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Costing governmental services in a reformed environment: unreachable goal or unfinished business?


The vast literature on New Public Management (NPM) reveals that most of the past decade governmental reforms, along with a substantial portion of the academic research on NPM, focused on autonomy, decentralization and performance measurement (Hood 1995; Laegreid and Verhoest 2010; Pollitt 2005; Vining 2011). Many governments have chosen to reform the public sector partly by creating decentralized organizations that benefit from more autonomy, but in return, are formally held accountable for their results based on performance indicators. The literature on whether NPM delivers on its promises, however, yields mixed results (Lapsley 2008,2009).

We examine one crucial aspect of a transition that comes as a direct consequence of NPM, namely the development of cost consciousness, which is defined as a broader understanding of how costs relate to output and how to act on specific cost drivers to reduce the total costs (Shields and Young 1994). Using an action-research methodology, we analyze three governmental entities that have attempted to develop cost consciousness over a five-year period. Our analysis of the three cases reveals that the nature and intensity of the pressures to which organizations are exposed play a crucial role in the development of cost consciousness. Our results show that unless credible and intense pressures are in place, the organizations will not succeed in the necessary transition in institutional logic that would allow for a development of cost consciousness.

The remainder of the paper is organized as follows. In the next section, we present the main components of our conceptual framework. Then, we briefly review the literature. After presenting the action-research approach used in this study, we present the three cases and analyse our results. A brief conclusion follows.

Conceptual framework: the NPM paradox and the role of institutional logics

After more than 30 years of debate surrounding the issue of how to best reform governmental organizations, our understanding of public management has now come to a paradoxical crossroad. On one side of the paradox, the arguments according to which traditional public administration should benefit from a massive dose of "business-type managerialism" (Hood 1991, 1995), which includes disaggregation of business units (re-allocation of decision rights) and improved accountability, have now survived long enough to be considered convincing at least to some public sector decision makers (Laegreid and Verhoest 2010; Vining 2011). Increasing the formal autonomy of public sector organizations through any form of corporatization (1), along with emphasizing the accountability that should follow, is at the core of the NPM doctrine (2).

Empirical evidence supports the acceptance of key elements in the NPM doctrine. First, public sector reforms that include some form of corporatization have been implemented in many developed countries around the world during the last three decades. Guthrie, Olson, and Humphrey (1999) list eleven nations in which reforms that involve corporatization have taken place since the 1980s. Humphrey et al. (2005) expand that list by including five more countries, including a study of reforms in the less developed Eastern European nations. Overall, it is safe to say that many countries have considered implementing some form of corporatization, and the majority of them have done so.

Second, an analysis of the literature reveals that increasing the autonomy of government entities, adopting "business-like" practices and improving accountability are all at the core of recent research. Since the publication of Hood's (1991) seminal paper on NPM, a countless number of articles, books and other types of publications (3) have attempted to assess, qualitatively or quantitatively, the impact of reforming public sector organizations using some form of corporatization. For example, corporatization, in any one of its many forms, including privatization, 3Ps, and state-owned enterprises, is, according to Pollitt (2005), a "central concept in contemporary public management" (4). A number of empirical studies, including Bilodeau, Laurin, and Vining (2007), has attempted to measure the impact of corporatization on several dimensions of performance, including financial performance, output production, average cost, productivity and service quality.

But on the other side of the paradox that opposes theory and evidence in public sector reforms, the current literature on corporatization and its impact on the actual performance of public sector organizations yields mixed results. If there are examples of agencies or government services that appear to have benefited from corporatization, explicit performance measurement or enhanced accountability (Vining, Laurin, and Weimer 2014), these examples are too few and counter-examples are far too many (see, for example, Goldfinch and Wallis 2010; Hannan and Freeman 1989; Jeong, Miller, and Sobel 2009; Reddy, Locke, and Scrimgeour 2011; Vining 2011) to conclude that corporatization in the public sector is a success.

The literature provides several explanations as to why NPM reforms fail to deliver. In the early stages of NPM, Hood (1991) challenged the universality of this paradigm, claiming that "different administrative values have different implications for fundamental aspects of administrative design" (Hood 1991: 9). Later on, Cooper and Ogata (2005) argued that accountability in the public sector is so complex that it cannot be improved simply by using a set of indicators often inspired from private business practices which are not subject to the same level of complexity. Pollitt (2005) argued that decentralization could imply complex patterns of accountability that would favour blame-shifting rather than sound accountability. For these authors, the efficiency gains associated with decentralization could be realized at the expense of accountability.

