Practicing what we preach: measuring the performance of the finance office.

• Author: Kelly, Janet M.
• Position: Tips for public finance managers on how to evaluate employee, department performance

The finance office is usually where performance data is collected, analyzed, and prepared for decision-making purposes and for presentation in the annual budget. Finance office staff possesses the kinds of skills that a performance measurement system needs to flourish, including the ability to summarize departmental performance goals and achievements for budget deliberations. They often can help department managers--even reluctant ones--formulate appropriate measures and develop a data collection system to monitor them. Many finance shops audit departmental performance measures for relevance and accuracy. So why is it that most financial managers find reliable, meaningful performance measures for their own offices so hard to come by?

Many finance and budget offices are responsible for their government's performance measurement program. Ironically they often have difficulty collecting and reporting performance information on themselves.

To be fair to public managers everywhere--especially the reluctant ones--part of the problem is that chief financial officers understand the details of the finance function the way, say, police chiefs understand the details of law enforcement. The crime clearance rate seems like a fine outcome measure to the CFO, but the police chief knows that it is a function of a number of different factors, only some of which he or she can control. Similarly, the police chief thinks the city's bond rating is a fine outcome measure for the finance office, but the CFO knows that it too is a function of a number of different factors, only a few of which he or she can control.

Different performance measures are appropriate for different audiences. For example, clearance rates and bond ratings are essential for external audiences. For police chiefs and CFOs, they are a bridge between what matters for managerial purposes and what is important to report to citizens and the financial markets. However, for internal managerial purposes, the police chief and the CFO need to break the larger measure into smaller components to monitor trends that may influence the decisions they make about how to deploy scarce resources. For example, the police chief would need to know what kinds of crimes are happening in what sectors of the city and at what times of day. The CFO would need to know debt service as a percent of general expenditures for the last five years.

Reporting financial performance to external audiences involves some risks (see sidebar next page). External reporting is necessary and appropriate, despite the fact that it may encompass factors financial managers cannot control. Collecting and monitoring components of financial management for internal decision making also carries some risks, though these risks are different from those associated with external reporting. Not every performance measure that is collected for internal decision making should be reported externally, lest employees confuse outputs with outcomes. For example, the volume and cost per purchase order processed should be monitored, but the goal of the purchasing unit is not just to increase volume and decrease cost. If volume and cost are reported, employees might undervalue important verification activities for the sake of improving their "numbers." Managers must recognize the possibility of conflicting goals and take care not to let performance measures become proxy goals for organizat ional units.

We selected five common external performance indicators to review. They range from low to high control, and are complicated by the tension between the public's right to know how well their finance office is performing and the CFO's need to refrain from reporting information that reflects poorly on elected officials. These measures include bond ratings, audit findings, revenue forecasting, fund balance, and debt load...