Public Sector Reform – With Today’s Tools We Can Make It Work

Public sector reform, or ‘reinventing government’, has been on the agendas of many governments since the early 1990s, but it is receiving a renewed emphasis today.

The New Public Management (NPM) was always clear about:

  • approaches to accountability at the top of public organisations;
  • flexibility and initiative and responsibility for civil servants;
  • structures and institutions that are incentive rather than rule driven, many of which may be profit-making or non-governmental;
  • or client focus; and
  • concentrating on quantitatively measured outputs or outcomes.

While the justification for the reforms was founded by the need to

  • make the delivery of public services manageable and accountable,
  • avoid waste and reduce costs,
  • encourage competition and customer responsiveness,
  • apply proven private sector practices and to focus on results,

The main components of the reform process were at the time and are still today:

  • Budgeting for outputs rather than inputs,
  • of service delivery from advisory and regulatory functions,
  • for managers to spend their operating budgets as they deem fit,
  • like relationships between politics as purchasers of goods and services, and departments and other entities as suppliers,
  • separation of audited financials and performance reporting under NPM.

All this was supposed to lead towards an environment of fewer procedural constraints, more discretionary powers to managing budgets in a better manner and to performance-related pay.

In many countries world-wide these basic concept are enshrined in law, but where do we really stand today and why are these discussions still on-going?

Many politicians and public administrators say that, by 2011, it will be difficult to justify a structure of government and provision of public services in the same manner which has been using since decades. This is largely caused by the availability of advanced technologies and Enterprise Resource Planning-Systems (ERP) to enable a transformation of the public sector structure and to rebuild government’s relationships with citizen and business customers. Successfully transforming public policy using IT will help minimize the political and financial repercussions of failed implementations, meet the increasing expectations of citizens in modern democracies, and shape the public sector of the future.

Public sector reform initiatives therefore need to reinforce competitive ERP-solutions, upon which businesses increasingly depend to be competitive, because advanced technology improves efficiency and lowers costs.

However, if the ERP-System has not been set-up with the objective to deliver management information relevant to a public service environment, even the most sophisticated ERP-System cannot deliver the required answers.

Usually management accounting tools, in particular cost and performance accounting, would be able to extract the required information from the respective ERP system. However new public management techniques and practices are mainly drawn from the private sector. Unfortunately the management accounting concepts in a public service environment need to consider other prerequisites than one would usually apply in the private sector. This applies in particular to:

  • cost structure: in a public administration controllable variable cost components do hardly exist, virtually all costs are fixed;
  • responsibility for administrative overheads or internal cost allocations (e.g. from HR or Finance Department, etc.): they are hardly influenceable by the other organisational units. This fact requires a very coordinated pricing scheme combined with a reporting system adapted to the needs of the different hierarchies.
  • personal representation: there are special requirements for treatment and evaluation of employee performance.

In summary, management accounting for organizational units or institutions of the public administration shall be designed and guided by the following principles:

  • Management accounting shall be based on meaningful, logical figures which need to be transferred into coherent – plain language – reports everybody can understand and utilize;
  • There is no one-size-fits-all costing method, the public sector offers multiple often complex nested services, which may need different costing methods; however they must integrate into one system;
  • Avoid fixed hierarchical relationships, but apply a process orientation allowing free cost allocations to reflect service delivery and performance linkages;
  • Do not calculate yourself to death, keep it easy and focus on the economically necessary and relevant information for management purposes;
  • Develop a reporting system to reflect the decision-making and responsibility-oriented structure of a public service environment – as they are different to the private sector;
  • Ensure the transferability to other areas, in other words: do not create “management accounting islands”.

All the building blocks are known and the systems are available; now the information requirements of the public sector have to be pieced together with what an ERP-System is actually able to deliver.