In terms of cost consciousness, which is a crucial dimension of performance in the public sector and the main focus of this study, the empirical evidence relating its link with corporatization is even less convincing. To our knowledge, there exists no clear demonstration that the last 30 years of public sector reforms have allowed for systematic cost management improvements. Very few reformed organizations have implemented innovations in order to better manage their costs (Lapsley and Wright 2004).

We argue that to better understand why cost consciousness is difficult to develop, institutional logics need to be considered. According to Meyer and Hammerschmid (2006): "Institutional logics shape worldviews by providing relevance structures and frames to construct issues, problems, and solutions as well as script actions" (p. 1000-1001). They use the concept of institutional logics to answer the question of "whether and to what extent the 'old' administrative orientations are being replaced by a new managerial one" (p. 1002). Meyer and Hammerschmid (2006) argue that the movement from traditional public management (TPM) to NPM constitutes a major change for public sector organizations. According to them, fundamental change necessarily needs to occur in the institutional logics in moving towards NPM.

We further argue that moving from TPM to NPM implies the coexistence of two institutional logics, legalistic-bureaucratic and managerial. The legalistic-bureaucratic logic, typically associated with TPM, refers to strong emphasis devoted on processes and rules, and to the prevalence of legal and procedural correctness over performance and results. The managerial logic refers to economic rationality reflected by result-based governance within a decentralized system allowing for high managerial autonomy.

In our view, analyzing the degree to which organizations are cost conscious reveals the difficulties associated with the coexistence of two institutional logics. The emergence of NPM has been triggered by financial problems caused by a lack of discipline in the way public sector organizations consume their resources. As a result, the most important NPM doctrines are aimed at disciplining managers in the way resources are consumed in their organizations (Hood 1991,1995). In this context, organizations that have been the subject of reforms should adopt an institutional logic that allows for improved cost consciousness and, in turn, these organizations should be held accountable for their resource consumption.

Under a legalistic-bureaucratic logic, public sector organizations are asked to monitor their inputs notably by controlling their expenses. To control expenses, they mainly have to satisfy a number of budget constraints, and not much effort is devoted to managing costs per se. This approach essentially consists of using budgeting techniques to make sure that cash inflows and outflows balance out and implies a low degree of cost consciousness.

Under a managerial logic, entities are required to adopt business-like practices that are specifically aimed at monitoring outputs by managing their costs. More specifically, organizations should attempt to manage costs by 1) measuring the cost of the goods they produce and the services they render and, ideally, 2) identifying their main cost drivers and manage them to keep the cost of goods and services at the lowest possible level. This approach is conducted mainly based on a calculative tool referred to as a costing system, which implies a high degree of cost consciousness.

In sum, to achieve a macro-level change from TPM to NPM, the coexistence of legalistic-bureaucratic and managerial logics has to be reflected at the micro level, notably with (i) a focus on inputs and outputs as objects of costing, and (ii) a twofold costing function whereby on top of controlling expenses to make sure that budget constraints are met, entities also manage the costs of goods and services. Figure 1 illustrates this transition at the macro level from TPM to NPM, and at the micro level from expense control to the coexistence of expense control and cost management through the integration of two calculative tools, namely the budgeting and costing system.

In order to induce a macro-level change in institutional logics and more specifically the development of cost consciousness at the micro level, sufficient pressure must be put on the decision makers. In the private sector, fundamental change in institutional logics can be induced in a number of ways. For example, Brickley, Smith, and Zimmerman (1997) argue that the appropriate allocation of decision rights, along with the identification of sound performance measures and the right incentives, are three pillars that, once correctly aligned, should favour long-term improvements in performance.

In the public sector, if reforms have led to the reallocation of decision rights and to the extensive use of performance indicators (Vining, Laurin, and Weimer 2014), the question of individual incentives remains the subject of much debate. While Dixit (2002) claims that for real and long lasting change to occur in the public sector, incentives need to be used in concordance with key performance measures, he also argues that the use of high-powered individual incentives is problematic in the public sector. Given the difficulty in using individual incentives to induce change in the public sector, the resulting problem is that reformed public sector organizations may have trouble in implementing the transition from an accounting system focused on expense control to a system focused on both expense control and cost management (see Figure 1).

But without internal pressures coming from high-powered individual incentives, other types of pressures could be assumed to be strong enough to initiate the development of cost consciousness, notably external pressures (Modell 2002). In this study, we use an action-research strategy to analyze two types of external pressures that public sector organizations are facing: intra-governmental pressures (that is, pressures from governmental organizations outside of the entity) and extra-governmental pressures (that is, pressures from organizations outside of the entity and government). These external pressures could represent a threat to organizational routines, legitimacy and, in some cases, survival of the entity. In our specific context, these external pressures could represent the needed trigger to initiate the development of cost consciousness. This is the subject of our main research question, drawn from Figure 1 : In a context where the legalistic- bureaucratic and managerial logic coexist at the macro level, to what extent are external pressures needed to induce the development of cost consciousness at the micro level?

