managerial perceptions Paula Linna Poverty and Social Development Cluster, UNDP Viet Nam, Ha Noi, Viet Nam, and Sanna Pekkola, Juhani Ukko and Helina Melkas Lahti School of Innovation, Lappeenranta University of Technology, Lahti, Finland Abstract Purpose This paper aims to identify what productivity means in the public sector, how it is measured and how it should be measured and improved, according to municipal authorities in managerial positions. Design/methodology/approach The approach is both theoretical and empirical. The rst part is a literature review of research concerning public sector productivity. The second part presents ndings of empirical research that is based on interviews and workshops with municipal authorities representing: special healthcare services; basic healthcare and social services, and educational services. The research was carried out in the Paijat-Hame region, Finland. Findings According to the results, there is a certain mismatch between perceptions concerning productivity and the potential that lies in this concept as a functional tool in the public sectors development efforts. Public sector productivity cannot be developed and discussed without taking into consideration the issue of effectiveness. Practical implications Deeper common understanding concerning productivity and effectiveness and their measurement are likely to facilitate municipal decision making and service processes in individual workplaces as well as within and among different spheres of authority and thus facilitate mutual learning. Originality/value This paper contributes to development and application of productivity and effectiveness thinking in the public sector. It is linked to service excellence, performance measurement and management systems, creativity in process delivery and deployment of improvement techniques in the public sector. It is of interest both to researchers and practitioners. Keywords Cost effectiveness, Public sector organizations, Performance management, Performance measurement (quality), Finland Paper type Case study 1. Introduction The issue of productivity of the public sector is very topical in Finland. Finland, like other European countries, faces major challenges due to rapid ageing of the population and nancial difculties of municipalities. The Nordic welfare state has come to a phase, where its mere existence is sometimes questioned. Municipalities are thus at a crossroads trying to assure how to produce services. One solution is to improve productivity of public services. It is argued that discussions about productivity in the context of public services are likely to arouse contradictory feelings, or even the concept itself may be understood differently. The current issue and full text archive of this journal is available at www.emeraldinsight.com/0951-3558.htm IJPSM 23,3 300 International Journal of Public Sector Management Vol. 23 No. 3, 2010 pp. 300-320 qEmerald Group Publishing Limited 0951-3558 DOI 10.1108/09513551011032491 This study investigates how public sector productivity is understood among municipal ofcials in managerial positions within three different spheres of authority in the Finnish region of Paijat-Hame, and how productivity is measured and should be measured according to the interviewees. Understanding these issues becomes increasingly important also because it is expected that the share of the public sector of those entering the labour market will grow in Finland. 2. Productivity in the public sector Public sector productivity is as important to economic performance of a country as that of the private sector. Thornhill (2006) identies three main reasons for why public sector productivity is crucial. First, the public sector is a major employer. Second, the public sector is a major provider of services in the economy, particularly business services (affecting cost of inputs) and social services (affecting labour quality). Third, the public sector is a consumer of tax resources. Changes in public sector productivity may have signicant implications for the economy. In the case of Finland, besides the above-mentioned reasons, it is necessary to take into consideration future challenges facing the public service delivery. It has been claimed that it will become harder in the future to raise the standard of living or even to maintain current good quality of public services. The labour supply is shrinking, and international competition is becoming more demanding. Finland is located away from the fastest growing international markets. Public sector nance will remain scarce, and tax competition will restrict available policy alternatives. Information and communication technology allows reorganisation of many services but reluctance to reshape established practices may constitute a bottleneck. Whatever the uncertainties about underlying conditions are, a need to accelerate productivity will serve as a policy recommendation and a key economic policy objective. Economic growth and rising living standards depend on higher productivity. The less manpower and capital are available, the more productivity growth must be accelerated (e.g., Waller, 2006; Kaitila et al., 2006.) Productivity is generally dened as a measure of the amount of output generated per unit of input. In many countries, public sector productivity has been assumed to be zero in the national accounts. The output of the government sector has been measured as equal in value to the total value of inputs. This output input convention has increasingly come under scrutiny in recent years. The challenge is to devise alternative estimates based on output measurement in a public sector context where collective services are provided and where there is, in most instances, no market transaction in services provided to individuals. (Boyle, 2006.) The denition of productivity as being concerned with the relationship between input and output does not cover issues that many people have in mind when they talk about public sector productivity. A more general interpretation of productivity encompasses broader concerns about the outcomes achieved by the public sector. In common parlance, many people talking about public sector productivity have in mind the general question of what value they receive from public services in return for the utilisation of public funds. Putnam (1993) rejects the idea of including outcomes in productivity measurement. His argument is that to focus on outcomes (changes in health rather than patients treated; changes in educational status rather than numbers Dening and measuring productivity 301 of lessons taught) includes changes over which the government has no control. The historical development of the Nordic welfare state showed, however, that the government might control, or rather support, quite holistic changes. There may be national differences in these views. Holzer and Seok-Hwan (2004) argue that although the concept of productivity has been utilised for many years, it is often simplied, misinterpreted and misapplied. According to them, the concept of performance may represent a more attractive conceptual path toward improvement. Still, both concepts are underlying premises of public administration and the core of an ongoing effort that persists because it addresses a fundamental linkage: a productive society is dependent upon a high-performing government. Although the issue of productivity and performance enhancement in the public sector is nothing new, scholars and practitioners have worked for decades to identify what makes government