Public Sector Management: A Treasury Perspective on Contracting for Outcomes and Managing Risks

The Treasury has released a speech delivered by Gabriel Makhlouf, Deputy Chief Executive of the Treasury, at the Institute of Internal Auditors conference in Wellington on 24 November 2010.


Thank you, I’m here today to talk with you about risk assurance and its role in public sector management.

Risk management is one of many activities that public servants undertake across the public sector to ensure that the state sector is performing well: delivering the Government’s objectives at the same time as delivering value for money for taxpayers.

So as well as describing our approach to risk management and how we are working to improve it, I also want to share some thoughts about the way state sector performance is managed, the issues and risks posed in the management model we currently use, and what the Treasury is doing in response to those issues and risks.

Why it matters#

The Treasury takes state sector performance management extremely seriously.  Both as the guardians of the public purse, and, equally importantly, because state sector management is an important tool for achieving our elected Government’s economic and social policy goals.

I should note that when I talk about state sector management, I include the process of making and enforcing regulations, too.

The state sector is the biggest employer in New Zealand.  It is nearly 43% of gross domestic product.

What the state sector does, how it goes about doing its work, and how well it does it,  has a direct impact on everyone in the country – whether as taxpayers, employees and employers, recipients of services provided by government or users of government assets and infrastructure.

The state sector description of what happens in people’s lives is "outcomes."

The state sector influences what happens to outcomes. We use taxpayers’ money in all sorts of ways to achieve all sorts of things that influence the outcomes in people’s lives, so how outcomes are achieved matters. 

The design of our state sector management system, and the way that we run that management system, affects whether and how outcomes are delivered.

The state sector management system matters.

The theory of state sector management#

The theory of state sector management is that government decides what outcomes it cares most about improving, then the public service provides advice on the best way of meeting those outcomes within available resources – i.e. what outputs to deliver, to what standards, using what inputs (like staff time), and at what price. 

The state sector is held to account by Parliament for delivering the outputs it says it will deliver as efficiently as possible – and also for whether or not they were the right outputs that actually make the desired difference to the outcomes of people’s lives. 

The challenge#

So that’s the theory. But does it work?

Treasury is very good at debating the merits or otherwise of theories but we need to sometimes remind ourselves that what matters is whether the theories actually work in practice.  Is our performance management system getting results?

Testing theories against reality is not about winning the intellectual argument.  It is about making sure we get tangible, practical results. It is about what all public servants can do to improve outcomes for New Zealanders.

With that in mind, we need to consider seriously whether we have the state sector management framework that we want.

The issues#

We know that there are issues that need to be addressed.  We have a lot of symptoms:

  • inconsistent buy-in and ownership of state sector performance by organisations (including senior managers), and Ministers;
  • confusion about how the system fits together, with mixed messages often emanating from  central agencies;
  • poor quality performance information;
  • excessive compliance costs;
  • lack of accessible, relevant information that can be effectively used to inform decisions, evaluation and scrutiny of policies and programmes; and
  • variable capability and capacity across the state sector.

We need to find the underlying causes of these symptoms.

I believe that one of the fundamental causes, where we are being held back from maximising our performance, is incentives.  As well as a clear understanding of what is required in terms of performance responsibilities and standards, there need to be clear consequences associated with fulfilling, not fulfilling or exceeding these performance expectations.   This means not just the existence of rewards or sanctions for performance, it means applying them actively and proportionately so that they remain credible enough to influence behaviour. 

One of the other causes is our sometimes unnecessarily narrow conception of how we think about using performance information. Historically, we have seen the central purpose of state sector management as one of accountability for taxpayers’ money spent, rather than improving performance.

In practice, this has meant lots of reporting – to the point that we are almost drowning in data.

But how can we make sure we have the right information to drive change?

The Minister of Finance summed up this issue in a speech to the Australia New Zealand School of Government back in August this year when he said: "Currently, governance and accountability are driven by the Parliamentary appropriations process.  That process accounts for the money, but not for the results."

The state sector is good at telling people what we’ve done, but we’re not good at articulating why we’ve done it or explaining how our work makes New Zealand a better place to live, work and do business.

