was 3% per annum, according to statistics released by the NHS information

centre (www.ic.nhs.uk). There was clearly some increase in the portion of

budgets spent on managers, but hardly a significant increase.

Empirical evidence

It is extremely difficult to assess the impact of the use of targets in public sector organisations, due to the fact that it is difficult to assess what would have occurred had they not been introduced. Unlike scientific experiments, where there is a control experiment, no such control experiment exists in the public sector. In some situations, governments introduce pilot schemes in an attempt to gain some sort of comparison, but it is often difficult to get precise comparisons.

Another problem is that numerous changes have been made to the practices of setting and monitoring targets over the years, making the picture even less clear. Debate has largely focused on anecdotal evidence rather than on proper studies of the outcomes.

Studies into the impact of performance-related reward schemes are fairly few

and far between, but do appear to show a positive relationship between the use of performance-related pay and the performance of the staff of the organisation (5). While such studies have shown that individuals work harder, the impact on the provision of services overall is far from certain.

Use of benchmarking in public sector bodies

Benchmarking has also been used in many countries as a means of reducing

the perceived gap between the performance of public sector organisations and

their private sector counterparts, with the aim of improving the quality of

service, and ultimately saving the taxpayer’s money.

Benchmarking is where one organisation compares its performance in a

specific area with another organisation, the benchmark, to identify how much

room there is for improvement. It then attempts to implement practices similar

to the benchmark in an attempt to narrow the gap in performance.

The specific area for benchmarking could be a particular business processsuch as inventory control, or it could be a broader area such as “quality of customer service.” The benchmark could be another organisation, or it could be another department within the same organisation.

Seven-step approach to benchmarking

The consulting firm Kaiser Associates proposes a seven-step approach to

benchmarking as follows:

1.    Determine which areas or functions to benchmark. It would probably not be feasible to benchmark all functions at one time, so it is necessary to choose those activities where benchmarking can bring the greatest benefits to the organisation. This may be based on which activities offer the greatest scope for cost savings, or which are ‘key service differentiators’.

2.    Identify the performance indicators and performance drivers that will be measured during the benchmarking exercise.

3.    Select the organisations that will be used as the benchmark. 4. Measure the performance of the benchmark using the measures identified in step two above.

4.    Measure your own performance, and compare it to the benchmark to identify the gaps.

5.    Specify actions and programmes to close the gap. This involves analysing how the benchmark achieves superior performance, and identifying similar practices that could be adopted.

6.    Implement and monitor the actions and programmes. Monitoring should not be a one-off process, but should continue for a longer period after the benchmarking exercise.

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