productive and effective. In fact, the use of the concept of productivity has been intermingled with the concept of performance (e.g., Jackson, 1999; Stainer and Stainer, 2000.) Researchers have identied each concept in different ways. Productivity and performance are functions of many factors ranging from top management support, committed personnel at all levels, a performance measurement system, employee training, reward structures, community involvement and feedback to correction of budget-management decisions. It is thus important to build up capacities for productivity improvement (Holzer and Seok-Hwan, 2004). In research literature concerning services, central points of view are the role and productivity of customers as well as quality issues that widen the traditional techno-economic view of productivity. Special attention should be paid to productivity issues departing from the special characteristics of services such as intangibility, openness and process-basedness. The service research literature emphasises effectiveness instead of productivity. Thus effectiveness and productivity are not opposites but they should be understood as mutually complementary (Brax, 2007). The task of understanding productivity in the context of services and ways in which it could be raised is challenging. Insufciency of such knowledge has been brought up in recent works. Productivity of services should be understood more deeply as a phenomenon and pay attention to the relationship between productivity and quality, measurement of productivity and factors that raise productivity and quality. More and holistic empirical research on the topic has also been called for (Martin and Horne, 1992; Johnston and Jones, 2004; Johnston, 2005; Van Ark, 2006). Research literature on productivity at organisational and process levels has focused on manufacturing industry; it is based on an assumption of an organisational core process as an industrial production process (e.g., Gummesson, 1992; Gronroos and Ojasalo, 2004). Productivity of services has been studied less from the point of view of micro economy than from the point of view of macro economy. Still, the micro-economic view concerning service productivity would be just as important, and the importance of productivity for industrial and service organisations is equal. Discussion on service productivity has also been characterised by a narrow emphasis on traditional services consumer services and/or labour intensive services such as restaurants, cleaning and maintenance, retail sales, education, health care, etc. There are however also many other types of services. Consumer services have been the most IJPSM 23,3 302 common context for developing theory concerning services, but the context should be widened (Brax, 2007). In manufacturing industry, labour intensive manual work and automation may be seen as opposites, but in services, the situation is different. Productivity is also often linked to discussions concerning general efciency. In such cases, productivity is understood in a wider sense and combined to rationalisation of work and improvement of wellbeing in the work community (Uusi-Rauva, 2006). Some researchers however argue that productivity is a conceptual phenomenon, and widening the concept weakens its characteristics as a tool for research and development (Brax, 2007). Pritchard (1995) distinguished three categories for denitions concerning productivity: (1) the techno-economic approach, i.e., productivity as an efciency measure (output/input); (2) productivity as a combination of efciency and effectiveness (output=input output=goal; see, e.g., Rantanen, 1995); and (3) a wide approach that contains everything that makes an organisation function better. According to the techno-economic approach, the concepts of productivity, efciency and effectiveness are distinguished. Many researchers have claimed that in dening productivity, the basic concept of productivity should be seen as separate from its sister concepts, but for investigating services, the concept should again be widened (Vuorinen et al., 1998; Johnston and Jones, 2004). If only efciency improvement is sought, the choice of the term is somewhat less relevant, but when it is the aimed to measure and analyse performance somehow, the terminology becomes important. The terminology is thus a tool from the point of view of research and practical work. (Brax, 2007.) This is the understanding concerning the terminology that underlies this present study, too. Drucker (1963) has expressed the difference between efciency and effectiveness in a very practical way: efciency means doing things right and effectiveness means doing the right things. One must do the things that produce the desired end result most efciently. The concepts of productivity and efciency focus on quantitative change and presume that no qualitative changes take place in the process, its inputs or its output, or possible quality changes are left out of the investigation. From the point of view of effectiveness, the quality changes are focused on as well as the quantitative changes produced by exploiting the quality changes. The discussion concerning short-term and long-term solutions is related to the same theme: the short-term view often concentrates on doing things right; the things as they are at the moment. The long-term view again may question the present way of doing things and compare different options (Brax, 2007). Tangen (2005) noted that effectiveness often implies paying attention to value creation for the customer, and this is harder to quantify. Changes in effectiveness show primarily as changes in outcomes, and effectiveness has no maximum value in practice. Service contains conducting activities, and thus a more thorough investigation requires a process-based view. The point of view of quality is very important with regard to services, because a more efcient process may have an impact on the Dening and measuring productivity 303 character of the service supplied. The impact may be positive or negative. Services may also be investigated from the point of view of customers, which makes the research come closer to marketing research rather than operational management research. As far as processes are concerned, they may be further broken down according to their level of rutinisation (a continuum ranging from rigid service process to uid service process) (Brax, 2007). According to Gronroos and Ojasalo (2004), due to openness of processes, services may well be investigated from the point of view of developing productivity as a mutual learning process of customers and service providers, in which resources and production and consumption processes of both groups are reconciled. This is more appropriate (than the traditional productivity model) to the context of uid service processes, according to them. If productivity is improved only by producing more in a quantitative sense, this may lead to a greater share of defective or low-quality performance (Van Looy et al., 1998), so service research literature recommends measuring productivity so that also quality is taken into account (Sahay, 2005). Technical quality is related to quality of the end result of the service process: what is the end result of the service like? Functional quality is related to quality of the delivery process: how well was the service conducted? Gummesson (1993) distinguished four basic types in service production according to the relationship between service provider and customer: (1) the service provider produces the