oversight

Performance-Based Organizations: Lessons From the British Next Steps Initiative

Published by the Government Accountability Office on 1997-07-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Government Management,
                          Information, and Technology
                          Committee on Government Reform and Oversight
                          House of Representatives

For Release on Delivery
Expected at
9:30 a.m. EDT
                          PERFORMANCE-BASED
Tuesday
July 8, 1997              ORGANIZATIONS

                          Lessons From the British
                          Next Steps Initiative

                          Statement of J. Christopher Mihm, Acting Associate
                          Director
                          Federal Management and Workforce Issues
                          General Government Division




GAO/T-GGD-97-151
Summary

Performance-Based Organizations: Lessons
From the British Next Steps Initiative

              The administration has proposed the creation of performance-based
              organizations (PBOs), modeled after British Next Steps agencies. PBOs, like
              Next Steps agencies, seek to separate service delivery functions from
              policy functions. In exchange for flexibilities from certain
              governmentwide requirements, the head of the agency is to be held
              directly accountable for the agency’s performance.

              Next Steps agencies are the British government’s predominant form of
              service delivery. As of March, about 75 percent of all British civil servants
              were employed in one of the 130 Next Steps agencies or agencies that
              operate along Next Steps lines. These agencies have reported that, over
              the years, performance has improved, in some cases substantially. Some
              agencies have also reported significant cost savings.

              The British government has confronted some difficult and continuing
              issues Congress may want to consider as it considers the PBO concept.
              These are:

              First, a lack of clarity in the relationship between agencies and their
              parent departments. The British have found that the roles of the Next
              Steps agencies and their parent departments often remain unclear because
              of the problems inherent in trying to delineate responsibilities.
              Management decisions made by Next Steps agencies can have an impact
              on policy choices made by their departments.

              Second, an uncertainty concerning who is accountable for performance.
              Lack of clarity in roles between agencies and departments affects
              accountability. It is sometimes difficult to tell if a poor result was due to
              poor policy or inadequate implementation of that policy.

              Third, difficulties in developing and setting performance goals. British
              evaluations identified three areas of concern regarding performance
              measurement. First, goal setting does not always reflect what is realistic as
              much as adding incremental improvements to prior results. Second, it can
              be difficult to determine exactly what to measure. And third, it is
              important to ensure that performance information is put in a proper
              context and used to improve performance.

              GAO reported to Congress in May 1997 on the administration’s proposal to
              convert the Saint Lawrence Seaway Development Corporation to a PBO.
              GAO found that such a conversion would result in significant changes in the
              Seaway’s management structure, funding mechanism, and relations with



              Page 1                                                         GAO/T-GGD-97-151
Summary
Performance-Based Organizations: Lessons
From the British Next Steps Initiative




Congress. However, since PBOs must be created through the enactment of
enabling legislation, Congress has an opportunity to define its role with
regard to the Seaway or any other PBO.




Page 2                                                    GAO/T-GGD-97-151
Statement

Performance-Based Organizations Lessons
From the British Next Steps Initiative

              Mr. Chairman and Members of the Subcommittee:

              I am pleased to be here today to discuss the British Next Steps initiative, a
              model the administration used in crafting its performance-based
              organization (PBO) proposal, and the lessons that the Next Steps
              experience suggest for PBOs in the United States.

              According to the British government, the aim of the Next Steps initiative
              has been to improve the delivery of government services, obtain better
              value for the taxpayers’ money, and give staff more satisfying work and
              working conditions. Under Next Steps, a government department’s service
              delivery functions, such as paying social security benefits, repairing
              military vehicles, and doing inspections to enforce regulations, are
              separated into distinct organizational units, referred to as agencies.
              Agencies are responsible for delivering those services and are accountable
              to their parent departments for their performance, while departments
              continue to be responsible for policy decisions. Agencies generally are
              given broad flexibility in managing operations while being held
              accountable for meeting specific, agreed-upon performance goals.

