School of Business and Social Sciences

Research Papers from the School of Business and Social Sciences

Roehampton University Year

Performance Management Systems: A Conceptual Model and and Analysis of the Development and Intensication of New Public Management in the UK
Jane Broadbent Richard Laughlin

jane.broadbent@roehampton.ac.uk Kings College London, University of London, This paper is posted at Roehampton Research Papers.

http://rrp.roehampton.ac.uk/bsspapers/2

PERFORMANCE MANAGEMENT SYSTEMS: A CONCEPTUAL MODEL AND AN ANALYSIS OF THE DEVELOPMENT AND INTENSIFICATION OF NEW PUBLIC MANAGEMENT IN THE UK

Jane Broadbent Vice Chancellors Office Roehampton University, Roehampton Lane, London SW15 5PH jane.broadbent@roehampton.ac.uk and Richard Laughlin Department of Management Kings College, London, University of London London SE1 9NN richard.laughlin@kcl.ac.uk

November 2006 The authors would like to acknowledge, with thanks, the support of the ESRC Public Services Programme Draft only, please do not quote from the contents without prior permission from the authors.

PERFORMANCE MANAGEMENT SYSTEMS: A CONCEPTUAL MODEL AND AN ANALYSIS OF THE DEVELOPMENT AND INTENSIFICATION OF NEW PUBLIC MANAGEMENT IN THE UK
Abstract This paper, builds on the view that too much attention in the management, management control and management accounting literatures has been given to ex post performance measurement as distinct from ex ante performance management. The paper builds on the conceptual models of Performance Management Systems (PMS) developed by Otley (1999) and Ferreira and Otley (2005). Three key developments are developed in this conceptualisation in relation to focus, context and culture leading to a middle range (Laughlin, 1995, 2004; Broadbent and Laughlin, 1997) conceptual model of alternative PMS lying on a continuum from transactional at one end to relational at the other built on respectively instrumental and communicative rationalities. The conceptual model is then used to provide new insights into the development of the new public management (NPM) in the UK. This analysis demonstrates how the move in 1982 with the Financial Management Initiative, to the 1988 Next Steps and the recent developments through the Public Service Agreements and targets from 1997 are a progressive move from relational PMS to be increasing and progressive more transactional in form intensifying the nature, significance and power of NPM to control public services. Key Words: performance management systems, communicative and instrumental rationality, UK public services, new public management, public service agreements, targets.

Performance Management Systems: A Conceptual Model and an Analysis of the Development and Intensification of New Public Management in the UK Introduction The analysis of performance measurement systems is considerably more extensive than the analysis of performance management systems (PMS) (cf. Fitzgerald et al, 1991; Otley, 1999, Brignall and Modell, 2000; Kloot and Martin, 2000). In fact, as Kloot and Martin (2000:233) highlight, PMS often refer to individual performance management or appraisal schemes. Despite the work of these authors to open up this understanding of PMS the wider conceptual debate has, in some cases, been closed down again by a concentration on how to measure this wider emphasis for instance through the balanced scorecard (cf. Kaplan and Norton, 1992, 1996). This paper distances itself from such a narrowing of understanding of what constitutes PMS and builds on the work of Fitzgerald et al. (1991), Fitzgerald and Moon (1996), Otley (1999) and Ferreira and Otley (2005) that PMS are concerned with the management of results (outcomes or ends to achieve) and the nature and functioning of the determinants of these results (the means used to achieve these results) at a more organisational, rather than individual, level.

Otley (1999) and Ferreira and Otley (2005) argue that there needs to be greater conceptual understanding of PMS before detailed measurement is considered. This paper builds on their work to develop such a model. It also shows the power of this modelling in terms of providing a rather different analysis of the current approaches to new public management (NPM) (Hood, 1991, 1995) and its extensions into the target regime (Public Administration Select Committee, 2003) of the current Labour Government.

Otley (1987, 1999) and Ferreira and Otley (2005) have done more than most to take forward the conceptual understanding of PMS and it is their model which forms the starting point for the conceptualisation in this paper. Otley (1999) and Ferreira and Otley (2005) build their conceptual model of PMS empirically by drawing from an analysis of management control systems in a range of organisations. Otley (1999) poses his conclusions from this analysis in terms of five issues or questions that need to answered by any organisation in relation to the design and nature of its PMS. This is extended in Ferreira and Otley (2005) to 12 questions 8 of which relate to PMS design and the other 4 to issues and questions related to what they refer to as the underlying culture and context which are seen to influence the nature of the PMS in any organisation.

This paper builds on this framework but extends it in three major ways. First, by making rather clearer that the focus of any PMS is related to financial flows between a transferor and transferee. Second, by extending understanding of context and its relationship to PMS design. This is undertaken by clarifying the organisational focus of any PMS and by introducing a network understanding of interlinked PMS designs within organisations. Third, by extending the cultural understanding of PMS design and linking this to alternative guiding models of rationality. The concern with rationality and rationalisation will be a key theme of the paper. The logic for this is because the very process of linking action to results and the determinants of these results and making transparent this thinking to explain action which are the key elements of any PMS - involves, as Townley, Cooper, and Oakes (2003: 1045) indicate, the pursuit of reason in human affairs, which can be directly related to

the discourse of rationalisation. This rationalisation assumption, of course, assumes that actions have an intentionality rather than being completely random events. They are, in this sense, goal-oriented (Hoogenboom and Ossewaarde, 2005: 602) using goals in a broad sense related to the action having underlying intentions. A key conceptual question for this paper will relate to the form of rationality that guides PMS design conceptually and empirically.

The building of this conceptual model and its relationship to particular empirical situations is based on middle range thinking (cf. Laughlin, 1995, 2004; Broadbent and Laughlin, 1997). The paper will develop a conceptual model of PMS, which will be used as a framework providing a language for analysing applications in actual empirical situations. This conceptual skeleton is not predictive and it is not possible to use it to build hypotheses that can be tested empirically but rather it presents, in a skeletal sense, a set of possible conceptual alternatives that are likely to be present in any empirical situation and a language by which to discuss them. The empirical detail does not test these models it provides the flesh which makes the skeleton meaningful as well as providing a source to reshape the conceptual framework should it fail to adequately express, in a skeletal sense, the empirical situation.

The empirical focus of this paper is the recent PMS changes that have been occurring in the continuing modernisation agenda of the UKs public services (cf. Cabinet Office, 1999; Broadbent and Laughlin, 2005). It starts by analysing the evolving nature of NPM (Hood, 1991, 1995) or, more specifically, the new public financial management (cf. Olsen, Guthrie and Humphrey, 1998:7) demonstrating an intensification of a particular PMS conceptual emphasis. This has culminated

specifically on the UKs Labour Governments introduction of Public Service Agreements (PSAs) and more generally on an emphasis on output and outcome controls. PSAs specify explicit objectives and performance indicators to achieve and are aligned with the financial allocations coming from the Comprehensive Spending Review (CSR) and Spending Reviews (SRs)1. PSAs were introduced as part of the CSR and SR development and feature at the pinnacle of different public service delivery chains2 (HM Treasury/Cabinet Office, 2004, paragraph 2.27). We will argue that the introduction of PSAs takes NPM in new directions with a new emphasis.

The paper is divided into three further sections followed by a reflective conclusion. The following (second) section explores the nature of PMS, with a concentration on a critical analysis of the conceptual model of Ferreira and Otley (2005). The third section extends and refines the conceptual model of Ferreira and Otley (2005) to provide a richer middle range theoretical understanding of PMS. The fourth section uses this developed conceptual model to analyse the evolving nature of NPM in the UK. Finally, the reflective conclusion will draw the analysis together, providing an initial analysis of the intensification of NPM in the UKs public sector, as well as developing a future research agenda for analysing PMS across a wide range of public and private sector organisations.

CSR and SR are three year rolling financial plans and allocations for the entire public sector. The first CSR was undertaken in 1998 a year after the Labour Government was elected. Apart from the CSR in 1998 there have been three subsequent SR - the last of which was published in July 2004 covering the years 2005 to 2008. The next CSR is planned for 2007. 2 They form a foundation element in the design of the PMS for all the different functional public services. However, this premier position can be reshaped on moving down the delivery chain where the PSA can be redefined and/or amplified. This paper is part of a wider ESRC funded project that explores the nature of the PMS along the delivery chain of higher education.

Current Views on Performance Management Systems The term, performance management, is widely used and yet when probed provides substantial differences of meaning. For example, it is often used to refer to human resource management systems (HRM) an area where PMS are linked to controlling individual (employee) behaviour: performance management includes: planning work and setting expectations, continually monitoring performace, developing the capacity to perform, periodically rating performance in a summary fashion, and rewarding good performance (United States Office of Personnel Management, http://www.opm.gov/perform/overview.asp )

We are concerned with another sphere; the management, management control and accounting literature where there is less consensus in terms of understanding. Otley (1999: 364) links PMS to overall control systems which he reminds his readers goes beyond the measurement of performance to the management of performance (Otley, 1999:364 (emphasis in the original)). A reminder for the management and accounting community is required because of the focus on measurement in these disciplines reprised in the HRM approach to PMS illustrated above - and the judgement that this has had a limiting effect on conceptualising PMS.

