Management Accounting Research, 2000, 11, 231251

doi: 10.1006/mare.2000.0130
Available online at http://www.idealibrary.com on

Strategic performance management:

A balanced approach to performance
management issues in local government

Louise Kloot* and John Martin

The drive for reform in the public sector worldwide has focussed attention on the
measurement of performance in public sector organizations. This is particularly true in
local government. Local government has traditionally been concerned with measuring
the delivery of primary objectives, or results, at the expense of secondary objectives, or
the determinants of organizational performance. Current strategic management literature
suggests that there should be a strong linkage between strategic plans and performance
measures. Kaplan and Nortons (1992) balanced scorecard and Fitzgerald et al.s (1991)
results and determinants framework can provide this linkage. This paper reports on research
into performance management systems in local government using the four dimensions of the
balanced scorecard: financial, community, internal business processes and innovation and
learning. It shows how the focus in this system of local government has been on the results of
council work, ie. financial performance and to a lesser extent on how the community views
performance. Local government performance measurement pays much less attention to the
determinants, or means of achieving long-term, sustained organizational improvement in
internal business processes, and innovation and learning. Whilst these issues are recognized
as important, there are few measurement processes in place to manage performance in
these areas. Strategic performance management demands an approach that recognizes the
importance of a focus on both results and the means of achieving these results. This paper
highlights a suggested framework for strategic and balanced local government performance
measurement.

c 2000 Academic Press

Key words: local government; performance measurement; strategic management.

Address for correspondence: Associate Professor Louise Kloot, Department of Accounting and Fi-
nance, Victoria University of Technology, PO Box 14428, Melbourne City, MC Vic 8001, Australia.
E-mail: louise.kloot@vu.edu.au
*Victoria University of Technology.
Queensland University of Technology.
Accepted 10 January 2000.

10445005/00/020231+21/$35.00/0

c 2000 Academic Press
232 L. Kloot and J. Martin

1. Introduction

Value for money has become an important aspect of local government management
and is one of the factors that have stimulated the spread of performance measurement
systems in local government (Palmer, 1993). Greater expectations of all levels of
government, with increased accountability to stakeholders and requirements for
increased efficiency and effectiveness in government operations, have also increased the
focus on performance measurement (Hood, 1995). Indeed, performance measurement
and program evaluation have been central to drives for a more efficient, effective and
accountable public sector (Guthrie and English, 1997).
Traditional performance measurement systems have concentrated on the develop-
ment of indicators largely relating to economy (inputs) and efficiency (costs) due to the
limited ability to measure effectiveness or outcomes in government organizations. This
traditional performance measurement has been much criticized due to the exclusion of
non-financial dimensions of performance from many sets of measures (see Ghobadian
and Ashworth, 1994, for a comment on the British experience, Atkinson et al., 1997, for
comment on the Canadian experience and Guthrie and English, 1997 for a comment
on the Australian experience).
The use of non-financial measures in addition to financial measures of performance
has been increasingly called for in both the for-profit and not-for-profit sectors
of the economy. For example, Emmanuel et al. (1990) argue that organizational
success is a multi-dimensional concept which changes both over time and between
stakeholders. Fitzgerald et al. (1991) suggest a performance model over six dimensions.
Two of the performance dimensions are the results of strategy: competitiveness and
financial success. The remaining four are determinants of the success of these strategies:
quality, flexibility, resource utilization and innovation. Similarly, Atkinson et al. (1997)
differentiate between primary objectives (and results) which are externally oriented and
concerned with measurable deliverables, and internally oriented secondary objectives
concerned with how services will be delivered.
In another similar model, Kaplan and Nortons (1992, 1996) balanced scorecard
argues for performance measurement over four dimensions of performance: financial,
customer satisfaction, internal business processes, and innovation and learning. Kaplan
and Norton effectively consider the three dimensions of quality, flexibility and resource
utilization in Fitzgerald et al.s 1991 model to be the single dimension of internal
business processes. Kaplan and Nortons dimensions can also be classified as results
(financial, customer) and determinants (internal business processes and innovation and
learning).
Ballantine et al. (1998) use Fitzgerald et al.s 1991 model to illustrate the links between
strategy and performance management. The linkage between strategy and performance
is the cornerstone of the Kaplan and Norton (1992) balanced scorecard and has been
acknowledged by Atkinson and McCrindell (1997) and Atkinson et al. (1997). When
strategic concerns are impounded into performance then management, rather than the
more limited concept of measurement, becomes the focus of performance. Performance
management is the process by which the organization integrates its performance with
its corporate and functional strategies and objectives (Bititci et al., 1997).
In the government sector, given that objectives are often stated in non-financial terms,
non-financial performance measures are needed as conventional financial reporting
will not fully capture performance (Guthrie and English, 1997). Guthrie and English
 Strategic Performance Management in Local Government 233

also suggest that in government, performance measurement is essential for choosing

between alternative strategies and prioritizing activities. The purpose of this paper is
to report on research examining how performance management systems incorporating
strategic and operational issues are developed and integrated across local government
organizations in the State of Victoria, Australia.
The aim is to understand how, in the local government environment, performance
measurement systems are linked in an integrated, holistic way to a councils strategic
choices so that overall efficiency and effectiveness of the the councils operations are
improved. Our argument is that when this occurs across the organization a performance
management system is in place.
The paper explores the literature on performance measurement and how it has been
applied to local government; describes our research; analyses the results and concludes
with a proposed performance management model for local government.