service apart from the customer; (2) the customer produces the service as self-service; (3) the two parties produce the service together or in interaction; and (4) the customers produce the service amongst themselves. According to these four basic types, Gummesson (1998) took into account the larger context: productivity arises from the service providers own actions, actions of the customer, interaction between the service provider and the customer; or interaction among customers. Gummesson (1998) also noted that the customer is rather than an end user an active actor in a continuous cycle of value creation. The customer has many roles as a production resource, as affecting quality, satisfaction and value creation, and as a competitor of the service organisation (Bitner et al., 1997). The customers impact on productivity may be positive or negative. As the input of the customer increases, the service providers possibilities to control the service production process decrease and insecurity increases. Thus Ojasalo (2003) noted that it would be benecial for a service provider to aim at selecting her/his customers somehow. Denition of inputs and outputs is the most central question in analysing productivity (Gadrey, 1988; McLaughlin and Coffey, 1992; Gallouj, 2002). The traditional way of measuring productivity is based on physical units; physical input may be hours of work and physical output may be customers served. Also time may be seen as corresponding to physical units (Uusi-Rauva, 1996). One notable issue in discussing productivity in the public sector is that the public sector has very different characteristics and logic in different countries, and thus literature on public sector productivity may be problematic. The Nordic welfare state was a social innovation that managed to reconcile the different interests of the capital IJPSM 23,3 304 and labour (Karisto, 2009). Its rationale, development and traditions are very different from those of most other countries (see, e.g., Melkas and Anker, 1998). Today this is rarely brought up, and the public sector is seen automatically as stiff and a barrier to innovativeness, while it could be seen from a more holistic perspective that would also contribute to seeing service productivity in a new light. 3. Measuring public sector productivity Another important question regarding public sector productivity concerns how to measure it. Productivity can be measured in a number of ways. The interpretation of productivity growth is greatly dependent on the way in which productivity is measured. Public sector productivity is most often measured as labour productivity. In addition to labour productivity, multifactor productivity should also be measured. A major problem in the interpretation of single factor productivity is that it attributes all increases in efciency to one factor, even though the increased production may have been partly or even completely due to changes in other factors. Productivity measures examined have also commonly been sectoral or national in nature, and often driven from a top down perspective. It is important to note that at a micro level productivity measurement in the public sector may also take place at the level of an individual organisation, and from a bottom up or service user perspective (Boyle, 2006). Ammons (2004, p. 147) points out that many government managers are inclined to focus on their departments activities or workload its outputs, rather than on the bigger picture of whether their efforts lead to positive changes in the lives of citizens or produce other results they were designed to bring about. According to Ammons (2004), by xating on simply maintaining or expanding the activities of the department in question, the managers may overlook opportunities, perhaps procedural innovations or fundamental service delivery alternatives that might improve the results or outcomes of these activities. It is thus not enough to measure productivity only in an input and output way in the public sector context, but also quality needs to be taken into account. In measuring service productivity, conceptual, technical and strategic problems may be distinguished (Nachum, 1999; Brax, 2007). First, one needs to identify the inputs the measurement of which is the most important in the process in question. Second, if intangible characteristics are related to inputs, it needs to be solved how the inputs can be measured at a sufciently accurate level or even at a rough level. Third, services are combinations of many different components, so it needs to be solved in how detailed a level productivity is investigated. Fourth, it needs to be dened at which level measurement and monitoring of productivity is most efcient with regard to the aims (McLaughlin and Coffey, 1992; Klassen et al., 1998). The more intensive and participatory customer contact or the more tailored service product is, the harder it becomes to study productivity. The complexity of inputs and outputs and their number also add to the difculty of measurement. How many different components are combined into the service? How many different components may be distinguished in inputs and outputs of the service? Does one service process produce several end results simultaneously? (Brax, 2007). Especially in services that require a lot of human contribution, measurement problems are caused by mutual impact and convergence of resources, when teams collaborate or colleagues guide each other Dening and measuring productivity 305 (Mohanty, 1992). These issues characterise the services focused on in the present case study. Intangibility of the elements that affect productivity and uid service process in certain service contexts are characteristics that have an impact on reliability of measurement, too. The factors affecting productivity are difcult to express in a measurable form (the problem of operationalisation). Indicators should not be overlapping in the sense that several indicators utilised together should not focus on the same production factor or end result. If such indicators were used in a combination of several indicators, the role of some individual production factor or output could be emphasised more than other factors. It is generally difcult to distinguish relationships between different factors. Measurement should produce information on productivity in light of the purpose and strategy of the organisation and in order to support those. In a theoretical sense, however, it is problematic to dene inputs and outputs linking them to the strategy of the organisation, as this leads in practice easily to measuring efciency and effectiveness rather than productivity (Brax, 2007; Borg et al., 1995). This again shows how easily the concept of productivity becomes obscure. Customer relationships are related to measurement problems in three ways. First, it has been discussed how the input of customers into the production process should be taken into account when investigating productivity. Second, it has been suggested that outputs should be dened from the point of view of customers. Third, the customer-based quality view that characterises services causes questions concerning validity of measurement. Service researchers have called for linking the customers role into the traditional productivity understanding so that it would suit better to describe services. Measuring productivity becomes more difcult, as often only the service producers production input is taken into account. In a service, the customer has the role of a partial producer; increase in productivity through contribution of the customer is not visible in numbers. Gummesson (1998) recommended that more attention should be paid to the relationship between inputs of customers and service producers when measuring service productivity (Brax, 2007; Gummesson, 1998). 