Value for Money - Not-for-Profit Organisations

'The measurement of performance in a not-for-profit organisation may have value for money as its focus.’

Expand on this statement, incorporating comments on economy, efficiency and effectiveness into your answer.
***************

Since profit is not available as a performance measure in a non-profit-making organisation, other performance measures need to be considered. The value for money principle should ensure that the service is provided for minimum cost, or that the maximum benefit is achieved by the users of the service for the sum of money provided to fund the service organisation.

The principles of economy, efficiency and effectiveness would all seem to be desirable under such circumstances, but can sometimes provide conflicting decisions as follows:

• economy – using the least cost option to provide a requirement
• efficiency – maximising the ratio of output to input
• effectiveness – the extent to which objectives are achieved.


By purchasing a cheap component for a system, we may achieve economy and, by producing an output at an increased level due to the reduced cost involved, we have achieved efficiency, but if the quality is poor then the effectiveness objective is not achieved.

As an example, consider a charity that aims to provide an opthalmic service to a third world country and issue glasses where necessary to the population. By issuing cheap glasses (economy), more of the population can be assisted (efficiency), but if there is a high incidence of breakage and the glasses prove to be of little or no use then effectiveness is not achieved.

Therefore, all three ‘tests’ should be considered when assessing value for money.


************

"Beyond Budgeting" - Adaptation Issues in Public Sector

The legal framework of public sector organistions would prevent such a system being introduced. For example, UK local authorities are prevented by law from borrowing funds for revenue purposes or budgeting for a deficit.

If the beyond budgeting model is to allow greater freedom for managers then it will take a considerable change of mindset in the public sector to achieve the flexible agenda envisaged, especially where such flexibility would involve considerable and increased delegation to managers.

Need for organisational, managerial and cultural changes.
Such an adaptation would require a mindset which not only moves away from control but also requires a reduction in the internal political power of large departments which has been at the heart of public sector budgeting for many years. In addition, individual managers might become overwhelmed by the complexity of decision-making in such an unregulated decision-making environment.

In the public sector, the budget process inevitably has considerable influence on organisational processes, and represents the financial expression of policies resulting from politically motivated goals and objectives.

Whether the public sector can adapt to the concept of greater flexibility - which lies at the heart of beyond budgeting - remains a matter of ongoing debate.

Such an adaptation would require a mindset which not only moves away from control but also requires a reduction in the internal political power of large departments which has been at the heart of public sector budgeting for many years.

The desire to generate improved performance - essentially considered the driver for the beyond budgeting model - is present in the public sector evidenced in initiatives such as key performance indicators and 'best value' plans. But this is not matched by a desire for the flexibility inherent in the model.

In terms of beyond budgeting, managers in such organisations are likely to remain constrained by the inability of their organisation to change.



*************

Assessment of the ‘overall performance’ in respect of public services

‘Overall performance’ refers to a comprehensive coverage of the major issues that are generally regarded as important in assessing a public service. They could be broken down into three categories:

1. Financial indicators (assessing efficiency).
2. Non-financial quantitative indicators (assessing effectiveness).
3. Qualitative indicators that are difficult to quantify (assessing effectiveness).


1. Financial
 Cost per unit of activity/unit cost measurement e.g. per hospital bed per annum, annual cost per pupil, per arrest, per each call to attend a fire.
 A comparison between actual and budgeted or standard cost (variance analysis) – flexible budget approach may be adopted to relate costs to activity levels.
 Benchmarking costs against other regions and/or ‘best practice’.
 An indicator that measures cost recovery against service delivered – e.g. fees received from dental patients who are required to contribute towards the cost of a service – may be set at a ratio to total costs incurred.
 The ratio of one cost component to the total cost of the service e.g. staff costs as a percentage of the total costs. This could be supplemented by benchmarking ratios.


2. Non-financial (quantitative)
 Units of activity delivered within a period e.g. operations undertaken, number of children attending school, criminals arrested, fires attended.
 Flexibility and speed of response e.g. time taken for ambulances to arrive, hospital waiting lists and time elapsed between diagnosis and treatment.
 Quality of Service/output measures – pupils’ test marks, crime rates, life expectancy, the number of hospital deaths arising from infections, numbers of people rescued from fires.
 Utilisation of resources e.g. – bed occupancy ratios, average class size, ratio of police vehicles currently operational.
 Number of complaints received.
 Accessibility – e.g. distance to nearest hospital or school.


3. Qualitative
 Public confidence in the service – the strength of the expectation that –
 a criminal will be arrested.
 a pupil will receive a ‘good’ education.
 a patient will be ‘well looked after’ in hospital.
 the fire service will respond rapidly when required.
 The morale of the workforce.
 The ‘attitude’ of the staff – do they appear concerned, helpful and confident when dealing with the public?
 How effective are they at meeting the information needs of their 'customers’?
 Cleanliness, comfort, security – do people feel ‘comfortable’ within the premise owned by the public service (school and hospital)? It is part of ‘quality’, but it is difficult to quantify.




***********

ABC and Public Sector

Activity based costing (ABC) was developed for manufacturing companies to address the problem of overhead absorption.

ABC regards labour costs as fixed in the short run, in capital-intensive industries, where the bulk of costs are fixed costs. It is inappropriate to allocate overhead costs by labour hours, which are of decreasing significance.


Cost profile of Public Sector

**High levels of overhead are experienced in public sector organizations.
**Labour is often fixed in the short run,
**There are few raw materials and
**Some items of capital equipment are very expensive.

It may not be easy, for example, to allocate a ward sister’s time over the patients in her care. ABC would therefore appear to be appropriate.


Role of ABC

ABC tries to identify those activities on which costs are spent, referring to them as cost drivers. The cost of the service’s individual operations can be determined.

The advantage of this approach is that it take a critical financial view of work practices.

1. High cost activities can be identified.
2. Design. An examination of the cost drivers may result in those activities being better designed.
3. Management. Additional and better information leads to better planning and control.




***************