2. Literature review

The literature on performance measurement is much more extensive than the literature
on performance management. The latter is often used to refer to individual performance
management or appraisal schemes. The focus is disproportionately on the individual
rather than the individual and the organization. The theme of the performance
measurement literature, on the other hand, is preoccupied with the measurement
process with less reference to the context within which measurement is carried out. The
concern is with the validity of the measurement system rather than how the information
will be used to change and improve the way in which services are delivered. There is
little discussion about the nature of performance information and an organizations
strategic choices.
Governments need a better means of determining performance in relation to
objectives (Atkinson and McCrindell, 1997). Performance measures have become
too bountiful and too operationally focussed (Atkinson and McCrindell, 1997; MAV,
1993). The result is performance measures that are overwhelming and do not always
meet the needs of relevant stakeholders. Performance measurement in government is
related to accountability (Broadbent, 1995; Sinclair, 1995; Guthrie and English, 1997),
and inadequate performance measurement systems do not help in understanding what
services are provided and to whom.
When linking performance measurement and organizational accountability, several
writers have made an important distinction between primary and secondary objectives
(Atkinson and McCrindell, 1997) or results and the determinants of those results
(Fitzgerald et al., 1991). The strategic planning process begins by determining the
organizations primary objectives. It is through the development and articulation of
primary objectives that governments establish the nexus between their organization and
its stakeholders. Secondary objectives reflect the organizations strategic choices about
how it chooses to pursue its primary objectives and the relationships it must have with its
stakeholders to be successful in its strategic choices (Atkinson and McCrindell, 1997).
This is an important distinction in defining aspects of performance management
systems. There is an obvious and complementary relationship between results (primary
objectives) and determinants (secondary objectives). A focus on secondary processes
for achieving primary objectives provides a tool for monitoring relationships with
stakeholders.
234 L. Kloot and J. Martin

A focus on stakeholders is evident in recent performance models. Kaplan and

Nortons (1992, 1996) balanced scorecard explicitly refers to shareholders, competitors
and customers. Fitzgerald et al.s (1991) results and determinants framework also
makes explicit reference to customers and competitors. Atkinson et al. (1997) refer
to environmental stakeholders: customers, owners and the community, and process
stakeholders: employees and suppliers. Environmental stakeholders are concerned with
primary objectives, which in the public sector is value-for-money service delivery.
Process stakeholders are vested with the planning, design, implementation and
operation of the organization to meet the primary objectives. The way in which this
works in organizations is what Atkinson et al. (1997) call a strategic performance
measurement system.
A performance measurement systems coordinating role is to direct and focus the
attention of decision makers on results and determinants or primary and secondary
roles (Atkinson et al., 1997; Fitzgerald et al., 1991; Kaplan and Norton, 1992,
1996). In this way employees know what is expected of them. It is also clearer for
external stakeholders to determine what the organization is trying to achieve. To
explicitly link long-term strategic objectives with short-term actions Kaplan and Norton
(1996) argue that their balanced scorecard introduces four new management processes
that, separately and in combination, contribute to this linkage. We question that
translating the vision, communicating and linking, business planning and feedback
and learning are new management processes. The important point is that by using
the scorecard managers are forced to use these processes in a way they have not done
before.
A preoccupation with financial performance measures is widely regarded as less
than satisfactory. Such measures lack the requisite variety to give decision makers
the range of information they need to manage processes (Ballantine et al., 1998;
Atkinson et al., 1997; Kaplan and Norton, 1992, 1996; Ghobadian and Ashworth,
1994; Fitzgerald et al., 1991). Performance measurement systems based primarily
on financial performance measures lack the focus and robustness needed for internal
management and control (Atkinson et al., 1997). Financial measures are also dependent
on choice of accounting policy. If policies differ between organizations cross-sectional
comparison is difficult and if policies change over time longitudinal comparisons are
impossible (Fitzgerald et al., 1991).
Performance measurement in organizations is still largely focussed on financial data
for the purposes of coordination and control (Atkinson and McCrindell, 1997; Atkinson
et al., 1997). Making the connection between performance, strategy and organizational
purpose is more challenging. Kaplan and Norton (1992, 1996) attempt to do this
with their balanced scorecard. In fact their 1996 paper is titled Using the Balanced
Scorecard as a Strategic Management System (our emphasis). Fitzgerald et al. (1991) and
Kaplan and Norton (1996) conclude that performance information wider than financial
information is crucial. Ballantine et al. (1998) and Kaplan and Norton (1996) describe
the need to tailor performance measures to strategy across a range of organization
attributes and activities.
Kaplan and Norton (1996) argue that their scorecard is not a replacement for financial
measures: it is a complement. The four perspectives of the scorecard are financial,
customer, internal business process, and learning and growth, which are consistent
with Fitzgerald et al.s (1991) results (financial performance and competitiveness) and
determinants (quality, flexibility, resource utilization and innovation).
 Strategic Performance Management in Local Government 235

Table 1
A Balanced Approach to Performance Management (adapted from Fitzgerald et al., 1991, Ballantine et al., 1998,
and Kaplan and Norton, 1996)

Performance Management Process Questions to be addressed

Primary objectives or results to be achieved
Financial To succeed how should we appear to our
shareholders?
Customers To achieve our vision how should we appear to
our customers?
Secondary objectives or determinants of success
Internal Business Processes To satisfy our stakeholders and community what
business processes must we excel at?
Innovation and Learning To achieve our vision how will we sustain our
ability to change and improve?

Our research is concerned with the performance management systems of local

government organizations. We are interested in the way councils monitor and integrate
their performance across the organization for the purposes of planning and control.
Clearly the concepts articulated above form an important framework for our research.
The three models are very similar and have been combined in Table 1 to provide the
basis for our research.

