Question: (a) Briefly explain how the measurement of divisional performance differs when assessing the achievement of strategic targets as distinct from operational targets. J is a hospital which supplies a wide range of healthcare services. The government has created a competitive internal market for healthcare by separating the function of service delivery from purchasing. The government provides funds for local health organisations to identify healthcare needs and to purchase services from different organisations which actually supply the service. The service suppliers are mainly hospitals. J is a service supplier and has established contracts with some purchasing organisations. The healthcare purchasing organisations are free to contract with any supplier for the provision of their healthcare requirements. Previously, J was organised and controlled on the basis of functional responsibility. This meant that each specialist patient function, such as medical, nursing and pharmacy services, was led by a manager who held operational and financial responsibility for its activities throughout the hospital. J now operates a system of control based on devolved financial accountability. Divisions comprising different functions have been established and are responsible for particular categories of patient care such as general medical or general surgical services. Each division is managed by a senior medical officer. J's board recognises that J exists in a competitive environment. It believes there is a need to introduce a system of divisional appraisal. This measures performance against strategic as well as operational targets, using both financial and non-financial criteria. The board is concerned to develop a system which improves the motivation of divisional managers. This will encourage them to accept responsibility for achieving strategic as well as operational organisational targets. In particular, the board wishes to encourage more contractual work to supply services to healthcare purchasing organisations from both within and outside its local geographical area. It is a clear aim of the board that a cultural change in the management of the organisation will result from the implementation of such a system.

Sol: (b) (a) The broad overall aims of the organisation are identified in the mission statement and this is the starting point in the preparation of a strategic plan. Using the mission statement, it is possible to establish the objectives which are more specific and will incorporate criteria which will enable performances to be quantified and measured. When the objectives, as the long-term aims of the organisation, have been established, it is then necessary to identify and evaluate the alternative courses of action which can be adopted to achieve the goals. The operational goals are short-term targets which are set in order to provide the basis on which the day-to-day performance can be monitored. The operational targets are the ‘immediate steps' which will be taken and it is expected that they will eventually result in the long-term objectives being attained. It is necessary that a system of performance measurement be introduced which enables the extent to which the organisation has moved towards its overall long-term objectives to be ascertained. The number of contracts gained, the quality of the service offered or the relative position of the organisation in relation to competitors would be appropriate non-financial measures to monitor the extent to which the long-term objectives of the organisation are being achieved. Production levels as compared with the budget, the efficiency of the labour force, wastage rates of materials and levels of spending would be indicators of whether the operational targets of the organisation were being met and these would provide a means of monitoring the implementation of the short-term strategy

(b) When establishing a system of performance measurement for divisional managers, it is important that a number of different aspects of the problem be addressed. These include the effects on the motivation of the management and staff and the establishing of measurable strategic and operational targets which are realistic and can be monitored effectively. Finally, consideration must be given to the manner in which the changes will be introduced and implemented within the organisation. In a not-for-profit organisation, it is important that both financial and non-financial information be used. Within a hospital, divisional performance must be reported to focus on the crucial elements of performance in each area. This is likely to be difficult, as outputs are often hard to measure in non-profit organisations and imagination and creativity will be required in developing a useful system of performance measurement in the hospital.