Financially testing times in the public sector

This is a testing time for any organisation. Picture: PA

In THE current financial climate, with the requirement for stringent cost-cutting a familiar reality, public sector organisations must take bold steps to ensure they maintain optimum efficiency in the face of tight budget constraints. This is a testing time for any organisation, requiring a keen understanding of the drivers of cost, risk and value. Without this knowledge, savings can soon prove to be false economies and organisations risk damaging the competencies they need for the longer term and their ability to recover from the recent recession.

However, performance management in the public sector is a challenge because of the multiple stakeholder requirements.

In many cases, the funders are different from the intended beneficiaries of public services and this can cause reporting complications. For example, the Royal Botanic Garden Edinburgh (RBGE) is principally funded by the Scottish Government but it is scientists across the world that benefit from our expertise. Most public sector accounting relies on knowledge of input costs, but they do not necessarily reflect the purposes to which the money is being directed, but simply to the organisational structures and related budget management processes.

To overcome some of these deficiencies I developed a strategic objective costing model with Professor Falconer Mitchell, of the University of Edinburgh Business School, to support RBGE in its strategic planning activity.

This was done by matching costs to each of its strategic objectives. Thus, a model to calculate the cost of achieving strategic objectives was created and is now in operation. By clear alignment of activities to outputs and outcomes – measures of the results of activity – which gauge the achievement of the desired purpose: the benefits accruing to the intended recipient of the activity and applying the costs of performing the tasks that contribute to the outputs and, thereafter, to the relevant outcome, an outcome cost can be derived. The revised outcome costing model is now in operation at the RBGE.

An important consideration is how to determine whether an organisation is cost-effective and delivering value for money. Caution must be exercised to ensure that organisations do not simply reduce the input costs in the belief that there will be an improvement in cost-effectiveness. Cost-effectiveness needs to be viewed as a ratio of outcomes produced to resources employed. Using a cost analysis model only would inform an organisation of which approach to delivering outcomes is the cheapest, whereas cost-effectiveness analysis will indicate which course of action returns the best value for a given resource allocation. Consequently, what this means is that the decision-makers are being asked to consider the rate of change (increase or decrease) of costs compared to the rate of change in outcomes. Accenture’s public service value model identified this requirement a number of years ago. If outcome delivery (measured by the indicators) increases at a faster rate than the cost of the resources allocated, or if resources costs decrease at a faster rate than the outcomes delivery reduces then cost-effectiveness increases. Obviously, the converse is true. However, the Accenture model relied on financial information abstracted from the annual accounts, which of course, are input-based and do not necessarily reflect the effort expended on delivering the outcomes. The outcome costing model does relate to relevant costs.

We also know that an outcome can have several measures or indicators attributed to it. If a more in-depth analysis is performed, employing outcome costs and data relating to the individual behaviours of each of the measures/indicators, then better-informed decisions can be taken by management to reallocate effort to the appropriate activities to produce a better outcome overall. Consequently, improved cost-effectiveness can be achieved and will deliver better value for money.

I have also proposed a framework that can bring together public bodies working towards achieving the Scottish Government’s national outcomes. Nine organisations have started to work on the concept, but it is too early to expect results. The government of Malaysia sent over two ministry of finance officials to work with me to help them develop outcome costing models for their national performance management framework. The ordnance survey in the Republic of Ireland was also interested in the RBGE model, and is currently working on the project, while Scottish Government officials are considering the outcome costing application to determine how best it might be adopted on a wider base in Scotland.

• Dr Alasdair Macnab FCMA CGMA is director of corporate services, the Royal Botanic Garden Edinburgh www.rbge.org.uk