Public sector and sustainability measures - Economy efficien...

Learning Outcomes

After reading this article, you will be able to explain and apply the key concepts of economy, efficiency, effectiveness, and value for money in public sector performance management. You will be able to select and evaluate appropriate performance indicators for not-for-profit and public sector entities, address common challenges in measuring outcomes, and analyse how these elements contribute to sustainable service provision in exam scenarios.

ACCA Advanced Performance Management (APM) Syllabus

For ACCA Advanced Performance Management (APM), you are required to understand how public sector and not-for-profit performance should be managed and assessed, especially where direct financial measures are less meaningful. When revising, concentrate on the following syllabus points:

• Explain and apply the concepts of economy, efficiency, and effectiveness (‘the three Es’) to public sector and sustainability measurement
• Assess the application of value for money (VFM) as a performance measure
• Discuss the selection and use of appropriate performance indicators (including non-financial measures) for public sector bodies
• Analyse the difficulties in measuring outputs and outcomes in not-for-profit contexts
• Evaluate how benchmarking, targets, and sustainability objectives impact public service management

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following best describes ‘efficiency’ in a public sector body?
   1. Achieving the maximum outcome for the minimum input
   2. Meeting budget targets exactly
   3. Procuring resources at the lowest price
   4. Providing the highest quality service regardless of cost
2. A government hospital hires additional staff, decreasing patient waiting times but increasing costs above budget. This change primarily demonstrates improved:
   1. Economy
   2. Efficiency
   3. Effectiveness
   4. Value for money

3. True or false? ‘Value for money’ requires an organisation to focus only on minimising its expenditure.

4. List the three ‘Es’ that form the basis of public sector value for money measurement.

Introduction

Performance measurement in the public sector focuses on delivering services that maximise benefit to society rather than purely seeking financial profit. In these contexts, financial results alone cannot provide a complete picture of organisational performance. Instead, managers use specific measures to assess whether resources are acquired and used wisely, desired outcomes are achieved, and taxpayers or donors receive value for money.

This article explains the meaning and application of the three Es—economy, efficiency, and effectiveness—and how they combine in the concept of value for money. We also discuss practical difficulties of performance measurement in public bodies, the importance of appropriate indicators, and how these support sustainable service delivery.

Key Term: economy
The acquisition of resources (inputs) of appropriate quality and quantity at the lowest possible cost.

Key Term: efficiency
The relationship between inputs used (resources) and outputs delivered, meaning how well resources are converted into services or products.

Key Term: effectiveness
The extent to which intended outcomes or objectives are achieved as a result of activities.

Key Term: value for money (VFM)
The optimal balance of economy, efficiency, and effectiveness, ensuring maximum benefit is achieved from available resources.

THE 3 ES: ECONOMY, EFFICIENCY, EFFECTIVENESS

Measurement in the public sector often relies on assessing performance across three related areas.

Economy

Public bodies must acquire inputs—such as staff, equipment, or materials—that meet necessary standards but at the lowest suitable cost. Focusing on economy alone can be risky if it results in substandard inputs that undermine service objectives.

Efficiency

Efficiency relates to the process of turning resources into outputs. Efficient organisations minimise waste, delays, or duplication, using as few resources as possible while delivering required services. It is possible to be efficient without being effective if the right outcomes are not achieved.

Effectiveness

Effectiveness measures how successfully a public body attains its goals. For instance, a literacy programme is effective if student reading levels improve. This may require substantial resources and effort, which is why a balance with economy and efficiency is essential.

VALUE FOR MONEY (VFM)

Value for money brings together the three Es, focusing on achieving the best combination of cost, process, and outcome. In public and not-for-profit organisations, VFM means service provision that maximises impact and benefit for users or society relative to the resources consumed.

Management and oversight bodies (such as government auditors) often evaluate whether public funds achieve VFM, considering whether lower costs could have been achieved for similar results, or whether greater outcomes could have resulted from the same expenditure.

