Adoption of Performance Management System: External Compliance Versus Internal Capabilities

Abstract

The acceptance of New Public Management (NPM) believing that private sector is the exemplar for the public sector has led to the use of a performance measurement and management system in governmental sector. Similarly, in Indonesia, the Government Institution Performance Accountability System (SAKIP), as established in Law No 8, 2006, requires local government to implement a performance management system (PMS). However, many local governments have not fully implemented this system. Hence, in this paper, issues are discussed regarding the pressures around and barriers to adoption of a PMS for an Indonesian local government. A two-year field study was undertaken, comprising formal interviews and a documentary review at a local authority. The findings showed that the adoption of a PMS at such an authority faced significant barriers, mainly triggered by the combination of an excessive number of indicators mandated by SAKIP, and the difference in staff and officers’ competence that has led to a relatively high reliance on external consultants, especially in operationalising regulations and programme goals into their relevant performance indicators. Consequently, even if they have relevant and suitable performance indicators, their reliance more on externally developed indicators has decreased their contextuality as well as created barriers to apply them optimally, such as in developing appropriate formula, and in determining relevant data to be collected. The excessive number of indicators mandated by SAKIP has also caused difficulty in achieving set targets. The findings also highlighted that the poor SAKIP ranking result represents major social pressure regarding the adoption of PMS.

Keywords: Performance Measurement and ManagementLocal GovernmentIndonesiaSymbolic Adoption

Introduction

The new public management philosophy, with the view that private sector practices are relevant in the public sector, has led to efforts to reform the governmental sector in Indonesia. These reform efforts, together with the shift in political power in Indonesia, have had a major impact on governmental accounting practices (Harun, Van Puersem, & Eggleton, 2012; Marwata & Alam, 2006). While efforts have been made to reform the governmental accounting system since the 1970s and 1980s (Mir & Sutiyono, 2013), the push for change in accounting practices intensified in the 1990s was due to coercive pressure from international bodies, especially debtor agencies such as the IMF and the World Bank, and the normative pressures of the key technocrats (Harun, et al., 2012; Mir & Sutiyono, 2013). The public sector reform has had a significant impact on local government, as it has a wider responsibility to manage its affairs and be accountable to citizens (Jurnali & Siti-Nabiha, 2015; Seymour & Turner, 2002).

As the focus of the public sector reform is on good governance, accountability and transparency, managerial accounting tools and techniques, specifically the performance measurement and management system, have played a significant role in the process. Consequently, efforts to ensure the utilisation of systems of managing performance were made over the years, with the issuance of various presidential instructions and regulations detailing the elements of performance measurement and management (SAKIP) and reporting of yearly performance (LAKIP) (Jurnali & Siti-Nabiha, 2015). The government, through Ministry of State Apparatus and Bureaucratic Reform (MSABR), pushed the adoption of performance management by evaluating and rating local authorities based on their yearly performance report (LAKIP). The evaluation criteria largely focused on the implementation of the system, as compared to the achievement of results (Jurnali & Siti-Nabiha, 2015). Efforts to enforce the implementation of PMS have gained further momentum over the last few years, as MSABR actively publicised the results of the PMS reports, which led to an increased presence in mass media reports about local government performance, where previously the media provided statements from high-ranking ministerial officers regarding the PMS reports. Despite these actions in publishing the evaluation results of local government, several local governments have not managed to improve their ratings or effectively implement a PMS.

Problem Statement

The problematic nature of PMS implementation in public sector organisations is well documented in the empirical literature (Arnaboldi, Lapsley, & Steccolini 2013; Modell, 2003, 2009). A PMS is decoupled from organisational practices with various negative consequences. The same issue is also faced in developing countries, as, in most cases, the accounting tools and techniques that underpinned the reform were introduced in public sector organisations that lacked the capacity and capability to implement the reform (Mir & Sutiyono, 2013; Akbar, Pilcher, & Perrin, 2012; Mimba, Van Helden, & Tillema, 2013; Khan & Hoque, 2016; Marwata & Alam, 2006; Djamhuri, 2009). Therefore, the accounting reform, with the objectives of improving governmental efficiency, transparency and governance, has failed to achieve its intended objectives (Mir & Sutiyono, 2013; Akbar et al., 2012; Yang & Modell, 2012). Among the issues that hindered PMS implementation in public sector organisations in developing countries were the lack of skills, limited facilities and limited number of staff, which resulted in difficulty for public officers in formulating the performance indicators, and consequently, the organisations were not able to produce the performance report (Akbar et al., 2012; Mimba et al., 2013; Djamhuri, 2009). Wijen (2014) found other compliance barriers such as officers’ lack of attention, motivation and knowledge.

