Value for money in public services has often been based on squeezing but this approach is "blunt" argues David Mason, who explores a more accurate measurement framework suggests ways to enhance it.

Good practice and common sense dictate that it is important to obtain value from the money we spend and to optimise our return on investments but assessing VfM is not easy nor is it straightforward – particularly in the Public sector where a definition of value is not always easy to find.

Historically, across many parts of the public sector, VfM has been managed through a ‘squeeze’ - ie progressive reductions in unit funding levels of 1 or 2% per annum.  This approach does work but is a relatively ‘blunt’ instrument.  It presumes that the sector is well funded initially, that all types of activity are equally 1 or 2% inefficient and can be ‘squeezed’ financially without too many detrimental effects.  It forces organisations to consider how to become more efficient and to obtain economies through a variety of means such as: improved/more efficient methods, better buying and economies of scale. 

However, whilst the ‘1% reduction’ and similar approaches have early successes in driving down costs and driving up productivity, there is no evidence that such increased efficiencies have a positive impact on quality.  In FE sector, for example where it was applied for the best part of the 90s and early parts of this decade, many individuals felt it had had a negative impact and that it had reduced the capacity of the sector to cope with change or respond to ‘shocks’ or major changes in direction in the system.

More robust and fairer VfM measure(s) are needed to take greater account of the value delivered rather than just cost reduction.  All sectors of the economy have attempted to bring in VfM measures and performance measures to reward achievement but as yet there is no universal panacea.  So what has been tried? 

How have VfM measures developed ?

Methods of assessing VfM have progressively developed from process based approaches to hard indicators that are used to inform judgments on the value being provided. 

Process approaches to VfM

In their simplest form these process based approaches cover cost benchmarking between organisations on common cost headings such as staff, commodity or services cost.  These include benchmarking and cross sector reviews of good practice.

Benchmarking

The benchmarking approach helps organisations to identify areas where their costs are ‘out of kilter’ with their peer group. This allows attention to be focused on areas that are at a significant variance from the norm.  Considerable effort is being placed on this area in the commodities efficiency programme in the public sector where cross governmental organisations are being encouraged to reduced costs by joint buying. 

However, whilst apparently simple, the benchmarks fairly quickly become complex to ensure that the unit costs are being calculated on a consistent basis.  This has been clearly evidenced in the Higher Education (HE) sector where HE institutions, with support from the Funding Councils, implemented a costing and pricing initiative to bring consistency in the allocation and absorption of overhead costs into HE activities.  Similar cost benchmarking initiatives have been created in other sectors and go some way to identifying opportunities for costs reductions/improvements. 

However, benchmarking only provides a partial picture of VfM.  One drawback is that it is easy to assume that the average cost or the lower quartile unit cost is an acceptable level of expenditure for the resulting outcomes.  Closer examination might reveal that much more economic methods or fundamental changes in business methods could result in far greater advantages.  In addition, cost is only one element in VfM.  Concentrating purely on cost can result in loosing sight of the quality of the resulting product or service that the organisation is providing. 

Cross sector comparisons of the three Es

The ‘Three Es’ approach of ‘Economy’,  ‘Efficiency’ and ‘Effectiveness’ extended the assessment of VfM and were championed in the Public Sector in Local Government.  Here, cost benchmarking to determine if the cost heading was being delivered in the most economic way, was supplemented by assessing the efficiency of the processes used within the organisation and whether these processes were effective in delivering the required results.  This approach has led to a series of process based assessments covering similar organisations within sectors.  Typically these involve comparing the different ways of delivering the products and services across different organisations and making an assessment of which overall approach delivered optimum results.  However, cross sectoral studies do not provide a fully comprehensive picture:

(1) They assess VfM from the perspective of past performance.  Whilst they attempt to examine other methods for improvement, they are generally limited to what has already been undertaken within the sector.  They are not generally designed to undertake a fundamental re-assessment of the methods used or if there are substantially better ways of achieving the same results.

(2) The results of the assessment are difficult to aggregate into an overall assessment or indicator for the sector as a whole on a regular and systematic basis.  Without such an aggregated indicator, it is difficult to assess trends in VfM and if it is improving over time without conducting fairly extensive (and potentially expensive) cross sectoral studies on a regular basis.

Development of VfM Indicators (and the resulting perverse incentives)

All sectors have attempted to develop VfM indicators.  Over time these have progressed from relatively simple ratios to more complex calculations as the need for more complete, robust and fair indicators develop.  The basic challenge is that, whilst the simple measures or ratios provide an indication of VfM, they affect the behaviour of the managers in the organisations being assessed.  These individuals naturally attempt to optimise their performance indicators, but as the simple VfM indicators represent an incomplete model of the business, optimising the measure can generate significant ‘perverse’ results. 

