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Measuring productivity in the public sector

Editor's Note to Readers

Human Capital Matters (HCM )is the digest for leaders and practitioners with an interest in human capital and organisational capability. It seeks to provide Australian Public Service leaders and practitioners with easy access to the issues of contemporary importance in public and private sector human capital and organisational capability. It has been designed to provide interested readers with a guide to the national and international ideas that are shaping human capital thinking and practice. The inclusion of articles is aimed at stimulating creative and innovative thinking and does not in any way imply that the Australian Public Service Commission endorses service providers or policies. It is intended that the articles are accessible for the general reader, do not require subscriptions to specific sites and, where possible and appropriate, editions of HCM have been reviewed by topic specialists to provide range and reasonable currency on topical issues.

Welcome to the first edition of Human Capital Matters for 2016.

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This edition attempts to collate thought-provoking articles on measuring productivity in the public sector and addresses reasons this might be considered a vexatious proposition and how the public sector might proceed. It looks at instructive articles from history, the community sector, international literature and ends with findings about measuring productivity in the APS based on the APS Agency Survey from 2014.

The edition begins with the history of the efficiency dividend. The efficiency dividend—a long-standing mechanism employed by Australian governments to reduce the running costs of Commonwealth agencies—has traditionally been thought of as a way of driving productivity in the public sector.

There is no doubt that measuring public sector productivity is difficult. The notion of measuring 'service' is seen to be more complex than calculating inputs versus outputs and recent authors have queried how best to assess less tangible aspects of productivity, like quality and intellectual capital (Agor, 1997). To some extent grappling with measuring service has been the rationale behind the efficiency dividend.

Productivity is often linked with words like efficiency and effectiveness though at least one author has made a case for including notions of quality in attempts to measure public service productivity.

This review of the available articles leads to a conclusion that there is no universal definition of productivity for the public sector and that any effort to develop a single measurement is problematic. What does seem possible is comparisons across similar organisations within the public sector, using multiple frames of reference, different measures for different functions and preferably ones that have been developed within rather than being imposed on the agencies.

List of articles:

The first article is the overview of the Commonwealth efficiency dividend. It includes a history of the efficiency dividend and its strengths and weaknesses, not least the difficulties associated with measuring productivity gains that might support the rationale for ongoing efficiency imposts.

The second article is a review of public sector productivity by Dr Richard Boyle for the Institute of Public Administration in the UK in which he uses cross-national (including Australia) and cross-sectoral (health, education) comparisons to arrive ultimately at recommendations for developing a public sector productivity measurement framework in Ireland. The article, released in 2006, explores traditional notions of productivity and examines their utility in the light of the value the general public perceive from public sector services.

The third article by Pricewaterhouse Coopers(PwC) in Australia revisits the complex issue of measuring productivity in the public sector by noting at the outset that productivity is a recurring topic of debate complicated by various interpretations of what productivity means. Added to this is the perception from the authors that 'the principles underlying a discussion about improving productivity in the public sector bear little relation to the way market focused sectors would think about the issue'.

The fourth article is also a Pricewaterhouse Coopers (PwC) report using productivity in the public sector of the UK as its base. It takes a different approach to the Australian report which proposes a macro-level model by which to approach the question of productivity. This UK-based report looks to a micro understanding of productivity: at the job and employee engagement levels.

The fifth article is another from the UK. 'Measuring employee productivity' looks at the employee as central to any discussion about productivity; it addresses issues of presenteeism and well-being as being integral to notions of productivity.

The sixth article is an exhaustive report by the Australian Research Alliance for Children and Youth (ARACY) in response to the Productivity Commission's Draft Framework for productivity. It provides a summary of research into the use and effectiveness of outcome measurement frameworks for Community Organisations (COs). The value of this article is its scope. It goes beyond traditional views about measuring inputs and outputs and highlights the need to consider outcomes (as well as outputs) and impact on the communities that are serviced by COs. In its review of effective frameworks, ARACY offers that the common features of effective frameworks are organisational alignment, stakeholder acceptance, organisational integration and an outcomes focus. It concludes by offering recommendations for suggested improvements to the 2009 Productivity Commission's Draft Report into measuring the Contribution of the Not-for-Profit Sector.

Finally, the seventh article provides the findings from the APS Agency Survey of 2013-14 from three open-ended questions posed about the current status of productivity in the APS. The report on the open-ended items builds on the results from the one quantitative item reported in the 2013-14 State of the Service Report. While the State of the Service 2013-14 report on productivity in the APS is publicly available, the research note addressing the open-ended items can be provided on request.