              The administration’s proposed PBOs have some important similarities in
              design with Next Steps agencies. For example, both are intended to
              separate the delivery of services—the agency’s role—from policy
              functions—the department’s role. Also, like the Next Steps agencies, the
              administration proposes that PBOs be granted flexibilities to deviate from
              some governmentwide requirements, such as certain personnel and
              procurement processes. Both are to be led by a chief executive—to be
              called a chief operating officer in a PBO—who is selected competitively and
              evaluated annually on the basis of his/her agency’s performance. The chief
              executive’s pay and job security are to be directly tied to annual agency
              performance. The chief executive is to be directly accountable to the head
              of the parent department, who, in Great Britain, is accountable to
              Parliament, or, in our country, to Congress and the President.

              The administration expects that the orientation of management and
              accountability in PBOs will shift from a focus on processes to a focus on
              customers and achieving program results. This shift in focus is to be
              achieved by establishing clear measures of performance which are also
              required by the Government Performance and Results Act of 1993.
              According to the administration, PBOs are to commit to clear management
              objectives, measurable goals, customer service standards, and specific
              targets for improved performance. These clearly-defined performance



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                         Statement
                         Performance-Based Organizations Lessons
                         From the British Next Steps Initiative




                         goals, flexibility in managing operations, and direct ties between the
                         achievement of performance goals and the pay and tenure of the head of
                         the PBO, are intended to lead to improved performance. The administration
                         expects that, in most cases, the creation of a PBO will require statutory
                         changes.

                         As agreed with the Subcommittee, today I will first provide an overview of
                         the Next Steps initiative, including the number and size of British agencies
                         participating in the Next Steps program and the reported performance of
                         those agencies. Second, I will discuss the lessons the British have learned
                         about the Next Steps experience that we believe are most relevant to PBOs.
                         Finally, I will highlight some of the major issues that Congress may wish to
                         examine as it considers the administration’s proposal to transform the
                         Saint Lawrence Seaway Development Corporation into a PBO.

                         My statement today is based on our May 1997 report on the PBO initiative
                         and the Saint Lawrence Seaway Development Corporation’s candidacy.1 It
                         also is based on our continuing efforts to track reinvention initiatives
                         overseas. Our work in this area began with our May 1995 report on
                         management reforms other counties were undertaking and the insights
                         those reforms provided for reform efforts here in the United States.2


                         The Next Steps initiative was launched in 1988 under then Prime Minister
Next Steps Is the        Margaret Thatcher. According to the British government, Next Steps was
Centerpiece of British   undertaken in response to the government’s desire to have the public
Management Efforts       sector provide services through markets or market-like arrangements,
                         managed by people with the resources and authority to provide those
                         services. The reforms were also carried out to streamline the central
                         government, which, the government concluded, was burdened by high
                         operating costs and a workforce that was too big and insufficiently
                         focused on results.

                         Beginning with the first Next Steps agency—the Vehicle Inspectorate of
                         the Department of Transport which was created in August 1988—Next
                         Steps agencies have become the British government’s predominant form
                         of service delivery. As of March 1997, about 75 percent of all British civil
                         servants were employed in one of the 130 Next Steps agencies or in

                         1
                          Performance-Based Organizations: Issues for the Saint Lawrence Seaway Development Corporation
                         Proposal (GAO/GGD-97-74, May 15, 1997).
                         2
                          Managing for Results: Experiences Abroad Suggest Insights for Federal Management Reforms
                         (GAO/GGD-95-120, May 2, 1995).



                         Page 4                                                                      GAO/T-GGD-97-151
Statement
Performance-Based Organizations Lessons
From the British Next Steps Initiative




agencies that operate along Next Steps lines. Nearly one-third of the
agencies employ 250 or fewer staff, and more than half the agencies
employ 700 or fewer staff.

However, some agencies are fairly large. The largest agency is the Social
Security Benefits Agency, which has about 75,000 employees. Other large
agencies include those responsible for the prison system, employment
training, and defense evaluation and research. Each of these agencies has
over 10,000 employees. While not formally Next Steps agencies, Inland
Revenue (which administers income and other taxes) and Her Majesty’s
Customs and Excise (which, among its responsibilities, enforces import
and export restrictions) operate fully along Next Steps lines. Each of these
organizations has over 20,000 employees.