3. Performance management in local government

The literature on performance management in government is starting to address issues

of strategic linkages with operational performance (Atkinson et al., 1997) and this is
consistent with the literature on performance management in general (Kaplan and
Norton, 1992, 1996; Fitzgerald et al., 1991; Ballantine et al., 1998). However the
literature on performance management in local government is less strategic in focus. It
is still largely grounded in operational concepts of efficiency, with a lower emphasis on
effectiveness. Palmers 1993 research provides evidence that organizations concentrate
on measuring what is easily measurable and in local government this results in a
bias towards measuring performance in terms of economy and efficiency, rather than
effectiveness. Palmer found that the types of indicator most frequently used relate to
costs, volume of service, utilization rates, time targets and productivityall measures
of economy and efficiency, not effectiveness.
Increasingly there are many pressures on local government to plan for the future
rather than adopt an incremental approach, which includes the tender process and
competition; central requirements for formal plans and increased customer focus
(Flynn and Talbot, 1996). Flynn and Talbot further suggest that much of the pressure
for improved performance in the short term may militate against strategic planning
and strategic performance management. Budget constraints, cost reduction strategies,
purchaser/provider splits and a focus on financial performance can fragment local
government and prevent a strategic overview being adopted.
Whether or not a strategic focus is evident, performance measurement and review
is important in local government. It became important in British local government in
236 L. Kloot and J. Martin

Table 2
Ghobadian and Ashworth: Performance measurement systems

Multiple measures Identify trade-offs between various

Ongoing and evolving process
Capture both efficiency and effectiveness
dimensions of performance
Qualitative and quantitative measures
Link measures to corporate objectives
Avoid measures becoming ends in themselves
dimensions of performance
Enable management to plan and aid
decision making designed to meet
requirements of different organizational
levels
Measures cannot be manipulated by
managers being measured

the 1980s because of five interrelated factors: pressure from the central government
and the Audit Commission; greater public expectation and consumerism; compulsory
competitive tendering; changing culture and attitudes among local authority managers;
and loss of confidence (Ghobadian and Ashworth, 1994). These factors are still
prevalent in Victoria, where our research was carried out. The Victorian State
Government introduced wholesale change in its system of local government in a very
short time frame to refocus the emphasis on performance management across a State
struggling under the burden of excessive public sector debt.
In reviewing the development and use of performance measurement in British local
government, Ghobadian and Ashworth (1994) suggest characteristics of performance
measurement systems that are consistent with the principles underlying the balanced
approach to performance management set out in Table 1.
We believe that an integrated, holistic performance measurement system that did all
of these things would, in fact, be a performance management system.
Performance measurement information is influenced by who constructs the indicators
and who does the measuring (Lawler and Rhodes, 1976 quoted in Palmer 1993). Palmer
also notes that utilization is likely to be highest when decision-makers are involved in
these activities (p. 33). In the British experience approximately half of the respondents
indicated that the introduction of performance measurement was not part of a coherent
strategy (Palmer, 1993, p. 33). This is clear evidence that there is no overarching, holistic
performance management approach in a significant proportion of U.K. local govern-
ment. The preoccupation is with measurement for purposes of compliance and control.
This is clearly an important point when we consider the myriad issues people in Aus-
tralian local government experience as this industry faces significant, on-going change.
Recent Australian research confirms that prior to the reforms of the 1990s
performance measurement, let alone performance management, was not a high priority
in Victorian local government (Kloot et al., 1997). Managerialist changes instituted
by the State Government, consistent with managerialist changes in other Australian
government sectors, New Zealand, the U.K., Canada and the USA (Dixon et al., 1998)
now demand a focus on performance measurement. The most obvious managerialist
change is the introduction of compulsory competitive tendering which requires
performance information for the purposes of contract specification and management
(Palmer, 1993). The primary focus in the U.K. was, as Palmer (1993) and Ghobadian
and Ashworth (1994) report, on financial information, and as is shown below, this is
the case in Australia.
Another major driver for the establishment of performance information systems in
Victorian local government was the legislative requirement for councils to prepare
 Strategic Performance Management in Local Government 237

annual management plans containing measures and indicators, designed to increase

accountability. Over the last few years councils have refined and improved the quality
of this process as they provide feedback to stakeholders: councillors, council employees,
the community and the State Government.
The adoption of managerialist private sector practices by Victorian local government
suggests that there should be an increased focus on performance management. Strategic
planning, business re-engineering, customer service, quality assurance, performance
management, risk management and accrual accounting all underpin managerialism
(Dixon et al., 1998). The first five of these practices are central to the research reported
in this paper linking as they do the concepts of Fitzgerald et al. (1991), Kaplan and
Norton (1996) and Atkinson et al. (1997).

4. Research questions

Using the framework developed in Table 1, two questions guided this research. First,
how are balanced performance management systems developed and integrated within
local government organizations for managerial and accountability purposes? Second,
from our observations of local government in Victoria can a balanced model of effective
performance management for Australian local government be developed?

5. Research methodology

The framework developed in Table 1 was used to guide this research and was adjusted
to reflect the differences between local government and the for-profit sector. To reflect
how local government differs from the private sector, the emphasis in the financial
performance category was changed to acknowledge how the council should appear to
its stakeholders, rather than shareholders. The concept of stakeholders is problematic
when applied to Australian local government as there is a diversity of groups often with
different interests, for example the state government, which provides funding and the
legislative framework under which local government operates. Obvious stakeholders
include the federal government (which provides some funding), ratepayers, the wider
local community, consumers and clients of local government services, while employees,
councillors and suppliers have significant interests in issues affecting local government.
During data collection, the researchers and respondents acknowledged the multiplicity
of stakeholders and the possibility of conflict between them. A second change was
replacing customer focus with community focus. Local government decisions affect
the broader community and not just those who use specific services.
The emphasis on anchoring the performance measurement system within the
strategic framework of the council was maintained by asking questions which related to
both strategy and operational levels. Notions of efficiency and effectiveness were also
impounded into the model.
This research was undertaken in Victoria. This State was chosen as its local
government sector has undergone arguably the greatest level of public sector reform
in Australia over the last six years. These reforms have included the need to report
238 L. Kloot and J. Martin

using accrual accounting methods,1 the requirement to undertake corporate planning

and report performance against the corporate plan, amalgamation into larger units,2
the introduction of Compulsory Competitive Tendering (CCT)3 and most recently
the need to report a number of performance indicators determined by the State
Government (see Appendix A). Changes continue to be imposed by the State. During
the course of this research new league tables were released relating to customer
satisfaction surveys commissioned by the State Government. Councils were required
to indicate how they would improve their performance against these indicators over the
next twelve months.
The research was conducted using a qualitative methodology. Over a full day in each
council, councillors, the CEO, executive directors and managers were interviewed.
This required a major commitment from councils so, on the basis of prior good
relationships developed with management, twenty councils were approached to take
part of which seven agreed. These seven came from four of the state governments five-
group classification of like councils: two inner-metropolitan; two outer-metropolitan; a
regional city and a large (rural) shire. Only small shire councils were not represented.
This was not considered to be a major impediment to the research as small shire councils
are known from previous research to be still struggling with managerialist reforms.
In total more than 80 people participated in the interviews for this study. The
interviews were conducted in four groups in each council with up to 12 people in
a group. The researchers took care to engage all participants in the process. Although
there was a set of semi-structured questions the interviews were wide-ranging and many
unexpected issues emerged. The data collection process was therefore highly interactive.
Detailed notes were taken during the interviews by both researchers which were later
compared and consolidated. The consolidated notes in raw form for each council were
sent for comment to the councils CEO, along with a brief letter on the initial findings.