Action-research methodology

We attempt to answer our research question using an action-research approach. The main objectives of action research are to simultaneously (i) solve "real" problems in social systems, and (ii) contribute to the basic knowledge of social science (Jonsson and Lukka 2007). It is conducted with rather than on organizational members, as such it deliberately provides some type of intervention that seeks to improve the practices of the participants (Herr and Anderson 2005). Field work was performed in three decentralized government organizations from one of Canada's provinces. The co-authors of the study first took part in a working phase where they independently collaborated with an organization to initially diagnose a costing problem and then developed a solution to the problem. By doing so, the researchers became part of the field study in which they collected the data that forms the basis of this research. The analysis of the similarities and specificities between those three interventions constitutes the main purpose of this paper and aims to contribute to the development of knowledge in the domain of management accounting and public sector.

The three cases

The legislative context

In 1995, the government of Quebec created the first decentralized entities. This new management approach was, according to official documents, based on four main principles. The first of which was the delegation of responsibilities to make managers more directly responsible for how the resources allocated to their department were used. Determining objectives and measuring their results, using both qualitative and quantitative means, were the second and third principles of the new strategy. Finally, these results had to be communicated in a regular and public way to ensure accountability (Source: the report of the Auditor General of this province, 1999).

Because the first attempt at reforming governmental entities yielded mixed results, the provincial government formalized its reform using legal means. In 2001, the government adopted a law that formalized decentralization and explicitly implemented results-based management in all public sector decentralized entities. It required also decentralized public sector entities to develop a strategic plan and define a set of performance indicators that are fully integrated to the plan.

The three decentralized organizations are fictitiously labelled the Service to Citizen Agency (SCA), the Culture and Entertainment Agency (CEA) and the Natural Resource Production Agency (NRPA).

The Service to Citizen Agency (SCA)

Description of the entity

The Service to Citizen Agency (SCA) was created in 1994. It is the only office authorized to deliver birth, marriage, civil union and death certificates in one province of Canada. Before 1994, religious and governmental organizations were responsible for issuing these documents. Since 1994, the role of SCA has been to develop and maintain the register of civil status which includes information regarding births, marriages and deaths that occurred in the province. When a request for a civil status document is made, the register is consulted and the document is delivered. Thus, resources are employed at SCA essentially to keep the register up to date and provide citizens and governmental agencies with the certificates and information needed.

SCA needs to self-finance its operations. Thus, revenues from the issuance of certificates and other services must match the costs incurred by SCA to keep the register of civil status up to date and issue certificates. In 1994, when SCA was created, the government of the province set the rates for certificates at $15 for a certificate issued in the regular mode and at $35 for an emergency issuance. These rates were based on an evaluation that was conducted at that time and have not been changed for more than ten years. During the 1990s, SCA had to put in place the register and the revenues were largely invested in the database. In the beginning of the year 2000, the register was well established.

In 2010, the rates were increased and adjusted to take into consideration the mode of transmission of the application for the documents. For example, a certificate processed normally costs $39 if the application is submitted through the mail. This is a 160% increase in comparison to the 1994 rate.

Involvement of the researcher

The study of SCA began in 2005. A co-author was asked to assist a manager in implementing an activity-based costing (ABC) model. A first model was developed in 2005. The co-author spent 60 hours developing the model, supervising the manager and attending several meetings. The results of this first model were presented to top management. The co-author and the manager made several suggestions to improve the model. The suggestions were considered relevant by management, and a more refined model was developed in a second phase in 2006.

Initial state of the organization

The costs of SCA, which are mainly fixed, increased every year after its creation in 1994. In 2005, SCA started to worry about its capacity to break even, and top management expressed the need to have more information about the costs incurred in the organization and the unit cost for the documents issued. Management noticed that the organization did not exactly know what the unit cost of a certificate was and therefore was unable to justify an increase in the rates charged for the issuance of a certificate. Like many organizations from the public sector, SCA did not develop a costing system for the services that it provided because rates were already set, and the organization was making surpluses and meeting its budget targets. There were no organizational or individual incentives in place to better manage costs.