Key Term: performance indicator
A quantifiable or qualitative measure used to assess specific aspects of an organisation’s activities or outputs.

PERFORMANCE INDICATORS FOR THE THREE ES

Effective measurement in the public sector requires choosing indicators that reflect each ‘E’ and link them to the organisation’s mission and objectives.

• Economy indicators: average unit cost for supplies; comparison of staffing costs per service delivered
• Efficiency indicators: relation of outputs to inputs (e.g. patients treated per nurse, cases processed per staff hour)
• Effectiveness indicators: percentage of objectives achieved (e.g. educational attainment rates, patient recovery rates)

Performance indicators should also consider quality and user satisfaction, particularly for services where outcomes are complex or take time to materialise.

Worked Example 1.1

A local authority manages a waste collection service. Last year, they reduced the cost of acquiring collection vehicles by 15%, but these vehicles frequently broke down, causing service delays.

Answer:
The authority improved economy (lower purchase cost) but reduced effectiveness and potentially efficiency due to service disruption. True value for money was not achieved, as cost savings undermined service quality.

Worked Example 1.2

A public school increases teacher training hours but keeps the budget constant. As a result, exam pass rates rise.

Answer:
This represents improved efficiency (more outputs—higher pass rates—from the same inputs) and higher effectiveness (better learning outcomes). The school is moving towards better value for money.

MEASURING PUBLIC SECTOR PERFORMANCE AND SUSTAINABILITY

Accurately measuring performance in the public sector is challenging due to:

• Non-financial objectives and difficult-to-measure outcomes (e.g. improved quality of life, social inclusion)
• Multiple stakeholders with competing priorities
• Long-term goals that may take years to realise (such as reductions in crime or pollution)

Selecting balanced performance indicators—both financial and non-financial—is critical. For sustainable management, organisations must also consider environmental and social impacts, not just short-term financial outcomes.

Key Term: sustainability
The capacity to maintain services or results over time without negatively impacting future generations or the environment.

TYPICAL EXAMPLES OF PUBLIC SECTOR PERFORMANCE MEASURES

• Economy: Percentage of contracts awarded below benchmarked cost, cost per hospital bed, average salary per case handled
• Efficiency: Throughput rates (e.g. cases processed per month), waiting time reductions, energy used per service provided
• Effectiveness: Proportion of targets met (e.g. literacy rate improvement), patient survival rates, user satisfaction levels

Indicators should be selected with reference to the organisation's mission and the needs of various stakeholders, ensuring that cost-cutting does not undermine service quality or long-term objectives.

Exam Warning

In exam scenarios, avoid assuming that lower costs always lead to improved performance. Your answer should always consider the impact on quality and intended outcomes—sometimes higher spending is necessary for effectiveness or sustainability.

LINKS TO SUSTAINABILITY AND LONG-TERM VALUE

Sustainability is now a key public sector objective, ensuring that resources are used in a way that does not compromise future needs. Performance measures must therefore include economic, social, and environmental aspects. For example, public transport services may measure not just passenger numbers and cost per journey, but also emissions levels and customer satisfaction.

Revision Tip

When recommending performance indicators in your answers, always relate them to the relevant ‘E’ (economy, efficiency, effectiveness) and consider both short-term and long-term impacts.

Summary

Economy, efficiency, and effectiveness (the ‘three Es’) are central to public sector performance management. Value for money means achieving the best balance between controlling costs, optimising resource use, and meeting organisational objectives. To support sustainability, performance measures should align with strategic goals and include both financial and non-financial elements.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the meaning of economy, efficiency, and effectiveness and their role in public sector performance
• Discuss the concept of value for money and its link to the three Es
• Select appropriate performance indicators for public sector and sustainability measurement
• Identify common difficulties in measuring outcomes and VFM in not-for-profit contexts
• Recognise the importance of linking short-term management with long-term sustainability and strategic objectives

Key Terms and Concepts

• economy
• efficiency
• effectiveness
• value for money (VFM)
• performance indicator
• sustainability