I’d echo John Whitehead’s challenge in August that the public sector still doesn’t tell a clear enough story to Ministers or the public about what they get for the money we spend on their behalf or the regulations we make.

I know that public servants are able to focus on and feel ownership of outcomes.  We do it all the time at the Treasury when we focus on the economic growth rate, or when we talk about living standards, incomes, GDP, maintaining standards of wealth and well-being relative to other countries.

We need to be doing the same for outcomes across the state sector.

We know that many of the outcomes that the public service contributes to are complex and sometimes difficult to measure.

Outputs – not outcomes – are different and are easier to focus on, so that is where a lot of work has been done. But producing and providing outputs is only a means to achieve much broader and more complex ends; a means to achieving lasting improvements in outcomes.

The Public Finance Act requires comprehensive reporting of non-financial information (for example, we must have measures for every class of outputs), rather than allowing a focus on the most important. 

To me, as a relative newcomer to New Zealand, it seems strange to require public reporting of performance measures for services that are internal to government, like policy advice, or support for Ministers, but that is what the Public Finance Act requires us to do.

The conceptual framework for both financial and non-financial reporting in the state sector is to meet the needs of "general purpose users", whereas almost all the key people and organisations that we hope will use the performance information (central agencies, Ministers and Parliament) are really "special purpose users." And they already have the power to require departments to produce information - without having the requirement set out for them in legislation


So where does this take us? I would suggest that government and the state sector collectively need to re-consider what the state sector management system is really there for. 

The Treasury is currently looking at how well the state sector management system is working, including the question of what the management system needs to achieve.

We are looking at the effectiveness of the performance management system and the tools within it, focusing our analysis on:

  • Line of Sight – that is, every single public servant understands what is expected of them, and what their own individual contribution is to their organisation and the Government’s objectives;
  • Incentives for performance improvement – genuine consequences and behaviourial impact;
  • Customer Focus, including relevance and accessibility of information;
  • Using what we learn about the state sector’s performance to inform our advice to Ministers on policy, regulation and spending decisions; and
  • Proportionality, including reducing the compliance burden and making sure that we have a lean performance management system that gets maximum result for the minimum bureaucracy.

Clear, strategic leadership is vital to ensuring that we get the state sector that New Zealand needs.  The history of the state sector management in New Zealand since the late 1980s can be seen as a progressive evolution, beginning with an administrative model that primarily focused on counting and classifying inputs, with Treasury micro-managing the dollars and cents via highly complex rules and detailed process instructions. 

In response to the limitations of this model, reforms were introduced that moved the state sector towards a much more decentralised  managerial model primarily focused on outputs and with a strong emphasis on the responsibility of individual Chief Executives, and a strong vertical chain of accountability from managers up to Parliament.

 The ultimate goal, however, is a leadership model where everything we do is driven by, and can be directly traced back to, the outcomes the Government wants the state sector to achieve; and where we think across the public sector and work collectively on the difficult issues we need to tackle.  This model does not reduce the accountability of individual Chief Executives or Ministers for performance, but it does require us all to re-think the way we approach performance improvement, to take on greater responsibility for the ends as well as the means. 

I would say that we have started on the next step on this journey, and I want to talk about some of the things we’re doing to get there, and where we need to accelerate the evolution.  For example, the public sector needs to be thinking more in terms of contracting for outcomes, responding and adjusting outputs as necessary depending on what works best, rather than seeing the delivery of the product or service as our whole job done- that’s just the start.

I’ve spoken about the need for a clear line of sight between the day-to-day work of public servants and the outcomes that they are working to improve, and the importance of public sector leaders setting a clear strategic direction for their organisations.

The public sector is powered by its people.  So I want to talk a little about staff engagement.   Employees who are engaged with their work and the ideals and objectives of the organisation they work for, quite simply, are better employees. 

It feels like an obvious point.  But perhaps we all occasionally need reminding that the public sector is not an inanimate machine, and public servants aren’t robots.  Motivation, commitment, shared professional and corporate values are critically important to whether any organisation or group of organisations achieves its goals.