Parliament of Australia Report, The Commonwealth efficiency dividend: an overview, dated 13 December, 2012, accessed 18 December, 2015.

In 2013 the State of the Service report opened with the headline that 'increased public sector productivity continues to be a priority'. This coincided with the second increase in the Commonwealth efficiency dividend—the first being in 2008-09—which became known colloquially as 'doing more with less'.

The efficiency dividend has been in place for nearly 30 years and operates as an annual reduction in funding for Commonwealth government agencies. According to the report the efficiency dividend is acknowledged as 'the most widely-used mechanism for improving efficiency in Commonwealth agencies' and is justified on the basis that increased agency productivity results in reduced operating costs. The aims of the efficiency dividend are to 'give managers the incentive to continually seek new or more efficient means of carrying out continuing government business, allow government to redirect a portion of efficiency gains to higher priority activities and clearly demonstrate Public Service efficiencies resulting from improvements in management and administrative practice'.

In 2012-13, the annual efficiency dividend of approximately 1.25% was increased to an overall rate of 4% with consequent impact on agencies that was noted in the report as attracting media attention. It was noted that '(t)here is very little information on aggregate savings realised as a result of the dividend over time' but estimates suggest that savings were about $508 million up to about 1998.

In 2008 the Australian National Audit Office suggested it was time to re-think the efficiency dividend because of the seemingly inordinate demands being made on small agencies particularly. Other criticisms included that the dividend was not underpinned by any formal assessment of potential efficiencies and the likely default action by agencies to reduce staffing which would have a negative impact on workloads and outputs. The Joint Committee of Public Accounts and Audit (JCPAA) also noted difficulties in imposing an efficiency dividend related to the actual functions (eg technical) and scope of functions of agencies; those with tightly defined functions had less scope to propose new policy funds by which to attract additional funding.

The impost of the increased efficiency dividend in 2012-13 and the unprecedented attention this caused again highlighted the universal difficulty of calculating public sector productivity.

Suggested alternatives included replacing the efficiency dividend with productivity improvements realised through enterprise bargaining and regular department-specific reviews to assess potential savings.

The Parliamentary report concluded the mechanisms for driving efficiencies warranted further exploration.

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Boyle, R., (2006) Measuring Public Sector Productivity: Lessons from International Experience Committee for Public Management Research (CPMR) Discussion Paper 35, Institute of Public Administration, Dublin Ireland

In this six chapter document Boyle emphasised that productivity measures and comparisons, especially across nations, require cautious interpretation, should not be applied simplistically for fear of 'perverse consequences' and require more supporting evidence in the form of quality assurance and guarantees about data reliability and validity.

He also addressed issues such as organisation-based and bottom up initiatives for public sector performance measurement, particularly for the insight they provide in terms of the value being delivered by public agencies. He concludes '... a broad definition of productivity should be used in determining productivity in the public sector. The focus should be on the value received from the services provided through public funding ...'

In terms of the development of public sector productivity measures—although specifically for Ireland, the general principles appear appropriate—Boyle recommends:

  • Cross-national comparative studies: Tracking public sector performance comparatively through studies by, for example, the World Bank and the European Central Bank; participating in OECD initiatives
  • National and sectoral initiatives: identifying a lead agency (in Ireland, the Central Statistics Office) to develop measurement of government output and productivity studies; using annual output statements from government departments to inform productivity studies; identifying priority productivity studies (for Ireland health and education were identified); encouraging research into public sector productivity by academic institutions and relevant bodies; benchmarking comparable organisations
  • Organisation-based and bottom up initiatives: developing organisation-based measures; sponsoring studies of efficiency of public service across sectors which are repeated periodically; benchmarking comparable organisations

Dr Richard Boyle was Head of Research, Publishing & Corporate Relations at the (Irish) Institute of Public Administration in 2014

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PwC (Australia) December 2013, Improving public sector productivity through prioritisation, measurement and alignment: new approaches for how the public sector improves productivity

Pricewaterhouse Coopers (PwC) believe that the most disparate views on productivity exist between the public and the private sectors. There is an argument, PwC claim, for treating public sector productivity as an 'unsolvable issue' or available only to those public agencies that 'exhibit commercial attributes'.

The report notes that productivity in the public sector is usually associated with three drivers: reduction in cost-base (such as that driven by the annual and occasional extra-ordinary efficiency dividend); public sector modernisation (usually related to machinery of government changes); and, service delivery improvement (often associated with words such as improved efficiency and effectiveness).