4. Performance management and measurement in the public sector The concept of productivity is often confused with the wider and more common concept of performance and performance measurement. Productivity is one of the many ways in which performance may be measured and dened (Byus and Lomerson, 2004). Performance contains both economic and operational perspectives (Tangen, 2005). According to Brax (2007), any characteristic of an organisations aims may be measured under the title of performance measurement such as quality of outputs, or it may be a question of individual indicators or whole measurement systems and methods. The public sector is devoting more attention, time and money to performance management, measurement and evaluation than in earlier times (McAdam et al., 2005). Many public sector organisations have implemented performance measurement systems, such as the Balanced Scorecard. However, such adaptation of private sector approaches has caused a number of difculties because of multiple stakeholders in public sector organisations in comparison to private sector organisations that mainly focus on customers. IJPSM 23,3 306 Rantanen et al. (2007a) identied specic problems faced by Finnish public sector organisations in designing and implementing performance measurement systems. They are: . many stakeholders with conicting needs; . undened end products and goals; . lack of ownership of the property; and . poor management skills. The main reasons for the problems of performance measurement in public organisations were identied by using the results of three case studies (Rantanen et al., 2007a, b): . Difculties in solving the conicts between the needs of different stakeholders (owners, employees, customers, suppliers and the community); i.e., not clear what should be measured. . Difculties in target setting (i.e., not clear what the goal of the operations should be). . Representatives of different stakeholder groups inuence the development of individual measures at too detailed a level. . The personnel does not understand the objectives of the measurement development. . Too many persons responsible for the measurement development leads to non-responsibility. . The personnel does not see the usefulness of the project with regard to their work, and ignores or resists it. . Overlapping projects hamper the measurement project because they take up resources. It is becoming more usual to say that when developing and implementing performance measurement systems in the public sector, the starting point and key driver should be stakeholders needs and expectations. The public sector should thus prefer performance measurement systems that pay sufcient attention to stakeholders. For example, Performance Prism (Neely et al., 2001) was found to be suitable in identifying and categorising stakeholders of an organisation. However, there are also dangers in such thinking. There is rstly the legislation that dictates many things concerning public services. Legislation at its best should be based on, for instance, research on health promotion and long-term health effects of various societal choices and environmental factors, for instance. Concentrating too much on stakeholders needs and expectations may lead to an erosion of this valuable societal foundation that should be based on long-term thinking and public value as well as clear aims. Current literature also highlights the role of rewarding in the performance measurement context. Ukko et al. (2008), for example, stated that one of the most important factors behind successful operative level performance measurement is the linkage between measurement and rewarding. Public sector organisations do not, Dening and measuring productivity 307 however, have similar nancial resources for rewarding their employees as private sector organisations do, because the municipal economy limits nancial rewarding (Pekkola et al., 2007). Rewarding may well be non-nancial, too such as greater job security in a period of economic recession. Rewarding in the public sector appears to be characterised by similar challenges as measurement, as some ways of rewarding are indirect, invisible and unidentied. In spite of the limitations concerning nance, the public sector has a clear need to develop its appraisal, reward and recognition schemes, along with other motivational inuences. McAdam et al. (2005) claim that this ensures that employees targets are consistent with organisational and stakeholder objectives. According to Mohanty (1992), productivity whether it is understood as a concept, a philosophy, a measure, or a method is a useful view into all kinds of work systems regardless of their aims (e.g., aiming at producing prots or not). Mohanty, however, noted that measurement should be looked at with a critical approach, as measurement that is poorly conducted and implemented may also hinder an organisations activities. Also the measurement process itself should be looked at from the points of view of efciency and effectiveness. Measurement may be too hard in relation to the benets it produces, so it takes away resources from core processes. Measurement directs the personnel to improve the things that are measured and in the way in which the things are displayed in light of the indicators. This is a problem, when false things are measured or right things are measured with false kind of indicators. For instance, the quantity of outputs may be measured, although it would be more reasonable to monitor the quality of the outputs. Measurement may also produce false information for decision-making within the organisation. Inaccurate or incorrectly operationalised indicators may produce false end results. Combining the pieces of information into aggregate level measures multiplies the errors. Measures should not be seen as unambiguously objective. (Mohanty, 1992; Brax, 2007.) 5. Case study: managerial perceptions concerning denitions and measurement of productivity 5.1 Methods of the case study This case study is based on empirical research concerning how to dene and measure productivity in the public sector, especially in the municipal context. Findings are presented of research on how different actors approach the concept and meaning of productivity in the public sector. This case study concentrates on one specic Finnish region Paijat-Hame, where municipal ofcials in managerial positions in three different spheres of authority were interviewed. The research themes looked into are how the municipal ofcials dene productivity, and how productivity is measured and should be measured and improved, according to them. The Paijat-Hame region has faced many public sector reforms during the last few years for example setting up of a social affairs and health district following the principles of purchaser-provider-model. The three different spheres of authority focused on are: (1) special healthcare services; (2) basic healthcare and social services; and (3) educational services. IJPSM 23,3 308 In Finland, the municipalities need to take care of educational services, social care services and basic healthcare services, as well as fund hospitals providing special healthcare. Changes related to the ageing population, growth of service needs, diminishing labour force and increasing age dependency ratio affect especially these three spheres of authority (e.g., Moisio, 2006). If the municipalities wish to maintain a large amount of public services, it is necessary to look into these three spheres. Background information on the interviewees is presented in Table I. All the eight interviewees worked at the managerial level in their municipality or organisation. The interviews were semi-structured to explore interviewees views on how they see that productivity is dened in their sphere of authority, how it should be dened, how productivity is measured and how it should be measured. The interviews lasted for about one hour, and they were recorded and transcribed. In this study, differences between the three spheres of authority are not focused on; on the contrary, we search for similarities that are common in each sphere of authority. 