Many agencies provide services directly to the public—for example the
United Kingdom Passport Agency and the Social Security Benefits Agency.
Other agencies provide services to other parts of the government, such as
those agencies that provide information technology support or logistics
support for the defense forces. Next Steps agencies also cover a range of
service and program types. For example, several agencies have a research
focus, such as the agencies that do research on agricultural issues, while
some other agencies have regulatory responsibilities, such as those
concerning food and vehicle inspection.

Next Steps agencies have reported that, over the years, performance has
improved, in some cases substantially. For example, the United Kingdom
Passport Agency reported that since 1993 it has made significant and
consistent improvements in the timeliness of its processing of passport
applications. Overall, the British government’s most recent annual
summary review of the Next Steps initiative notes that 79 percent of the
agencies’ key performance goals were met for the 1995-1996 time period.3
This level of accomplishment generally is consistent with the levels
reported in previous years. Eight agencies reported that they achieved at
least 80 percent of their goals for 1995-1996, even after they had set at least
80 percent of those goals at a more stringent level than in previous years.
Not all goals are comparable from one year to the next, but for those that
are quantified and are comparable, about 60 percent reported the same or
better results for 1995-1996 as compared to 1994-1995. On the other hand,
14 agencies reported that they had failed to achieve at least half of their
key performance targets.


3
 Next Steps Agencies in Government, Review 1996, London, The Stationary Office, Cm 3579.



Page 5                                                                       GAO/T-GGD-97-151
                         Statement
                         Performance-Based Organizations Lessons
                         From the British Next Steps Initiative




                         Some agencies also have reported significant cost reductions. For
                         example, both the National Health Service Pensions Agency and the
                         Scottish Office Pensions Agency showed significant savings in their
                         “running costs,” which essentially include employee pay, benefits, and
                         other administrative costs. The National Health Service Pensions Agency
                         reported that it reduced its running costs by 11 percent in 1994-1995, and
                         the Scottish Office reported that it reduced its 1995-1996 running costs by
                         17 percent. In addition, the United Kingdom Passport Agency reported that
                         it had reduced the unit cost of passport services by 4.3, 5.2, and
                         7.25 percent over the past 3 years, respectively.


                         In moving forward with the Next Steps initiatives, the British government
Assessments of Next      has confronted some difficult and continuing implementation issues that
Steps Provide Insights   Congress may want to consider as it assesses the PBO concept. These
for PBO Proposals        issues include (1) a lack of clarity in the relationship between agencies
                         and their parent departments, (2) an uncertainty concerning who is
                         accountable for performance, and (3) difficulties in developing and setting
                         performance goals.


Agency and Department    The British have found that the roles of the Next Steps agencies and their
Roles                    parent departments often remain unclear because of the problems
                         inherent in trying to delineate responsibilities.4 For example, while in
                         theory departments make policies and agencies implement those policies,
                         a British evaluation found that there has not always been a clear
                         separation between policymaking and implementation. Management
                         decisions made by Next Steps agencies sometimes have had an impact on
                         policy choices made by their parent departments. For example, if an
                         agency’s goal is to reduce an operating deficit, it may propose to do so by
                         creating a user fee. While this proposal may be viewed as a decision by
                         agency management on how to implement the policy of reducing costs, it
                         could also be viewed as making a policy decision about the type of public
                         program for which user fee funding is appropriate.

                         The British government has taken steps to address the issue of unclear
                         department and agency roles, but with limited success, according to
                         published studies. One step taken by the British government has been the
                         establishment of the “Fraser Figure,” a senior official who is to improve
                         coordination between the agency and the department. The Fraser Figure is
                         used in about 40 percent of the Next Steps agencies. However, evaluations

                         4
                          Trosa, Next Steps: Moving On (Feb. 1994) and After Next Steps: The Massey Report (Jan. 1995).