The three drivers 'often fail to achieve their desired outcomes' from the perspective of PwC because of lack of prioritisation, 'thereby embedding a range of activities that are no longer relevant to service delivery'; immature productivity measures, 'leading to the application of high level outcomes rather than a specific understanding of what an activity, function or program can do'; and, inability to align strategy to execution, creating an environment of 'risk-aversion, reluctance to drive wide-ranging reforms and unmet expectations at the political level and amongst the community'.

The PwC report itemises initiatives for enhancing productivity thus far attempted in the Australian public sector and often referred to as 'value for money', identifying benefits and limitations with each:

Measure Benefit Limitations
  • Policies of 'zero new hires' and not replacing staff who leave voluntarily
  • Application of 'efficiency dividends' across departments
  • Setting up back-office shared service centres
  • Outsourcing a government run service to a single commercial market provider
  • Heavy compliance requirements for suppliers of goods and services to government
  • Stabilises the workforce cost base in the short term. Sends a message to the organisation to prioritise activities within available resources
  • Seeks to ameliorate the expectation of increased funding for the same activity year on year and attempts to inject a continuous improvement mindset into how activities are performed
  • Investment has the potential to achieve a step change in service costs for non-core services within the department
  • Removes the cost of a function from the salaries and wages line of the operating statement to the cost of goods and services line leading to the appearance of a leaner business model; savings may also result. Demonstrates that productivity can be achieved by engaging with market providers instead of internal cost cutting. Engenders commercial thinking in how services are procured, which can increase innovation
  • Sets a level playing field for the market by clearly establishing what is expected through a procurement process
  • Usually completely undirected, leading to capability gaps across the organisation regardless of whether activities performed by the role are 'on strategy' or not. Ongoing application can result in an organisation structure evolving with little relationship to what was originally intended, eg spans and layers that are too narrow or wide, inappropriate oversight of key functions, or top-heavy management
  • Removes budget flexibility from senior decision-makers and weakens the role of the chief financial officer as departmental expense control is transferred to Treasury and Finance department officials. Diminished capacity to invest in improving internal operations, leading to 'death of a thousand cuts' and degradation in service quality
  • Often established without consideration to the scale required to adequately achieve an acceptable rate of return to departments Business cases often developed with erroneous assumptions about the outlay required to design and implement the new shared service. Usually scoped out with little consideration of what the department actually does, leading to compromises in the service catalogue and duplication in service provision
  • Can turn an inherent market failure into a monopoly. Arguably, stifles opportunities to enliven the market with more participants as barriers to entry are raised through the incumbency of a single service provider. Runs the risk of evolving into cost shifting rather than achieving internal transformation through true outsourcing
  • Drives away competitive tension in the market. Removes innovation as all tenderers are reduced to bidding to supply a commodity service when there is opportunity to achieve benefits by doing things differently. Creates a culture of risk aversion, which has the capacity to increase rather than reduce the risks in the procurement process

In considering the unintended negative consequences of productivity initiatives used to date, PwC proposes a new perspective on the issue of productivity. The report suggests addressing three key focus areas: prioritisation (diverting resources to more socially valuable uses), measurement (acknowledged as a significant barrier to progressing action on productivity though recognises that emphases on method, data quality, evidence, benchmarking and value to society, all within comparable and controllable time frames are key to this issue) and alignment (defining and agreeing priorities and risks and aligning them to performance drivers, leadership and behaviours, in an iterative rather than linear fashion). Each of these is discussed with supporting key questions and considerations.

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PwC (UK), Productivity in the public sector: what makes a good job? July 2014

This report takes as a central tenet the need to understand the drivers of employee performance which, alongside other factors like investment, technology and infrastructure, also has an impact on productivity. The report introduces the current context for the UK public sector and considers aspects of the workforce that are instrumental in meeting the challenge of enhancing productivity. The report concludes with suggested actions, at the employee level, to the challenge of improving productivity: job design, learning and development and pay and rewards—all things identified in other reports as being integral to a 'good job'.

Whilst drawing on the three key issues identified in the PwC (Australia) report of 2013—namely prioritisation, measurement and alignment—the UK report homes in for a closer look, suggesting that the public sector needs to be more like the private sector. It needs to adopt a model of 'open innovation' based on employee knowledge about service users. Associated with better utilisation of employee knowledge is the requirement to provide the training, skills and confidence required by employees to do their jobs and to ensure accountability. PwC refer to this as 'adaptable talent'.

PwC provides a Talent Adaptability Score for comparison across 11 countries to assess employers' ability to look at new sources of talent and also to assess individuals who are prepared to embrace change and apply their skills across different settings. It is applying skills to a challenging task that is seen to be essential to productive working and well-being as reported by PwC in drawing on research and psychological theory.