5.2 Results and analysis 5.2.1 Denitions of productivity and effectiveness. The respondents were asked to tell how they dene productivity in their own sphere of authority. Some of the responses are cited in the following: [. . .] what comes to special health care, productivity is that we are able to produce as much health impact for the citizens as possible using as few nancial inputs as possible [. . .] however, nancial inputs cannot be reduced endlessly because this leads to a situation where it is not possible to achieve health impact anymore [. . .] (Interviewee B). Productivity and effectiveness were not well understood by many respondents; they were unclear as to what they mean in the spheres of authority in question. Denitions of productivity covered a wide spectrum. On the one hand, productivity was dened as the relationship between inputs and outputs, but on the other hand, much more holistic views were expressed showing careful consideration of the complicated issue. Many interviewees emphasised that productivity (in the public sector) cannot be analysed without taking into consideration the impacts on citizens. Efciency and quality were felt to be strongly linked to productivity, and effectiveness was seen as related to, for instance, impacts on health, qualications for further education, impacts on quality of life of citizens depending on the sphere in question. The respondents highlighted Interviewee Sex Organisation Sphere of authority Interviewee A Male Public service provider Special healthcare Interviewee B Male Public service provider Special healthcare Interviewee C Female Municipal Basic healthcare and social services Interviewee D Female Public service provider Basic healthcare and social services Interviewee E Female Municipal Basic healthcare and social services Interviewee F Female Municipal Education Interviewee G Female Municipal Education Interviewee H Female Municipal Education Table I. Background information on the respondents Dening and measuring productivity 309 that should nancial costs be reduced endlessly, benets to the society are also strongly reduced. It was acknowledged that it is vital to nd an area where the resources spent give the best possible results. Despite the lack of clarity, there were many thoroughly considered responses that reected the multi-faceted and highly challenging character of the concepts that was discussed in the literature review: [The denition] . . . depends on how productivity is measured. [. . .] At least in the public sector, comparisons are often made to productivity in the private sector. [. . .] the public sector is built for the kind of service production that is related to basic safety and security of citizens, and it is an issue that [. . .] needs to be assessed by politicians how much it may cost and how good a coverage it has and on what grounds people can benet from it [. . .] As to its grounds, experts are the ones who are responsible there. This has an essential impact on productivity; how comprehensive is the production, how close to the people etc.; the whole service concept there (Interviewee A). An interesting result was also that one of the respondents could not dene productivity in any way. Reasons for this can only be speculated on: does it mean that productivity is such a new phenomenon or concept in the municipal context that it feels impossible to dene what it is? Or does the person nd the issue so complex and difcult that he/she has not made up his/her mind yet? Or perhaps the discussions concerning productivity are politically so sensitive in the municipality that she/he thought that it is better not to say anything. Some of the responses reected a thinking that appears to outsource responsibilities and decisions related to productivity. For instance, decisions by politicians and experts were called for. An interesting question is, however, who these experts are. If productivity-related decisions are left to be made by such anonymous experts who may not have sufcient knowledge of daily operations in various municipal elds, sustainable results may be difcult to achieve. On the other hand, this is the everyday life of municipal personnel there are multiple stakeholders and a certain degree of outsourcing of decisions is inevitable. If, however, productivity is felt to be an issue that is so difcult to grasp that it is willingly left for others to decide and consider, this may contain risks for services. This may lead to quite one-eyed decisions at the municipal level for instance, emphasis on the traditional industry-based engineer thinking about productivity. A common understanding of everyones roles in productivity improvement should be strived at. Rather than outsourcing productivity thinking, networking and collaboration in its advancement and in creating a common understanding are needed, according to the results. Productivity and effectiveness thinking may be argued to be part of core business in municipalities, and decision-making and responsibility concerning them should not be outsourced by anyone on the contrary, they should be internalised. The situation could be compared with outsourcing of operations in companies too much outsourcing may lead to a situation, where the managers have no or poor control over the operations that have been outsourced. The producers of such operations may not know the needs of the company. Learning and experience do not accumulate in the company. In municipalities, such a situation may arise, if the experts of daily grass-roots operations and their close managers are not involved in shaping a common, realisable understanding of productivity and effectiveness, and in implementing this understanding. IJPSM 23,3 310 And the aim of productivity is that all these resources are spent in a way that leads to providing services that are as good as possible. That resources are spent in a sensible way, and especially hopefully also in an equal manner. [. . .] it would be more correct to talk about efciency instead of productivity, because as far as denitions are concerned, efciency includes the element of effectiveness. When we think of traditional denitions in health economics, for instance, efciency is the right concept, in my view. Productivity is too meagre, effectiveness should always be included. [. . .] We may, of course, assume that if we give transportation services and interpretation services, [. . .] that a person then acts more independently, naturally. So such cause-effect relationships do exist, of course. [. . .] but the level of legislation does not really depart from effectiveness. It departs from citizens rights and responsibilities of municipalities. There is still a long way to