United States General Accounting Office

GAO Testimony

Before the Subcommittee on Government Management,

Information, and Technology

Committee on Government Reform and Oversight

House of Representatives

For Release on Delivery

Expected at

9:30 a.m. EDT

Tuesday

July 8, 1997

PERFORMANCE-BASED

ORGANIZATIONS

Lessons From the British

Next Steps Initiative

Statement of J. Christopher Mihm, Acting Associate

Director

Federal Management and Workforce Issues

General Government Division

GAO/T-GGD-97-151

Summary 

Performance-Based Organizations: Lessons

From the British Next Steps Initiative

The administration has proposed the creation of performance-based

organizations (PBOs), modeled after British Next Steps agencies. PBOs, like

Next Steps agencies, seek to separate service delivery functions from

policy functions. In exchange for flexibilities from certain

governmentwide requirements, the head of the agency is to be held

directly accountable for the agency’s performance.

Next Steps agencies are the British government’s predominant form of

service delivery. As of March, about 75 percent of all British civil servants

were employed in one of the 130 Next Steps agencies or agencies that

operate along Next Steps lines. These agencies have reported that, over

the years, performance has improved, in some cases substantially. Some

agencies have also reported significant cost savings.

The British government has confronted some difficult and continuing

issues Congress may want to consider as it considers the PBO concept.

These are:

First, a lack of clarity in the relationship between agencies and their

parent departments. The British have found that the roles of the Next

Steps agencies and their parent departments often remain unclear because

of the problems inherent in trying to delineate responsibilities.

Management decisions made by Next Steps agencies can have an impact

on policy choices made by their departments.

Second, an uncertainty concerning who is accountable for performance.

Lack of clarity in roles between agencies and departments affects

accountability. It is sometimes difficult to tell if a poor result was due to

poor policy or inadequate implementation of that policy.

Third, difficulties in developing and setting performance goals. British

evaluations identified three areas of concern regarding performance

measurement. First, goal setting does not always reflect what is realistic as

much as adding incremental improvements to prior results. Second, it can

be difficult to determine exactly what to measure. And third, it is

important to ensure that performance information is put in a proper

context and used to improve performance.

GAO reported to Congress in May 1997 on the administration’s proposal to

convert the Saint Lawrence Seaway Development Corporation to a PBO.

GAO found that such a conversion would result in significant changes in the

Seaway’s management structure, funding mechanism, and relations with

Page 1 GAO/T-GGD-97-151
Summary 

Performance-Based Organizations: Lessons

From the British Next Steps Initiative

Congress. However, since PBOs must be created through the enactment of

enabling legislation, Congress has an opportunity to define its role with

regard to the Seaway or any other PBO.

Page 2 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the British Next Steps initiative, a

model the administration used in crafting its performance-based

organization (PBO) proposal, and the lessons that the Next Steps

experience suggest for PBOs in the United States.

According to the British government, the aim of the Next Steps initiative

has been to improve the delivery of government services, obtain better

value for the taxpayers’ money, and give staff more satisfying work and

working conditions. Under Next Steps, a government department’s service

delivery functions, such as paying social security benefits, repairing

military vehicles, and doing inspections to enforce regulations, are

separated into distinct organizational units, referred to as agencies.

Agencies are responsible for delivering those services and are accountable

to their parent departments for their performance, while departments

continue to be responsible for policy decisions. Agencies generally are

given broad flexibility in managing operations while being held

accountable for meeting specific, agreed-upon performance goals.

The administration’s proposed PBOs have some important similarities in

design with Next Steps agencies. For example, both are intended to

separate the delivery of services—the agency’s role—from policy

functions—the department’s role. Also, like the Next Steps agencies, the

administration proposes that PBOs be granted flexibilities to deviate from

some governmentwide requirements, such as certain personnel and

procurement processes. Both are to be led by a chief executive—to be

called a chief operating officer in a PBO—who is selected competitively and

evaluated annually on the basis of his/her agency’s performance. The chief

executive’s pay and job security are to be directly tied to annual agency

performance. The chief executive is to be directly accountable to the head

of the parent department, who, in Great Britain, is accountable to

Parliament, or, in our country, to Congress and the President.

The administration expects that the orientation of management and

accountability in PBOs will shift from a focus on processes to a focus on

customers and achieving program results. This shift in focus is to be

achieved by establishing clear measures of performance which are also

required by the Government Performance and Results Act of 1993.