6. Results

Performance management in local government is concerned with both managerial

and political accountability (Guthrie and English, 1997; Sinclair, 1995). These
accountabilities impact on each other but to narrow the focus of this research we
concentrated on managerial accountability. We interviewed many more managers than
councillors. The results concentrate on managerial accountability and performance
management systems required for internal management. However, when speaking of
the walk and talk community inputs they receive from going about their normal
activities in the community, councillors referred to political accountability. Several
mentioned that the ultimate measure of performance occurs every three years at the
ballot box and they suggested that no other measures were needed.

6.1. Financial performance management

In managing their financial performance councils are not merely concentrating on pure
cost measures. The overwhelming response to the question how should we appear to
1 Australian Accounting Standard 27 Financial Reporting by Local Governments.
2 210 local government units at the start of 1992 were reduced to 78 by the end of 1994.
3 50% of all local government costs (including depreciation) must be subjected to open tender.
 Strategic Performance Management in Local Government 239

our stakeholders? was that local government had to provide value for money while
maintaining service levels. Value for money was variously defined including provision
of adequate services without wasting limited resources and ensuring services are
affordable. Generally, value for money has the same meaning for managers as Palmers
(1993) joint concepts of efficiency (lowest cost per unit of output) and effectiveness
(providing the right services at this lowest cost).
There are two other common themes driving financial performance: explicit
accountability to the community and implicit managerial accountability. This emphasis
on accountability is consistent with other research (Guthrie and English, 1997).
Explicit accountability drivers reported by respondents are:

evidence of transparency in financial transactions

demonstrated accountability and responsibility to council stakeholders
proper stewardship and probity in transactions should be apparent
equity in the provision of services across geographic areas and across social classes

Managerial drivers are:

debt reduction4 strategies to demonstrate responsible financial management: never

to be in the red
infrastructure and asset management
long-term economic and social sustainability

A further set of accountabilities is to the Victorian State Government. Councils

are required to calculate and monitor 21 financial performance indicators on an
annual basis for the Victorian Office of Local Government (OLG) (Appendix A)
designed to force local governments to become more cost efficient (Ballantine et al.,
1998). Such requirements are consistent with Dixon et al.s (1998) observation that
monitoring bureaux become increasingly involved with the minutiae of administration
and increasingly demand greater quantity and detail of reporting. These and other
OLG requirements are seen as a burden by councils: financial systems do not provide
information in an appropriate format for the OLG and developing reports which satisfy
the requirements is time consuming and costly.
One manager described the OLG indicators as superficial and dysfunctional unless
they were interpreted in the light of specific council situations. They are seen as
burdensome because they are not sufficient for appropriately managing financial
performance. Managers use many other measures to ensure that they provide other
stakeholders with value for money.
Strategic considerations guide financial performance management. Councils develop
long-term financial plans (three to five years) within the framework of their strategic
plans, which anchor the annual budget. Three-year rolling budgets assist in financial
management. Councillors generally receive quarterly financial reports on expenditure
against budget and year-to-date, whilst managers receive at least monthly reports and
generally have access to on-line reports as part of the performance management process.

4 There was an interesting dichotomy between those councils which had previously owned electricity
authorities and which were, after compulsory acquisition by the state government, flush with electricity
money, and those councils without such money. Those with electricity money had no need of debt reduction
strategies.
240 L. Kloot and J. Martin

A common theme, however, was that financial information was poor: A reporting
nightmare was the description of one manager about the councils reporting system.
Another asked how can you manage performance when the information is flawed? Instances
of poor information which negatively impacted on performance management are:
Real-time cash flow information is crucial but may be unavailable.
Each business unit requires its own full financial reports to manage its performance,
but these are not generally available. The accounting and financial reporting systems
are not yet focussed on units: they still report on the big picture.
Contract management requires reports for each contract related to its own time
frame, not related to the council financial year. These are generally unavailable.
Managers may need to keep supplementary information on spreadsheets, or
download financial information and manipulate it to assist in managing their
finances.
Transfer pricing between business units is problematic.
The conclusion which can be drawn here is that management accountants in
local government need to be more proactive in developing and implementing good
information systems to provide necessary financial information.
To ensure probity under CCT, most councils have set up clients who develop policy
and purchase and manage services for ratepayers, and providers who contract to
provide the service (see Ballantine et al., 1998, for an extended discussion of these
arrangements in the provision of public health services). Financial performance has
different implications for the client side and the provider side.
Providers have some form of incentive to improve their financial performance as there
is usually some form of gain sharing: if a unit has a higher-than-budgeted profit this
may be shared between the council, the unit itself (for example providing extra training
and development for staff) and the unit employees. These incentives provide a process
for managing performance and for driving down costs as far as possible while still
providing appropriate service levels (Merchant, 1989).
Clients have no such incentive: there is no reward for beating the budget. A common
theme was that performance management is more difficult in the absence of such
incentives: measuring and reporting budget variances of itself is insufficient to improve
performance and minimize costs. Innovative ways of providing incentives for client side
employees are needed to further improve financial performance. However, this can be
difficult and is further discussed below in the section on innovation and learning.

