Seven Steps for Creating a Bottom Line in the Government

The Challenge

Absence of an objective, credible and meaningful bottom line for government agencies is arguably the single biggest challenge in managing government. Most of the management problems we observe in government agencies are ‘symptoms’ resulting from the missing bottom line in this sector.

Governments around the world seem very busy “reforming” and “modernizing” their agencies. However, without an acceptable yardstick to measure the outcome of these effort, this process of reforming agencies seems to have no end in sight. This process-oriented approach to the reform of the government is akin to giving medicines to a patient without a sound diagnostics system that can inform the doctor whether the patient’s health is improving or if it is, in fact, being harmed. Without a clear and agreed bottom line, “good” performance of agencies cannot be distinguished from “bad,” and managers cannot be rewarded based on performance; consequently, inefficiency results.

Indeed, it is hard, if not impossible, to imagine how anyone could manage a private sector company without any agreed financial framework or a reliable accounting system which measures the bottom line — such as net profit or earnings per share. Managing in government without a clear bottom line is like playing a game of soccer without goal posts. Initially, players might continue to exhibit their old skills through professional pride or force of habit. Eventually, however, new forms of behavior will emerge. For example, selfish show-boating will begin to yield rewards in crowd applause without incurring the cost of reduced teamwork and scoring. The coach will have little reason not to indulge his whims and play his favorites regardless of their skills.

The Problem

Indeed, the difficulty in specifying the bottom line in the government is genuine. Typically, most government agencies are faced with multiple principals who have multiple and, often, conflicting objectives. Everyone in a country feels they have the right to supervise the government agencies. Not only are they questioned by the auditor general, ministry of finance, treasury, courts, Parliament (Congress), Prime Minister / President’s Office, but also by the media, vigilance agencies, investigating agencies and nonprofits. To be sure, a listed company in the private sector also has thousands of shareholders (multiple principals). The difference between the two is whereas in the private company all shareholders have the same objective (profitability), in the case of a government agency principals have different objectives which are often conflicting objectives (equity versus efficiency, political versus non-political objectives).

The Solution

The following seven-step process has been successfully used by many governments around the world to create a bottom line for government agencies. Four steps are to be taken at the beginning of the year and three steps at the end of the year.

Various institutional arrangements have been used by governments to implement these seen steps. In parliamentary systems, successful examples include Prime Minister’s Delivery Unit, Performance Management Division in Prime Minister’s Office, and Cabinet Secretariat. In presidential systems, most of the successful initiatives are driven essentially from the President’s office. In short, creating and monitoring the government’s bottom line is a top management function. More on this in another column.

Steps to be taken At the Beginning of the Year

• STEP 1: Specify the long-term Vision for the agency

A vision specifies the final destination for the agency. It shows where we want the agency to be in a few years’ time. It is the big picture of what the leadership wants the government agency to look like in the future.

• STEP 2: Specify the Objectives that will help achieve the vision

Objectives specify how to get to the final destination captured in the vision statement. They should be linked and derived from the departmental vision.

• STEP 3: Prioritize Key Objectives and corresponding KPIs

While many agencies take the first two steps mentioned above, they flounder when it come to the next steps. As mentioned in my earlier blog post, objectives and corresponding Key Performance Indicators (KPIs) should be prioritized and specific weights attached to these objectives. As depicted in Table 1 (Column 3), these weights must add up to 100 percent.

Table 1: Specifying the Bottom Line in Government

• STEP 4: Agree on How to Measure Deviations from Target

Instead of a single-point target, we need to agree on the entire range performance (Table 1, Columns 4-8). This scale of criteria values allows us to accurately measure performance at the end of the year. Without such clear understanding, performance measurement remains subjective. A document incorporating the first four steps is referred to as a Performance Agreement (for an actual example for the Indian government’s Agriculture and Cooperation Department click here). New Zealand as the pioneer in introducing this innovation as part of the New Public Management Revolution in 1980s and Government Performance and Results Act of 1993 made Performance Agreements a mandatory requirement for U.S. Government agencies.

Steps to be taken at the End of the Year

Once an agreement has been reached on steps 1-4, government agencies should be allowed sufficient operational freedom to achieve agreed targets. Couple this ‘accountability’ with appropriate ‘autonomy.’ This is the essence of Management by Objectives (MBO). At the end of the year, government agencies submit their achievements against the targets to the designate authority and we calculate their bottom line achievement as follows (Steps five through seven).

• STEP 5: Calculate Raw Achievement Score for Each KPI

By comparing actual achievement at the end of the year with the range of criteria values agreed at the beginning of the year, we can calculate the precise raw score for each KPI (Table 1, Columns 9-10).

• STEP 6: Calculate the Weighted Raw Score for Each KPI

Multiply the Raw Score for each KPI with the corresponding weight for that Raw Score (Table1, Column 11).

• STEP 7: Calculate the Composite Performance Score – The Bottom Line

Add up all the Weighted Raw Scores to get the Composite Score – The Bottom Line. For example, in Table 1 this number is 81.50 percent. It measures the degree to which a government agency was able to achieve agreed upon objectives.

Significance of the Bottom Line

This Bottom Line is powerful because the Composite Score:

• Incorporates government priorities.
• Is a comprehensive measure of all aspects of departmental performance – quantitative, qualitative, static, dynamic, short-term and long-term.
• Allows benchmark competition among agencies (research shows that competition is a key source of efficiency). See an example here.
• Is a necessary condition to implement an effective performance incentive system in government.

Note: This article first appeared in PATimes, published by the American Society for Public Administration, and is republished here with permission.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net