The private sector is a good example to use to illustrate the difficulties.  On first impression VfM appears easy to measure as it is assumed that it is the profit made by the business that generates value.  However if profits are used as the measure, managers optimise short term profits at the expense of long term gain or safety.  For example, in the railways or utilities, profit can be increased by reducing maintenance levels but at the expense of say safety – or loss of water through leakage.  In retail, short term profit targets can be met by reducing sales staff levels but generating longer term reductions in customer service, potential loss of customers and increased recruitment and training costs to restore levels in the future.  An alternative more comprehensive measure might be return on capital employed (RoCE).  However, if this is used in isolation, one outcome might be the reduction in capital assets to optimise return but at the expense of delivering a quality product to the customer and reducing longer term capacity to expand.

Similar examples have been seen in the public sector where over reliance on one measure has resulted in reductions in quality as well as costs, rather than increases in value for money.  As a very simple example – in order to meet a target to give every patient an appointment within 48 hours, managers in GPs’ surgeries prevented patients from making appointments more than 48 hours in advance even when the GP had instructed them to return ‘next week’.

Currently, the most well developed/advanced assessments in the private sector revolve around shareholder value and economic value added.  Whilst these rely on the examination of historic data they also draw heavily on the assessment of likely future performance based on current management strategies.  This assessment needs informed value judgements by individuals skilled as investment managers and knwoldegable in the organisation’s business activities.

This leads to an important message in how to assess VfM.  Despite having indicators, all current methods rely, in the final analysis, on professional judgement to interpret the indicators.  The indicators inform these judgements and support management in identifying areas to probe to obtain improved performance in the future.  The VfM indicators in themselves are not fully definitive but highly informative.

So what types of VfM indicators are in use?

This paper is not long enough to detail all the different types of measures.  However, we have picked out three major types of VfM indicators currently in use:

(1) Pricing ratios

These cover the cost or funding level per successful outcome or some form of output measure.  For example, the cost per successful medical episode in the NHS. 

(2) Performance over a range of indices

This often covers the three pillars of quantity, quality and costs of delivery and compares performance between organisations and over time to assess relative VfM.  This can demonstrate improved VFM in one of three ways or a combination - for example:

• We are providing more widgets at the same quality and for the same total cost
• We are providing the same number of better quality widgets for the same price
• We are providing the same number of widgets at the same quality for a lower cost.  

(3) Performance against plan

Here Value is described by the objectives of the organisation’s strategic plan.  If the organisation meets its objectives within the agreed financial targets, then the organisation is regarded as providing good VfM.  The approach relies on effective planning and performance review processes being in place that are sufficiently mature and robust to measure value as well as the monetary aspects of performance.  There are however difficulties of interpretation, for example, when the organisation fails to meet its first year objectives, because of external factors but seems to be on track for the succeeding years. When do the stakeholders decide they are not getting value for money?

Whilst these are very different types of measures, they are not incompatible.  It is often possible to use them in combination to inform the VfM assessment.  For example, in assessing performance against plan, several indices might be used to set targets for performance.  Some form of pricing measure might form part of the calculation of these indices.  In addition, coupling them with other techniques such as the Kaplan Balanced Score Card approach to performance measurement can be very powerful.  In addition many of the simpler measures might still be used at a variety of levels within an organisation providing that there is a clear rationale for the simpler measures and some link can be deduced between them and overall assessment.  However, to arrive at a comprehensive understanding of VfM a more complete model of the business/activity has to be used for the assessment.

How to use the measures

The final challenge is using the measures.  All too often they are seen as independent measurements used to call people to account for their performance and simply published in league tables.  This can lead to very poor decision making.  Organisations, even within the same sectors can work in very different circumstances.  Using inappropriate measures in a league table can penalise organisations that are achieving tremendous results given the limitations of their environment and circumstances. This challenge is particularly acute in the Public sector where we strive for a universal and equitable level service to all irrespective of local circumstances.  Parents want good schools for example in their locality – not 10 miles down the road.

In our view, the most effective use of the measures is in the positive management of the organisation as part of its regular business planning cycle.  This holds true as much for the measures associated with benefits realisation as it does for regular performance metrics. Using the measures as a diagnostic tool and as part of the planning process means that they can inform judgements on performance, highlight the degree to which improvements have been made, provide comparative performance so that good practice can be identified and shared and form an integral part of the organisation’s business strategy.  Coupling them with balanced scorecard techniques and cascading appropriate measures throughout the organisation can also send very strong performance improvement messages to staff and managers.  In this way they become part of the planning process and not simply a stick to beat people with perceived poor performance.

Acknowledgement:  I should like to thank Dr Andy Frost and the rest of the team who contributed to the study that gave rise to this article.

David Mason is an independent consultant specialising in the public sector.  Following a successful career in the European practice of Price Waterhouse, he formed his own consultancy in 1993 and has undertaken a considerable amount of work in the Education Sector.  He is currently one of the OGC's Strategic Advisory Consultants and is also one of the framework management consultancy suppliers to the Department for Education and Skills.  This article represents his views based on work he has undertaken in performance measuremnt and management.