A number of authors, Fitzgerald et al (1991) and Fitzgerald and Moon (1996), Otley (1999), build and develop the initial work of Otley (1987), seeking to provide a development of this broader conceptualisation. As indicated in the introduction

Fitzgerald et al (1991) make clear that PMS involves the management of results (ends) and the determinants of these results (means) without specifying exactly what these involve conceptually or empirically. Otley (1999: 365) reshapes this 7

understanding to develop .five main issues that need to be addressed in developing a framework for managing organizational performance. They are posed as questions on the grounds that empirical answers to these questions would, according to Otley, supply insights into the design of particular PMS. These five questions/issues are as follows: 1. What are the key objectives that are central to the organizations success, and how does it go about evaluating its achievement for each of these objectives? 2. What strategies and plans has the organization adopted and what are the processes and activities that it has decided will be required for it to successfully implement these? How does it assess and measure the performance of these activities? 3. What level of performance does the organization need to achieve in each of the areas defined in the above two questions, and how does it go about setting appropriate performance targets for them? 4. What rewards will managers (and other employees) gain by achieving these performance targets (or, conversely, what penalties will they suffer by failing to achieve them)? 5. What are the information flows (feedback and feed-forward loops) that are necessary to enable the organization to learn from its experience, and to adapt its current behaviour in the light of that experience? (Otley, 1999: 366)

As Otley (1999:366) makes plain .these questions relate very closely to some of the central issues of modern management and management accounting practice. They also give more conceptual definition to the management of results (ends) (issues 1 and 3) and the management of the determinants of these results (means) (issues 2, 4 and 5). It is also apparent that the HRM understanding of PMS is also swept into Otleys framework in issue 4 but with an acknowledgement that rewards needs to be understood in the widest possible sense, and not restricted to just short term financial rewards (Otley, 1999: 366 (footnote 6)).

Ferreira and Otley (2005) develop Otleys (1999) framework in a number of ways. First, they rename PMS, Performance Management and Control Framework (PMC). Whilst PMS gives a more thorough description of the systems concerned the two are identical, so to avoid any further confusion PMS will be retained in this paper. Second, they add another dimension to the understanding of PMS by drawing from Simons (1995) concept of levers of control. Third, they draw from a further set of case studies data that can be used to help reform the insights of Otley (1999) and Simons (1995) into a more developed conceptual model (framework) of PMS. Fourth, they expand the five issues (questions) to twelve eight of which relate to more functional concerns about PMS design and four to more contextual and cultural factors which underpin and to an extent guide the more functional concerns (the other 8 issues/questions).

The eight more functional issues/questions specify in more depth and detail issues related to the management of results to achieve and the management of the determinants of these results. The eight issues/questions are as follows: 1. What is the vision and mission of the organization and how is this brought to the attention of managers and employees? 2. What are the key factors that are believed to be central to the organizations overall future success? 3. What strategies and plans has the organization adopted and what are the processes and activities that it has decided will be required for it to ensure its success? 4. What is the organization structure and what impact does it have on the design and use of the performance management and control system? How does it influence and is influenced by the process of strategy implementation? 5. What are the organizations key performance measures deriving from its key objectives, key success factors, and strategies and plans? How does the organization go about assessing and measuring its success in achieving them?

6. What level of performance does the organization need to achieve in each of the areas defined in the above questions, and how does it go about setting appropriate performance targets for them? 7. What processes does the organization use for evaluating individual, group, and organizational performance? How important is formal and informal information on these processes? What are the consequences of the performance evaluation processes used? 8. What rewards (both financial and non-financial) will managers and other employees gain by achieving performance targets (or, conversely, what penalties will they suffer by failing to achieve them)? (Ferreira and Otley, 2005: 43) Questions 1, 2 (in part), 5 and 6 are concerned with the results (or ends), the means to achieve them can be seen in Questions 2 (in part), 3, 4, 7 and 8. It is also possible to see that the HRM emphasis is expanded in this framework relative to Otley (1999) with Questions 7 and 8 being aligned to these HR concerns.

Ferreira and Otley (2005: 41) position these issues/questions in what they refer to as an underlying culture and context since these permeate the whole of the performance management and control (PMC) system but are not addressed by the above questions. Drawing from a range of literature from Perrow (1967) to Chow, Harrison, McKinnon and Wu (1999), Ferreira and Otley (1999: 41) point out that it has been shown that variables relating to external environment, strategy, culture organisational structure, size technology and ownership structure have an impact on the control system. They then go on to point out that strategy and organisational structure are already explicitly built into the framework (Ferreira and Otley, 1999:41) leaving the other elements as context variables apart from culture which they separate out as a notable contextual variable that pervades the entire control system influencing choices and behaviours of individuals (Ferreira and Otley, 1999:41).

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Their understanding of context and culture is expressed in terms of a further four questions/issues that need to be considered to help understand the design of any PMS in any organisational context. These four questions/issues are as follows: 9. What specific feedback and feed-forward information flows has the organization devised for itself? What sort of information flows have been created for monitoring current performance and bringing about adaptation of current behaviour? What types of feedforward information flows (if any) have been formulated to enable the organization to learn from its experience, to generate new ideas and to recreate strategies and plans? 10. What type of use is given to feedback and feedforward information flows and to the various control mechanisms in place? Is use predominantly diagnostic, interactive, or a combination of both? 11. How has the performance management and control system changed in the light of the change dynamics of the organization and of its environment? What changes have occurred at the level of those systems in anticipation or response to such stimuli? 12. How strong and coherent are the links between the components of the performance management and control system (as denoted by the above 11 questions)? (Ferreira and Otley, 2005: 43)

The twelve questions/issues around which Ferreira and Otleys (2005: 41) PMS framework is built provide .an heuristic tool to facilitate the rapid description of significant aspects of control systems design and operation. Figure 1 illustrates these elements.

[FIGURE 1 ABOUT HERE]

This figure illustrates that the actual PMS is at the core of any organisation with the design guided by the eight functional questions which are closest to this centre point. These questions, in turn, are moulded by four further questions related to culture and

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context mapped in the outer rim of the figure, being somewhat distant from the actual PMS design but moulding its nature.

Developing a Conceptual Framework for PMS Unquestionably the framework of Ferreira and Otley (2005) has made considerable progress in defining the generic, conceptual nature of any PMS. This following, however, develops three areas in a more detailed fashion. First, we wish to be clearer about the focus of any PMS. The second and third areas of development relate to Ferreira and Otleys (2005:41 et seq) elements of context and culture which, whilst rightly recognised in their framework as being significant, needs further explication. We address the three areas to provide a developed PMS conceptual model. This model is summarised in Figure 2 and is reproduced here to provide an overview of where the argument is proceeding but will be explained in more depth at the end of this section.

[FIGURE 2 ABOUT HERE]

(i) Clarifying the Focus of any PMS Whilst the focus of any PMS is, as the title implies, the performance of any unit that the PMS is trying to control it is not clear how the former leads to the latter. As Figure 2 indicates, the argument of this paper is that the financial transfers (explicit and implicit) and allied accountability requirements in a relationship between a transferor of funds and a transferee collectively form the key intervening variable between the aspirations in a PMS and actual performance. Thus, PMS has a focus

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upon and uses the unique role of money to ensure that the desired ends are achieved through the chosen means of action.

This typecasting implies three things. First, that a PMS is primarily a vehicle for clarifying the ends an organisation or individual wishes to achieve and the means by which to achieve them. Second that to achieve these goals needs the involvement of other organisations and/or individuals. Third, that implicit or explicit financial transfers, controlled through the design of the PMS, are key in ensuring that aspirations become reality. Thus, the PMS designer is described as the transferor in Figure 2 and the other organisations and individuals the transferee.

Money is what Habermas calls a steering media (Habermas, 1987: 165 et seq) which mediate (Power and Laughlin, 1996:444) between values to achieve (Habermas lifeworld) and the action elements which achieve these values (Habermas systems). Whilst Broadbent, Laughlin and Read (1991: 3 et seq) make clear that lifeworlds, systems and steering media can be given meaning as tangible societal underlying values, institutions and organisations it is also possible to understand these distinctions .heuristically or methodologically as a basis for organising empirically enquiry (Power and Laughlin, 1996:444). In that sense there is a case for steering media to be seen to mediate system and lifeworld and which allow the normative priorities of the latter to flow into the former (Power and Laughlin, 1996:444). Heuristically, in the context of this paper, it is possible to typecast PMS as the lifeworld values of the controller of the system. The ways in which these values are achieved is through systems which require steering media to ensure the latter adequately achieves the former.