6.2. Community focus management

Local government corporate plans are strongly community focussed with the strategic
imperative being related to satisfying community needs. Community and customer
relations are areas which are generally well handled by local governmenta common
trend found across public sector services (Ballantine et al., 1998). Community
satisfaction is another area over which the OLG mandates performance measurement.
Its Community Satisfaction Measurement Program surveys community perceptions of
overall leadership, image, customer service and service delivery performance by each
council, and reinforces accountability to the state government.
Councils need to manage how communities perceive their performance in two
ways. First, they need to manage how the general community views their performance.
Second, they need to manage how those who use specific council services as customers
 Strategic Performance Management in Local Government 241

view the councils performance. Formal performance measurement is evident as

councils undertake extensive market research to gauge community perceptions of their
performance across both these dimensions. Surveys and focus groups are conducted by
independent market research organizations on an annual basis. Other market research
may be conducted by in-house groups much more frequently, for example monthly
client surveys to judge the quality of services provision.
To integrate performance outcomes with strategy and ensure secondary objective
outcomes are consistent with primary objectives (Atkinson et al., 1997) extensive com-
munity consultation and collaboration exists in all councils. Consultation is directed
at fulfilling community needs to achieve effectiveness of outcomes (Palmer, 1993). To
incorporate community views in developing broad policies and strategies councils are
increasing the direct participation of the public in the design, delivery and assessment
of public services. Participation develops a commitment to the long-term improve-
ment of council services (Pollitt, 1993). Examples are found in developing strategic
and corporate plans, transport policies, economic development plans, health plans and
environment plans. Consultation can take the form of public meetings, public member-
ship of advisory committees, community workshops, special-purpose forums and public
questioning and comments during specified attendance times at council meetings.
Strong efforts are made by councils to educate and inform their communities.
Managers believe that community knowledge leads to more accountability (Atkinson
and McCrindell, 1997), and it also leads to a community whose perceptions are closer
to the reality of services driven by limited resources. Heavy emphasis is placed on
preparing press releases (up to 8 per week), articles and a regular page or column for
local newspapers, quarterly newsletters to all households and businesses and annual
community directories. Pamphlets and information bulletins on specific areas and
services are available from councils. Councils may advertize on local radio stations. In
recognition of technology changes most of the councils are developing a home page on
the internet. In inner-city councils, disseminating information to those of non-English
speaking background is problematic, when over 70 languages may be spoken in the
local community. Despite these efforts managers and councillors believe that many in
the community are ill-informed if we are doing good things we have to struggle to inform
the community of what we are doing.
The second focus of performance measurement is satisfaction of those customers
who use council services. Business units undertake customer satisfaction surveys on
a regular basis, often monthly, as they are part of service quality specifications under
CCT. Both external contractors and internal providers were very supportive of the
need to ensure they maintain good customer relations at all times. For example, a road
building contractor (external) explained how he letterboxed all residents a week before
disruption began in their streets. He detailed the work, the time it would take, and gave
a phone numbers for queries. During construction, he visited a number of residents to
gauge their reactions to the work.
Councils are developing or have developed customer service charters to specify
what ratepayers can expect of their day-to-day performance across a wide range of
dimensions, for example how quickly the phone is answered or how long it takes to
respond to a building permit application. These charters provide standards against
which providers performance is measured. It is also suggested that charters should be
designed to allow for consistent improvement in service delivery. Customer perceptions
are a key input into the service charters.
242 L. Kloot and J. Martin

6.3. Internal business process

Internal process reform is being driven by two factors: the need for cost reduction
in a time of financial stringency and the need to perform to business standards (to
be competitive and win tenders in a CCT environment). Consistent with the need to
demonstrate financial accountability, there is recognition that services must be delivered
in a cost-effective, high-quality manner. This requires significant reform of processes
and systems to reduce costs, including cost-based performance measures. However,
lack of financial information on specific processes and the effect of process change on
costs hampers reform. Managers are uncertain about how to proceed when the effects
of change cannot be estimated. Lack of information and performance measures is a
critical problem and a recurring theme in all councils.
Benchmarking, both formal and informal, is a popular method of process improve-
ment. Formal benchmarking requires performance measurement whilst informal
benchmarking may take place in informal networks without formal indicators being
available. Informal networking and benchmarking is valuable for local government
in exploiting opportunities to enrich management perspectives (Corrigan and Joyce,
1997). Again, lack of valid information for accurate benchmarking was a recurring
theme, confirming earlier results from an Australia-wide Local Government Ministers
pilot program on benchmarking (1995).
Councils are largely following some form of business improvement program and
system redevelopment. One council has a business improvement program based around
documentation of processes, performance indicators and analysis of variances between
target and actual performance indicators. Senior managers are emphasizing the need
for process reform at all levels as a strategic priority, linking processes to strategy as
suggested by Atkinson et al. (1997). Performance measurement in this council is leading
process reform. This council was also undertaking a formal program of process mapping
for continuous quality improvement. This is an important initiative which would be of
benefit to other councils.
Formal quality assurance (ISO 9000) with its associated performance measurement
is not a priority. It is viewed as expensive and time consuming, with too much focus on
process and documentation and not enough on the quality of the services as perceived
by the end user. However, some councils are quality assured under ISO 9000 and
believe the six-monthly audit assists in process improvement. Despite the lack of formal
quality measurement in other councils an internal focus on quality of service was evident
throughout the sector.
As described earlier, councils are generally developing service charters, which
requires analysis of internal processes and community perceptions of outputs. Writing
contract specifications is a powerful process to review the way things are done and
aids performance management. Recognition of the need to work towards customer
satisfaction has led to new processes replacing those which dont meet customer
needs. Performance measures designed to enhance internal processes related to
customer satisfaction include telephone answering performance and tracking the
time taken to respond to letters. Modern business practices such as EFTPOS, B-
pay and credit card payments5 are slowly being introduced in line with community
expectations.