In an Indonesian study, Akbar et al. (2012) also believed that due to a lack of skills, resource-rich local governments have employed the services of consultants and academics to assist them with the formulation of indicators (Akbar et al., 2012). This outsourcing of performance management practice could lead to a host of other issues, especially if the indicators formulated were not contextualised to the specific nature of the local authorities. Hence, Akbar et al. (2012) noted that the performance report has no significant impact on planning and control of the local governments, and does not impact on decision making. This is not surprising, as noted by Van Helden and Reichard (2016), performance information in public sector organisations is mainly used for external accountability purposes regarding political bodies, citizens or oversight agencies, as compared to its use for internal control and decision making, as seen in the private sector.

Such problematic adoption of PMS arises because the PMS implementation was not due to internal considerations, but more due to external pressures. In Indonesia, the legislative and governmental regulations are a major factor driving the use of performance measurement practice (Akbar et. al., 2012). Despite this regulatory pressure, many local governments have not submitted performance reports during the early years of the reform (Jurnali & Siti-Nabiha, 2015). Hence, the PMS was not adopted or was decoupled from organisational internal practices, where the practice is decoupled from policy, as the policy was adopted for ceremonial purposes and did not alter the organisational practices or routine (Bromley & Powell, 2012). Issues in implementation could also lead to decoupling between subunits, where there is a difference in implementation between subunits in an organisation. It has been argued that the non-adoption or symbolic adoption of PMS practice might not be permanent (Bromley & Powell, 2012; Modell, 2009), especially due to the intensive action on ensuring policy compliance through auditing of public organisations (Bromley & Powell, 2012).

Research Questions

The following question is addressed in this paper: What the pressures and barriers to PMS adoption in a local government authority?

Purpose of the Study

The purpose of this study is to understand the pressures and barriers to PMS adoption at a local government authority.

Research Methods

A qualitative case study approach is used in this research. The case selected is a local authority in one of the provinces in Java, LG1, which has received a low ranking from MSABR. LG1, a city of tourism and agriculture, was established as a municipality nearly 20 years ago. It is categorised as a small city and comprises only three districts. LG1 has 12 departments, nine divisions, six agencies and four offices. The total population under the city governance was approximately 200,000 in 2016, with an average population growth of 1.19% over the last six years. Thus, the population density is around 1,000/km².

LG1 was selected as the case site since the mayor was receptive to the idea of identifying a better solution to improve the performance of his organisation. Ongoing fieldwork was conducted in LG1 from 2016 to 2018, which included two focus group discussions, in-depth interviews and documentary reviews. The first focus group discussion was conducted with eight key members of local government located in the same province as LG1 (see Table 1 ). The purpose of this focus group was to gain understanding about the Indonesian government model of PMS, and the factors that enable success or failure in its implementation.

The second focus group discussion took place in 2017, in order to gain understanding and perspectives from LG1’s organisational members about the PMS at the organisation. In-depth interviews were conducted with key organisational members of the case organisation from 2017 to 2018. The head of the Organization Division of the LG1 Municipality was interviewed, as the division is responsible for compiling all material for performance reporting purposes. Due to the critical role of the division in performance measurement reporting for the city, the head of the division was interviewed five times. The list of people interviewed and participants of the focus group are shown in Table 1 .

Data was also gathered from both internal and public documents, as shown in Table 2 . The main documents reviewed are the Medium Term Local Government Development Plan and the Government Institution Performance Report (LAKIP) since 2015. Other documents reviewed were the 2016 Performance Contract, and reports from the LG1 Central Statistical Bureau and the newspapers.