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In Habermas earlier work money and power are key steering media. In his later work he focussed more on law (Habermas, 1996) somewhat eclipsing the relevance of the former two elements. Money to Habermas (1987: 264) has the properties of a code by means of which information can be transmitted from a sender to a receiver making it possible to produce and transmit messages with a built-in preference structure. Habermas saw moneys power to be all encompassing; having the ability to decouple itself from lifeworld direction and control. Because of this danger, Habermas shifted his emphasis to administrative power and then to law which he saw as possibly less powerful ways to steer systems but which have less chance of decoupling from lifeworld concerns. Yet to Dodd (1994: 74 et seq) and Power and Laughlin (1996: 458 et seq) this fear is fundamentally misplaced and reduces the role and importance of money. Put simply Habermas .characterization of the relationship between money and lifeworld is ultimately shallow (Power and Laughlin, 1996: 459). Money is, as Habermas makes clear, a powerful code by means of which information can be transmitted from a sender to a receiver (Habermas, 1987: 264) but needs the imprint of the lifeworld (the PMS in the context of this paper) to provide the details of this information coding. More generally there is no more powerful steering media than money to ensure that the PMS (lifeworld) demands are met by those given the task to achieve these requirements (systems). It is for this reason that a PMS, to achieve the performance it desires, needs to be expressed in and through the transfers of money from a transferor to a transferee.

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(ii) Clarifying Context Ferreira and Otleys (2005: 41) last four questions/issues relate to context and culture. Thus, they ask about information implications within the make-up of any PMS; coherence of the entire PMS; and its adaptation to the changes within the wider organisations in which they are located. These concerns are unquestionably important making any PMS workable in the widest sense both currently as well as in the future, yet they are only a partial depiction of the contextual and cultural aspects of PMS.

Context in broad terms refers to the location and nature if the entity to which the PMS relates. This can be explored at a variety of different levels. Some hints on this are apparent in Ferreira and Otley (2005) with the recognition that their model is actually applicable to an organisation as a whole. We wish to emphasise that there are different levels within any system and that there are interdependencies between them which need to be explored. Ferreira and Otley (2005:44) implicitly recognise this in terms of the need to confirm the relevance of their questions/issues by use but that use requires the questions to be asked at several hierarchical levels right down to first level management, and evidence gathering about patterns of usage and behaviour at each level. Our view is this needs to be more explicitly highlighted and that the interconnectedness of organisations and individuals and how this affects PMS design is crucial. In this respect we would also wish to emphasise that context is not only about how the PMS reacts to organisational change but the context itself moulds both the PMS design and the financial transfer as Figure 2 indicates. (iii) Clarifying Culture As indicated above, whilst Ferreira and Otley (2005) recognise context and culture they only touch on some of the important aspects of both. We also wish to extend the

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analysis of culture, which as highlighted in the introduction and represented diagrammatically in Figure 2, is related to two fundamentally different forms of rationality: instrumental and communicative.

This link to rationality is pertinent because the elements that make up any PMS are the social and cultural processes that make up the project of rationalization due to their power to ..shape the structure and functioning of work organizations (Hasselbladh and Kallinikos, 2000: 697). These associations with the project of rationalization are closely linked with ideas and thinking of particularly Max Weber and his critics, notably Jurgen Habermas.

Allen (2004: 134/135), drawing heavily from Collins (1986), notes there are at least three different rationalisation processes in Webers work but, for the purposes of this paper, it is possible to concentrate on only one of these - the rationalisation processes in his theory of social action. Townley, Cooper and Oakes (2003:1045) refer generically to rationalisation as the pursuit of reason in human affairs which, to Weber, in the context of social action, assumes a concern to structure and make transparent intended ends and means to achieve such ends. It is for this reason that Weber saw rational social action as inevitably instrumental in the broad sense of defining social action in an intentional sense of trying to achieve some defined end state and thinking rationally about the means to achieve these ends, making transparent any indirect repercussions. It involves, as Weber (1978: 26) himself makes plain: ..the rational consideration of alternative means to the end, of the relations of the end to secondary consequences and finally of the relative importance of different possible end states.

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This move to what Hoogenboom and Ossewaarde (2005: 603) refer to as goaloriented rationality is, to Weber, inescapably linked with the development from premodern to modern society: Weber claims that the transition from pre-modern to modern society was accompanied by a transition from (mainly) a traditional form of social action, which was based on ingrained habituation, to a goal-oriented rational form of social action, that is, action in which the means to attain a particular goal are rationally chosen. (Hoogenboom and Ossewaarde, 2005: 608)

Wallace (1994) makes plain that this recognition does not define the actual ends to be pursued or the means that should be adopted to achieve these ends. Neither does it indicate what secondary consequences might arise. The PMS directing social action and the underlying rationalities at work are always contextually defined even though it is possible to provide some skeletal middle range ideal types of models of rationalities that might be present. Working under one or other of these ideal types will, like the contextual factors, directly affect the way the 8 questions of Ferreira and Otley (2005) are both asked or not asked and what would be a coherent set of answers even if they were asked. Such is the power of models of alternative cultural rationalities.

Webers understanding of possible conceptual end states, which he saw as the dominant area of concern, was encapsulated primarily in two key alternative forms of rationality (which Weber described as Zweckrationalitat and Wertrationalitat) but these were moulded and, in many respects, given meaning by other competing rationalities (substantive versus formal rationality and practical versus theoretical rationality) that defined primarily how the ends could be evaluated but also relate to the choice of appropriate means. These more secondary rationalities link directly with the dominant forms of rationality to provide two ideal types Zweckrationalitat (with

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substantive and practical rationalities) and Wertrationalitat (with formal and theoretical rationalities).

Zweckrationalitat, or instrumental rationality, as it has come to be known, was originally conceived in relation to individual values and particular self interest or even personal aggrandizement (Wallace, 1994: 23). As Weber (1978: 28) made clear: .a uniformity of orientation may be said to be determined by self-interest if and insofar as the actors conduct is instrumentally (zweckrational) oriented towards identical expectations

Whilst Webers analysis is very individual focussed, the essence is, as Wallace (1994: 25) indicates, described as innate self-interest rationality which gives the impression of a very clear and unambiguous end state driven through by an individual who has a single minded purpose. It is probably for this reason that the more orthodox translation (Wallace, 1994: 25) of Zweckrationalitat is instrumental rationality. Wallace (1994: 25) is uncomfortable with this latter descriptor since his view is that all forms of rationality are instrumental and it is not just Zweckrationalitat that should be described in this way. Despite this argument, instrumental rationality, as a descriptor, predominates (cf. Townley, 2002; Townley, Cooper and Oates, 2003; Allen, 2004) such that instrumental rational action is taken to be: based on rational calculation about the specific means of achieving definite ends you do something because it is the effective means of achieving a specific goal. (Allen, 2004: 78)

Whilst Weber is of the view that instrumental rationality will, in the end, develop into the iron cage, where even individual self-interest will give way to a more abstract set of bureaucratic goals, he does pose an alternative, idealistic, end state.

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This he describes as Wertrationalitat, or as Wallace (1994: 25) describes it, as learned non-self-interest rationality. The reason for this altruistic descriptor is because of the examples Weber gives for this form of rationality, which would include: .actions of persons who, regardless of possible cost to themselves, act to put into practice their convictions of what seems to them to be required by duty, honor, the pursuit of beauty, a religious call, personal loyalty, or the importance of some cause no matter in what it consists. (Weber, 1978: 25)

As Wallace (1994: 25) makes plain .this type of rational orientation is not instinctual, not universal, and not fixed but learned, variable and changeable. Whilst there is less systematisation and greater variability in this end state, relative to instrumental rationality, its lack of instinctiveness and connectedness to innate beliefs other than those that are learned makes it somewhat idealistic and lacking in widescale application. It was probably for this reason that the hope of moving to this form of rationality, as distinct from the inevitable march towards the iron cage of bureaucracy, was, for Weber, very unlikely if not impossible. Weber considered it could only be achieved through the wills of charismatic leaders (Habermas, 1984: 352) who could free themselves from the iron cage of bureaucracy.

This prescriptive alternative has been questioned on a number of fronts. For instance, feminists, such as Bologh (1990) make a clear caricature of Webers prescription: What is Webers solution to the problem of bureaucratic organization.? For Weber, the solution came at the level of the individual who can negotiate between means and ends, between formal rationality and human values. Weber looked to the heroic individual, a strong leader, who can take charge of the state bureaucracy and master it, subordinating bureaucratic rules and methods to sustantive, political ends.Only a political leader able to control the bureaucracy and act out of commitment to some substantive cause such as imperial greatness can rescue the nation from the ossification of bureaucratic rationalisation and bring dynamism to a society. (Bologh, 1990: 92/93)

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Bologh taunts Webers narrow mindedness with real but rejected alternatives: Weber saw no modern choice other than capitalist bureacratization tempered by patriarchal leaders. This stand led him to reject socialism or anything like a feminist solution. (Bologh, 1990: 94)

Habermas (cf.1984 and 1987) has also reacted strongly to Webers pessimism and the weakness of his prescriptive alternative. Habermas argues a case for a new theory of communicative rationality and communicative action to fill the void: that makes possible a mutual and constraint-free understanding among individuals in their dealings with one another.. This means, on the one hand, a change of paradigm within action theory: from goal-directed to communicative action, and, on the other hand, a change of strategy in an effort to reconstruct the modern concept of rationality that become possible with the decentration of our understanding of the world. (Habermas, 1984: 391/392)

Central to this process of understanding is the design of systematic discourses between individuals leading to a consensus on action alternatives. Originally Habermas referred to this as an ideal speech situation although as Cooke (1997: 31) indicated, Habermas, in his later years, was very uneasy about continuing to refer to his understanding of discourses in this way due to it being too concretist and open to misinterpretation.

