Activity based management and performance measurement systems.

• Author: Gearhart, Jon

Advanced capabilities associated With modern enterprise financial systems now provide a vehicle by which governments can realize the goals of measuring performance and capturing costs of core business activities. The author describes the impact of such systems on public-sector decision-making capabilities.

More than ever before, governments are using technology to enhance organizational efficiency by either automation or cost reduction. Technology and business process reengineering are at the center of efficiency initiatives. As government technology utilization continues to evolve, effectiveness is becoming the dominant factor surrounding the organization. Taxpayers are looking for government organizations to leverage technology as a way to formulate and execute better business strategies. Efficiency is about "doing things right" and effectiveness is about "doing the right things." From a financial management perspective, the demands of efficiency and effectiveness are quite different. Whereas efficiency demands doing things more inexpensively, effectiveness demands accomplishing what is intended and providing services with fewer resources.

Traditional Accounting Systems

The traditional government accounting system was developed in a world where program costs and revenues were tracked easily. As the nature of business changed and direct costs became harder to tie directly to programs, management dissatisfaction developed. Rather than supplying managers with information necessary for forward-looking action, with an emphasis mostly on financial control, traditional systems chronicled past data for citizens, regulators, and other parties. As shrinking resources and increased productivity demands placed greater pressures on accountability, managers needed to know which activities delivered the greatest benefit. Without this detailed information, managers could only guess at the program's real efficiency in performing service. Choosing which programs to fund, which services to alter, even which processes to provide at all was driven by instinct rather than information. For reporting overall budget information, traditional accounting systems served their purpose. But for delivering the information necessary to better manage an organization, traditional accounting systems have deficiencies. To gain a better understanding of the contribution of the next generation of financial systems, some of the other deficiencies of traditional accounting systems are described below.

Limited Capability. The traditional approach to cost accounting was adequate when processes were not complicated. However, technology investments and the expenses associated with increased overhead, increased services, complex processes, and changing roles of government have significantly complicated the cost profile of governmental organizations. As a result, costs that traditionally had been considered overhead now represent activities critical to the delivery of government services and account for a majority of expenses. It is increasingly difficult to associate these costs directly to individual programs or customers for results analysis purposes.

Increasing Complexity. Organizations that produce a limited number of services or conduct business with a limited number of customers find it relatively easy to accurately report costs using standard cost accounting. However, when the volume of products and customers increases so does the overall complexity of the operation. For instance, costs from one activity may be incurred at different rates depending on the customer. Traditional cost accounting has had difficulty tracking cost variances associated with different customers.

Data Retrieval Limitations. Traditional cost accounting systems can easily convey information about overall costs. But because traditional cost accounting systems were developed to catalog costs, they cannot provide the level of detail needed for the effective management of today's complex organizations. As a result, rather than performing ad hoc inquiries as the need arises, decision makers must conduct special queries to...