5 Until 1992, the old Municipal Accounting Regulations specified every procedure regarding accepting and
banking of monies, and practices such as EFTPOS were probably illegal under the regulations.
 Strategic Performance Management in Local Government 243

Other methods which councils use to improve processes include formal monthly
meetings to focus on process improvement and cost reduction, gainsharing of profits
in provider units and market testing. Market testing, whether or not formally part of
CCT, requires full specification of services and thorough analysis and review of the
processes through which they are delivered.
Lack of performance measures has resulted in business process change being
reactionary rather than strategic. However, business unit planning has been widely
introduced and this is being undertaken within the strategic framework provided by the
corporate plan. It is thus likely that process change will be more strategically oriented
in future if suitable performance measures are developed.

6.4. Managing innovation and learning

Continued organizational success depends on the ability of organizations to learn and
to innovate (Senge, 1990) and managerialism requires a shift from a bureaucratic to an
innovative paradigm (Dixon et al., 1998). Yet this is the very area in which performance
measurement and management is weakest in local government. There are gaps between
what is perceived to be needed and what is measured. There is little recognition of
the need for innovation and learning in formal documentation and plans. However,
a council outside the seven which were the subject of this research has incorporated
innovation and learning into its corporate plan as a key result area, with appropriate
performance indicators such as the number of organizational development programs
conducted, participation in local government forums, the number of initiatives and
innovations implemented, and the number of staff recognized for effective workplace
innovations.
There is some recognition of the importance of innovation and learning. One council
has developed a formal recognition program to encourage new ideas. It awards $500
annually for the best new idea, and awards movie tickets and dinner vouchers for other
innovations. Every new idea gains some form of recognition. To encourage innovation
this council gives staff the freedom to fail: staff may try out new ideas, and fail, but they
should not repeat mistakes. This is important: over-reliance on performance measures
may stifle innovation (Sinclair, 1995). Some councils believe that recognition rather
than rewards encourage innovation. The benefits and motivational effects of celebrating
success are recognized although mechanisms for doing so are lacking. One comment
made was that if something goes well, the councillors get the praise, indicating some
disillusionment with recognition of excellence.
Heavy workloads were suggested as a reason why there is a low level of innovation.
Thinking of new ways to do things takes time which is not available. However, it was
also suggested that there may be a need to train people to reflect on what they are
doing so they can better manage their workloads. Focussing training on continuous
improvement and human resource development is expected to lead to innovation.
A relatively strong emphasis on learning by individuals was evident in most councils.
Councils have formal staff development programs used as tools to connect individuals
with organizational goals, by enhancing skills and knowledge to equip staff to achieve
these goals. Programs also inform staff about organizational goals and objectives. One
council identified a range of skill shortages and training needs such as managing work
teams, holding meetings, and how to make decisions. Other training includes stress
management, relationship management, managing the balance between home and
professional lives, financial skills, budgeting skills, and using financial performance
244 L. Kloot and J. Martin

reports. However, budgetary constraints mean that not all training needs are addressed.
Learning is also required to replace intellectual capital bought by the private sector
following significant downsizing experienced by all councils due to the mandated
reforms of the state government. The private sector has purchased the industry expertise
needed to prepare tenders and bids for CCT.
Empowerment of lower-level staff is necessary if government is to adopt a
performance orientation (Dixon et al., 1998). Empowerment is viewed by respondents
as an essential change to promote improvement and learning: the more people are
involved in decision making, the more they are committed to participate in future problem
solving work. However, some councils have had mixed results, with hierarchical power
structures still in evidence in supposedly empowered teams. Although empowerment is
seen to be essential, gaining commitment from staff can be problematic. Staff may
not believe that they are truly empowered: managers believe they empower people to
change processes, but they dont measure this and dont know. The theme of lack of
information was again raised and is seen as a barrier to full empowerment. Staff need
information on their performance and on alternatives before they feel competent to
make decisions.
Although we did not intend to study organizational culture, participants frequently
commented that cultural change is a precursor to continuous improvement and that
cultural change programs are necessary. Several councils were undertaking staff attitude
surveys, one on a six-monthly basis to map changes in attitudes. One council described
the need to identify where we are before we can develop change programs. In different
areas of the organization, tribal, rules-based and consensus cultures are all in evidence.
Although a change program for staff had been suggested by managers it had been
refused funding by councillors.
Cultural change needs vary within councils. Significant cultural change has occurred
in provider groups which are now working in a business paradigm, competing against
the business sector for the right to maintain their jobs. These groups are subject
to performance measurement, being evaluated against outside tenders in the initial
bidding process, and subsequently measured on a continuing basis to ascertain any
profits which may accrue to the employees.
By comparison, client groups are still largely working in the old public service
paradigm. Their performance may be measured in terms of budget variances, but there
are no rewards in getting it right and few sanctions for getting it wrong. It should
be noted that in councils with a heavy union presence, performance rewards schemes
(which may help in cultural change) are difficult to implement for any group. Unions
were described as fighting innovation, being divorced from reality and not adding value.
Councils which had experienced a reduced union presence reported increased flexibility
and innovation.
One council has implemented an organization-wide integrated learning and change
program using focus groups and workshops. The issues discussed and resolved in these
focus groups include the future structure of the council; how to be competitive; growing
people in their jobs; and contributing to the planning process. Specific training needs
(particularly financial training) are addressed as is encouraging managers and staff to
challenge the status quo. This program is linked to the corporate plan so it is driven by
strategic issues. In other councils change and learning seems ad hoc and unrelated to
espoused strategy.
 Strategic Performance Management in Local Government 245

