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PAR
24,3 Performance measurement
in Indonesia: the case of local
government
262
Rusdi Akbar
Fakultas Ekonomi, Universitas Gadjah Mada, Yogyakarta, Indonesia, and
Robyn Pilcher and Brian Perrin
School of Accounting, Curtin University, Perth, Australia
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Abstract
Purpose The purpose of this paper is to investigate the implementation of performance
measurement systems (PMSs) in Indonesian local government (ILG) using Smart PLS. Couched within
an institutional theory framework, it explores a conceptual model developed to explain the hypothesised
relationships between technical and organisational factors and the development and use of performance
indicators and accountability practices.
Design/methodology/approach Surveys were sent to senior finance officers in all local
governments (457) across Indonesia with a response rate of 21.4 percent being achieved. Smart PLS
was used to assess the quality of the data and analyse the research model proposed.
Findings Findings revealed that ILGs developed performance indicators more to fulfil regulatory
requirements than to make their organisation more effective and efficient. As a way of increasing the
success of PMS implementation management commitment through good leadership was found to be a
major contributor. Coercive pressure from central government impacted on the result as did normative
isomorphism by way of widespread training by universities (and others) and the subsequent sharing
of this knowledge.
Practical implications The findings will assist Indonesian central government formulate future
government policy as well as design appropriate strategies for implementing the second wave of
(bureaucratic) reform.
Originality/value Set in a local government environment in a developing country, this research is
original and makes three major contributions. First, it provides an understanding of factors influencing
the development and use of performance measures in the ILG context. Second, the use of Smart PLS is
original in this context and fills a gap in the literature examining local government PMS. Last,
the existence of institutional isomorphism reaffirms that this theory is still applicable in the twenty-first
century and relevant as an explanator of the results in the context examined here.
Keywords Performance measurement systems, Indonesia, Local government, Institutional theory,
Isomorphism, PLS analysis, Performance management
Paper type Research paper
1. Introduction
Many government entities in developed countries have introduced elements of new
public management (NPM)[1] (Hood, 1991, 1995; ter Bogt, 2004) which is based on
a fundamental concept that public sector organizations can, and even should, borrow
Pacific Accounting Review
Vol. 24 No. 3, 2012 The authors would like to acknowledge the anonymous reviewers at the AFAANZ 2010
pp. 262-291 Conference for their feedback on an earlier version of the paper. The authors would also like to
q Emerald Group Publishing Limited
0114-0582
thank the two anonymous reviewers who provided feedback as part of this journals review
DOI 10.1108/01140581211283878 process.
many management strategies from the private sector. In Indonesia the government Performance
introduced performance measurement reporting to respond to public demand on measurement in
productivity, transparency and accountability. According to Cheung (2011, p. 131),
the NPM and good governance models were the two dominant paradigms having Indonesia
the greatest impact on Asian (in which he includes Indonesia) institutional reforms.
This study focuses on two pivotal aspects in the public sector accountability and
performance measurement. Over the last 40 years the idea of performance measurement 263
has been the focus of considerable attention from both academics and practitioners
(Neely, 1999; Kihn, 2010). Initially, the research in the field mainly concentrated on
performance measurement in the private sector (Kaplan, 1983; Johnson and Kaplan,
1987; Chenhall and Smith, 2007). However, since then there have been a number of
studies addressing the issues of performance measurement in the public sector
(Hood et al., 1998; Cavalluzzo and Ittner, 2004; Micheli and Neely, 2010). In Indonesia, the
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interest in performance measurement began to emerge at the beginning of the reform era
in 1999 when President B.J. Habibie signed a presidential instruction (Inpres No. 7/1999),
the Performance Accountability Report of State Apparatus (known as LAKIP).
Coinciding with the first wave of public sector reform, this research investigates the
implementation of performance measurement systems (PMS) in Indonesian local
government (ILG). A second generation structural equation modelling technique known
as partial least squares (PLS) was used to analyse the proposed model and relationships.