External pressures

In 2005, SCA decided to develop a costing system that would enable the organization to determine the costs of the different services offered to citizens. The main objective of the project was to better understand why the organization was no longer creating surpluses and to what extent costs were above the rates charged for the certificates and the other services rendered by SCA. This was the main trigger that led SCA to examine its costs. This was clearly a departure from the traditional budgeting approach used since the creation of SCA. In this context, an ABC model was developed and used to determine the costs of the services rendered by SCA. The model consisted in a four-step allocation scheme. Firstly, responsibility center costs were allocated to support activities. Secondly, support activity costs were assigned to direct activities. Direct activity costs were allocated afterwards to an intermediate cost object, the civil status database and finally to the main cost objects, the certificates.

The new costing system showed that the costs of the two most important services provided by SCA were above the allowed rates. The outcome of the cost analysis was the explanation for the 2005 deficit. It also became a legitimate justification for rate increases in a context where SCA is the only organization that can provide this service in the province. After the project, it was clear for SCA that the results of the model would first lead to increasing rates charged for the services and not reducing costs. The purpose of the project was never at any stage to understand and eventually manage costs. Thus, the concern was not cost efficiency, per se, but more to align rates with costs.

Current state of the organization

Because SCA has been an agency since its creation, one could have expected that developing a costing system would have led to a review of procedures and improved cost efficiency. But in our analysis of this agency, we have not been able to detect signs of increased cost consciousness. The costing system enabled managers to demonstrate that the agency showed no sign of mismanagement and therefore, did not have to focus on cost reduction. In fact, the costing system provided managers with justifications to legitimize rate increases. Since the development of the costing system, SCA has been able to justify increases and have them approved by the government.

In 2014, SCA was still an independent agency that had now put in place a process under which rates are increased annually based on inflation. Generating enough revenues to cover costs seems to be the most important financial objective. Thus, the conclusion is that instead of improving cost management, the costing system has been used to legitimize rate increases, which appears to be the main vehicle used to maintain a balanced budget at SC A.

The Culture and Entertainment Agency (CEA)

Description of the entity

The Culture and Entertainment Agency (CEA) was created in 2001 following the adoption of the LAP. Its mission is to manage the motion picture rating system in the province. CEA also classifies and approves films for distribution to the general public, including all categories of films featured in movie theaters or distributed in home video outlets.

In relative terms, CEA is a small agency, with annual expenses of about $6 million and approximately 45 full-time equivalent employees (FTEEs). CEA generates approximately $16 million in autonomous revenues, mainly through collecting dues paid by distributors of classified movies (Source: CEA's 2009 Annual Report). Because of its very specific mission and its high level of autonomy, CEA was an ideal candidate for decentralization.

In line with corporatization, CEA produces an annual report in which it provides a standard set of results along with a compilation of performance indicators that are specific to the organization. For the most part, the standard results include a statement of revenues and expenses, accompanied by information related to the amount of output produced and the number of employees. The set of specific performance indicators includes indicators about output produced and quality of services provided. Over the years, the organization has published data on close to 15 categories of output produced annually, including various numbers of permits and certificates allowing for the diffusion of many types of movies. CEA's annual reports also include data on approximately 12 quality indicators, mainly comprised of indicators related to the delays of processing permits and certificates (10) and measures related to employees' continuing education (2). CEA uses no performance indicator related to costs.

Involvement of the researcher

The study of CEA started in 2009. The chief executive officer contacted a co-author for a mandate related to costing their services. The first part of the project was to link the cost of labor to the services rendered. The second part began in the fall of 2010 and had two main objectives: 1) costing all the services offered, and 2) reassessing the link between costs and rates. During the course of the mandate, the researcher met with every employee involved in CEA's executive committee and attended numerous meetings. The researcher produced a report in which the approach used to establish service costs was summarized. Service costs were revised afterwards using updated financial information.

Initial state of the organization

Although CEA was created in 2001, it was not before 2008 that the implementation of a costing system was considered. During its first seven years, CEA used a traditional expense controlling approach built on a legalistic- bureaucratic logic. Pre-determined resources were allocated by the government and managed by the organization, regardless of the volume or cost variations in the quantity of services rendered. During this period, CEA's output more than doubled while the expenses allowed by the government remained fairly stable. As a result, CEA reported annual results that exceeded expectations on several dimensions of performance, including production volume, revenues, excess revenues over expenses, average cost, and productivity. Furthermore, these results were not achieved at the expense of service quality, which remained fairly stable.

