Decentralization, Performance Evaluation and Government Performance

Abstract

In order to improve the organizational performance of governmental entities, there has been a tendency in many countries to introduce management reforms that are believed to prevail in private companies. The term 'NPM' (New Public Management) was coined to label these reforms. NPM stresses - among many other things - that public services have to be rationalized and emphasis put on quantification as a means of demonstrating achievements (efficiency gains, new levels of performance) and of holding responsible people accountable. In the Netherlands, many municipalities have adopted NPM reforms.

This paper considers the results of these NPM reforms. In particular, it focuses on two reforms: the decentralization of decision making authority to middle managers and the greater emphasis on accounting criteria for performance evaluation. This research explores whether managers are indeed motivated by such measures using a contingency-type approach.

In this paper, the survey data (214 observations) are analyzed by using Partial Least Squares (PLS). The analysis shows that the performance evaluation system of municipal departments is hardly related to the level of decentralization. Furthermore, it is shown that the effect of the use of accounting performance measures for evaluation purposes on the performance is moderated by the level of environmental uncertainty: the use of these accounting criteria results in more goal clarity at higher levels of uncertainty. However, we also found that managers are more concerned about their performance evaluation in these circumstances. These findings confirm the claim of Hartmann (2000) that environmental uncertainty may have multiple effects. Organic processes are found to be an important moderator: especially open communication increases the positive effects of using accounting performance measures at higher levels of environmental uncertainty and it mitigates the negative effects. The use of objective nonfinancial indicators (such as indicators expressing the quality of services) overall has a positive effect. For the use of subjective nonfinancial indicators we found opposite effects. Finally, we show that goal clarity of the managers and agreement on evaluation criteria are positively related to the performance of municipal departments.

Keywords: Qualitative analysis, Partial Least Squares, Reliance on Accounting Performance Measures (RAPM), Environmental Uncertainty

JEL Classification: M40, M46, M41, M47, M48, L23