According to the administration, PBOs are to commit to clear management

objectives, measurable goals, customer service standards, and specific

targets for improved performance. These clearly-defined performance

Page 3 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

goals, flexibility in managing operations, and direct ties between the

achievement of performance goals and the pay and tenure of the head of

the PBO, are intended to lead to improved performance. The administration

expects that, in most cases, the creation of a PBO will require statutory

changes.

As agreed with the Subcommittee, today I will first provide an overview of

the Next Steps initiative, including the number and size of British agencies

participating in the Next Steps program and the reported performance of

those agencies. Second, I will discuss the lessons the British have learned

about the Next Steps experience that we believe are most relevant to PBOs.

Finally, I will highlight some of the major issues that Congress may wish to

examine as it considers the administration’s proposal to transform the

Saint Lawrence Seaway Development Corporation into a PBO.

My statement today is based on our May 1997 report on the PBO initiative

and the Saint Lawrence Seaway Development Corporation’s candidacy.1

 It

also is based on our continuing efforts to track reinvention initiatives

overseas. Our work in this area began with our May 1995 report on

management reforms other counties were undertaking and the insights

those reforms provided for reform efforts here in the United States.2

Next Steps Is the

Centerpiece of British

Management Efforts

The Next Steps initiative was launched in 1988 under then Prime Minister

Margaret Thatcher. According to the British government, Next Steps was

undertaken in response to the government’s desire to have the public

sector provide services through markets or market-like arrangements,

managed by people with the resources and authority to provide those

services. The reforms were also carried out to streamline the central

government, which, the government concluded, was burdened by high

operating costs and a workforce that was too big and insufficiently

focused on results.

Beginning with the first Next Steps agency—the Vehicle Inspectorate of

the Department of Transport which was created in August 1988—Next

Steps agencies have become the British government’s predominant form

of service delivery. As of March 1997, about 75 percent of all British civil

servants were employed in one of the 130 Next Steps agencies or in

1

Performance-Based Organizations: Issues for the Saint Lawrence Seaway Development Corporation

Proposal (GAO/GGD-97-74, May 15, 1997).

2

Managing for Results: Experiences Abroad Suggest Insights for Federal Management Reforms

(GAO/GGD-95-120, May 2, 1995).

Page 4 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

agencies that operate along Next Steps lines. Nearly one-third of the

agencies employ 250 or fewer staff, and more than half the agencies

employ 700 or fewer staff.

However, some agencies are fairly large. The largest agency is the Social

Security Benefits Agency, which has about 75,000 employees. Other large

agencies include those responsible for the prison system, employment

training, and defense evaluation and research. Each of these agencies has

over 10,000 employees. While not formally Next Steps agencies, Inland

Revenue (which administers income and other taxes) and Her Majesty’s

Customs and Excise (which, among its responsibilities, enforces import

and export restrictions) operate fully along Next Steps lines. Each of these

organizations has over 20,000 employees.

Many agencies provide services directly to the public—for example the

United Kingdom Passport Agency and the Social Security Benefits Agency.

Other agencies provide services to other parts of the government, such as

those agencies that provide information technology support or logistics

support for the defense forces. Next Steps agencies also cover a range of

service and program types. For example, several agencies have a research

focus, such as the agencies that do research on agricultural issues, while

some other agencies have regulatory responsibilities, such as those

concerning food and vehicle inspection.

Next Steps agencies have reported that, over the years, performance has

improved, in some cases substantially. For example, the United Kingdom

Passport Agency reported that since 1993 it has made significant and

consistent improvements in the timeliness of its processing of passport

applications. Overall, the British government’s most recent annual

summary review of the Next Steps initiative notes that 79 percent of the

agencies’ key performance goals were met for the 1995-1996 time period.3

This level of accomplishment generally is consistent with the levels

reported in previous years. Eight agencies reported that they achieved at

least 80 percent of their goals for 1995-1996, even after they had set at least

80 percent of those goals at a more stringent level than in previous years.

Not all goals are comparable from one year to the next, but for those that

are quantified and are comparable, about 60 percent reported the same or

better results for 1995-1996 as compared to 1994-1995. On the other hand,

14 agencies reported that they had failed to achieve at least half of their

key performance targets.

3

Next Steps Agencies in Government, Review 1996, London, The Stationary Office, Cm 3579.

