A performance management system accommodates the transformation from line item expenditures

The need to account for the strategic perspective comes into light as governments are currently faced with financial distress and enormous potential future burdens. As the relationship between governments and citizens is more conclusive than the relationship between private sector companies and customers, it is more urgent in the government context to comprehend the strategic perspective and performance sustainability to support decision-making processes.

The government is obliged with basic commitment to provide or to ensure the provision of merit goods and services to its citizens (Batley and Larbi, 2004), regardless of the future financial conditions or citizens’ ability and willingness to pay. The adoption of a strategic perspective in a performance management system would help to address the dynamic and unpredictability of problem in the public sector under the performance regime. As the performance cycle of policy and objective achievement in the public sector requires longer time to measure and manage, it has supported the shift from an incremental perspective of budget decision making to a strategic performance perspective

The requirement for an effective performance management system varies according to the characteristics of the budgetary context (Wildavsky, 1975). The framework in Table 3.4 provides an explanation for the need to move from incremental budgeting to flexible budgeting as resources decline and the problem becomes unpredictable. A flexible budget offers organizational flexibility at the level of individual department to cope with incremental change and at the level of the budgetary system as a whole to manage interdepartmental structural changes within the framework of efficiency and effectiveness.

Table 3.4 Budgetary contexts

Resource Problem

Predictable Unpredictable

Growing Incremental budgeting Supplementary budgeting

Declining Efficiency budgeting Flexibility budgeting

Source: Metcalfe, L. and Richards, S. (1993), Improving Public Management, European Institute of Public Administration.

This framework helps to isolate the strategic issues involved in assessing the appropriateness of the performance and accrual information to present and future budgetary problems. The

discussion about a flexible budget draws attention to the need to integrate performance and accrual information as such flexibility should be arranged according to the standardized performance and cost. It also extends the budget perspective into the strategic perspective as the organization should consider the strategic impact of flexibility.

The strategic perspective (multi-year estimates and a flexible budget) will positively influence the implementation of the accrual concept in a cash-based budgeting system by providing more flexibility in executing the line ministry and agency level of autonomy, as they are provided with lump sum appropriation and allowed to carry the budget over to the next fiscal year.

The strategic perspective will emphasize the significance of accrual accounting because it encourages the gap between cash and accrual accounting in a cash-based budgeting system.

Countries have previously dealt with relatively immaterial differences between cash-based and accrual-based numbers, as policy implementers tend to spend the budgeted amount according to the budget stipulations due to the lack of flexibility in the annual cash-based budgeting system.

A strategic perspective also highlights the significance of the cost concept. As performance regimes shift the measurement focus from expenditures to costs, a strategic perspective provides the required framework to redefine the cost calculation concept despite the accounting basis through the categorization of operating and capital spending. The strategic perspective redefines the accrual concept through the reconciliation between cash and accrual-based measurements, particularly in the calculation of costs. The categorization of operating and capital expenditures within the strategic perspective encourages the calculation and utilization of full cost information in resource allocation.

H2A

The categorization of operating and capital expenditure under the multi-year estimates/targets and a flexible budget positively influences the implementation of the cost concept despite the accounting basis.

The calculation and utilization method of cost information in resource allocation and performance evaluation is different according to each job order type and process type business process. A job order type business process calculates cost by each job (cost object) and evaluates each job based on the estimated costs. A process type business process calculates and evaluates cost according to standard costs. The ability of a performance management system to accommodate the type of business process will positively influence the utilization of cost information in resource allocation and performance evaluation.

The influence of the strategic perspective is different for each type of business process. A strategic perspective influences the job order type business process in terms of progress

achievement, while it influences the process type business process in terms of performance improvement.

H2B The transformation of rules (adoption of accrual systems) into routines (utilization of accrual information) is influenced by the utilization of cost information.

The focus of performance measurement on businesslike practices and cost cutting, in order to improve efficiency and effectiveness, runs the risk of implementing one-size-fits-all solutions for both businesslike and non-businesslike parts of the government. Although both would emphasize the evaluation of performance targets and costs to measure efficiency and the achievement of objective, different levels of businesslike-ness require distinct adjustments to the performance management system.