So we take staff engagement very seriously at the Treasury.   Our people make the difference, and it isn’t enough for the Treasury to just be "good," we need to be an exemplar. As one of the three central agencies, the Treasury needs to be a living demonstration of the leadership model; able to inspire and challenge public servants to be the best. 

John Whitehead said in August that we welcomed the challenge that PIF presented.  We don’t yet know what the PIF review will say, but we already have our own take on what the big questions and challenges are for the Treasury. 

Being a good Treasury official, the way I approach this is by thinking about the counterfactual, and the opportunity cost of not being as good as we can possibly be.  So how much better can we be if:

  • we have a clearly-articulated, well-understood articulated vision for the future of New Zealand;
  • we engage more quickly and effectively with Ministers, other state sector organisations and the public;
  • we become a truly 21st century Ministry of Finance, including becoming less reliant on the distant and directive, old-school methods of central agency engagement
  • we are known for being responsive and adaptable, moving rapidly problem to solution or decision without losing our existing levels of robustness;
  • we deliver a step-change in performance, with clear incentives for improved performance; and
  • we can realise the full potential of every member of staff and embed a culture of continuous improvement.
  • The Treasury, and I think the public sector as a whole, would acknowledge that these questions are critical. There is an imperative for all of us in the public sector to:
  • know where we are going and how to get there as well as understanding how we got where we are today.
  • act decisively and communicate our direction clearly, within our own organisations and across the state sector.
  • produce real solutions and make things happen as well as provide high-quality analysis of problems.
  • actively manage risk and doesn’t fall into the trap of over-caution.

Making it happen#

We also need to make sure that we acknowledge and build on the areas where we are currently strong.  For example, we have taken a leadership role in debate about the economy. Of course, this may be because such a role is within our comfort zone where we feel we have a degree of control and competence.

For Treasury, part of taking risks will include us showing leadership in areas that we’ve not been associated with before, where we’re not so comfortable, or where our levers are less direct than having the Government’s hand on the purse strings.

This Government has charged us to be innovative and flexible, to adapt to new ways of doing things with fewer resources: smaller, smarter government.   This means a future state sector that uses the technological and human capital of both the public and private sectors more intelligently, in policy-making and implementation.

What we are doing#

So what are we doing about these issues?

At the moment we are doing a lot of work on making our Statement of Intent and our Output Plan really useful.  Everyone working for the Treasury needs to be able to see how their individual objectives contribute to our Statement of Intent, so we’re putting a lot of work into getting a clear line of sight from the Treasury’s strategic vision, through its business plan and to the activities and priorities of Treasury teams and staff.  I want everyone who works for the Treasury to be able to see how what they do contributes to the outcomes we achieve.

The Statement of Intent is our strategic plan.  It sets our direction, communicates our priorities and should be used to drive action and change.  Ministers, businesses, individual members of the public, should be able to look at our Statement of Intent and understand why the Treasury is here, what it cares about and why, and what it is going to do.  The Statement of Intent should clearly state the outcomes that the Treasury is working to improve.

The Output plan is our business plan. It sets out what we will produce, and how we will use taxpayers’ money to do it.  It describes what we do to achieve the outcomes we set out in the Statement of Intent. It also sets up the basis for reporting throughout the year, which helps us ensure that we are delivering our outputs, and that those outputs are having the desired impact.

To this end, Treasury has overhauled its internal reporting focusing on providing management with timely information to support decision making. We’ve replaced old compliance focused trimester reports with monthly reporting that focuses on progress toward our strategic priorities. This is complemented with a quarterly reporting process that is shared with the Minister and has a wider focus including risk management and organisational capability.

The reporting regime supports the new leadership structure that Treasury implemented at the end of last year. This structure has seen the establishment of a Treasury Board that includes three external directors and is focused on improving the performance of the organisation.

The restructuring also saw the establishment of a Results and Resourcing Team, which is using performance information to allocate the Treasury’s resources to priority areas and collectively hold managers accountable for the impact that they have.     

We have been working with agencies across government to ensure that the state sector takes a longer-term approach to state sector management. 