                         Page 6                                                                         GAO/T-GGD-97-151
                    Statement
                    Performance-Based Organizations Lessons
                    From the British Next Steps Initiative




                    suggest that this approach has not worked well because (1) the Fraser
                    Figure rarely is able to represent the views of both the department and
                    agency in a balanced way, and (2) this official does not have sufficient
                    staff to coordinate activities. In addition, advisory boards have been
                    established in about 30 percent of the Next Steps agencies, but they too
                    are reported to have had limited success. Available reports indicate that
                    the boards tend to be unbalanced in their advisory and monitoring
                    responsibilities, generally emphasizing one over the other.


Accountability      The lack of clarity concerning the respective roles and responsibilities of
                    agencies and departments also affects accountability for results. Since the
                    distinction between administration and policy often remains unclear, one
                    British evaluation described the task of assessing accountability as a
                    “complex web of issues.”5 For example, because policies and their
                    implementation are inherently linked, it is difficult at times to distinguish
                    who is truly responsible for a result—the department minister who makes
                    the policy or the agency chief executive who implements the policy.
                    Questions have arisen about whether a poor result was due to poor policy
                    or inadequate implementation and about who was ultimately accountable
                    for the resulting performance. To mitigate this concern, the British
                    government has encouraged greater collaboration between ministers and
                    chief executives, facilitated by Fraser Figures—an approach that, as I have
                    noted, has had limited success.


Performance Goals   The British experience with Next Steps has underscored the fact that
                    public sector performance measurement is a complex, iterative process
                    involving a number of competing considerations. A British evaluation
                    suggested that three major concerns have arisen in connection with Next
                    Steps goal-setting.6 First, goal-setting does not always reflect what is
                    realistic; it often consists of no more than adding incremental
                    improvements to prior results. As a result, targets are sometimes set
                    simply to reflect an improvement on the previous year’s achievement
                    rather than being based on an assessment of what might be possible.
                    Tensions can arise between the agency and department over target
                    magnitude, with departments generally favoring more ambitious
                    improvement targets.



                    5
                     After Next Steps: The Massey Report (Jan. 1995).
                    6
                     Trosa, Next Steps: Moving On (Feb. 1994).



                    Page 7                                                       GAO/T-GGD-97-151
Statement
Performance-Based Organizations Lessons
From the British Next Steps Initiative




A second challenge to performance measurement is the difficulty of
determining exactly what to measure. The evaluation showed that
performance measures frequently focus on what agencies can measure,
rather than on what is most important in assessing performance. For
example, one enforcement agency had established a performance measure
to count the total number of enforcement actions. However, the agency
had no information about how many infractions actually occurred, so the
agency did not know to what extent, if at all, its enforcement actions
contributed to reducing illegalities. Further complicating the
determination of what to measure is the fact that some targets, such as
efficiency and quality, may even be in conflict with one another, requiring
a careful balance.

Finally, a third issue raised by the study was the need to ensure that
performance information is put in a proper context and used to improve
performance. The study stated that all the chief executives interviewed
believed goals and performance information should be the basis for
decisionmaking and resource allocation, but only as a starting point and
tool for subsequent discussions. Using unmet targets to criticize agencies,
rather than attempting to examine the reasons why the targets were not
reached and developing strategies to meet unmet goals, may simply lead
agencies to establish more easily achievable targets. For example, one
British official commented that the goal-setting process can be
discouraging when an agency is criticized for reaching 98 percent of a
100 percent target without considering how much effort the 98 percent
represents.

The British government has initiated several efforts to address the
performance measurement issues it, in company with other governments,
confronts. For example, in an attempt to provide a basis for making
summary judgements on the overall performance of agencies, Next Steps
agencies are moving to what the British are calling “indexation.”
Indexation is a method of measuring an agency’s overall performance
whereby each performance goal is given a score that is weighted to its
level of priority. The scores of all goals are then combined to produce an
overall score for an agency. By comparing overall scores over time,
ministers of departments and agency chief executives can tell if overall
performance is improving and whether targets are becoming more
challenging. Some agencies are already adopting this approach in
reviewing performance and setting targets, and reporting will begin in the
Next Steps’ 1997 annual summary report.