Key to Habermas model is a view that a definition of performance (encapsulated in the equivalent of a PMS) should come out of discursive processes of defined groups of participants/stakeholders. Put simply, ends, in whatever form, should not be predefined either instrumentally or through abstract values or through any charismatic leader but should find their definition, and legitimacy, through the discursive processes and consensus agreement of the participants/stakeholders to any action situation. Such processes assume defined rules of engagement (cf. Habermas, 1984; Laughlin, 1987; Arrington and Puxty, 1991; Power and Laughlin, 1996; Cooke, 1997)

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(e.g. equal opportunity to offer speech acts and the only force allowed is the force of the better argument) so that it is possible to judge whether the resulting consensus on the nature of the PMS is grounded and justified.

These two forms of rationality (instrumental and communicative3) are extended and given meaning by four other rationalities which give direction on the design of performance indicators - but also the way means to achieve these end states are designed. These rationalities are, as Wallace (1994) suggests, substantive versus formal rationalities which link directly to different forms of performance indicators and theoretical versus practical rationalities, which relate to the diverse PMS controls over the means used to achieve the ends required. The following touches briefly on the nature of these two pairings.

Substantive and formal rationalities need to be considered together since as Allen (2004:138) indicates the former is less clear and appears to be defined in terms of everything the latter is not. Formal rationality is defined .according to the degree in which the provision of needs, which is essential to every rational economy, is capable of being expressed in numerical, calculable terms and is so expressed (Weber, 1978: 85). As Allen makes plain .accounting and calculation are, therefore, the defining terms of formal rationality (Allen, 2004: 138). Whereas Webers definition of substantive rationality is less clear-cut and a catch-all space for anything that is not formally rational (Allen, 2004: 138). According to Weber (1978: 85 (emphasis in the original)) substantive rationality applies to: ..certain criteria of ultimate ends, whether they be ethical, political, utilitarian, hedonistic,
Whilst the nature of Webers original alternative to instrumental rationality has changed in the above discussion this does not change the alignment of the four other forms of rationalities to these dominant rationalities.
3

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feudal, egalitarian or whatever, and measure the results of economic action.against these scales of value rationality or substantive goal rationality.

This has tended to set any form of formal measurement, in which accounting is clearly implicated, as something that has no place in substantive rationality, yet this is too simplistic. Accounting and calculation can be part of substantive rationality as long as they fairly reflect key values and concerns and are recognised as such by the stakeholders to the PMS design and fall out of these debates and concerns. Formal rationality, on the other hand, starts with the measures and derives and defines the values from the numbers used.

Theoretical and practical rationalities relate more to the choice of means to achieve the ends objectives and performance indictors (whether of a qualitative or quantitative nature) desired. Wallace (1994: 34/35 (emphasis in the original)) contrasts these two forms of means-related rationalities in the following way: In theoretical rationality, the means in question are mental concepts and the end is the theoretical mastery, or mental understanding of the world. In practical rationality, the means are both mental and physical (i.e. both conceptual know-how and physical do-how, a combination that accounts for Webers calling them broadly means) and the end is the human physical control of the world. Weber proposes, then, one type of rationality directly (but of course not exclusively) serving the human ideal interest, and another serving the human material interest.

These different overall rationality clusters also have an implied authority structure underlying them. Authority to Weber (1968 p.53) is the probability that a command with a specific content will be obeyed by a given group of persons. To Weber there are three types of authority structure, which he refers to as traditional, charismatic and legal-rational. To Hoogenboom and Ossewaarde (2005) instrumental rationality (and

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formal and theoretical rationalities) is reliant on a legal- rational authority structure which rests .on a belief in the legality of enacted rules and the right of those elevated to authority under such rules to issue commands (Weber, 1968: 215). Whilst Webers pessimism maintained there was no escape from this the iron cage was inescapable Hoogenboom and Ossewaarde (2005: 613), like Habermas, are more optimistic: As the iron cage of modernity opens up as a consequence of the process of reflexivization, the spell of legal-rationality authority is broken. Late modern actors no longer believe that rational rules of modern bureaucracies and those who are elevated to enact these rules to be legitimate.

To Hoogenboom and Ossewaarde, there is a possibility that a new authority structure can emerge in modern society which they refer to as reflexive authority: ..which can be defined as the belief in the ability of institutions and actors to negotiate , reconcile and represent arguments, interests, identities and abilities.Like legal-rational authority, reflexive authority is resting on the belief in the legitimacy of rationality, but in the case of reflexive rationality the nature of the rationality is not fixed. In late modern society, authoritative decision-making is guided by rules which are negotiated in the process itself by all the actors concerned. (Hoogenboom and Ossewaarde, 2005: 614 (Emphasis in the Original))

This is closely aligned and realised through communicative rationality (and substantive and practical rationalities). However, Hoogenboom and Ossewaardes, optimism, that there is an inevitable move to this idealistic state, is not borne out by the evidence. It is a counterfactual possibility and indeed the iron cage can be broken through but it is not inevitable.

The two types of dominant rationalities, the four secondary rationalities and two authority structures link together into ideal types formed around two key clusters to provide underlying cultural guides for PMS design. These clusters and their

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constituent elements are summarised in Table 1 and are named after the dominant rationalities. The communicative rationality ideal type starts from ends being formed by communicative rationality, performance indicators determined by substantive rationality, where measures used are discursively agreed and are conducive with desired, agreed ends, and the use of practical rationality related to the chosen means. The resulting PMS are likely to be accepted and owned by the

participants/stakeholders involved in any action-based organisation because they have been actively involved in discursively agreeing their design and content. To pursue these requires a deliberate acceptance that the legitimate authority structure is one built on reflexivity. The alternative instrumental rationality ideal type, has ends formed by instrumental rationality, performance indicators generated by formal rationality, where measures come first and largely define the implied values underlying these numbers, with the use of theoretical rationality leading the choice of the preferred means for achieving these end. Ownership of the PMS can be difficult to achieve and can lead to displacement of established norms of behaviour, alienation but also resistance. To operationalise such an imposition is reliant on legal-rational authority.

[TABLE 1 ABOUT HERE]

In ending this sub-section it is worth noting that as Townley (2002a) makes clear, this fundamental divide between instrumental and communicative rationality ideal types mirrors a deep philosophical divide over many centuries dating back to the Greek philosophers Aristotle and Plato. Relying heavily on Toulmin (1990) and Flyvbjerg (2001) Townley makes plain:

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These two traditions derive from different intellectual origins: the Platonic and the Aristotelian (Flyvbjerg, 2001). From Aristotelian understanding that different kinds of argument, i.e. their degree of formality and certainty, were relevant to different issues, dependent on their nature, i.e. reasonable was context dependent; following Plato, the 17th century limited rationality to theoretical arguments. In so doing the language of reason was changed, and a calculative idea of rationality developed. Calculation was enthroned as the distinctive virtue of human reason (Toulmin, 1990: 134).

So, these underlying cultures, link to and reflect quite fundamental disagreements in knowledge formation which dates back to the beginnings of the modern world.

(iv) Concluding Thoughts on a PMS Conceptual Model Figure 2, as indicated above, provides a diagrammatic presentation of the PMS conceptual model that builds on the above three developments related to the conceptualisation put forward in Ferreira and Otley (2005). What it implies is that context affects the PMS functional questions and the financial transfers yet culture, expressed through communicative and instrumental rationalities have an even more direct and ultimately more significant effect on the PMS design. Put simply if an instrumental rationality ideal type is adopted the way the question related to ends and means are asked and answered will be fundamentally different if, instead, a communicative rationality ideal type guides the PMS design and this will apply no matter what the context is.

This divide in the underlying guiding rationality types over the more functional ends and means questions/issues leads to two fundamentally different forms of PMS guiding the financial transfers. These are described as transactional and relational in Figure 2. The transactional has a high level of specification of ends to achieve (e.g. through performance measures, targets etc) as well often a clear specification of the

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means needed to achieve these defined ends. It often leads to project-based financial transfers linked to contracts over a defined period of time. It is for this reason the PMS is defined as transactional since at its simplest it is a PMS to guide a simple exchange transaction where money is exchanged for a particularly definable good or service which is needed to achieve a particular end state through a defined set of means. Relational PMS can be less specific about the ends to achieve and the means to achieve then if this is the view of the stakeholders designers but could be very precise if they so chose. The key factor in this is choice and ownership of the resulting ends and means. Invariably the specific focus will be less project based, less shortterm in nature and more concerned with the long term survival and sustainability of the organisation/unit through which the stakeholders are working.