For example, we are currently implementing a redesigned budget process that focuses on baseline expenditure (operating and capital) across a 3-4 year period, to ensure spending is matched with priorities, including more focus on reprioritising existing spending towards priorities

We are using a group of senior chief executives (the Senior Executives Group) to test Treasury advice during the Budget process and provide a consistent approach across departments.

And in terms of aligning decision-making processes, Ministers will be able to make decisions about the use of new capital funding, operating expenses and policy decisions at the same time during the budget process.

We are also currently actively promoting long-term planning and performance through our work on capital asset management (CAM), bringing a whole of life approach to portfolio management and investment processes and reporting to Ministers on the 10-year capital expenditure intentions of the government agencies that hold the most assets.

Treasury is in the final stages of work on the Government’s Investment Statement, which will help inform debate on emerging risk issues that could affect the long-run strength of the Crown’s balance sheet and the country’s overall economic performance.

To assist Ministers in driving up performance of their agencies, the Treasury, working jointly with the State Services Commission, has developed the Preparing Agencies for Performance Discussions "toolkit".  The toolkit is aimed at improving agencies’ understanding of the assurance Ministers are looking for from Chief Executives and Crown entity boards which is that they are facing up to the challenge of delivering "more for less" over the medium term.

And to give one example of what can be achieved, the recent Defence White Paper highlighted how the New Zealand Defence Force will drive significant value-for-money opportunities to free up and reprioritise resources towards frontline capabilities.  Treasury will continue to engage with defence agencies as they take up the challenges to deliver value-for-money and the strategic direction set out in the Defence White Paper.

Risk management#

At the forefront of our taking a longer-term approach is the work we are doing to review our risk management policy. This work includes ensuring a clear, consistent understanding of risk and risk-related terms across the Treasury.

Risk management in Treasury is not a compliance-driven exercise to fill out detailed risk registers in all areas that are never looked at apart from when people are required to update them.  Instead, the strategy is for people to understand the principles behind risk management and apply these as appropriate to all aspects of Treasury’s business that involve uncertainty.   There will be requirements to formally assess and report key risks in some areas as part of good governance (eg, projects and major initiatives, strategic and business planning). 

However the need for risk to be part of discussions and considerations is as important as formal risk processes – we want Treasury to be a "risk intelligent" organisation that understands and appropriately treats its risks to maximise our chances of success while protecting and enhancing our reputation, our people, our financial position and our information and knowledge.

We are also reviewing our approach to internal audit, to ensure that it focuses on providing assurance and advice around the key risks that really matter to us – our strategic risk profile is the key reference for this.  The risk treatments and internal controls in place to manage the key risks are the source of our assurance programme – our Board requires assurance that these controls are operating effectively to manage the risks identified.  An internal audit programme is being developed based on a prioritised list of risk and key controls. 

Your call to action#

Earlier this year, Secretary to the Treasury John Whitehead set out his vision for a high-performing state sector in a speech to state sector Chief Financial Officers. His vision included:

  • Proven cost-effective public services;
  • Clear, shared understanding of what good performance is and who is accountable for achieving it;
  • Success measured by improvement in outcomes, not outputs or volumes;
  • Being free, frank, fearless - and fast, from advice to delivery;
  • High aspirations about performance; and
  • Taking a longer-term approach to state sector performance.

Agencies must start thinking what this means for them.

In August, the Minister of Finance called upon his colleagues to keep demonstrating political support for change, and enabling Chief Executives to do what’s necessary to improve performance without fear of political consequences.

The senior leaders in the state sector also need to demonstrate that they have understood the world has changed.

I urge all state sector agencies to note the importance that the Treasury places on risk management, not as an afterthought but as an integral part of planning.

We need to be bold, we need to consider all ideas. If that means structural, institutional or legal change, then we should say so, and make the case for why that would help.

If it means making recommendations in areas that we would normally shy away from, then we need to overcome our instinctive caution.  If it means setting and enforcing higher standards, then we shouldn’t be afraid of that.

For the people of New Zealand whose lives are affected at every turn by the state sector - the people we deliver outcomes for - the best demonstration that we’re working for them isn’t in Statements of Intent or a theoretical state sector management model. It comes with tangible action to deliver on the social and policy objectives of the elected Government of the day.