Page 5 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

Some agencies also have reported significant cost reductions. For

example, both the National Health Service Pensions Agency and the

Scottish Office Pensions Agency showed significant savings in their

“running costs,” which essentially include employee pay, benefits, and

other administrative costs. The National Health Service Pensions Agency

reported that it reduced its running costs by 11 percent in 1994-1995, and

the Scottish Office reported that it reduced its 1995-1996 running costs by

17 percent. In addition, the United Kingdom Passport Agency reported that

it had reduced the unit cost of passport services by 4.3, 5.2, and

7.25 percent over the past 3 years, respectively.

Assessments of Next

Steps Provide Insights

for PBO Proposals

In moving forward with the Next Steps initiatives, the British government

has confronted some difficult and continuing implementation issues that

Congress may want to consider as it assesses the PBO concept. These

issues include (1) a lack of clarity in the relationship between agencies

and their parent departments, (2) an uncertainty concerning who is

accountable for performance, and (3) difficulties in developing and setting

performance goals.

Agency and Department

Roles

The British have found that the roles of the Next Steps agencies and their

parent departments often remain unclear because of the problems

inherent in trying to delineate responsibilities.4

 For example, while in

theory departments make policies and agencies implement those policies,

a British evaluation found that there has not always been a clear

separation between policymaking and implementation. Management

decisions made by Next Steps agencies sometimes have had an impact on

policy choices made by their parent departments. For example, if an

agency’s goal is to reduce an operating deficit, it may propose to do so by

creating a user fee. While this proposal may be viewed as a decision by

agency management on how to implement the policy of reducing costs, it

could also be viewed as making a policy decision about the type of public

program for which user fee funding is appropriate.

The British government has taken steps to address the issue of unclear

department and agency roles, but with limited success, according to

published studies. One step taken by the British government has been the

establishment of the “Fraser Figure,” a senior official who is to improve

coordination between the agency and the department. The Fraser Figure is

used in about 40 percent of the Next Steps agencies. However, evaluations

4

Trosa, Next Steps: Moving On (Feb. 1994) and After Next Steps: The Massey Report (Jan. 1995).

Page 6 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

suggest that this approach has not worked well because (1) the Fraser

Figure rarely is able to represent the views of both the department and

agency in a balanced way, and (2) this official does not have sufficient

staff to coordinate activities. In addition, advisory boards have been

established in about 30 percent of the Next Steps agencies, but they too

are reported to have had limited success. Available reports indicate that

the boards tend to be unbalanced in their advisory and monitoring

responsibilities, generally emphasizing one over the other.

Accountability The lack of clarity concerning the respective roles and responsibilities of

agencies and departments also affects accountability for results. Since the

distinction between administration and policy often remains unclear, one

British evaluation described the task of assessing accountability as a

“complex web of issues.”5

 For example, because policies and their

implementation are inherently linked, it is difficult at times to distinguish

who is truly responsible for a result—the department minister who makes

the policy or the agency chief executive who implements the policy.

Questions have arisen about whether a poor result was due to poor policy

or inadequate implementation and about who was ultimately accountable

for the resulting performance. To mitigate this concern, the British

government has encouraged greater collaboration between ministers and

chief executives, facilitated by Fraser Figures—an approach that, as I have

noted, has had limited success.

Performance Goals The British experience with Next Steps has underscored the fact that

public sector performance measurement is a complex, iterative process

involving a number of competing considerations. A British evaluation

suggested that three major concerns have arisen in connection with Next

Steps goal-setting.6

 First, goal-setting does not always reflect what is

realistic; it often consists of no more than adding incremental

improvements to prior results. As a result, targets are sometimes set

simply to reflect an improvement on the previous year’s achievement

rather than being based on an assessment of what might be possible.

Tensions can arise between the agency and department over target

magnitude, with departments generally favoring more ambitious

improvement targets.

5

After Next Steps: The Massey Report (Jan. 1995).

6

Trosa, Next Steps: Moving On (Feb. 1994).

Page 7 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

A second challenge to performance measurement is the difficulty of

determining exactly what to measure. The evaluation showed that

performance measures frequently focus on what agencies can measure,

rather than on what is most important in assessing performance. For

example, one enforcement agency had established a performance measure

to count the total number of enforcement actions. However, the agency

had no information about how many infractions actually occurred, so the

agency did not know to what extent, if at all, its enforcement actions

contributed to reducing illegalities. Further complicating the

determination of what to measure is the fact that some targets, such as

efficiency and quality, may even be in conflict with one another, requiring

a careful balance.