Findings

Conclusion

The key triggers behind the relatively new radical intention of LG1 to adopt a PMS are due to both external and internal factors. The external factor was in the form of the poor SAKIP ranking result, which created social pressures for the city, as other local governments in the same province had improved their ranking as compared to the city. This was compounded by increased MSABR publicity of the ranking results. The yearly publication of SAKIP achievement among government agencies by MSABR seems to be more effective in pushing governmental organisations more strongly to achieve a better ranking in the SAKIP system, and institutionalising the spirit of accountability within governmental organisations. Thus, the adoption and implementation of a PMS were due to external compliance to the ministry’s regulations and its consequent social pressures. The barriers to adoption of a PMS correspond to organisational, cognitive and political issues. They are manifested in the lack of skill and knowledge among public officers regarding the system of managing performance, a less contextual and relevant design of the PMS system, and also – equally importantly – political nuisance precluding the approval of medium-term planning and budgeting.

Acknowledgments

The support of Chartered Institute of Management Accountants (CIMA) is gratefully acknowledged.

References

1. Akbar, R., Pilcher, R., & Perrin, B. (2012). Performance measurement in Indonesia: The case of local government. Pacific Accounting Review, 24(3), 262–291
2. Arnaboldi, M., Lapsley, I., & Steccolini, I. (2015). Performance Management in the Public Sector: The Ultimate Challenge. Financial Accountability & Management, 31(1), 1–22
3. Bromley, P., & Powell, W. W. (2012). From Smoke and Mirrors to Walking the Talk: Decoupling in the Contemporary World. The Academy of Management Annals, 6(1), 483-530.
4. Djamhuri, A. (2009). A Case study of governmental accounting and budgeting reform at local authority in Indonesia: An Institutionalist Perspective. Unpublished Phd. Thesis. Universiti Sains Malaysia.
5. Harun, Van Peursem, K., & Eggleton, I. (2012). Institutionalization of Accrual Accounting in the Indonesian Public Sector. Journal of Accounting & Organizational Change, 8(3), 257-285.
6. Jurnali, T., & Siti-Nabiha, A. K. (2015) Performance Management System for Local Government: The Indonesian Experience, Global Business Review, 16(3), 1–13
7. Khan, S. H., & Hoque., Z. (2016). Changes in Public Accounts Committee of a less developed democratic country: A field study, Financial Accountability and Management, 32(1), 80-103.
8. Marwata, & Alam, M. (2006). The Interaction amongst Reform Drivers in Governmental Accounting Changes. Journal of Accounting & Organizational Change, 2(2), 144-163.
9. Mimba, N. P. S. H., van Helden, G. J., & Tillema, S. (2013). The Design and Use of Performance Information in Indonesian Local Governments Under Diverging Stakeholder Pressures, Public Administration and Development, 33(1), 15-28.
10. Mir, M., & Sutiyono, W. (2013). Public Sector Financial Management Reform: A Case Study of Local Government Agencies in Indonesia, Australasian Accounting, Business and Finance Journal, 7(4), 97-117.
11. Modell, S. (2003). Goals versus institutions: The development of performance measurement in the Swedish university sector. Management Accounting Research, 14(4), 333–359.
12. Modell, S. (2009). Institutional Research on Performance Measurement and Management in the Public Sector Accounting Literature: A Review and Assessment. Financial Accountability and Management, 25(2), 197–224.
13. Seymour, R., & Turner, S. (2002). Otonomi daerah: Indonesia‘s decentralization experiment, New Zealand Journal of Asian Studies, 4(2), 33–51.
14. Van Helden, J., & Reichard, C. (2016) Performance Management, in A. Farazmand (ed.), Global Encyclopaedia of Public Administration, Public Policy, and Governance, Springer International: Switzerland, p. 1-13.
15. Van Helden, J., & Uddin, S. (2016) Public sector management accounting in emerging economies: A literature review. Critical Perspective on Accounting, 41, 34-62.
16. Yang, C., & Modell, S. (2013). Power and performance. Accounting, Auditing & Accountability Journal 26(1), 101-132.
17. Wijen, F. (2014). Means Versus Ends in Opaque Institutional Fields: Trading off Compliance and Achievement in Sustainability Standard Adoption Academy of Management Review, 39(3), 302-323.