Two further points need to be made by way of conclusion to this sub-section. First, it is important to recognise that some PMS aspects of what would be seen as the transactional may be apparent in the relational form but the use of some of the latters characteristics may be less likely in the former. Transactional PMS require certain rules of behaviour, which may preclude certain less seemingly rigorous4 and precise practices that are normal to the way of proceeding with thinking based on a relational approach. The situation with a communicative rationality approach is not as black and white. There can be a tendency in a relational PMS to avoid the level of precision expected with a transactional model, very largely because such levels of precision do, as Hasslebladh and Kallinikos (2000, p. 705) perceptively indicate, lead to ideals giving way to techniques of control as the discourse shifts from oral language to

Words such as rigorous, precise and precision are dangerous since they could be seen as downgrading anything that does not fall under such descriptive categories. It is important to stress that this is not meant to imply that practices that are more relational are not rigorous or precise but rather they have a different understanding of rigour and precision to those coming from instrumental rational practices.

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formal codification. However, the important point to stress is that this is not programmable in quite the way they suggest. The key criterion is whether this increased formalisation is understood and owned by the discursive

participants/stakeholders such that they adequately reflect desired end states. If it is, then such increased codification is entirely acceptable. If it is not then the dangers to which Hasslebladh and Kallinokos, and Weber and others draw attention are genuine and real and need to resisted.

Second, whilst the transactional and relational are absolute ideal-types it is possible and appropriate to see them empirically as two ends of a continuum. At the ends there are potentially pure empirical examples of PMS in each category transactional or relational. More likely is that there will be a situation signified by a point along the continuum where different PMS elements are mixed in different proportions. Our argument, however, is that the transactional and relational categories are analytically distinct very largely because they reflect the fundamental divide between the cultural elements of instrumental and communicative rationalities.

With this analytical framework in mind the following section demonstrates its empirical worth by analysing the evolving nature of New Public Management (NPM) in the UK culminating in the intensification of NPM through the target regime of public service agreements (PSA). What it will show is that NPM started off as transactional near the centre of the relational-transactional continuum and has moved ever further from the centre to now a more extreme transactional PMS.

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The Evolving Nature and Intensification of New Public Management in the UK Hood (1991) identifies seven key doctrinal components of new public management (NPM). These are: 1. Hands-on professional management in the public sector; 2. Explicit standards and measures of performance; 3. Greater emphasis on output controls; 4. Shift to disaggregation of units in the public sector; 5. Shift to greater competition in the public sector; 6. Stress on private sector styles of management practise; 7. Stress on greater discipline and parsimony in resource use. (Hood, 1991: 4/5 (emphasis in the original)) These components reflect particular key underlying values or as Hood (1991:15) puts it NPM can be understood as primarily an expression of sigma-type values where sigma values can be typecast as keep it lean and purposeful (Hood, 1991:11). This can be distinguished from alternative forms of core values in public management that Hood (1991: 11) calls theta-type values (keep it honest and fair) and lambda-type values (keep it robust and resilient).

There are considerable overlaps between Hoods sigma and theta-type values and instrumental and communicative rationalities discussed in the previous section and summarised in Table 1. Sigma-type values align directly with the underlying content of instrumental rationality ideal-type summarised in Table 1. Lambda-type values link directly to the characteristics aligned with the communicative rationality ideal-type in Table 1. The theta-type values, on the other hand, can be seen to apply to both sigma and theta-type values and instrumental and communicative rationalities. Whilst these values and rationalities are very different it seems highly unlikely that by adopting sigma or lambda-type values would be doing anything other than trying to honest and fair in the financial flows that they are controlling. Both would claim therefore to be adopting theta-type values, albeit in very different ways.

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In making these linkages it is possible to argue that NPM contains all of Hoods seven characteristics, and is a particular form of transactional PMS. This is not to say that NPM in any form is universal in its application or adoption. As Hood (1995) and Laughlin and Pallot (1998) indicate only a limited set of countries can be seen to be what the former refers to as high adopters of NPM where the seven characteristics are present and operative. Other countries have varying low and medium levels of NPM adoption. As Humphrey, Miller and Smith (1998) indicate it is not as though a fully formed NPM control system became implemented as a totality. There has been an evolutionary process at work over decades.

We wish to analyse some key points in the recent development of NPM in the UK giving particular emphasis to the development in output and outcome controls enabling devolution and disaggregation to occur. This, we will argue, has led to a step change in emphasis in the nature of NPM, as described by Hood in 1991, whereby a limited number of Hoods seven characteristics have taken precedence. This is to such a degree that the other elements are either eclipsed altogether or become downplayed considerably. It is this shift we describe in this paper. In the specific context of Hoods listing, we argue that characteristics number 2 and 3, which emphasise outcome controls, have become primary. These, in turn, enable disaggregation to occur (characteristic number 4). The remaining characteristics are either seen as instrumental to this new form of devolved outcome control or are largely redundant and irrelevant to these concerns. They are certainly secondary to the other concerns. It is this change in emphasis which is key in the recent development of NPM. In

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returning to the earlier genesis of NPM, the thread of the intensification of this emphasis can be illustrated.

A key moment in the development of NPM in the UK is acknowledged to be the 1982 Financial Management Initiative (FMI). Whilst FMI is not the start of the development of NPM in the UK Zifcak (1994:12), for instance, traces the origins, as others do, to 1968 with the Fulton Report (1968) whilst Jackson (1988) traces it even further back to the 1950s there is no disputing that the emergence of the study on the efficiency and effectiveness of the civil service (Treasury and Civil Service Committee, 1982) which launched the FMI was unquestionably a watershed point in the development of NPM in the UK. It was given ever greater urgency and intensity with the election of the Conservative Government in 1979 under the leadership of Margaret Thatcher who, by 1982, was well established in the public service change agenda.

The FMI had clear intentions to bring a very different emphasis to the work of public sector management. Jackson (1988: v) describes FMI as: .a framework in which public sector managers are invited to think about their decisions relating to public spending and public service provision. It is a set of broadly-based management techniques, designed to improve the quality of public sector management generally and to enable that management to give greater value for money in the spending of public funds.

More specifically it had the intention to: promote in each Department an organisation and system in which managers at all levels have: 1. a clear view of their objectives; and assess and wherever possible measure outputs or performance in relation to these objectives; 2. well defined responsibility for making the best use of their resources including a critical scrutiny of output and value for money; and

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3. the information (including particularly about costs), training and access to expert advice which they need to exercise their responsibilities effectively. (Treasury and Civil Service Committee, 1982:21)

To Jackson (1988: vi) the FMI embodied the rational model of decision-making, in which objectives and constraints are set clearly, decision-making within the organisation is devolved, and financial management information is generated that will enable managers to manage resources efficiently.

Thus, in the terms that we wish to analyse the issue, FMI was intended to bring new forms of rationality into public sector management. The FMI was the first serious attempt to shift, in Hoods terms, away from an underlying lambda-type values system guiding public sector management to one based on sigma-type values or, using the terms in this paper, from a PMS guided by communicative rationality to one that has a more instrumental rational emphasis. Its intentions were clear yet its prescription was limited since as Jackson (1988:vi) makes clear: The Treasury and Cabinet Office did not impose the FMI on individual departments. Instead, departments were encouraged to adopt their own FMI. In this sense, as Jackson continues, FMI was not a rigid management system. It was, using the framework developed in this paper, a shift from the far extremes of a relational PMS to the start of a more transactional form. It is the watershed point on this continuum, involving a clear point of departure from, using the concepts developed in this paper, a relational PMS to a tentative, but still important, move to more transactional forms of control.

Given the tentative nature of the movement and the magnitude of the change required it is not surprising that within a few years FMI floundered needing the development of

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what became the Next Steps initiative. The Next Steps Report was introduced to Parliament by the Prime Minister on 18 February 1988 (Efficiency Unit, 1988). As Zifcak (1994: 72) makes clear the analysis of the Next Steps Report: ..found that while the civil service was much more conscious of the cost of its activities than it has ever been, the essential features of management in Whitehall had remained untouched by five years of intensive administrative reform. Short-term political priorities still squeezed out long-term planning. Policy and ministerial support dominated civil service structure and function to the neglect of effective delivery of government services. Government programmes were focussed on the expenditure of money rather than the achievement of results. There was a chronic shortage of managerial skills. The civil service itself was far too large to manage as a cohesive entity. Clearly, the introduction of new management systems had been a welcome development. However, without a real change in attitudes and institutions, in the culture of the administration, the benefits obtained from the systems had been limited.