go (Interviewee C). Productivity, effectiveness and efciency were often somewhat mixed up in the interviewees responses. All of these issues are not discussed in greater detail in this study. The problematic situation is, however, understandable, as although productivity and effectiveness have been developed for a long time already, they have only been brought up in public debate to a greater extent in recent years especially in relation to nancial crises. This negative context is likely to affect peoples views and analyses, making the concepts themselves negatively coloured. The negative attitudes that may be based on false or overly narrow impressions towards the whole theme are especially clearly visible at the grass-roots level of municipal employees (e.g., Makinen et al., 2006). The concepts often come originally from economics, and they have not been applied and claried to suit into the different sectors and spheres of operation before their use has become more prevalent. This was visible in these responses, too, although many of the respondents tried to apply the concepts better into their own eld. In the research community, many conicting views concerning concepts exist, as shown in the literature review. There is a jungle of denitions. The interviews showed, however, that in practical contexts, denitions are not that relevant in themselves, but the crucial issue is how people grasp the aims of the operations in their own eld and in the municipality more generally, and how these aims may be achieved in the municipality as a whole (for instance, health promotion). Smooth processes were also discussed by the respondents, as was the inseparability of productivity and quality in public services. Development of productivity as a mutual learning process of customers and service providers was not emphasised, but the role of customers was looked at with a certain degree of powerlessness. Customers are nowadays sometimes too demanding and badly behaving, and municipal personnel feel powerless when facing such behaviour. In order to increase interactive service production between customers and service providers, also customers attitudes concerning services would require changes so that they would affect quality, satisfaction and value creation positively. The relationship between legislation, productivity and effectiveness that was brought up is interesting. Should legislation indeed depart increasingly from considerations of effectiveness, measurement issues would gain even more importance. Moreover, many issues related to healthcare and education, for instance, would benet from proactive services rather than reactive services based on illnesses or school drop-outs. Questions related to this are: Dening and measuring productivity 311 . In which situation or phase should these proactive services start? This is not always obvious. . What is the time frame for considering causes and effects? . What about life-style choices of adults (see Putnam, 1993)? Proactive services aim at anticipating and affecting causes and processes that may worsen peoples living conditions, quality of life and self-management. These issues were also brought up by the interviewees. An additional difculty lies in drafting a list of issues concerning effectiveness. It is more straightforward to draw up a list of citizens rights. Apart from the legislation and the important and impartial guiding role of the state, a list of issues would be a relevant topic at the municipal level in order to further comprehensive considerations of cause-effect relationships versus fragmented and short-sighted budgeting practices in municipalities: And another issue is, in my view, a more valuable output is actually when the same input leads to outputs that are clearly of better quality. [. . .] Because this shows that something else has happened there [. . .] that things have changed. [. . . On effectiveness] except that aims have been achieved and it is naturally also good to hear if we have done the right things. Because as public authorities, we may believe that such and such things are expected from us, but the people who are targeted and provided services to they may be of quite different opinion (Interviewee F). Productivity, what is produced with these staff resources [. . .] I would summarise it as the outputs. [. . .] If we think about our own sphere, this is what we get: reception visits, days in care, customer contacts and visits in social work, and so forth, this is what I see as productivity. [. . .] Well, effectiveness is, in my view, what we accomplish in the life and well-being of municipal citizens. So there the aim is to affect with these services so that the citizens can cope with their daily life, and their well-being is good. This well-being is a large area, but our aim is that the citizens can cope with their life. And how we can affect this with our own operations both directly or indirectly, this is effectiveness (Interviewee D). On the basis of the interviews, the views concerning productivity could be divided into two categories a mechanistic and a functional point of view. The mechanistic view is technical and based on higher-level rhetorical arguments concerning inputs and outputs. This view does help establish a common understanding between those who are already acquainted with the topic. This takes place much in the same way as, for instance, innovations have earlier been linked to top-level science and technology policy only although they are relevant at other levels, too (see Harmaakorpi and Melkas, 2008). In the same way, the concept of productivity was set by some on a high-level pedestal, while it could be treated increasingly as a tool for thinking and collaboration between different levels. The functional view, again, emphasises links between productivity and effectiveness, quality, and benets to the society from the point of view of people. This view was also well visible in the responses. Making such a distinction might advance increasingly holistic discussions of productivity in the future (see Melkas, 2008.) 5.2.2 Measuring and improving productivity and effectiveness. Measurement of productivity and effectiveness was seen as quite a difcult topic when discussing IJPSM 23,3 312 public sector productivity. The respondents acknowledged the problems and shortcomings in the measurement quite well with regard to what has been brought up in the research literature. The results of the interviews revealed that public sector productivity is measured in two different ways. First, the most common tradition in measuring and evaluating productivity is related to how well the sphere or organisation holds on to the budget: [. . .] if I think very realistically and a little bit cynically, public sector productivity is evaluated mainly in money. It is simple to measure how much the whole of the activities costs to the hospital (Interviewee C). Second, public sector organisations measure their productivity with how much we get when we have that much money to spend thinking. Especially in the healthcare services, organisations collect information to see which amount of services has been produced in the organisation in one month and how much these services cost. The results of the interviews also highlighted that productivity was most often measured as labour productivity: So, one way to measure productivity in the healthcare organisation was to add up medical operations or clinic visits and then check up how much these cost in money. It is the easiest way (Interviewee C). This was