7. Discussion

This research has implications for performance measurement and management in local
government on a number of levels. On one level, this research has provided evidence
of the measurement of both efficiency and effectiveness (Palmer, 1993). There is
no doubt that local government is extremely concerned with the measurement and
management of cost efficiency. Given the Victorian State Governments emphasis on
reform to achieve efficiency, particularly through competitive tendering, this is not
surprising. Studies have shown a tendency for the use of accounting controls such as
financial performance measures to increase as the intensity of competition increases
(Scapens and Roberts, 1993). Greater clarity around financial performance is essential
in the drive for the efficient provision of value-for-money services in a competitive
environment.
There is also emphasis on managing effectiveness of outcomes, in terms of
customer satisfaction, and in specifying outcome measures during the planning process.
Significant community input into the planning stage ensures outcomes are much more
in line with community expectations. Community collaboration in much of the local
government strategic and other planning processes results in specifying and delivering
services which meet the needs of the local community. There has been a change from
government to governance, brought about by the interaction between government and
society (Corrigan and Joyce, 1997).
At a second level this research examined the issue of the comprehensiveness of
performance management and its linkages to long-term strategy (Atkinson et al., 1997).
There is evidence that performance measures cover the four categories specified in our
model but they are not balanced over the categories. Overall, local governments have
a range of measures which are used to manage performance across the financial and
community focus dimensions (the results dimensions or primary objectives). These
measures are also linked to strategic priorities where financial measures are tied to
long-term corporate plans and where there is a strong sense of community input into
long-term strategic plans. In contrast, whilst there are good examples of managing
performance in the innovation and learning and internal processes categories, these
determinant dimensions are much less well developed. In addition, they are generally
not linked to corporate strategy (Ballantine et al., 1998).
Financial performance is linked to the wider organizational context (Scapens and
Roberts, 1993). It is strongly linked to long-term strategy, in that annual budgets are
prepared in the context of long term financial plans which are themselves part of the
corporate plan. The strategic implications of financial performance are enhanced by
having financial performance as a key result area for performance-based bonuses for
managers. Financial performance management is essential for long-term survival in a
context of reduced revenue and increased community expectations.
Performance management requires performance indicators but simply measuring
performance is not sufficient for performance management. Some performance
indicators required by the OLG are dysfunctional as they do not add to the information
needed to manage. Preparing them requires time and effort which would be better used
elsewhere. On the other hand, lack of useful financial performance information hampers
the management of performance in a number of areas.
Local governments are enhancing the role of the citizen in Victoria (Corrigan and
Joyce, 1997). They are very aware of the importance of community perceptions of
246 L. Kloot and J. Martin

their performance, and of their accountability to the community. They are measuring
and managing their performance in relation to community standards and taking a
strong community focus with significant consultation and information provision to
the community. It is also interesting that in this dimension local governments are
managing areas such as community consultation which are critical to achieving effective
outcomes. Community consultation in the corporate planning process further suggests
that there is a strong strategic focus to performance management as consultation helps
set strategic goals.
There is a need for more integration of the strategic framework into internal
process review. These processes ultimately determine the success of council strategies
(Fitzgerald et al., 1991; Atkinson et al., 1997). Continuous internal process reviews
are important in relation to the on-going emphasis on cost reduction and efficiency
management (which are strategic priorities for all councils) and in reviewing service
provision to customers in a customer-focussed environment. While process reviews
are being undertaken lack of measures to determine internal process performance is a
hindrance to managing them. The development of better performance measures may
provide the impetus for councils to be more proactive in managing internal processes.
Workload indicators are one way of measuring internal process performance. At the
managerial level it may be that workload indicators are not perceived to be particularly
important. A limitation of this research may be that insufficient evidence was gathered
about the use of workload indicators at lower levels in councils. This might indicate
that more emphasis is placed on internal processes at these levels. Process mapping is
another way of assessing internal processes and there is a lead given by one council
which has embraced this technique enthusiastically.
Finally, innovation and learning occur largely on an ad hoc basis in local government,
with few formal performance indicators or attempts at performance management at
an organizational level. The managers and directors largely agreed that innovation
and learning is important, but the creation of a learning environment is not formally
addressed. However, there are guides as to how such an environment can be created:
awards for innovation, heavy emphasis at senior levels on training and workshopping
ideas and strategies for the shape of the council in the new millennium. More explicit
recognition of the need for learning and continuous improvement is a prerequisite for
enhanced performance. There is also a need to develop techniques to measure aspects of
learning such as the number of awards given for new ideas, the number of staff attending
training courses (particularly in areas outside their area of technical expertise), and the
number of staff contributing ideas about the future shape of the organization.
There is currently little linkage of innovation and learning to strategic plans
(Ballantine et al., 1998). However, there are good examples for councils to follow: the
specification of innovation as a key strategic area in the corporate plan; involving staff
in workshops about the future shape of the organization; and providing management
training for staff to ensure the client side will achieve strategic priorities.
There is a third level at which the results of this research can be interpreted. Although
this research did not set out explicitly to examine corporate culture (except in the
innovation and learning sense of the balanced scorecard), it became apparent that
the issue of corporate culture is crucial in performance management. Those councils
that were best managing their performance were those in which management was
actively engaging with employees: where there was a connection between the managers
and the employees. There was a culture of openness and access in these councils.
 Strategic Performance Management in Local Government 247

Information was freely available throughout the organizations. These results confirm
Martins (1999) work on the impact of reform on the management of local government
organizations and reinforce Dixon et al.s (1998) contention that a public agencys
traditional ideals, norms and values must change if it is to inculcate a performance-
oriented culture. The balanced scorecard/results-and-determinants model used here
encourages a performance-centred culture. It emphasizes quality, adaptability, the
leeway to make mistakes and learn from them and a commitment to stakeholders
(Dixon et al., 1998).
At the fourth level, this research questioned whether performance measurement per
se leads to enhanced performance. Some aspects of performance may be measured
but ignored in the management process due partly to conflicting accountabilities
to different stakeholders. A number of measures required for accountability to the
state government were ignored in day-to-day management, whilst other performance
measures were clearly used to drive performance and accountability to the community.
Conversely performance cannot be well managed without measurement: financial
and community measures were measured and well managed but internal process
and innovation and learning were not measured to the same extent and were less
well managed. What is measured is visible and important in organizations, and what
is not measured becomes invisible (Broadbent, 1995). These invisibilities may be
crucial to the continued success of the organization. Innovation and learning are
invisible because they are not measured, but this is a dimension to local government
performance that is essential to future viability.
At the fifth level, consistent with the growing literature on government accountability,
this research demonstrates an increased demand for accountability by all stakeholders
of local government: the community, employees and state government (Atkinson and
McCrindell, 1997). Perhaps the most interesting aspect of the increase in accountability
to the community is that it is being driven by managers who want to be more accountable
to the local community and who exhibit positive attitudes to those state government
requirements which increase accountability to the local community (Sinclair, 1995).
Improved performance measurement systems allow them to better demonstrate their
achievements to the community and to the state government (see Guthrie and English,
1997). However, performance measures which do not contribute to the management
process are considered to be dysfunctional.

