A study on the criteria of internal transparency, efficiency and effectiveness in measuring local government performance

• DOI: http://doi.org/10.1111/faam.12176
• Date: 01 November 2018
• Published date: 01 November 2018
• Author: Kristian Mohr Røge,Niels Joseph Lennon

Received: 31 January 2017 Revised: 31 May2018 Accepted: 13 June 2018

DOI: 10.1111/faam.12176

ORIGINAL ARTICLE

A study on the criteria of internal transparency,

efficiency and effectiveness in measuring local

government performance

Kristian Mohr Røge1Niels Joseph Lennon2

1AarhusUniversity, Department of Management,

AarhusUniversity, Aarhus, Denmark

2Departmentof Business and Management,

AalborgUniversity, Aalborg, Denmark

Correspondence

NielsJoseph Lennon, Department of Business

andManagement, Aalborg University, Aalborg,

Denmark.

Email:njl@business.aau.dk

Abstract

Public managers perceive performance measurement as an indis-

pensable element of modernising the public sector in the quest to

achieve ‘more for less’,despite research showing that performance

measurement in the public sector is risky in terms of unexpected

and undesirable effects. Through a case study of the introduction

of a performance measurement system (PMS) in a Danish munici-

pality, our analysis focuses on how internal transparency unfolds in

terms of addressing performance measures and aligning them with

the criteria of efficiency and effectiveness. We conclude that there

are two main reasons the PMS fails to address the desired effects

in terms of modernising the municipality. First, an overarchingfocus

by top management on outcome measurement results in inattention

to the measurement of resource consumption and efficiencies. Sec-

ond, empowerment of lower-level managers in the formulation of

key performance indicators (KPIs) results in competence problems

related to PMS design. Therefore, many of the KPIs are designed as

milestone measures, chosen to constrain the influence of the PMS

on daily activities. These factors hinder the organisation's ability to

design KPIs that attribute costs to outputs and therefore render the

goal of internal transparency impossible to achieve for the munici-

pality.The consequence is a PMS that loses track of its very purpose

along with a false sense of security among top management regard-

ing the optimisation of scarce resources.

KEYWORDS

effectiveness, efficiency, performance measurement, public sector,

transparency

392 c

2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/faam FinancialAcc & Man. 2018;34:392–409.

RØGE ANDLENNON 393

1INTRODUCTION

For a long time, the public sector has been exposed to allegations of wastefulness and inefficiency (Modell, 2005).

As a consequence, ‘value for money’ has become an important, nontrivial aspect of local government management

(Arnaboldi, Lapsley, & Steccolini, 2015; Kloot & Martin, 2000), and performance measurement is now considered an

indispensable element in modernising local government entities (Bouckaert & Peters, 2002; Cuganesan, Guthrie, &

Vranic,2014; Fryer, Antony,& Ogden, 2009).

However,public sector performance measurement is not a new concept (Ridley & Simon, 1938; Simon, 1937). Since

Simon's seminal work (1937), performance measurement has been considered a tool enabling public managers to

answer the following questions: (1) How adequate and effective is our service performance? (2)How efficient are we in

providing these services? (Simon, 1937). Thus, public managers are interested in the factors that render public sector

organisations efficient or inefficient, as well as in the measures that inform the improvementof public sector efficiency.

The role of performance measurement in improving accountability, decision-making and, ultimately,public sector

performance is often taken for granted (OECD, 1994, 1997; Van Thiel & Leeuw, 2002). However, the literature on

performance measurement in the public sector is filled with conflicting opinions about its applicability (Johnsen &

Vakkuri, 2006; Modell, 2005; Poister & Streib, 1999). Empirical results have demonstrated that implementation of

performance measurement systems (PMS) in the public sector has not resulted in the expected improvementsin per-

formance, accountability,transparency and quality of services (Arnaboldi et al., 2015; Fryer et al., 2009; Hood & Dixon,

2015).

Some scholars haveargued that the inadequacy of performance measurement is due to an unresolved problem with

formulating performance measures (Bouckaert & Peters, 2002; Fryer et al., 2009; Lapsley,2009; Van Thiel & Leeuw,

2002). This problem is attributed to the lack of a single satisfactory overallmeasure of performance comparable to the

measurement of the financial performance of private organisations (Anthony & Young,1999) in combination with the

intangible nature of public services. Forpublic organisations, it is easy to measure how much work has been done – but

not how well it has been done, nor whether the particular work undertaken was appropriate to the desired end (Ridley

&Simon, 1937). As financial measures are unsuitable for measuring the performance of public organisations, Ridley and

Simon (1938) developed other criteria for the appraisal of public organisations, namely,performance measurements

intended to measure the attainment of objectives and the efficiency of doing so. These concerns later translated into

the performance measurement criteria of efficiency and effectiveness (Anthony,1965).

We aim to explore how the efficiency and effectiveness criteria relate to the inadequacy of PMS implementations

in public sector organisations; we argue that a measurement of these two criteria must be central for any public sec-

tor PMS to achieve strategic objectives while maintaining efficient resource consumption under financial constraints.

The efficiency and effectiveness criteria render the resource flow,from costs to outputs and outcome, transparent and

manageable (Anthony,1965; Hood, 1996; Vigoda-Gadot & Meiri, 2008). If a PMS fails to provide internal transparency

into resource consumption by outputs and outcomes, the system would in theory be unable to inform decision-making

aboutimprovements in organisational performance (Kaplan, 2001; Ridley & Simon, 1938; Simon, 1937). To explorethis,

we studied the implementation of a PMS in a Danish municipality from the first working document to the latest itera-

tion. We focused on the construction of keyperformance indicators (KPIs) and their ability to facilitate improvements

in organisational performance.

The paper contributes to the theory and practice of public sector performance measurement with insight into the

importance of the role of efficiency and effectiveness criteria and how they are designed in creating a functioning and

successful PMS. We illustrate that if the two criteria are not met, a PMS cannot create internal transparency about

the relationship between resource consumption and results. We therefore conclude that due to the particular formu-

lation of KPIs in this case, this PMS implementation lost track of its very purpose – namely,to direct actions and deci-

sions towards efficient and effective use of resources in the accomplishment of the municipality's strategic objectives.

The PMS therefore created a false sense of security among management with regard to the optimisation of scarce

resources.