Finance Geek: Why Our Government Needs Performance Management

"Performance management" is an approach to running an organization that aims to optimize the use of its resources. It is an outgrowth of the concept of Peter Drucker's mid-20th century "management by objectives," which emphasizes measuring results against measurable goals rather than relying on gut feel. While there can be thousands of ways to measure results, performance management focuses on a limited set of the most important "key performance indicators," things that are most critical to an organization's ability to achieve its goals and strategic objectives.

Performance management has been adopted by the private sector in various forms, to various degrees and with varying success over the past two decades. It's beginning to catch on in government, but it must be adopted more aggressively and there ought to be a standard set of benchmarks that citizens can use to measure how well their governments are serving them and the efficiency and effectiveness with which they use their tax dollars.

As most of the developed world's economies grapple with fiscal stress, there is an ongoing debate in many countries at both a national and local level as to on how best to come to terms with existing deficits and the prospect of even higher spending needs in the future.

I have no interest in weighing in on what decisions should be made. I feel strongly, though, that voters have only limited information on which to make assessments. Just as Drucker wanted to make performance assessments more rational, I believe we can use numbers to make tax and spending debates more rational and less polemical. We need far more transparency in how federal, state and local governments account for the money they spend, the obligations they incur, the resources they command and (equally important) the results they achieve. To do this, we need accounting rules on par with what is demanded of public companies and we need a system of consistent metrics and scorecards to provide citizens with a complete and balanced assessment of how their institutions are performing.

To be sure, in the United States we've come a long way over the past 20 years in improving government accounting. Generally accepted accounting principles are applied more stringently to government entities and the Comprehensive Annual Financial Report (CAFR) has become a fixture of most government entities. Yet, there's vastly more to do. CAFRs remind me of 1950s-era bare-bones annual reports. Citizens should have more detailed information about government operations.

Pension obligations are finally being reported but in too many cases using assumptions that might get a CFO locked up for financial fraud under the Sarbanes-Oxley Act. Some states, counties and cities have their financial records available on line, but some (notably California) have only limited information. Moreover, it's not just the money that's important. It's impossible to judge how well our government bodies are performing without knowing about how this money is spent. How many of what things did the state, city or town buy? How many of them does it own or operate? What results did it obtain from them? Most important, how did that compare with other states, cities or towns just like it?

At the moment, one of the biggest obstacles to providing metrics to constituents is simply collecting the data. I know enough about the data environments in government entities not to be dismissive of the effort required. Still, it's not rocket science. Similarly, deciding on which metrics to use to gauge performance usually is one of the most difficult tasks in implementing scorecards in corporations. However, unlike private companies operating in wide range of businesses, basic public services are quite similar. Creating a comprehensive set of metrics won't happen overnight, but it should be possible to have usable a broad and deep set of public sector metrics in an open-source, open-ended taxonomy in just a few years.

Those resisting greater accountability in government for their use of resources can cite Peter Drucker's observation that we don't want to optimize the efficiency of government. He specifically cited the fire or police department as areas where efficiency was not the objective. That's a good point but only in the sense of focusing solely on efficiency (as many are wont to do). However, good government needs to balance efficiency and effectiveness objectives for our public institutions.

By right, citizens should know how well their institutions are performing both in terms of their results (say, specific crime rates and average response times by fire companies) and the resources they use to achieve them (for example, squad cars per 10,000 residents, people-hours paid per building permit issued, highway department budget per mile of paved road). This should be part of the CAFR, but from what I have observed, the CAFR discussion of results usually is a rote statement of financial facts, with few or any reasons given.

Measuring the relationship between resources and results provides a more reliable guide for good public policy than ad hominem arguments. If the schools are underperforming and the classroom instruction budget is sub-par, it may signal that increased classroom funding is in order. If the ratio of administrative to instructional employees in the school system is above average, or if fees paid to consultants are unusually high, it may indicate the need to shift funds, rather than raise taxes. If those metrics are below average, it makes a strong case for increasing the school budget.

We need to change how governments account for the money they spend. State and local budgets are Enron-esque in their opacity. The breadth, quality and timeliness of information that investors get from their companies is light years ahead of what government provides its citizens, who deserve no less. "Freedom of information" is a concept that should apply to fiscal as well as overtly political matters. Some progress has been made in overhauling accounting rules for government entities and some entities provide a wealth of detail. But far more needs to be done to ensure that all the necessary data is collected and accessible, and that interpretation follows well-established guidelines. Moreover, non-fiscal accounting data such as information about government facilities (e.g., miles of roads, maintenance facilities) and activities (police overtime hours as a percentage of total police hours worked) also must be readily accessible.

Those in favor of more government seem to think good intentions are good enough. Those that favor less government often base their opposition on philosophical grounds. Citizens are not well served by either argument. Politicians and bureaucrats need a better system of measurement to focus their attention on what must be accomplished. Citizens need better, reliable information to assess how well they are being served. We have the means to do this and a wealth of experience in the private sector to build on. All that is lacking the will and the focus to demand a system for improving the transparency and accountability of government entities for the resources they take from their citizens.