Based on a survey of ILGs, the research explores a conceptual model adapted
and developed to explain the hypothesised relationships between technical and
organisational factors and the development and use of performance indicators
and accountability practices. The theoretical development and interpretation of this
research is drawn from institutional theory. A major contribution of this research is that
it provides an understanding of factors influencing the development and use of
performance measures which, in turn, could be used to formulate future government
policy. Further, it fills a gap in the literature exploring PMS and accountability in a
developing country in this case, Indonesia. This paper begins with a brief literature
review followed by an explanation of the theoretical framework employed. Section 4
then considers the research model and hypotheses development, and Section 5 discusses
the research method used. Section 6 presents the results of the research using SmartPLS,
with these results discussed in the penultimate section. A conclusion and suggestions for
future research ends this paper.
2. Literature review
NPM and accountability
NPM was introduced in Europe in the 1980s. Lapsley and Pallot (2000) considered this
framework separately from that of institutional theory, whereas Bovaird and Downe
(2006) use institutional isomorphism to understand NPM-type reforms. This paper
adopts the latter framework as it considers whether, with the introduction of PMS,
institutional isomorphism particularly coercive plays a role in the implementation
processes adopted by ILG.
The development of NPM was seen as a means by which to enhance accountability
and transparency of governments and this, in turn, required performance information
that was more comparable, relevant and useful for decision-making within the public
sector. Romzek and Dubnick (1998, p. 6), define accountability as a relationship in which
PAR an individual or an agency is held to answer for performance that involves some
24,3 delegation of authority to act. Government organisations are created by the public,
for the public, and need to be accountable to the public. Given the myriad definitions and
variations on the term accountability, for the purposes of this paper, accountability is
separated into two components internal accountability (the accountability of
management to the major/head of district (elected official)), and external accountability
264 (accountability of ILG to its stakeholders such as central government, parliaments
and citizens).
Performance measurement/PMS
Managing and measuring performance has been one of the key drivers in the reform of
the public sector (Gianakis, 2002). Osborne and Gaebler (1992) claimed that to win public
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support, government officials needed to demonstrate the results achieved. From this, one
could ascertain that local government should manage and measure its performance
using PMS in order to better serve the citizens and in turn gain their support. As the form
of government that is closest to the people, ILG has been recognised as the sphere of
government that has the largest capacity to deliver real outcomes at a local level
(LOGOTRI, 2003). This development, in turn, should increase the quality of life for its
citizens. In order to do this, however, local government must have some way of
measuring the success, failure, and progress achieved in the pursuit of the objectives.
Increasingly, performance measurement is considered to be a vital tool for local
government to not only measure its activities, but also to then provide feedback into
the management process to help improve future performance (LOGOTRI, 2003).
Further, the development and use of performance measures is considered a key element
of NPM implementation (Lapsley, 2008; Boston, 2011).
Research on performance measurement in the Indonesian public sector is quite
scarce. One study by Riandi (2003) found there was still an expectation gap between
local government authorities and the community about the public service delivery.
This gap occurred due to the lack of relevant performance indicators available to
distinguish success from failure in public services delivery (Mahsun, 2005). McLeod
(2005, p. 1) examined the reform process in Indonesia as a whole and provided
some explanations from the private sector for what he saw as demonstrably poor
performance in Indonesia.
Adoption of PMS as an important component of management reform in the public
sector has become more prevalent in the last two decades. Some scholars claimed that
the arguments for this movement were mainly rational or technical in nature, and that
PMS was adopted as an effort towards achieving an efficient and effective organisation
(Andrews et al., 2006; Meier et al., 2006). As a result of PMS implementation it was
envisaged that better substantive performance would occur due to the expected benefits
of enhanced efficiency, accountability, and quality of public service delivery. For
example, Andrews et al. (2006) argued that PMS be included in both theoretical and
empirical models of public sector organisational performance. However, a different point
of view is offered by institutional theory, which argues that the main reason underlying
organisational change is gaining legitimacy rather than improving substantive
performance (Ashworth et al., 2009). Reasons for the shift in characteristics, therefore,
were not only due to rational or technical reasons, but often political or legitimising ones
(Ashworth et al., 2009; Scott, 1987).