Finally, a third issue raised by the study was the need to ensure that

performance information is put in a proper context and used to improve

performance. The study stated that all the chief executives interviewed

believed goals and performance information should be the basis for

decisionmaking and resource allocation, but only as a starting point and

tool for subsequent discussions. Using unmet targets to criticize agencies,

rather than attempting to examine the reasons why the targets were not

reached and developing strategies to meet unmet goals, may simply lead

agencies to establish more easily achievable targets. For example, one

British official commented that the goal-setting process can be

discouraging when an agency is criticized for reaching 98 percent of a

100 percent target without considering how much effort the 98 percent

represents.

The British government has initiated several efforts to address the

performance measurement issues it, in company with other governments,

confronts. For example, in an attempt to provide a basis for making

summary judgements on the overall performance of agencies, Next Steps

agencies are moving to what the British are calling “indexation.”

Indexation is a method of measuring an agency’s overall performance

whereby each performance goal is given a score that is weighted to its

level of priority. The scores of all goals are then combined to produce an

overall score for an agency. By comparing overall scores over time,

ministers of departments and agency chief executives can tell if overall

performance is improving and whether targets are becoming more

challenging. Some agencies are already adopting this approach in

reviewing performance and setting targets, and reporting will begin in the

Next Steps’ 1997 annual summary report.

Page 8 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

Potential Issues With

the Saint Lawrence

Seaway Development

Corporation PBO

Proposal

The administration’s proposal to transform the Saint Lawrence Seaway

Development Corporation into a PBO suggests how the Next Steps

experience can be illustrative for Congress as it considers the

administration’s initiative. We reported to Congress in May on the

administration’s proposal to convert the Seaway into a PBO. We noted that

a such a conversion would result in significant changes to the Seaway’s

current management structure, funding mechanism, and relationship with

Congress. I will briefly highlight the points we raised with regard to each

of these issues:

• First, as a result of the Seaway’s conversion to a PBO, the Seaway’s

leadership would change from an administrator appointed by the

President and confirmed by the Senate to a contracted-for chief operating

officer (COO) selected by the Secretary of Transportation. The COO would

be directly accountable to the Secretary of Transportation who would, in

turn, continue to be accountable to Congress and the President for the

activities and performance of the Seaway PBO.

British evaluations of Next Steps have shown that developing and

monitoring a chief executive’s contract is a long-term and iterative

process. We noted that, since the Seaway is a relatively small part of the

Department of Transportation (DOT), the Secretary may have to spend a

disproportionate amount of time in crafting and monitoring the COO’s

contract with specific and measurable performance goals. This degree of

oversight and accountability has not been applied before to the Seaway.

However, if the Seaway is one of the first PBOs, administration architects of

PBOs may pay particular attention to the development of the contract, since

it could be a model for other PBOs.

Although the PBO would remain part of DOT, it would have greater

autonomy in its relationship with its parent department. The Seaway

proposal follows the Next Steps program in attempting to separate

policymaking from the carrying out of services. The Seaway has started to

work on this separation by drafting a list that divides the functions to be

performed between itself and DOT under the PBO concept.

• Second, the Seaway is currently funded through the annual appropriations

process. However, as a PBO, the Seaway is proposed to be funded through

a mandatory payment, whose amount will be determined by a formula

based primarily on the tonnage of cargo moved through the Seaway.

Because of its design, Seaway officials told us that they believed the

formula would provide a more predictable funding mechanism than annual

Page 9 GAO/T-GGD-97-151
Statement 

Performance-Based Organizations Lessons

From the British Next Steps Initiative

appropriations, and that this would allow them to operate in a more

businesslike manner and better plan Seaway operation and maintenance

functions. We noted, however, that the proposed funding mechanism

raises a potentially significant issue of budget policy, in that funding would

shift from a discretionary account to mandatory funding.

• Third, the relationship between Congress and the Seaway PBO would

fundamentally change. Congress would no longer have a direct role in

funding the agency or in selecting the agency head. It is also unclear what

type and level of oversight Congress would have over the Seaway.

However, since PBOs must be created through the enactment of enabling

legislation, Congress has an opportunity to define its role with regard to

the Seaway or any other PBO.

In summary, PBOs would seek to emulate Next Steps agencies in important

ways in both intent and design. Both are to operate in a more businesslike

manner, gaining flexibility and freedom from constraints in exchange for

greater accountability for results. Because of their similarities, unresolved

issues from the Next Steps experience can provide lessons for the U.S.

effort, such as the need to focus on clarity in relationships between

agencies and their parent departments, certainty concerning who is

accountable for performance, and developing and setting good

performance goals.

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions you or other Members of the Subcommittee

may have.

(410148) Page 10 GAO/T-GGD-97-151
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100