Given CEA's performance and the absence of pressures, there was no incentive to migrate from a legalistic-bureaucratic logic to a managerial logic in order to implement any form of cost consciousness within the organization. During the 2001-2008 period, conversations between the province's auditor general and the CEA's director were hinting at the necessity of attempting to determine the cost of services. But after one attempt at costing services failed in 2006, the expense control approach, inspired by the legalistic-bureaucratic logic, prevailed.

External pressures

The major transformation of the film distribution industry that started in 2010 in Canada seriously challenged CEA's revenue base. If the increasing appeal for digital distribution was likely to make a significant dent on revenues, this transformation had no effect on CEA's operations. Also, in 2010, the provincial finance minister indicated that public sector organizations that generated revenues had to compare the rates charged with the costs of the services.

Starting in 2010, CEA was facing two organizational pressures to estimate service costs: 1) the major change in the film distribution industry, which caused a decrease in revenues while having no impact on costs and 2) the statement by the finance minister forcing CEA not only to revise the rates charged for services, but also to establish a link between the service costs and rates charged.

When faced with these pressures, CEA decided to undertake a thorough investigation of the costs of its services. Through this examination, CEA examined its processes and attempted to determine the cost of its services using a system based on time-driven activity based costing.

Current state of the organization

The impediments related to keeping a balanced budget and responding to central government requests have forced CEA to combine a traditional expense controlling approach with a cost management approach. But twelve years after corporatization, the development of cost consciousness was far from being complete. The set of performance indicators has remained stable and did not include performance indicators related to costs. The traditional yearly budget was still prepared and followed-up, while the process through which the service costs were determined and linked to rates was still a work in progress. It is probably fair to say that without stronger incentives or external pressures, the coexistence of expense control and cost management at the micro level in the mid to long term is, at best, doubtful.

The Natural Resource Production Agency (NRPA)

Description of the entity

The Natural Resource Production Agency (NRPA) was founded in 1998 following the grouping of the public plants, seeds and fish nurseries in one large Canadian province. The mission of the organization is to produce high-quality plants, seeds and fish at the best possible cost for its clients. At the time of the mandate in 2009, this organization had about 300 FTEEs and was the only manufacturing entity in the province's public sector. It managed an annual budget of $40 million resulting exclusively from public funding (no autonomous revenue). The organization coordinates three production sectors, namely forest seedlings, tree seeds and fish. In this paper, we concentrate on the forest seedlings sector which represents more than 80% of production.

Regarding forest seedlings, NRPA works with two parallel networks: 1) the public network, comprising six government forest tree nurseries, and 2) the private network, made up of 15 forest tree nurseries. Jointly, the two networks deliver 150 million plants on average per year to their clients. The public network represents 30% of annual plant production, but the scope of the production represents more than 35 essences. The 15 private nurseries belong to a forest seedling producer's bureau. They represent 70% of annual plant production but they are concentrated on a limited number of essences. They are linked to NRPA by contractual relationships stipulating the number of seedlings to deliver and the price per seedling. On the political scene, the continuity of public nurseries is constantly threatened by private nurseries' lobbying for total control over plant production.

Involvement of the researcher

The study of NRPA started in 2009. The general manager of the organization contacted a third co-author for a mandate related to the analysis of its costing practices. In 2010, the researcher issued a report on how product and service costs are analyzed and how costing practices could be improved. The second part of the mandate was undertaken in 2010. More specifically, after the hiring of a new employee devoted to the implementation of the solutions proposed in the report, the researcher acted as a mentor to support the implementation of the various solutions. During the mandate, the researcher met with every employee involved in the executive committee and costing systems for a total of approximately 55 hours and also attended several executive committee meetings.

Initial state of the organization

Before the creation of NRPA, public nurseries were associated with different regional operations sectors. The financial results of the public nurseries were consolidated with those of their respective geographic region. Representing a very low percentage of the budget, the accountability of the nursery was mainly focused on the expenses of various items. The costing philosophy followed a typical legalistic-bureaucratic logic whereby the level of cost consciousness is relatively low. The accounting system was structured around different expense items and the main objective was to meet the annual budget constraints. There was no formal costing system in these organizations and no real incentive to move to a managerial logic.

External pressures

In 1998, public nurseries were facing two important pressures to implement a system providing information on service costs: the merger of public nurseries and the pressure from the private sector.

Public nurseries had been structured with regional branches. The creation of an entity grouping together the six nurseries and the determination of forecasts to allocate resources among them triggered the need for information on costs. An information collection system (and not specifically a costing system) was put in place, but it was mainly designed to identify recurrent and representative costs. Therefore, the objective was not to evaluate the costs of the period or the costs of various cost objects, but to establish a representative baseline of typical nursery activities that would help determine the allocation of financial resources. Based on the various expense items, budget indicators were defined to understand the behaviour of the costs of various activities. Resources could then be distributed to the nurseries based on the average output of the three most efficient nurseries. These budget indicators are therefore similar to cost drivers used as a basis for cost allocation. In short, although the "costing system" is hampered by the will to establish anticipated costs rather than to determine real costs, its development reflects an increase in cost consciousness.