2.3. A performance management system accommodates the transformation from an annual to a strategic perspective by linking the accountability purpose to the managerial purpose (PDCA cycle)

Strategic planning is one of the most important budgeting frameworks for controlling public expenditures that contributes to transparency and accountability (Tanaka, 2003). The focus of a performance management system on annual budget accountability has run the risk of diverting the focus from the strategic managerial purpose and overlooking the mechanism to link accountability to the strategic managerial cycle in a performance management system, which could discourage the utilization of performance and accounting information.

A strategic performance perspective presumes that a budget decision should be considered with respect to the government’s priorities, multi-year estimates/targets, and a flexible budget. A budget decision should be set under the strategic review that aims to consider the appropriateness, efficiency, effectiveness and alignment of major clusters of programs with government priorities. Multi-year estimates are tied to specific and measurable performance targets, which form the basis of the annual planning and budgeting system. A strategic perspective will help to integrate the accountability focus into a larger managerial cycle.

H3A The ability of a performance management system to adapt to the strategic managerial framework (multi-year estimates/targets, a flexible budget and the link between performance evaluation, planning and budgeting) positively influences the utilization of performance and accrual (cost) information in the PDCA cycle and the link between processes.

The ambiguity of performance information is mainly driven by the inability of performance management to accommodate the strategic perspective of the business process, particularly in

linking performance evaluation, planning and budgeting. For performance information to be utilized effectively, a performance management system should strategically link the annual performance result (evaluation) with the strategic managerial (plan-do-control-action) cycle.

Introducing a performance management system without relating it to the strategic managerial framework is likely to impose added overhead costs on creating superfluous information flows without the benefit of utilization in decision making or changed behavior (Matheson and Kwon 2003).

2.3.1. Performance target setting and resource allocation

A performance management system adopted by the central government generally starts with the setting of the whole government’s strategic objectives, which are further translated into policies and programs, each with its respective performance targets. The objectives of policies and programs have long-term objectives that are translated into shorter-term policy implementation and service delivery goals. Consequently, the performance management system should link the performance targets in both policy making and implementation to ensure coherence between the two phases.

Performance budgeting is developed based on the concept of performance contracts and standard costs for performance, and this emphasizes the significance of linking performance targets with resources (cost). Resources are allocated based on the full cost of each cost object and on the performance targets by considering financial soundness. This practice enhances to the budgetary control by ensuring that the estimated cost reflects the performance target, and that the estimates and performance targets reflect the ongoing performance and full cost of the program annually and strategically.

Budget execution depends on the performance setting and resource allocation process. In the public sector, although it is said that reform has transformed the compliance culture to a performance-oriented culture, compliance is still important, but it is applied under the performance management framework. It highlights the significance of performance planning and budgeting to provide a performance-based framework for budget execution.

2.3.2. Performance measurement, evaluation and accountability

According to Scott (2003), governments can perform better when policy and management systems work properly under proper monitoring, reporting, and performance evaluation practices. The performance target is set in accordance with the government’s objective and by considering the performance result (evaluation) of the previous period. The utilization of performance information (performance evaluation) in strategic planning and resource allocation positively links the PDCA cycle and contributes to the development of a strategic perspective of

the performance management system.

The way to consider performance results as progress toward government objectives depends on the business process of the government. The job order type business process sets performance targets by matching performance results against objectives to fill the gap between actual achievement and performance targets. The process type business process sets standardized performance targets, and compares actual performance with performance target, with the objective of improving performance.

However, as linking performance evaluation to performance target setting remains questionable due to the characteristics of business processes, the objective of a performance evaluation is mainly to ensure annual budgetary accountability that evaluates the achievement of performance targets according to the plan and budget. As performance measurement and evaluation focus on annual accountability, the main objective is to provide information as to whether budget execution is conducted according to the performance target setting and resource allocation. The focus on accountability, however, runs the risk of overlooking the strategic managerial perspective.

A strategic perspective will contribute to the timeliness of performance and accounting information, as it is easier to measure and manage performance if the strategic plan is available for the purpose of evaluation and comparison. This prevents the performance information from being obsolete by the time it is measured due to the different time cycle between the planning and budgeting process and the performance measurement and evaluation process. The planning and budgeting process for the next fiscal year must commence before the end of the existing fiscal year, while the performance measurement and evaluation process must ordinarily wait until the end of the existing fiscal year.

H3B Performance evaluations by actors and stakeholders positively influence the utilization of performance and accrual (cost) information in strategic planning (setting of performance targets) and the resource allocation process.

Section 3. Data and methodology