seen as problematic, as the labour productivity was only counted on the basis of, for example, the number of patients per doctor, without taking into account the effectiveness of the decisions made by the doctor. These kinds of measures give quite a limited view of the actions in the public sector. There is a temptation of partial optimisation to increase the labour productivity. Productivity should, however, be measured and evaluated from a wider perspective to be able to assess long-term effectiveness. Long-term effectiveness is a crucial aspect when discussing improvement of productivity in the public sector. According to the interviewees, measurement of effectiveness is very complicated. Todays economic policy is commonly quite short-term oriented, which is why results of productivity improvement are often hoped to be visible rapidly. This problem was emphasised especially in the sphere of education, where effectiveness of teaching realises and becomes visible only in the long run: When thinking about effectiveness from the perspective of education, results of productivity improvement can only be seen after many years (Interviewee F). Even if effectiveness of various actions seems to go hand in hand with productivity, traditional measures do not give an overall view of the state of public sector productivity. According to the respondents, measures including aspects of quality and long-term effectiveness should be developed to give a more reliable view of public sector productivity. This kind of measurement information helps politicians to see the holistic state of productivity and to make more inuential decisions in the municipal politics. The interviews also indicated that current measures of productivity and effectiveness are quite poor and fragmented. The measurement results make the view biased and only provide information on the apparent state of productivity in the Dening and measuring productivity 313 organisations in question. This problem is especially emphasised in the healthcare services, according to the interviewees: [A Finnish national research and development organisation] annually announces the most productive hospital. [. . .] [It] measures how many patients the hospital has taken care of, how many surgeries have been done, and how much money has been spent [. . .] Like this, they measure productivity of the organisations, but the results, unfortunately, do not take into account the quality of the medical care. They just measure numbers of the outputs (Interviewee B). The respondent noted that the results of the above-mentioned assessment gain wide visibility in the Finnish media, as public sector productivity is a popular theme in Finnish politics. The results of the assessment in question may to some extent guide actions of politicians. This, again, may encourage them to make decisions that may have unfavourable effects on daily operations in hospitals. The media should also understand its role in furthering a holistic understanding of these issues: If a doctor only sees ten patients a day, he/she can examine a patient better and make more inuential decisions. [. . .] It should be measured how the actions of the doctors and nurses enhance the health benet of the patient rather than measuring how many surgeries have been done (Interviewee A). When improving and developing measurement, certain key issues were found that should be taken into consideration. The selected measures have to support the organisations long-term objectives and lead the operations of the organisations to proper and appropriate directions. Some of the interviewees proposed that short-term productivity and long-term effectiveness should be combined into one indicator or index. The indicator or index would take into consideration all the spheres of authority (healthcare services, education, social services, etc.) and result in a calculation of total productivity and effectiveness. Taking into account the research literature, creating such a measure is hardly possible. On the other hand, the interviewees highlighted that measures should be easy to use and measurement results should be clear enough and easy to analyse. They also stated that organisations should measure productivity and effectiveness formally and systematically. At the moment, measurement efforts were understood to be fragmented: I denitely see that measurement, both of productivity and effectiveness, should be systematised. At rst, top level objectives should be dened that are the long-term objectives at the same time (Interviewee D). Although the budget has an important role in most organisations, it is not a synonym for the concept of productivity. Public sector organisations could put more effort on dening aims, inputs and outputs, and on developing and implementing more comprehensive measurement systems including also the aspects of quality and long-term effectiveness, in addition to the short-term productivity measures. Deeper understanding concerning measurement and evaluation of productivity and effectiveness may well facilitate municipal decision making. Improved and comparable measurement systems together with the deeper understanding may also help benchmarking between the different spheres of authority, if relevant and thus IJPSM 23,3 314 facilitate learning. In the measurement of productivity and effectiveness, the focus should be wider than just the nancial dimensions and labour costs. Improvement and development of work methods and processes are alternative and probably better ways to increase productivity than cutting down costs; this was acknowledged by the respondents (see also Table II). The respondents were also asked to indicate how exactly they thought productivity and effectiveness could be improved. They emphasised factors related to, for instance, reorganisation of work, new prioritisation of tasks, competence development, increasingly efcient use of information systems, wider regional collaboration in service provision as well as reconsideration of the scope of municipal services. The responses are summarised in Table II. The responses covered a wide spectrum. Development practices for improving service productivity were understood in a relatively holistic way, only the human relations point of view was perhaps less well acknowledged (human relations with customers; guiding customers in partial production of services; collegial relations, etc. (see Dobni, 2004). What are productivity and effectiveness? How are productivity and effectiveness measured? How should productivity and effectiveness be improved? Productivity was dened as the relationship between input and output Efciency and quality were felt to be strongly linked to productivity Effectiveness was seen as related to, for instance, impacts on health, qualications for further education, impacts on quality of life of citizens (depending on the sphere of authority in question) Productivity and effectiveness were not well understood by some; there was lack of clarity as to what they mean in the spheres in question Measuring productivity and effectiveness was seen to be challenging There are many ways to measure, but some of them falsify the truth Many partial measurement methods exist, but holistic ways of measuring are lacking Measurement is based roughly on Financial gures (necessary to stay within the budget) Sector-specic national monitoring results, such as hospital productivity, placement in further education, etc. Numbers of outputs; diagnosis related groupings (DRGs) in healthcare Feedback and surveys of customer