8. Conclusiona performance management model for local government?

The comprehensive model used in this research to assess performance management

in local government is a strategic framework for action which allows organizations to
clarify and translate the vision and strategy; to communicate and link actions; to plan
and set targets; and provide feedback and learning. Thus it is a concept of balance and
integration, linking performance to strategic objectives.
In the early 1990s the Victorian Local Government system was under considerable
pressure to reform its structure to reduce the number of local authorities and improve
work practices. The drivers for reform included the provision of significant financial
savings across the State. Victorian Local Government had resisted previous attempts
at major reform over the previous two decades. The parlous financial position of the
State, at both levels of government, created greater urgency for microeconomic reform,
248 L. Kloot and J. Martin

Table 3
Strategic Choice in Local Government Performance Management

Traditional Approach vs Performance-Oriented Approach

Top-down State Government and
councillor-imposed, control-oriented
performance measurement
Imposition of universal, industry-wide
measures with less validity for specific
councils
Periodic reporting for the purpose of
meeting control requirements of senior
management, councillors and State
Government
Piecemeal, myopic approach with a
focus on the measurement process
Focus on financial measures only
vs Strategic, collaborative development of a
performance management system
involving all stakeholders
vs In-house development of valid, council
specific measures to be used for
organizational improvement and
benchmarking with like councils
vs Real-time, up-to-date performance
information for all stakeholders to
monitor progress, demonstrate
accountability and manage outcomes
vs Integrated performance management
system across the organization focussed
on value-for-money service delivery and
organizational improvement
vs Focus on financial and non-financial
measures: a results and determinants
approach

and an emphasis on better financial performance.

Financial issues drove reform and performance measurement resulting in a system
which is out of balance in the councils surveyed in this research. The imbalance in
contemporary, organization-wide approaches to performance management is similar
to other research findings in public sector management (Ballantine et al., 1998).
Although understandable in the reform context of this research, the preoccupation
with financial measures and, to a lesser degree, community concern at the expense of
internal business processes and innovation and learning, does not augur well for the
long-term development and improvement of local government in Victoria. Can local
government systems worldwide benefit from these findings and adopt an approach to
performance management which provides for the long-term development of council
organizations and the communities they serve? There are a number of strategic choices
which affect this outcome, shown in Table 3.
Although the performance management systems in this research are not fully
integrated there is sufficient public involvement in local decision making to ensure
that primary objectives reflect community concern. Councils current performance
management systems reflect this. Other public sector organizations can learn from
the focus on community collaboration and consultation found in this research. Greater
emphasis on accountability and value-for-money services has demanded better financial
management systems and more effective community involvement. They are far less
focussed on understanding, measuring and managing the secondary objectives or the
means to do this.
A further lesson is that continuing reform of local government systems worldwide
will demand accurate, timely and relevant information with which to assess council
performance. Managers and employees are actively seeking better accounting and
financial information systems to better manage performance. This is not enough. The
 Strategic Performance Management in Local Government 249

challenge for policy makers is to recognize the importance of process measures and
innovation and learning strategies for genuine, long-term quality improvement in the
delivery of value for money services. Genuine improvement over the long term will only
occur when managers and policy makers pay attention to the way people work and the
attitudes and beliefs they hold while performing this work.

Acknowledgement

The authors acknowledge helpful comments from participants at seminar workshops at

Cambridge University, Queensland University of Technology, Brisbane City Council,
participants at the European Accounting Conference Bordeaux, AAANZ Cairns, Jane
Broadbent and two anonymous reviewers. We also acknowledge the research assistance
of Ron Kluvers and funding support from the Faculty of Business, Victoria University
of Technology.

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Appendix A

Annual plan performance indicators required by the Office of Local Government.

Financial Performance

Rating levels

total rates and charges declared

rates and charges per assessment
rates and charges per capita
rates and charges as a % of CIV (Capital Improved Value)
rates and charges per median residential property value
average residential assessment
rates and charges as a % of CIV - farms
rates and charges as % of CIV - commercial/industrial
 Strategic Performance Management in Local Government 251

Dependence on rates and grants

rates and charges as % of total recurrent value

Financial Assistance Grants per capita

Achieving financial plans

recurrent surplus/deficit
capital expenditure

Financial health of the organization

recurrent surplus/deficit as % of total recurrent revenue net assets

total debt servicing costs as a percentage of rates and charges revenue
working capital ratio - % of current assets to current liabilities

Capital expenditure

ratio of capital expenditure to total depreciation

capital expenditure per assessment

Funding capital expenditure

recurrent surplus/deficit as % of capital expenditure

ratio of total internal funding to capital expenditure

Debtor management

% of rates, fees and charges outstanding at 30 June

Comparative Indicators

A further 47 comparative indicators are required in the areas of Town Planning (7),
Waste management (5), Municipal cleaning and parks management (3), Public library
and information services (8), Road construction and maintenance (6), Customer
Service (1, based on state government community satisfaction index), Family, childrens
and youth services (6), Environmental health/regulatory (4), Aged and disability
services (4) and Administration (3).
These indicators include costs (e.g. net cost of maternal and child health per
consultation), workload (e.g. number of planning permits decided during the year) and
quality/timeliness (e.g. average number of days to respond from referral to delivery).
An annual performance statement is required to report on both sets of indicators.
The report contains (for each indicator) actual result, target, variance against target, last
year result, variance against last year, target compared to last year, three year moving
average.