Page 8                                                      GAO/T-GGD-97-151
                            Statement
                            Performance-Based Organizations Lessons
                            From the British Next Steps Initiative




                            The administration’s proposal to transform the Saint Lawrence Seaway
Potential Issues With       Development Corporation into a PBO suggests how the Next Steps
the Saint Lawrence          experience can be illustrative for Congress as it considers the
Seaway Development          administration’s initiative. We reported to Congress in May on the
                            administration’s proposal to convert the Seaway into a PBO. We noted that
Corporation PBO             a such a conversion would result in significant changes to the Seaway’s
Proposal                    current management structure, funding mechanism, and relationship with
                            Congress. I will briefly highlight the points we raised with regard to each
                            of these issues:

                        •   First, as a result of the Seaway’s conversion to a PBO, the Seaway’s
                            leadership would change from an administrator appointed by the
                            President and confirmed by the Senate to a contracted-for chief operating
                            officer (COO) selected by the Secretary of Transportation. The COO would
                            be directly accountable to the Secretary of Transportation who would, in
                            turn, continue to be accountable to Congress and the President for the
                            activities and performance of the Seaway PBO.

                            British evaluations of Next Steps have shown that developing and
                            monitoring a chief executive’s contract is a long-term and iterative
                            process. We noted that, since the Seaway is a relatively small part of the
                            Department of Transportation (DOT), the Secretary may have to spend a
                            disproportionate amount of time in crafting and monitoring the COO’s
                            contract with specific and measurable performance goals. This degree of
                            oversight and accountability has not been applied before to the Seaway.
                            However, if the Seaway is one of the first PBOs, administration architects of
                            PBOs may pay particular attention to the development of the contract, since
                            it could be a model for other PBOs.

                            Although the PBO would remain part of DOT, it would have greater
                            autonomy in its relationship with its parent department. The Seaway
                            proposal follows the Next Steps program in attempting to separate
                            policymaking from the carrying out of services. The Seaway has started to
                            work on this separation by drafting a list that divides the functions to be
                            performed between itself and DOT under the PBO concept.

                        •   Second, the Seaway is currently funded through the annual appropriations
                            process. However, as a PBO, the Seaway is proposed to be funded through
                            a mandatory payment, whose amount will be determined by a formula
                            based primarily on the tonnage of cargo moved through the Seaway.
                            Because of its design, Seaway officials told us that they believed the
                            formula would provide a more predictable funding mechanism than annual



                            Page 9                                                      GAO/T-GGD-97-151
               Statement
               Performance-Based Organizations Lessons
               From the British Next Steps Initiative




               appropriations, and that this would allow them to operate in a more
               businesslike manner and better plan Seaway operation and maintenance
               functions. We noted, however, that the proposed funding mechanism
               raises a potentially significant issue of budget policy, in that funding would
               shift from a discretionary account to mandatory funding.
           •   Third, the relationship between Congress and the Seaway PBO would
               fundamentally change. Congress would no longer have a direct role in
               funding the agency or in selecting the agency head. It is also unclear what
               type and level of oversight Congress would have over the Seaway.
               However, since PBOs must be created through the enactment of enabling
               legislation, Congress has an opportunity to define its role with regard to
               the Seaway or any other PBO.


               In summary, PBOs would seek to emulate Next Steps agencies in important
               ways in both intent and design. Both are to operate in a more businesslike
               manner, gaining flexibility and freedom from constraints in exchange for
               greater accountability for results. Because of their similarities, unresolved
               issues from the Next Steps experience can provide lessons for the U.S.
               effort, such as the need to focus on clarity in relationships between
               agencies and their parent departments, certainty concerning who is
               accountable for performance, and developing and setting good
               performance goals.

               Mr. Chairman, this concludes my prepared statement. I would be pleased
               to respond to any questions you or other Members of the Subcommittee
               may have.




(410148)       Page 10                                                      GAO/T-GGD-97-151
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