The second pressure arose from external pressures of private nurseries to close public nurseries escalated. In this context, the organization needed to legitimize its existence through innovative production approaches, production output and exclusive production of some types of tree seedlings, but also to demonstrate superior (or at least equal) performance in terms of costs. It had to show that production did not cost more in the public sector than in the private sector. Consequently, a specific costing system based on the information system used for forecasting purposes has been developed to focus on comparable costs between public and private nurseries. In other words, the only costs considered were those also incurred by private nurseries. Although the costing system was hindered by the objective of establishing a comparison with external entities rather than of determining real internal costs, its development reflects once again an increase in cost consciousness.

To summarize, it is when faced with these two organizational pressures that the public nurseries undertook an investigation of the cost of its products. Through this exercise, they have moved toward a managerial logic by developing a costing system that is well-developed technically.

Current state of the organization

The financial results of NRPA are consolidated with those of the ministry. The ministry practises accountability using a standard set of results (list of expenses) along with a compilation of performance indicators that are specific to the nurseries. The organization still follows a legalistic-bureaucratic logic but also reflects a real movement toward a managerial logic. More cost consciousness is reflected in the use of a costing system structured around different activities. Although this system is not updated regularly, it has been well integrated into the organizational routines. Notably through the use of costing information in various situations, namely reporting, decision-making, legitimizing, monitoring, and coordinating. But without strong individual incentives, the legalistic-bureaucratic logic will probably continue to act as the dominant logic, and the cohabitation of the expense control and cost management functions will, at best, be maintained at the current level.

Analysis and discussion

The three cases provide some understandings of the evolution of public sector entities in the context of NPM. Table 1 summarises the analyses of the three cases.

The three cases share both similarities and differences. All three entities are highly autonomous through decentralization and use extensively performance indicators; however, they have not put into place individual incentives. Each entity has faced external pressures that created the need to review the costing function (expense control vs. cost management). For SCA, the increase in the amount of expenses over time while the rates remained unchanged has triggered the need for service cost information. For CEA, technological changes have had a serious impact on its revenues. In this context, a better understanding of costs and their drivers triggered the need for a new calculative tool. For NRPA, it is the creation of a branch that became responsible for the management of the six public nurseries and the threat of privatization that triggered the change for more refined calculative tools.

For SCA and CEA, the reaction to external pressures was to develop a more sophisticated calculative tool, an ABC system that would provide more refined information about costs. For NRPA, an ABC model was also developed, but the information was benchmarked with the costs incurred in similar organizations from the private sector.

In the three cases, the challenge to the prevailing institutional logic has led to some changes in the importance devoted to cost management. For SCA, cost management information was used to justify rate increases. This implies that the legalistic-bureaucratic logic stayed dominant. For CEA, the information was used to control costs in the context of declining revenues. The expenses controlling approach stayed important but basic cost management was introduced. For NRPA, the pressures from the private sector lead the organization to move more explicitly towards a managerial logic.

These results tend to show that without external pressures and individual incentives, organizations from the public sector appear to have difficulties managing the coexistence of two costing functions, namely expense control and cost management, even in the context of NPM. The analysis of the three case studies demonstrates that specific circumstances may trigger the use of calculative tools comparable to those used in the private sector, but that the use of these tools will be difficult to implement and to maintain without responding to important pressures.

To interpret our results at a more conceptual level, we refer to the institutionalization process model proposed by Tolbert and Zucker (1996). In their model, Tolbert and Zucker argue that institutions are formed and spread through a set of sequential processes referred to as (i) habitualization, (ii) objectification, and (iii) sedimentation. In response to technological change, legislation or market forces, the organization develops patterned problem-solving behaviors and associates such behaviors with particular stimuli. This pre-institutionalization stage is referred to as habitualization. The objectification refers to the development of general, shared social meanings and consensus attached to these behaviors. This stage is necessary for the transplantation of actions to contexts beyond their point of origin. Full institutionalisation involves sedimentation, which is characterized both by the complete spread of behaviors throughout the organization and by the perpetuation of behaviors over a lengthy period of time.