3. Theoretical framework Performance
Introduction measurement in
As a theoretical framework, institutional theory is a very broad concept and has many
strands that have evolved since the development of the theory in the early twentieth
Indonesia
century. The foundation of early institutionalism (old institutionalism) and its
application to organisations has been outlined by Selznick (1949, 1996). In contrast,
modern institutionalism (new institutionalism) emerged in the 1970s, as has been shown 265
in the work of Silverman (1971) followed by Meyer and Rowan (1977), Zucker (1977) and
DiMaggio and Powell (1983) who extended Meyer and Rowans (1977) concept of
isomorphism to encompass the organisational field. Selznick (1996) compares the old
with the new in an attempt to explain the differences such as the definition of
institutionalisation as well as promote the concept that institutional theory should be
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able to embrace all the classifications and definitions embedded in both the old and
new. One major difference between the two is the view of the institution, with
researchers like DiMaggio and Powell (1991) espousing isomorphism and then the
doctrine of power, subordination and responsibility (Selznick, 1996, p. 272). More
recently, academics have considered institutional theory in varying forms: Modell (2004,
2005) and Tsamenyi et al. (2006) utilise the new institutional sociology to explain
organisational change; Brignall and Modell (2000) who consider that institutional
theory could explore organisational change with the addition of the interests and power
from various stakeholders; Thornton and Ocasio (2008) who contend that institutional
logics provide a bridge between some of the earlier institutional theories; Lounsbury
(2008) offers alternatives to isomorphism; Ashworth et al. (2009) shows the benefits
of using isomorphism as an explanator of change; and Collin et al. (2009) who suggest
integrating positive accounting theory with institutional theory.
It is obvious from this brief summary that institutional theory has many dimensions.
In the field of organizational study, the concepts of institution and institutionalization
have been defined in many different ways. One definition proposed by Scott (1987)
was institutionalisation as a process of creating reality. This definition is relevant
here as this form of institutional theory is based on a shared social reality which, in turn,
creates a human construction in social interaction. In other words, organisations
(councils) operating in the same field (local government) react similarly and, over time,
develop similar responses or adopt similar practices when facing certain situations.
DiMaggio and Powell (1983, p. 147) explain: Institutionalization is a rational response;
one of the key outcomes of institutionalization is a homogeneous organizational
structure. Debate around nuances associated with variations on the old and then
new institutional theory continue today (Falkman and Tagesson, 2008; Lounsbury,
2008; Ashworth et al., 2009). Although many of these nuances would have fitted with the
research objective here (for example, that proposed by Schneiberg and Soule (2005)
which considered political and cultural aspects of the diffusion process), the more
traditional form of institutional isomorphism was used to inform the instrument and its
subsequent analysis. As a developing country, in many ways Indonesia is still in its
infancy in regards to the development of PMS particularly during the first wave of
reforms. Coercive and normative pressures played a role in the adoption process as will
be explained in the discussion section below.
PAR Isomorphism
24,3 DiMaggio and Powell (1983) proposed that over time, in a well-established field,
organisations tend to move towards homogenisation, even though they show considerable
diversity at first. The term used that best describes the process of homogenisation is
isomorphism. Although there are said to be different types of isomorphism (Meyer and
Rowan, 1977; DiMaggio and Powell, 1983), institutional isomorphism is used here. It is
266 a useful concept in an environment where politics and ceremony (DiMaggio and Powell,
1983, p. 150) are embedded in organizational life. Meyer and Rowan (1977, p. 348) argue
that isomorphism had three consequences for organisations:
(a) they incorporate elements which are legitimated externally, rather than in terms of
efficiency; (b) they employ external or ceremonial assessment criteria to define the value
of structural elements; and (c) dependence on externally fixed institutions reduces turbulence
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The knowledge of these factors could be utilized to evaluate and improve future
government policy. Although policy adoption has been said to rely on factors from
rational and technocratic theory (de Lancer Julnes and Holzer, 2001, p. 693), actual
implementation is more complex and is influenced by political and cultural
considerations (de Lancer Julnes and Holzer, 2001, p. 693). Hence, this
study contributes to the literature and understanding by government policymakers
by considering factors associated with development and use of performance measures
in Indonesia.
