Quattro Punti: Four Steps to Budgeting and Performance Management-Part II: Creating a Strategic Hierarchy and Defining Measures and Targets of Success Will Help You Manage for Results
Juszczak, Thad, The Public Manager
Budgeting and performance management (B&PM) is a tool for anyone interested in improving government agency performance. Performing effectively is about providing essential services to citizens to ensure their safety, health, and prosperity--their very lives!
In the Summer 2009 issue of The Public Manager, we began a review of the four steps (quattro punti) to B&PM. We examined the first two steps: 1) What are you doing and how are you doing it? and 2) How do you measure success? In the first step, we learned how to assemble a strategic hierarchy and then how to ascertain if it could actually work. In step two, we created performance measures and targets to determine if we were being successful. Next, because every organization needs resources, we have to establish how much it will cost to achieve success.
Terza Punto: How Much Will It Cost?
Discussions about cost in government organizations often revolve around efficiency (for example, minimizing time, effort, and cost). Efficiency is always an important question for a legislature that taxes citizens to get revenue. However, the true essence of B&PM is effectiveness--producing the expected results. It is a lot easier to be efficient than to be effective. Of course, the real trick is to be both effective and efficient.
Government organizations typically concern them-selves with two different sets of B&PM cost questions: How much will it cost to run this organization next year? and What will it cost to change the performance level?
The basic answer to the first question is relatively easy to calculate. The agency has various types of costs: labor, supplies, contracts, and systems. Labor usually drives much of an agency budget, and you can go back to your performance measures and targets to get budget inputs: number of patients expected; number of patients each doctor can see; or number of doctors and nurses. Most organizations also have last year's budget to use as a guide. With some pay raises and inflation estimates, it's relatively easy to calculate how much it will cost to run the organization next year, as long as there are no major changes, especially in planned performance levels.
However, if you want to make changes in planned performance levels from last year's budget, you need a different level of cost detail. Policy makers rarely want to know next year's cost of doing the same old thing. They want to make changes, and to do that effectively, they need to know the cost of performance change:
* What is the cost and savings of decreasing or in-creasing class size by one student?
* What is the cost of decreasing the infant mortality rate by 0.1 percent?
* What is the cost of reducing carbon emissions from agency buildings by 5 percent?
* What is the performance impact if we reduce last year's budget by 3 percent?
Most organizational cost structures are based on offices rather than programs because budgets are typically allocated organizationally. You give a budget to the director of the Office of Compliance because you hold the director responsible for that budget. However, the Office of Compliance may be involved in multiple programs, such as air compliance, water compliance, and toxic-substances compliance, and there are probably people in other offices who are also involved in these programs.
Organizations do not allocate budgets programmatically because organizations are set up to spend and manage budgets by office. You rarely give budgets to program managers when multiple offices contribute to the same program and the directors of those offices do not report to the program manager. Yet, results are achieved by programs rather than by offices.
Capturing Cost Data
To capture program-level cost data, organizations need to do some form of cost accounting. …