The costing function represents an important part of the institutional logic in that it represents a patterned behavior developed and adopted by a set of actors in order to solve problems created by unplanned external forces. The extent to which a managerial logic is embedded in an organization is reflected by the ability of the costing system to determine organizational actions (objectification) and its stability over time (sedimentation). Depending on the characteristics of the external pressures, namely the nature, intensity and length of the external threats, the level of institutionalization may vary.

The last line in Table 1 reveals the stage at which organizations are in this sequential process. Despite the major structural changes, the legalistic- bureaucratic logic has remained the dominant costing logic in place in two of the three organizations (SC A and CE A). The costing system has been used to reinforce the obligation of SCA to self-finance its activities and provide a justification for rate increases. Essentially, the goal of the implementation of the new calculative tool has been to develop appropriate cost information for the purpose of cost recovery.

In this context, in line with Tolbert and Zucker (1996), this organization has reached the stage of "habitualization." At this stage, in response to changes to the cost structure and the pressure from the self-financing policy, SCA developed a pattern solving behaviour, developing a costing system to get to know what the costs are, but without changing the fundamental legalistic-bureaucratic logic. As shown in Figure 2, it has moved along the no corporatization-corporatization axis but has not progressed to the right side along the Expenses control/Cost management axis.

CEA has been able to reach a more advanced stage. The context of CEA is different from the one of SCA. CEA is facing major technological changes that have a direct impact on its revenue basis. Reacting to this changing environment, the fundamental legalistic-bureaucratic logic is starting to change, as CEA is still trying to improve its TD-ABC system. Because CEA is starting to develop cost consciousness at the micro level, but given that the costing system and the budget are still not well integrated, we argue that this organization has reached a level of "objectivisation" (Tolbert and Zucker 1996). It has made efforts to incorporate costing system that will promote cost efficiency but the legalistic-bureaucratic logic remains very important. Figure 2 reveals that CEA has successfully incorporated this calculative tool while moving along the no corporatization-corporatization axis.

NRPA is the organization that has reached the most advanced level of institutionalization. According to Tolbert and Zucker (1996), it has attained the "sedimentation" stage. At that stage, the change in the behaviour perpetuates over time and is more than just a quick exercise in reaction to a change in the environment. This organization, which is permanently dealing with the threat of being replaced by organizations from the private sector, has more incentives to function like a corporation than the two other organizations that do not have any counterparts in the private sector. To some extent, NRPA has been able to reconcile the expense control and cost management functions with the integration of two calculative tools, namely the budgeting and costing system.

The results provide a certain number of elements relevant to answer our research question. The creation of autonomous entities under NPM to reconcile legalistic-bureaucratic and managerial logics has favoured the emergence of the corporatization of the three organizations from the public sector that have been examined in this study. Without high-powered individual incentives, the coexistence of the two costing functions (expense control and cost management) is expected to be a function of the intensity of external pressures. Within the three organizations from the public sector, it is for NRPA that the pressures have been the most important, especially with the threat of privatization. For SCA and CEA, the external pressures have not been as strong as for NRPA. The absence of competition and the current regulation have provided a context for an effort towards the use of costing systems but in that context, the current legalistic-bureaucratic logic remained predominant. This is reflected in Figure 2.

Overall, this field study shows that a simple restructuring of public sector organizations, even in the spirit of NPM, is not sufficient enough to alter the institutional logic under which crucial tasks, such as cost management, are performed. In order for the costing function to evolve towards combining expense control and cost management, strong and sustainable external pressures appear to be needed. Without oversight capacity, individual incentives, and external pressures, the evolution of the institutional logic governing cost management is, at best, an unfinished business and will likely remain an unreachable goal.


The aim of this study was to explain why most NPM type reforms fail to deliver on their promises with respect to cost consciousness. More specifically, we examine to what extent organizations from the public sector manage the coexistence of two costing functions, namely expense control and cost management. Based on collaborative field work, we conclude that a more decentralized public sector organization seems to be unable to move from a legalistic-bureaucratic logic to a managerial logic, notably in regard to cost consciousness, unless external pressures motivate managers and their organizations to complete the

reform. We propose that the probability of success of NPM reforms is increased if pressures, which could take the form of individual incentives or external threat, are in place. Since individual incentives are not common in the public sector, the success of the reforms is undeniably linked to the intensity of the pressures to which the organization must respond.

This study contributes to numerous aspects of the NPM literature. First, our study could explain why a number of empirical assessments of the impact of NPM on organizational performance of reformed governmental entities yields mixed results. Our results show that pressures could in fact play a major role in implementing reforms. More specifically, our study also provides some explanations as to why NPM seems to have a limited impact on the average cost of public sector organizations. In order to have a significant impact on costs, NPM needs to be deployed in such a way that not only the structure of the organization will be changed, but also the institutional logic under which its employee operates. Such migration of logic is likely to require much more effort than a mere restructuration of the organization.