The third of DiMaggio and Powells (1983) isomorphic pressures, but the second to
be used here, is normative isomorphism. This element of pressure is normally
developed by professional and occupational groups (Rahaman et al., 2004). Given the
low level of human resources capacity in ILGs, there has been a trend in the last decade
to give more attention to the education of government employees and managers. As the
demand emerged, many universities in Indonesia have offered programmes (degree and
non-degree) that are specially designed to respond to government employees and
managers needs. DiMaggio and Powell (1983) argued that the more educated the
workforce becomes, in terms of academic qualification and participation in
professional and trade associations, the greater the extent to which the organization
becomes similar to other organizations in the field.
(2002) model (in itself a permutation of items from other sources) was used as a template
and the eight items from the performance accountability construct were adjusted to suit
the ILG context.
In regards to the five independent variables, questions were again adapted from
Cavalluzzo and Ittner (2004) for the first four variables whilst four items were taken
from Wang (2002) to measure the level of organisational capacity (the final independent
variable). Again, differences existed with the first relating to technical knowledge
which, although based on the training construct in Cavalluzzo and Ittner (2004),
differs in the areas it addresses so that it fits with the ILG environment (and, again,
LAKIP). Legislative requirements are also based on LAKIP. Combining components of
each of these two studies not only allowed for a comprehensive examination of factors
affecting the development and use of performance indicators, but also provided an
important aspect for ILG particularly within NPM being accountability. Hence,
all three research questions detailed above could be addressed.
Figure 1 shows the conceptual model tested in this analysis and Appendix 1
contains a copy of the constructs used in the model.
The hypothesised relationships between the independent and dependent variables
are discussed in the following sections along with the hypotheses proposed.
Dependent variables
Development and use of performance indicators. Various studies regarding the use of
performance measurement conducted in local government suggest that the practice of
collecting performance indicators, at least at a rudimentary level, is fairly well
established in many countries, including the USA, the UK and Australia (Pilcher and
Dean, 2009). Despite this growing practice, previous studies found that the development
and use of performance indicators in the public sector is problematical with very few local
governments using performance indicators (Bellamy and Kluvers, 1995; Ammons, 1995).
As shown in Figure 1, the model includes five dependent variables:
(1) development of performance indicators;
(2) managerial use of indicators;
(3) higher use of indicators;
(4) internal accountability; and
(5) external accountability.
Performance
Metric measurement in
Difficulties
Indonesia
269
Development of
Indicator
Technical
Knowledge
Managerial Use
of Indicator
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Internal
Management Accountability
Commitment
Higher Use
of Indicator
External
Legislative Accountability
Mandates
Organisational
Capacity
Figure 1.
Conceptual model
Notes: P < 0.001 and P < 0.01; P < 0.05; no association
In this study, development, accountability and use of performance indicators are
assessed by asking respondents to answer a series of survey questions that refer to the
development and adoption of different types of performance measures used by the
organisation. The first construct reflects the extent of performance indicators
developed by ILG organisations. Managerial use of indicators refers to the extent to
which performance indicators are used by mid-level managers to manage the
organisation. Higher use of indicators refers to measures that are used by top-level
management to make funding decisions and manage high-level changes.
Accountability in local government is measured by financial and non-financial
performance indicators. The internal accountability construct determines the extent of
the accountability relationship between the supervisor and subordinate (for example,
in ILG between the general manager and the council members), whereas the external
accountability construct measures the extent of the relationship between ILG
organisations and their stakeholders (refer to Cheng (1994), for an example of the
myriad stakeholders associated with local government).
PAR Independent variables
24,3 There were five independent variables identified within the model (Figure 1):
(1) metric difficulties;
(2) technical knowledge;
(3) management commitment;
270 (4) legislative requirement; and
(5) organisational capacity.
sector organizations the complexity of programmes is not always the same. Some outputs
and effects are relatively easy to measure yet some are more difficult. For example, in
Indonesia, Mahmudi (2003) found that local government managers had difficulties
in determining higher level indicators such as outcome, benefit and impact, therefore in
practice they placed more weight on input measures rather than outcome measures. Given
the situation in Indonesia it is logical to expect that there will be a tendency in performance
measurement users to give more weight to the easy-to-measure indicators:
H1a. Development of performance indicators is negatively associated with metric
difficulties.
H1b. Managerial use of performance indicators is negatively associated with metric
difficulties.
