Maximise Public Resources with Performance-based Budgeting

For years, many public sectorleaders have promotedthe incorporation of performance management information as part of the annual budget approval process to more effectively focus on the budgets’ results and outcomes.

As opposed to traditional budgeting approachesthat compare actual and budgeted expenditures, performance-based budgeting (PBB) changes the entire mind-set and process around how organisations,especially those in the public sector,evaluate their projects for more effective resource allocation.

Traditional budgeting is a service-oriented approach in which most organisations consider what was budgeted last year and how should it change. That approach asks: “What will it cost in the newyear to provide the same level of service provided the previous year?”

On the other hand, PBB focuses on outcomes. This approach asks: “How can I maximize the effectiveness of public resources to produce the target outcomes?”

Both budgeting models have the same objective of allocating limited public financial resources to serve the citizens. However, the foci of different methods are distinct.

Changing Ways in Planning, Programming and Budgeting

In the public sector, there has been a long history of attempts to move away from traditional budgeting processes to PBB that focuses on results, not just expenditures.

The ‘Planning, Programming and Budgeting’ methodology goes back to the mid 1960’s when it started to be used inpublic sector organisations. In later years, there was the rise of Performance Management scorecards,whereby jurisdictions initiated programs with end goals set based on Key Performance Indicators (KPIs).

Yet, very few organizationshave truly married performance-based information to the process of allocating and monitoring resources.While Performance Management scorecards were widely adopted, theywererarely used withbudgeting processes for the following three reasons:

1. PBB requires a total change in the mind-set of all participants including managers, legislatures and even citizens.
2. Focusing on outcomes often involves crossing department lines to develop and fund programs to achieve results.
3. There was a lack of standard methodologies and technology tools to support the effort.

However in recent years, the adoption of PBB has risen due to a higher level of urgency driven by tight resources, public transparency and private sector influence. More governments around the world are exploring PBB for better budget decisions to optimise public resources.

Although PBB does not have to be an elaborate system that automatically makes decisions, performance data used during the process to influence and guide budget decisions is a technique that can be used by all jurisdictions.As a result, PBB has become a driving force toward changing the way governments can budget in the future.

The Formulation of Performance-based Budget(PBB)

PBB involves two major activities – i) Establishing strategies, performance targets (outcomes) for public sector organizations, and ii) assigning costs to outcomes and using that information during the budgeting process. Inmany jurisdictions, the first activity is done quite well. However, that information is not used during budget deliberations.

What is needed is a solution that combines performance information with traditional ‘line item’ information that can be used during budget deliberations. The goal is for a system that allocates public resources in a way thatcan help maximize the desired outcomes, yet can still monitor inputs and outputs.  This is in contrast to the line item-focused base budget approach used by most governments.

One should note that there are significant organizational issues in implementing PBB, as it represents a majorchange to traditional practices and requires a high level of executive and legislative support. It also incurs an administrative burden that can be an impediment.

Enterprise Performance Management (EPM)

In response, Enterprise Performance Management (EPM) solutionscan offer all three essential PBB elements (Performance Management scorecards, Planning and Budgeting, and Cost Analysis)to ease those burdens.

• Performance Management:Performance scorecard isthe vehicle that enablesusers to establish and track strategies and performance measures.
• Planning and Budgeting: This application tracks detailed budget and expense information and enablesusers to create and finalize detailed budgets.
• Profitability and Cost Management:Cost analysis enablesorganizations to gather cost information from multiple sources and create models for cost analysis. This information can then be used during the PBB process.

The three applications can work well separately.Performance ManagementScorecard and Planning and Budgeting are the elements typically viewed as being necessary. However, the third element, Cost Analysisis a valuable tool forreviewing costs and ensuring they are valid. The results of the cost analysis can then be used as targets for the scorecards to help monitor the budgets stay on track.

An increasing number of jurisdictions are moving toward using performance information during their budget preparation and planning processes. Two factors are enabling this move. The first is recognition that while difficult, the value of PBB to citizens is undeniable. Second, enabling technology is available to support the processes in a sustainable and cost-effective way.

A complete EPM solution that uses performance and cost information during the budget development process can be instrumental in makinggovernment as efficient and effective as possible.