The study also makes a contribution to the cost management literature. Lapsley and Wright (2004) suggest that organizations from the public sector have not implemented innovations in management accounting and have called for research that could explain why it is the case. This study contributes to the literature in that stream of research (for example, Modell 2002; Verbeeten 2011) by providing some explanations for the slow diffusion process for innovation in management accounting in the public sector and more specifically for cost management tools.


(1) A wide variety of labels have been used to describe these organizational change processes with "corporatization" and "agencification" being two of the most common. Following Bilodeau, Laurin, and Vining (2007), we will describe in this paper both the process and the outcome using the term "corporatization."

(2) There are other concepts that are central to the NPM paradigm, including privatization, a wider call to new technologies (the so called E-Govemment) and private sector management styles (see Lapsley 2009). These other concepts are not as relevant in this study as decentralization, performance measurement and increased accountability, which represent the three concepts that are directly linked to the strategic plans of government organizations.

(3) Boyne (2003) provides an analysis of more than 65 studies on the impact of NPM. Publications by Ferlie, Lynn, and Pollitt (2005) and Laegreid and Verhoest (2010) also attempt to assess the impact of institutional reforms along the lines of NPM.

(4) See also Laegreid and Verhoest (2010).


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Maurice Gosselin and Jean-Francois Henri are both professors of accounting at Universite Laval, Quebec City, Quebec. Claude Laurin is professor of accounting at HEC Montreal, Montreal, Quebec.

Caption: Figure 1. Conceptual Model

Caption: Figure 2. Illustration of the Main Results

Table 1. Synthesis of Three Public Sector Organizations


Description of the entity

Date of creation                 1994

Type of organization             Agency

Mission / Organizational         Deliver birth, marriage, civil union
objectives                       and death certificates

Size                             200 FTEE

Competition                      No

Autonomous revenues              Yes

Initial state of the organization

Decision rights                  Highly autonomous

Performance indicators           Yes

Individual incentives            No

Expense control                  High

Cost management                  Low

External pressure

Date of the pressure             2005

Nature of the pressure           Expenses increase threatening the
                                 organization's ability to meet

Reaction                         Develop an ABC system to link
                                 costs with tariffs

Current state of organization

Decision rights                  Highly autonomous

Performance indicators           Yes

Individual incentives            No

Expenses control                 High

Cost management                  Low

Costing system integration       Habitualization


Description of the entity

Date of creation                 2001

Type of organization             Agency

Mission / Organizational         Manage the motion picture
objectives                       rating system

Size                             45 FTEE

Competition                      No

Autonomous revenues              Yes

Initial state of the organization

Decision rights                  Highly autonomous

Performance indicators           Yes

Individual incentives            No

Expense control                  High

Cost management                  Low

External pressure

Date of the pressure             2008

Nature of the pressure           Technological innovation has
                                 a serious impact on

Reaction                         Develop an ABC system to
                                 link costs with rates

Current state of organization

Decision rights                  Highly autonomous

Performance indicators           Yes

Individual incentives            No

Expenses control                 High

Cost management                  Moderate

Costing system integration       Objectification


Description of the entity

Date of creation                 1998

Type of organization             Direction

Mission / Organizational         Produce high quality seeds, plants
objectives                       and fish

Size                             300 FTEE

Competition                      Yes

Autonomous revenues              No

Initial state of the organization

Decision rights                  Highly autonomous

Performance indicators           Yes

Individual incentives            No

Expense control                  High

Cost management                  Low

External pressure

Date of the pressure             # 1: 1998
                                 # 2: 2000
Nature of the pressure           #1: Creation of a branch
                                   centralizing management of the six
                                   public nurseries and tree seeds
                                 #2: Lobbying from the private sector
                                   to overtake the organization's

Reaction                         #1: Develop an information system
                                   based on an ABC logic to establish
                                   a representative baseline of
                                   typical nursery activities to help
                                   determine the allocation of
                                   financial resources among
                                 # 2: Benchmark the costs of the
                                   organization to those prevailing in
                                   the private sector

Current state of organization

Decision rights                  Highly autonomous

Performance indicators           Yes

Individual incentives            No

Expenses control                 High

Cost management                  High

Costing system integration       Sedimentation


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Author:Gosselin, Maurice; Henri, Jean-Francois; Laurin, Claude
Publication:Canadian Public Administration
Article Type:Report
Date:Sep 1, 2015
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