H1c. Higher use of performance indicators is negatively associated with metric
difficulties.
Technical knowledge. An organizational factor that is expected to influence the
development and use of performance indicators is the extent to which training on related
knowledge is provided to support the implementation (Shields, 1995; Cavalluzzo and
Ittner, 2004). According to Sukarno (2006), a lack of understanding of systems designed
to support the implementation of performance indicators has impacted on their
development. Technical knowledge enables improvement in the ability of internal
stakeholders to understand and use PMS, and should positively improve the
development and use of performance indicators (de Lancer Julnes and Holzer, 2001;
Laurensius and Halim, 2005). Different types of efforts, from technical training to formal
degree programmes, have been undertaken in Indonesia to increase the knowledge of
government employees and officers. From this perspective, normative mechanisms as
suggested by DiMaggio and Powell (1983) may also take place in practice:
H2a. Development of performance indicators is positively associated with related
technical knowledge.
H2b. Managerial use of performance indicators is positively associated with related
technical knowledge.
H2c. Higher use of performance indicators is positively associated with related
technical knowledge.
Management commitment. Implementation of PMS in government requires changes Performance
in the operation, personnel, structure, or even culture of the organization. It is important to measurement in
build high levels of commitment amount senior management first, followed by support
from middle managers and staff (Fernandez and Rainey, 2006). de Lancer Julnes Indonesia
and Holzer (2001) found that internal stakeholder support was positively related to the
adoption of PMS. As well, management also provides the political support needed to
encourage and motivate individuals who resist the innovation. In addition to financial 271
resources, time and personnel, the existence of internal commitment, especially by
top-level management within an organization, is required for the successful
implementation of performance reporting in Indonesia (Sukarno, 2006):
H3a. Development of performance indicators is positively associated with
management commitment.
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5. Research method
Table I provides a summary of the proposed model variables and the number of items
used to measure each variable. The structural equation model offered here is divided
into two key components; the measurement model and the structural model. The
measurement model, or outer model, focuses on the relationship between the unobserved
latent variables that cannot be directly measured and the measurable items known as the
manifest variables (Hair et al., 2012; Chapman and Kihn, 2009). The structural model,
also known as the inner model, focuses on the hypothesised relationships or paths
between the latent variables (Hair et al., 2012). All of the measureable items used in this
research are classified as reflective indicators.
Survey
In September 2008, surveys were sent to senior finance officers who are responsible for
performance reporting in all local governments across Indonesia[2]. The constructs used
to develop the questionnaire were adapted from surveys used in Western countries
(Cavalluzzo and Ittner, 2004; Wang, 2002), hence all the questions needed to be translated
from English into Bahasa Indonesia. There are several techniques available with the
direct translation method, and a relatively simple and straightforward but effective
came from cities. When comparing the response rate of local government by type, the
sample is fairly comparable with 21.5 per cent from districts and 23.2 per cent from
cities. With regard to location, there was only a 16.4 per cent response rate from
outer-Java, whilst that from Java was 38.3 per cent. The relatively low response rate can
be explained by two factors. First, and the most likely reason, was the lack of
experience in performance reporting of the 211 newly established local governments.
This was supported by the fact that almost all responses were from local governments
in existence long before the reform era (old local governments). Second, anecdotally,
very low responses are normally expected from local governments in outer-Java.
To ensure no response bias, the 14 late responses were compared to the 84 earlier
responses using the Mann-Whitney test (Field, 2009). Analysis revealed that for all
variables employed the mean rank between earlier and later responses was not
significantly different.
Demographic information of the respondents is summarized in Appendix 2.
One point worth highlighting is that only 9 per cent of the respondents were female and
89 per cent were male (2 per cent missing). These figures are representative of the
population of the study given the fact that the percentage of female senior finance
officers in Indonesian civil servants is only 9.5 per cent.
Location
In-Java 115 25.2 44 44.0 38.3
Outer-Java 342 74.8 56 56.0 16.4
Type
Districts 362 79.2 78 78.0 21.5
Cities 95 20.8 22 22.0 23.2
Table II.