Pricewaterhouse Coopers (PwC) is a multinational professional services network founded in 1998. It is one of the Big Four auditors, along with Deloitte, EY and KPMG

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Public Health England, August 2015, Measuring employee productivity—topic overview, London

The key messages from this report are: sickness absence data isn't an especially informative or worthwhile defacto measure of productivity; an improvement in any productivity measure can be achieved through including multiple input and output factors, including a focus on quality; and, employee well-being has an impact on productivity. The authors recommend the following when attempting to measure productivity:

  • Use meaningful indicators that are link to the organisation's operations, are reliable, practical, multi-faceted and take into account quality
  • Use an integrated approach to get a comprehensive picture of organisational performance
  • Involve employees in decision-making
  • Review progress regularly
  • Measure presenteeism for example by using self-reports in existing organisational surveys

In regard to this last point the authors note that 'there is a high level of correlation between self-report productivity and more objective ratings of productivity'.

Public Health England is an operationally autonomous executive agency of the UK's Department of Health

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Australian Research Alliance for Children and Youth, 2009, Measuring the outcomes of community organisations

This paper addressed existing approaches to measurement in the context of the Productivity Commission's framework and considered how to improve measurement for Community Organisations (COs). It reviewed available frameworks from within Australia and overseas and considered the effectiveness of the frameworks it reviewed. From the review ARACY identified that effective measurement frameworks had common features: organisational alignment, stakeholder acceptance, organisational integration and an outcome focus. Each of these are explained and developed for the community sector which is described as a complex system. The paper concluded that 'program logic' and its variants in the form of 'realist evaluation' and 'open systems evaluation' might provide effective approaches to measurement for a complex system like the community sector. This conclusion is discussed from the perspective of its relation with the Productivity Commission's framework and it was suggested that a more specific approach than the high-level guidance proposed by the Commission was required. Specifically, the paper identified that:

  • At the sector level a common approach to measurement to provide measurement related detail was required. This was seen to enable benchmarking among COs
  • A program logic approach to outcome measurement, incorporating realist and open systems evaluation approaches, should be adopted and implemented at the individual CO level in line with the Commission's framework
  • Standard and agreed outcomes (or broad outcome areas) should be identified for the different parts of the sector and in line with this the development and use of standard measurement tools
  • Enhancing research evidence base
  • Systematic promotion and dissemination of evidence of the effectiveness of activities
  • The government should build the requirement and associated cost of measurement and evaluation into its allocation of funding
  • A shift towards a 'culture of measurement'
  • Alignment of national data collection priorities at the organisational and sector levels with an associated question about who should take leadership and responsibility for such a task

The Australian Research Alliance for Children and Youth (ARACY) is a national non-profit organisation working to create better futures for all Australia's children and young people. ARACY commissioned KPMG to prepare this paper

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Australian Public Service Commission, 2014, State of the Service Report 2013-14, Chapter 2, Driving efficiency and effectiveness,Commonwealth of Australia, Canberra

Chapter 2 on driving efficiency and effectiveness from the 2014 report on the State of the Service directly addresses the question of measuring productivity. It identifies four prongs in approaching enhanced productivity: efficient administration, effective programmes and delivery of programmes, good organisational design and governance and, collaboration across agencies to share information, pool resources and leverage existing assets. The APSC notes that

Fostering a high-performance culture and renewed emphasis on performance management is an important component of maximising the contribution the APS makes and raising its productivity, broadly defined … Performance of the public sector is more than financial … though finding useful productivity measures in the public sector … has proved problematic

From the 2014 State of the Service Agency Survey, 37% of agencies (covering 35% of the workforce) reported they had a framework in place to measure agency productivity. Thirty one percent (covering 31% of the workforce) indicated a framework was being developed and another 32% (covering 33% of the workforce) reported that they had no framework in place.

The research note1 reporting the analyses on productivity from the 2014 agency data also provides analyses of the three quantitative or open-ended items from the same survey. These three items were:

What does your agency define as productivity in your business context?

In what ways does your agency report on agency productivity?

What mechanisms, if any, did your agency put in place in 2013-14 to build a culture of personal accountability?

The research note concludes that, as at 2014, there was no single definition of productivity for the APS, that some see that a measure of 'quality' is necessary in any definition of public sector productivity and, that different definitions of productivity are employed for different functions within agencies. The research notes states finally that, based on the findings from the responses provided by APS agencies, 'productivity seems to be defined and operationalised at a local level with relevant or function-specific measures that link back or are aligned to the core business and priorities of the overarching organisation'.

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[1] Australian Public Service Commission 2015, Research Note 136-15 Measuring productivity in the APS, Commonwealth of Australia, Canberra (available on request to the APSC to the email contact given at the start of this paper)