satisfaction Time frame for measuring effectiveness (the desired quick effectiveness/ long-term effectiveness) ! a suitable level for measurement should be found New ways of work and operation: personnel management, reorganisation of work (resourcing), motivation, reward practices New prioritisation of tasks: elimination of side steps and wobbly practices; attitudes often cause barriers Competence development: information and communication technology, new ways of operation and work practices Use of information systems: electronic statements from doctors to patients, virtual learning systems Regional concrete and efcient collaboration: common schools at municipal border areas, common authorities for several municipalities Reconsideration of what services municipalities are to provide in the future Increased functional (ways of life) and nancial responsibilities for municipal residents Table II. Summary table on the results of the interviews Dening and measuring productivity 315 6. Discussion and conclusions This study analysed the concept of public sector productivity and its measurement as well as effectiveness. Empirical ndings were presented of interviews with municipal managers from different spheres of authority in a Finnish region. According to the results, there is a certain mismatch between perceptions concerning productivity and the potential that lies in this concept as a functional tool in the public sectors development efforts. The results highlighted that public sector productivity cannot be developed and discussed without taking into consideration the issue of effectiveness and vice versa. Special attention is needed when comparing productivity in different organisations. The focus of this study was to nd similarities across the spheres of authority rather than differences, but the interviews also reected the difculties related to such comparisons. On the basis of the interviews, the points of view concerning productivity were divided into a mechanistic and a functional point of view. The mechanistic view is based on higher-level rhetorical arguments and helps establishing a common understanding between those who are already acquainted with the topic of productivity. Productivity is set on a high-level pedestal, while it could be treated increasingly as a tool for thinking and collaboration between different levels. The functional view emphasises links between productivity and effectiveness, quality, and benets to the society from the point of view of people. Making such a distinction might advance increasingly holistic discussions of municipal service productivity in the future. (See service productivity as a learning experience and a holistic service productivity model in Gronroos and Ojasalo (2004).) Concepts of the service-based productivity approach need to be developed further. As to the measurement issues, according to the interviews, there is a clear need for measurement frameworks that consider the entirety of a municipalitys operations. The budget should not be a synonym for the concept of productivity. More effort should be put on developing more comprehensive measurement systems that also include the aspects of quality and long-term effectiveness. The respondents acknowledged that the focus should be wider than just the usual nancial dimensions and labour costs. Using manufacturing-oriented productivity models in service contexts is likely to give managers wrong directions for action. Deeper understanding concerning productivity and effectiveness and their measurement is likely to facilitate municipal decision-making as well as benchmarking between the different spheres of authority, if appropriate. The views concerning productivity and effectiveness were already quite holistic and characterised by useful critique, but some respondents appeared to outsource productivity thinking to experts. Networking and collaboration in the advancement of productivity thinking and in creating a common, realisable understanding are needed at an individual organisation and more widely. This should also cover the political decision-makers and the personnel together, without forgetting the customers roles in service production. Productivity and effectiveness thinking are part of core business in municipalities, and decision-making and responsibility concerning them should be internalised by the whole staff in order to implement the deeper understanding. Increasing emphasis and skillful use of the concept of effectiveness might help in practical development efforts in municipalities. The concept of IJPSM 23,3 316 effectiveness is not as negatively charged as productivity. Effectiveness is vital from the point of view of municipal citizens, and improvement in effectiveness also improves productivity as understood in a stricter sense. The industrial tradition in investigating productivity was visible, but the respondents also attempted to adapt the concept more successfully to their own organisations. The research data of this study were not large, but the study contributed to understanding how productivity is understood by municipal service managers and how measurement systems should be designed in their view. When productivity is understood more widely, certain benets may be achieved. A service provider may, for instance, understood service actions better from the point of view of a customer. There is also a large and growing number of so-called hybrid products, where the core of the supply is a combination of service and product. Both elements are vital. 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(1998), Dealing with productivity and quality indicators in a service environment: some eld experiences, International Journal of Service Industry Management, Vol. 9 No. 4, pp. 359-76. Vuorinen, I., Jarvinen, R. and Lehtinen, U. (1998), Content and measurement of productivity in the service sector: a conceptual analysis with an illustrative case from the insurance business, International Journal of Service Industry Management, Vol. 9 No. 4, pp. 377-96. Waller, M. (2006), Fast track municipal and service restructuring to help meet new challenges, Demo Journal for Local Democracy Development, pp. 10-11. About the authors Paula Linna has worked previously as a Researcher at Lappeenranta University of Technology, Lahti School of Innovation, Finland. Her research interests focused on public-private sector partnership, networks and organisational innovativeness. Currently she is working at UNDP Viet Nam on issues related to poverty monitoring and project management. Sanna Pekkola is a Researcher in the Performance Measurement Team at Lahti School of Innovation, Department of Industrial Management, Lappeenranta University of Technology. Her current research focuses on performance measurement systems and performance management in private enterprises and public organisations. Juhani Ukko is a Senior Researcher and Project Manager in the Performance Measurement Team at Lahti School of Innovation, Department of Industrial Management, Lappeenranta University of Technology. His research interests focus on performance management, management systems and management accounting. Helina Melkas, D.Sc. (Tech.), is a Senior Research Fellow and Adjunct Professor at Lappeenranta University of Technology, Lahti School of Innovation. Her research is related to, inter alia, elderly care services, technology use and public sector innovations. Helina Melkas is the corresponding author and can be contacted at: helina.melkas@lut. 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