Note: Due to invalid data, two responses were excluded and 98 were further analysed Distribution of responses
PAR generation structural equation modelling technique that has been used in a number of
24,3 accounting studies (see Hall (2008), for a list of studies). It is particularly suited to this
study because of the small sample size and complexity of the proposed model
(Hair et al., 2012). Several authors, including Barclay et al. (1995), suggest the sample
size should be no lower than ten times the number of items within the most complex
construct of the model tested. Based on this rule, the sample size for this study would
274 need to be a minimum 80 cases (n 8 items related to managerial use of indicator and
external accountability by ten). Here there are 98 valid cases in this study satisfying
the requirement for a sound PLS analysis. One limitation of this rule is that it does not
consider factors such as size and reliability. Such factors are discussed shortly. What it
does do is provide an estimate of the minimum sample size requirements and thus
has been used by many for robust PLS estimations (Hair et al., 2012).
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Data examination
Scanning of data on a line-by-line basis confirmed the absence of errors and the data set
was ready for further SmartPLS procedures. As PLS regression analysis does not
require the data to be normally distributed (Chin et al., 2003), tests for normality were not
necessary. As well, goodness-of-fit measures were not appropriate here. Instead, similar
to the process used in prior PLS research, fit was evaluated by the overall incidence of
significant relationships between constructs and the explained variance of the
dependent variables (Chapman and Kihn, 2009; Chenhall, 2005).
Five exogenous (dependent) variables and five endogenous (independent) variables
were employed in the model. Research indicates that a minimum of two indicators
(i.e. questions) are needed to measure a construct (Kline et al., 1998; Rahim et al., 2001).
In this research, the number of indicators used to measure each of the model variables
ranged from two to eight, with only one variable (legislative mandates) having the
minimum of two indicators.
Convergent validity
The measurement model of PLS analysis consisted of two phases: convergent validity
followed by discriminant validity. The first phase assessed the models convergent
validity using two measures: individual item reliability and internal consistency
(Santosa et al., 2005). Individual item reliability measures the convergence of each
indicator variable on its associated construct. Item reliability is assessed by examining
the loading (i.e. correlations) of the indicator with their respective construct.
Convergence, then, is established by comparing the loadings with a certain benchmark.
All indicator loadings used in this research were above the minimum requirement (0.4)
suggested by Igbaria et al. (1997) and Hair et al. (2006).
The second convergent validity measure considers the internal consistency of
constructs. Composite reliability was used (Fornell and Larcker, 1981) as it is considered
superior to the traditional measure of consistency (Cronbachs a) because it does not
depend on the number of indicators. Adequate reliability is gained when composite
reliability value is greater than 0.5. Here, all the constructs exhibited adequate reliability.
Fornell and Larcker (1981) also suggest that convergent validity can be determined by
using a more conservative test, which is by considering the average variance extracted
(AVE). AVE should equal or exceed 0.5 to be judged adequate and again all constructs
presented here meet this requirement (Table III).
Performance
Construct Composite reliability Cronbachs a a AVE
measurement in
Development of indicator 0.904 0.876 0.574 Indonesia
Managerial use of indicator 0.926 0.908 0.609
Higher use of indicator 0.912 0.858 0.777
Internal accountability 0.863 0.791 0.625
External accountability 0.955 0.946 0.726 275
Metric difficulties 0.926 0.901 0.716
Technical knowledge 0.860 0.793 0.558
Management commitment 0.933 0.892 0.823
Legislative mandate 0.925 0.838 0.861
Organizational capacity 0.904 0.876 0.574 Table III.
Internal consistency
Note: aPresented only for comparative purposes and AVE
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Discriminant validity
At construct level, discriminant validity is adequate when the variance shared
between a construct and any other construct in the model is less than the variance
that construct shared with its indicators (Fornell, 1982; Fornell and Larcker, 1981).
Regarding indicator level validity, Barclay et al. (1995) suggest that no indicator
variable should load more highly on another construct than it does on the construct it
is supposed to measure. Within SmartPLS, a technique known as cross loading of
constructs is used to test the discriminant validity at both indicator and construct
level. Table IV shows the results of the correlation of the constructs for each of the
model variables.