As Zifcak (1994: 74) makes clear Next Steps was indeed an outgrowth of FMI but it was FMI with more teeth geared towards more fundamental change and looking .upon structural change as the precondition for attitudinal change (Zifcak, 1994:89). In this regard the Next Steps Report: made five principal recommendations. First, agencies would be established to carry out the executive functions of government. Second, the manner in which an agency would perform its tasks would be specified in a policy and resources framework agreed with its sponsoring department. Third, each agency would be headed by a chief executive appointed from within or outside the civil service. The chief executive would be held personally responsible for the achievement of the specific objectives and targets set in the agencys framework document. Fourth, the chief executives would be responsible to ministers who in turn would be accountable to Parliament for the operation of their agencies. To implement these changes, the unit recommended, fifth, that a full permanent secretary be designated as a project manager to ensure that the reform programme proceeded quickly and to a high level. (Zifcak, 1994: 73)

The proposals of the Next Steps Report were an even greater concern than the FMI to HM Treasury due to the increasing possibility, even probability, for the move to agencies as a worrying relaxation of central controls (Zifcak, 1994:81). This led

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to a foretaste of the new NPM in an increasing emphasis importance given to output and outcome control to resolve these worries: The Treasury was considerably more prepared than it had been to delegate some of its financial controls, particularly input controls. It accepted, for example, that the agencies should have increased in-year and end-year financial flexibility; that agencies might, in appropriate circumstances, be accorded trading fund status; and that chief executives rather than permanent secretaries could be nominated as accounting officers.. But for this relaxation it had extracted a price. The price was a greater role in setting targets and monitoring agency performance. The ground it lost on inputs it made up on outcomes. (Zifcak, 1994: 83)

This change of emphasis was given ever greater amplification with the changing relationships between the departments and their agencies: In the post-agency era, core departments were expected to take on a much more strategic and less interventionalist stance. They had to clarify their new identity, set targets for their agencies and develop new skills to perform adequately in the changed ministerial environment.. The key attitudinal change necessary was that the core department should learn to trust chief executives to perform effectively. Its own rule would be to determine whether what was done was consistent with government and ministerial objectives. (Zifcak, 1994: 84/85)

This emerging relationship involved management by contract (Zifcak, 1994:86) yet as he continues the reality was that no enforceable contracts existed. The seeds of a different emphasis in NPM were planted at this point yet its realisation was still some way off. Yet the Next Steps initiative ensured that a further move along the transactional/relational continuum was guaranteed. Creating distance between steering and rowing ensures greater formalisation in the processes with output and outcome control being of primary importance for operationalising this required structural change.

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This move along the continuum, away from the relational and lambda-type values is encapsulated in the development of public service agreements and targets to which we now turn.

The long-term importance of performance measurement and targets was signalled in the views of Sir John Bourn, the UKs Comptroller and Auditor General, in his submission to the Public Administration Select Committees (PASC) critical report on target setting (PASC, 2003): Over the last 20 years performance measurement has developed into an important means of improving performance and reinforcing accountability. In 1982 the Financial Management Initiative required Departments to set clear objectives and to allocate measures to those objectives. The introduction of Executive Agencies from 1986 on led to the creation of performance targets covering throughput, efficiency, quality of service and finance. (PASC, 2003: Minutes of Evidence, PST 54, Paragraph 3) As he continued: Performance measurement has become an integral part of modern government. It stands behind the creation not only of formal targets, but also features in the many contracts and agreements that control service deliveryGood performance information is a crucial element in helping public sector organisations to develop policy; manage their resources cost effectively; improve delivery; and account for their performance to Parliament and the general public. (PASC, 2003: Minutes of Evidence, PST 54, Paragraph 4) In 1998, the Comprehensive Spending Review (CSR) with the introduction of Public Service Agreements (PSAs), which the Labour Government initiated following their electoral victory in 1997, was a step-change in this emphasis.

The Governments submission to the PASCs report on targets (PASC, 2003) provides some pointers to the nature of PSAs and why they involve such a major change:

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The targets set out in Public Service Agreements have proved immensely valuable. They provide: - a clear statement of what the Government is trying to achieve. - a clear sense of direction and ambition. - a focus on delivering results. - a basis for monitoring what is and isnt working. - better public accountability The PSAs have contributed to a real shift in culture in Whitehall away from inputs and processes towards delivering outputs and results. (PASC, 2003: Minutes of Evidence, PST60)

The introduction of PSAs is the key vehicle for operationalising and managing the financial allocations coming from the Comprehensive Spending Review (CSR). Gordon Brown, the Chancellor of the Exchequer, introduced the CSR in 1998 to provide a wide-ranging review and rolling three-year finance-led plan for all Government Departments. The 1998 CSR contained plans for the 1999 to 2002 cycle. This was followed by a Spending Review (SR) (rather than another CSR) in 2000 covering the period 2001 to 2004. The second SR was in 2002 covering the period 2003 to 2006. The CSR in 2004 covers the period 2005 to 2008. A new CSR is underway with the results to be published in 2007 to cover the period from either 2008 to 2011 or possibly 2009 to 2012. Each CSR and SR overlaps with the other and has become ever more developed as a planning tool that links financial allocations to outcomes to be achieved.

PSAs are a central and key element and were introduced in the 1998 CSR in the context of a clear commitment of the Labour Government to focus on results. As the Government made plain when introducing PSAs: The amount spent or numbers employed are measures of the inputs to a service but they do not show what is being achieved What really matters is the effectiveness and efficiency of the service the public receives. That is what makes a difference to the quality of peoples lives.

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The targets published in this White Paper are therefore of a new kind. As far as possible, they are expressed either in terms of the end results that taxpayers money is intended to deliver for example, improvements in health and educational achievement and reductions in crime or service standards - for example, smaller class sizes, reduced waiting lists, swifter justice. The Government is therefore setting specific, measureable, achievable, relevant and timed (ie SMART) targets, related to outcomes wherever possible. Moreover, as experience of this new approach develops, it hopes to further refine and improve future target-setting. (HM Treasury, 1998: Paragraph 1)

The 2000 SR refined the nature of PSAs but also added a new control device called Service Delivery Agreements (SDAs) and Technical Notes (TNs). The 2000 CSR clarified the rationale for these changes as follows: As the Government recognised at the time of the 1998 CSR setting targets for central Government was a process that would need to be refined over time. In the 2000 Spending Review, the Government has further developed the PSA documents, in order to prioritise the most important goals and reforms it wants to deliver.New Service Delivery Agreements (SDAs) will be published in the autumn covering the work of both main and smaller departments. These will set out the more detailed outputs which departments will need to focus on to achieve their objectives, and the modernisation processes they will go through to improve the productivity of their operations. These new SDAs replace the section on increasing the productivity operations in the 1998 Comprehensive Spending Review PSAs. In order to make the PSAs a real tool for transparency and accountability, the Government has attempted to make the targets as clear and readable as possible. It is important both for the accurate collection of information, and the rigorous monitoring and reporting of progress, that the precise technical details are agreed, and are publicly available. To this end all departments will be publishing Technical Notes later in the year, which will specify precisely what will be measured under each target. (HM Treasury, 2000: Paragraphs 1.11 and 1.12)

In the 2002 SR further refinements were made along with reflections on the developments that had occurred from the move into PSAs in 1998 and SDAs and TNs in 2000. In terms of reflections the following points were made: In the 2000 Spending Review, the Government developed the PSAs set out in 1998 in a number of ways by:

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reducing the total of headline performance targets for the new period from around 300 to 160, focusing more on the Governments key priorities and outcomes; including at least one target in each departmental PSA about improving efficiency or value for money, which is a key part of the Governments agenda for delivering efficient public services; introducing Service Delivery Agreements (SDAs), which set out lower level input targets and milestones underpinning delivery of the headline PSA performance targets; and introducing Technical Notes, which explain how performance against each PSA target will be measured. (HM Treasury, 2002: Paragraph 1.3)

The 2002 SR did not introduce any major structural changes, but simply refined the number and nature of the PSAs. PSAs were reduced to only 125 for all the Government Departments on average about 5 or 6 per Department - compared to the 366 in the 1998 SR. These were almost entirely outcome oriented which was not the case with the 1998 SR which had a considerable mixture of input, output and outcome based PSAs. They also took account of a number of shared PSAs that involved more than one Government department.

The structure of PSAs was also much clearer in the 2002 SR and started to make more direct links with the aims and objectives behind the targets even though the connection to performance indicators was more implied. As the SR made plain: PSAs bring together in a single document the aim, objectives and performance targets for each of the main Government departments. They include: Aim: a high level statement of the role of the department. Objectives: in broad terms, what the department is looking to achieve. Performance targets: under most objectives, outcome focused performance targets. Value for money: each department is required to have a target for improving the efficiency or value for money of a key element of its work. A Statement of who is responsible for the delivery of these targets. Where targets are jointly held this is identified and accountability 37

arrangements clearly specified. (HM Treasury, 2002: Paragraph 1.5 (Emphasis in the original))

In the 2004 SR, PSAs evolved and changed yet again: the number of PSA targets has fallen. to 110.to increase focus on the Governments highest priorities; the targets have become increasingly outcome-focused, giving departments and local organisations the freedom to decide how best to deliver priority outcomes; the targets are now supported by rigorous performance information, with data systems underpinning targets validated by the National Audit Office; and accountability and transparency has increased to an unprecedented level, with biannual department reports and electronic publication of performance information on the Treasurys website. (HM Treasury, 2004: Paragraph 1.1)

The second bullet point highlights a major change in the 2004 CSR. Devolution or, more accurately, constrained discretion (Balls, Grice and ODonnell, 2004:18) is a key priority such that the: PSAs increasingly focus only on the key national priorities giving freedom to local organisations over how best to achieve those outcomes in their area (HM Treasury, 2004: Paragraph 1.9). This has been accompanied by the abandonment of all SDAs. As the Chancellor of the Exchequer indicated in his forward to the 2004 PSAs: We have also abolished the requirement for departments to set Service Delivery Agreements (SDAs), representing a reduction of over 500 input and process targets, providing further flexibility to those delivering services.

The hope is that there will be a development of local PSAs not dissimilar to those that were initially introduced in the 2000 CSR for local authorities and are now in their second generation based on the apparent success of the first generation (Office of the Deputy Prime Minister (ODPM), 2003). Yet, at the same time, as the last two

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bullet points indicate, any freedom comes at a price of increased accountability and transparency to unprecedented levels5 (HM Treasury, 2004: Paragraph 1.1).

The important point to register at this stage is that it is not just the PSA targets, which are directing or intending to direct performance there are a range of other regulatory bodies along the delivery chain (HM Treasury/Cabinet Office, 2004, paragraph 2.27) of any public services which add to these targets to exercise performance management. So in their recent Report they make clear: The review found that many organisations do face excessive externally set targets, measures and compliance requirements When faced from the perspective of a local authority, hospital or other local organisation, the number of controls faced is dramatically higher than the number of PSA targets suggests. For example the Department of Health has only 12 PSA targets across the NHS and Social Care. Front line trusts and PCTs however face more than 4 times as many PSA-related controls from the Local Delivery Plans and CHI. With a further 125 non-PSA related controls identified, the overall number of targets, measures and compliance requirements is more than 17 times greater than the headline PSA would suggest. (HM Treasury/Cabinet Office, 2004: Paragraph 2.24

They conclude, after looking at other public service delivery processes, as follows: As the health, education and police analyses show, two factors drive the difference between the number of PSAs and the number of targets and measures actually faced: as PSAs are transmitted along the delivery chain, government departments, local government, intermediate tier organisations and inspectorates often set additional targets and controls concerned with inputs and processes; and government departments and other standard setting bodies set a large number of additional controls (at least 10 times as many as the number

The interest in developing performance reports has been growing exponentially over the last few years. Driven by a recent report by HM Treasury, the Cabinet Office, the National Audit Office, the Audit Commission and the Office for National Statistics (HM Treasury et al, 2001) there is now a central web site for all PSAs, TNs, SDAs and Annual Departmental Reports (http://www.hmtreasury.gov.uk/documents/public_spending_and_services/ ) which is regularly updated to report on performance achievement. This is anticipated to be only the start of major developments in reporting unprecedented clearly is an appropriate descriptor.

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of headline PSA targets) in areas which do not relate to the PSA set at all. (HM Treasury/Cabinet Office, 2004, paragraph 2.27)

Whilst it is clear that the Labour Government would like to see a reduction of unnecessary controls along the delivery control this does not include the reduction in output and outcome controls. In fact it is only through these forms of controls, it is claimed, can there be a move to effective devolution and disaggregation. HM Treasurys view on this can be seen in their 2003 Report to meet what they refer to as the productivity challenge. To do this requires recognition of three building blocks leading to a four point reform framework: The first building block is a focus on outcomes performance of the public services should be assessed on the basis of results. The second involves devolving responsibility for the delivery of public services to local providers, subject to appropriate minimum standards and regular performance monitoring. The final building block is about improving the governance of public services, by reforming institutions to reflect the importance of clear objectives, appropriate incentives and good performance information in the achievement of higher productivity. These building blocks have been translated into a four-point framework to guide public service reform: Clear long-term goals, expressed as desired outcomes; Greater discretion for local service providers, constrained by effective governance structures; Improved information about performance; and Better incentives for service providers to meet users needs. (HM Treasury, 2003: Paragraphs E6 and E7)

In sum the PSA development, which has been becoming ever more sophisticated as it has developed from its 1998 introduction, is yet another shift along the relational/transactional PMS continuum.

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Devolution and disaggregation of activities, which has been occurring ever since the Next Step agencies were created and is seemingly being encouraged even further through what has been termed by the new localism (PASC, 2003: Paragraph 97) is only permitted with tight output and outcome controls in place. The term constrained discretion is emotive but descriptive of what is happening and it is only because of the growing sophistication of output and outcome controls that even this level of discretion is possible.

This is taking some elements of NPM that Hood (1991) describes and developing their significance out of all proportion to the others. This is intensifying a particular form of control. This is not to suggest all controls are transactional, but there is a step change again along that pathway. There is no current agenda to change the direction away from placing a key importance on output and outcome achievement, but there are other transactional forms of control that can be added to make sure that these are achieved.

Some Concluding Comments The paper has concentrated on a broad understanding of performance management systems (PMS), as distinct from performance measurement system or the more restricted understanding of PMS that comes with human resource management theorists. It has concentrated on building a conceptual model of any PMS using Otleys (1999) and Ferreira and Otleys (2005) analysis as a starting point but extending their insights in three ways: first in clarifying the financial focus for any PMS, second, by developing insights into the nature and relevance of the underlying context for any PMS and third, by extending the nature and significance of the

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underlying culture behind any PMS. This third area, which has involved demonstrating the significance of models of rationalities, with a concentration on the key distinction between instrumental and communicative forms of rationality has been key in developing a conceptual understanding of PMS.

This conceptual model is summarised in diagrammatic form as Figure 2 and highlights the key distinction between what can be described as transactional and relational forms of PMS. A relational PMS is driven by the exercise of

communicative rationality between stakeholders to debate and derive a consensus on objectives to achieve, leading to the discursively agreed definition of performance indicators based on substantive rationality which could, if discursively agreed, use quantitative measures to typify performance indicators but often may be more comfortable with qualitative indicators. It also relies on practical rationality in the choice of means to achieve these objectives, performance indicators and targets. In a relational PMS, targets aligned to the performance indictors are assumed to be discursively agreed between the stakeholders. The key underlying theme is that there is ownership by the stakeholders of the PMS that drives action in any organisation working under a reflexive authority structure such that it can be demonstrated that, in Habermas terms, the resulting structures are regulative and amenable to substantive justification. A transactional PMS is driven by instrumental rationality to define the objectives, which take on the characteristics of being highly functional and directed to specific outcomes. In this context ownership is associated and linked either to a particular sub-group of stakeholders or to an abstract requirement seemingly owned by no-one. Performance indicators are defined through formal rationality, which has a tendency to be more comfortable with precise and quantitative forms of measurement.

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In general, theoretical rationality, with a certain reluctance to use practical rationality, due to its perceived lack of precision, guides the choice and use of means to achieve these objectives. Targets are taken to be driven by what either a defined sub-group of stakeholders determines or what the seemingly abstract definer of objectives and performance indicators requires. Implicit in this framework is a reliance on legal-rational authority structure to ensure compliance. Ownership is less likely when a transactional PMS is in place since the framework has a tendency, in Habermas terms, to be constitutive and legitimised through procedure rather than the outcome of a consultative process.

This typecasting forms a theoretical language, in a middle range sense (cf. Laughlin, 1995, 2004; Broadbent and Laughlin, 1997), for analysing empirical situations. Whilst the exact nature of any PMS is dependent on empirical explication, conceptually it is important to see these transactional and relational PMS as lying on a continuum where at either end will be extreme versions but towards the middle the distinctions are less clear. Yet our thesis is that there is a point on the continuum where there is a clear cross over point from relational to transactional or vice versa. The middle range theory cannot pre-define which form will be present in particular situations. What it does is provide a language for structuring the empirical description. However, it does not predetermine this description empirical surprises are still possible. In fact, such surprises can also reshape the conceptual language where it fails to provide meaningful placeholders for the analysis.

We have used this conceptualisation to explore empirically an area which has been looked at many times before: the evolution of New Public Management (NPM) in the

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UK. This conceptualisation provides new insights into this well documented development and also has allowed us to argue that the current concentration on output and outcome and target achievement is such a step change in NPM that it can be seen as a particular form of intensification of NPM. Unlike the Financial Management Initiative (FMI) on 1982 which we argue created the cross-over point from relational to transactional PMS and the 1988 Next Steps development which shifted the developments in NPM further into a transactional form the development of Public Service Agreements (PSAs) in 1998 was a further move along the transactional part of the continuum but marked a step-change in the nature of NPM, still NPM - but of a very different sort.

Two closing reflective points can be made. First, that the empirical study of NPM provides a number of important insights. First, it helps to explicate the nature of the relational/transactional PMS continuum and the way certain issues are emphasised at particular points on the continuum. Second, and in relation to this, the move to giving a greater emphasis to outputs and outcomes is an important marker of a tightening of the transactional emphasis. It only comes at particular points along the transactional end of the continuum. When reached it becomes highly significant since it is much more directional in its intent. It is for this reason we saw the PSA development to be an intensification of NPM. Third, there remains the potential for a greater intensification of control through greater use of transactional approaches. At this point in time, we can see no agenda to suggest the concentration and importance given to output and outcome achievement will change. Instead, we suggest the likelihood is that we will see refinements and greater levels of intensification (e.g. tighter PSA linkages to funding, increase in penalties for non-achievement, greater

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direction on means etc.) and that the concentration on outputs and outcomes will always remain.

Second, there are dangers with transactional PMS and the intensification of this emphasis by moving ever further towards the transactional end of the continuum. These dangers are well illustrated by Townley, Cooper and Oakes (2003) when they demonstrate that the imposition of an instrumental framework has important repercussions. Using their case study of the introduction of performance measures in the Canadian Province of Alberta they conclude: Such disarticulation has important consequences. When the coordination of action becomes unhinged from communicatively established consensus, participants are not required to be responsible for their actions. In other words, the control of behaviour passes from the authority of the conscience of associated individuals to the planning authority of societal organizations: more and more complex networks that no-one has to comprehend or be responsible for (Habermas 1987: 184). As the process of rationalization advances, the subsystems of purposive rational action become increasingly independent of ethically grounded motives of their members and make increasingly superfluous any internal behaviour controls related to more practical rationality. (Habermas 1984: 353). This represents our fundamental concern with the developments in Alberta: the substitution of technical for moral responsibility in the name of morality. But equally, we suggest, it could be otherwise. (Townley, Cooper and Oakes, 2003:1064)

We share Townley et als concerns and argue that what we have called transactional PMS is problematic in some situations, particularly in the public services. We argue the relational approach holds the key to a viable and meaningful alternative. This view, following Habermas and others, moves beyond the pessimism of Weber, and his alternative in the charismatic leader, to a new counterfactual possibility contained in the communicative rationality ideal type.

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What is interesting in this context is to note the comments of the Public Administration Select Committee (PASC) Review (PASC, 2003) which makes clear that, based on their understanding, the move, in our terms, to a transactional emphasis still does not have universal support or universal application: There seem to be two cultures at work in the Governments approach to public service reform. The first emphasises capacity-building in organisations, with attention to leadership and management issues. As such, the focus is on the organic ingredients of durable change and improvement. This is the central task for the Prime Ministers Office of Public Services Reform, which has responsibility for working with departments to embed reform and identify best practice. The second approach is typified by targets, its time frame is shorter and its techniques are more mechanistic. Among other things, the Prime Ministers Delivery Unit assesses and supports delivery in each of the departments, in particular, ensuring that there is a Delivery Plan in use for each target. Both have their place, but it is important that the former is not crowded out by the latter. (PASC, 2003: Paragraph 9, p.7).

Elsewhere they refer to these two cultures as respectively the performance culture and the measurement culture (PASC, 2003, Summary, p.3), seeing the latter as a poor substitute and an undermining of the former but where the PSA systematisation was heading towards.

Key to the concerns that were expressed to the PASC is the issue of ownership and the consequent linkages of the targets to the aims and objectives of stakeholders. This overarching theme came through in a number of different ways in the Report but it is well captured in the Committees view that: We doubt that the current target regime has succeeded in providing a clear sense of direction and ambition for our public services. Targets can never be substitutes for a proper and clearly expressed strategy and set of priorities, and we found that witnesses identified a significant risk that the target setting process had subverted this relationship with targets becoming almost an end in themselves rather than providing an accurate measure of progress towards the organisations goals and objectives. Targets can be good servants, but they are poor masters. (PASC, 2003, Paragraph 33, p. 13/14)

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Typical of the comments of witnesses that led the Review to this conclusion was the comment from the Rt. Hon. Estelle Morris the former Secretary for State for Education and Skills - who stated the .the biggest problem at the moment is that the profession feels no ownership of the targets, none whatsoever (PASC, 2003: Minutes of Evidence, Question 965). Professor Alison Kitson, from the Royal College of Nursing, makes the same point: It is about ownership, it is about interpretation and understanding of the relevance and impact of the target to the people who are providing the business. It is that dialogue, that constant iteration between the people who are setting targets and the people who are having to deliver them that improves the quality of them. (PASC, 2003, Minutes of Evidence, Question 753) Or, as the Audit Commission, noted: What makes a target good is not just the way a target is expressed its about the way it was derived, the extent to which service users were involved in its development, the extent to which it helps to achieve policy objectives, the extent to which it has the support of staff whose efforts will achieve it, the quality of the data used to measure its achievement, and the clarity and transparency of its definition. (PASC, 2003: Minutes of Evidence, PST14)

Lord Browne, one of the few witnesses who was asked to clarify the perspective on targets from the private sector viewpoint, made plain that, based on his experience, .you cannot impose targets by fiat (PASC, 2003: Minutes of Evidence, Question 347). However, as the Committees Report continues: We strongly agree, and we also feel that, at the front line in the public services, there is still a perception that this is what is happening. (PASC, 2003, Paragraph 36, p.15).

HM Treasury is well aware of these concerns and have reacted to them with their move to the new localism (PASC, 2003: Paragraph 97). Their 2004 Report notes: The next phase requires evolution in the relationship between central government, local government, regional organisations and the front line. Central government needs to maintain a strategic role, ensuring national standards are

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met and maintained, but allowing greater scope locally to determine other priorities and to decide how best to deliver national outcomes. This requires change in key areas: within a framework of national Public Service Agreements (PSAs), fewer targets and other external controls set in addition and greater scope for locally determined outcomes and methods of delivery; stronger local accountabilities and incentives for delivering improvements in public services based on timely publication of performance data; and increased performance management capacity within front line, local government and other intermediate tier organisations. (HM Treasury/Cabinet Office, 2004, Paragraph 1.6)

A cursory reading of this suggests more a shift in the forms of centralised control rather than a wholehearted encompassing of devolution along the lines suggested by the PASC. Closer examination of the Report seems to reinforce this impression: A more devolved approach makes it essential that local accountabilities and incentives to improve are strengthenedTo achieve this, it is first critical to identify a single organisation to performance manage each group of front line units, based on timely and regular performance data.Second, credible incentives in the form of rewards and sanctions must be made available such that intervention by central government only takes place in cases of clear underperformance that the intermediate tier has not been able to correct.For central government to devolve decision making authority with confidence, these proposed changes must be underpinned by stronger capacity in performance management within front line, local government and intermediary tier organisationsAnalysis of best practice in the public and private sectors in the UK and abroad suggest five areas that must be developed to strengthen local performance management capacity. These are: robust and reliable internal data reporting, strong leadership, clear accountabilities, performance review combining challenge and support and transparent rewards and sanctions. (HM Treasury/Cabinet Office, 2004, paragraphs 1.7, 1.8, 1.9 and 1.10)

This is arguably not quite what the PASC had in mind when they made their Recommendations. However, to the Governments credit they do acknowledge that the implementation of this model of devolution is likely to be difficult and that it does need to be owned by front line professional to be meaningful: The scale of the challenge required to move to this new phase should not be underestimated. The new approach must be advocated and owned by public service professionals, inspectorates and central government departments alike. The changes require a well-planned approach to implementation. Central

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government, local government and other intermediate tier organisations must focus on supporting front line delivery and building capabilities required to operate in a more devolved system. Structural change and new approaches within departments and along the delivery chain will also be required. Most important of all, a new level of trust needs to be built between central government and public service providers. This trust will only develop if all parties demonstrate their commitment to devolution by undertaking the concrete actions required to make it happen. (HM Treasury/Cabinet Office, 2004, Paragraphs 6.4 and 6.5).

As is apparent from the 2004 CSR, the Government has already made a start on this pathway by reducing the number of national PSAs and abandoning the input and process controls of SDAs. The 2004 Report by HM Treasury and the Cabinet Office, which is critical of the high number of additional controls that intermediate regulatory agencies impose on front line services, is intended to put pressure on them to change. There are, however, a considerable number of other changes needed, as they acknowledge, the building of trust and the need for generating ownership as being of paramount importance but very difficult. What is clear is that with increasing devolution more complex PMS elements and controls are seen to be necessary if performance is to be managed. But any shifts will not displace output and outcome control it is for this reason we see this as the start of the intensification of NPM. We await with interest to see what the 2007 CSR brings but at least the acknowledgement of the need for new localism gives some chance for stakeholders to have their say. Maybe, just maybe, the relational PMS will reassert itself.

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4 Questions on Culture and Context 8 Questions on Ends and Means

Performance Management and Control System (PMS)

Figure 1: Ferreira and Otleys Performance Management Framework (Adapted from Figure 2 from Ferreira and Otley (2005: 42))

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Figure 2 PMS: A Conceptual Model

CONTEXT
CULTURE INSTRUMENTAL RATIONALITY COMMUNICATIVE RATIONALITY

PERFORMANCE MANAGEMENT (AND CONTROL) SYSTEM (PMS) Selective definition of ENDS to achieve (e.g vision and mission, key success factors in relation to ends, key performance indicators, targets) and the MEANS to be used (e.g. strategy and plans, key success factors in relation to means, structures, performance evaluation systems, reward systems) to achieve these ends.

TRANSACTIONAL

RELATIONAL

EXPLICIT OR IMPLICIT FINANCIAL TRANSFERS AND ACCOUNTABILITY REQUIREMENTS IN A RELATIONSHIP BETWEEN A TRANSFEROR AND A TRANSFEREE

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Underlying Rationalities Description Ends defined derived using: Performance Indicators (PIs) derived using:

Instrumental Rationality Instrumental Rationality Formal Rationality

Communicative Rationality Communicative Rationality Substantive Rationality Practical Rationality

Choice of means to Theoretical use to achieve the Rationality objectives and PIs using: Probability of different stakeholders owning ends and means: Underlying Authority Structure Likely to be low

Likely to be high

Legal-Rationality

Reflexive

Table 1: Contrasting Ideal Type Rationalities in PMS Design

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57