Table IV presents the correlation matrix of the construct and the square root of
AVE (in italics). Previous literature recommends that these tests are best tabulated as
in Table IV because the off-diagonal items (correlation of constructs) must be less than
or equal to the bolded diagonal items (square root of the AVE) in the corresponding
rows and columns (Barclay et al., 1995; Gefen et al., 2000). Table IV shows that
diagonal values are greater than the off-diagonal values in their corresponding rows
and columns, therefore there should be no issues with discriminant validity of
the constructs.
Cap Com Dev EAcc HUse IAcc Kno Leg MUse Met
Cap 0.758
Com 0.390 0.907
Dev 0.238 0.581 0.758
EAcc 0.491 0.614 0.483 0.852
HUse 0.224 0.490 0.501 0.424 0.881
IAcc 0.275 0.620 0.442 0.642 0.644 0.790
Kno 0.339 0.516 0.513 0.528 0.361 0.466 0.747
Leg 0.189 0.505 0.510 0.491 0.361 0.507 0.515 0.928
MUse 0.179 0.732 0.652 0.545 0.608 0.552 0.556 0.546 0.781 Table IV.
Met 0.073 2 0.231 2 0.280 2 0.069 2 0.109 2 0.114 2 0.172 2 0.043 2 0.252 0.846 Correlation of constructs
and the square root
Note: Italicised diagonal are the square root of AVE of AVE
PAR Structural model assessment
24,3 The structural model focuses on the hypothesized relationships or paths between the
latent variables (Hair et al., 2006). A structural model can be used to draw conclusions
about the significance of the relationship between constructs and to comment on the
predictive power of the model proposed.
Given the fact that SmartPLS does not assume a normal distribution of data, it is
276 inappropriate to use traditional tests to ascertain the statistical significance between
constructs (Chin and Newsted, 1999). Instead, scholars of PLS have developed two
nonparametric approaches to test the relationship between variables; either jackknife
or bootstrap techniques (Gefen et al., 2000; Santosa et al., 2005). In this study bootstrap
was used as it is considered to be a more sophisticated approach than jackknife
(Chin, 1998). It provides two measures of the structural model: a t-value (similar to the
t-test) and R 2 (interpreted similarly to the traditional multiple regressions analysis).
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The predictive power of the research model can be assessed by using R 2 stemmed
from the output of the bootstrap. Although prior research has confirmed the robustness
of using PLS for non-normal data, it has still been raised by some that highly skewed
data can increase bootstrap standard errors. However, findings by Hair et al. (2012),
determined that reporting the extent to which data are non-normal is not often done by
researchers and those studies that do show that there is very little evidence of
significant differences. Table V shows the R 2 values for each of the dependent
variables in the model.
As indicated, R 2 values range from 0.265 to 0.607. The strongest R 2 value is that of
managerial use of indicator (0.607) which indicates that 60.7 per cent of use of indicators
for managerial level purposes can be explained by the constructs used in this model.
The second strongest is for external accountability (0.497), while the lowest is that of
higher use of indicator (0.265). All R 2 values meet the 0.10 minimum limit suggested by,
for example, Santosa et al. (2005). The path coefficient results are shown in Table VI.
The results range from the weakest of only 0.002 (for Met ! HUse) to the strongest of
0.529 (for Com ! MUse).
Hypothesis testing
To test the hypotheses, it was necessary to interpret the construct equations with standard
errors and test statistics. The construct equations measure the extent to which one factor
relates to another, that is, the structural path coefficient and t-values between
hypothesized constructs, reflecting direct relationships (Tabachnick and Fidell, 1996).
These path coefficients and associated t-values identify and demonstrate the direction and
Construct R 2a
strength of each relationship and, as indicated, are obtained by using the bootstrapping
technique in SmartPLS software. The t-values (robust scores) need to be significant to
support the hypothesized paths and should be above 1.96 or 2.56 for alpha protection level
of 0.05 and 0.01, respectively (Gefen et al., 2000, p. 35). Using this criterion, the results for
the structural relationships are reported in Table VI followed by an examination of
implications for the hypotheses. The discussion of the results appears in Section 7 with
Figure 1 (reviewed in Section 4) providing a graphical representation of the results.
7. Discussion
Performance measurement 279
PLS analysis, as shown in the previous section, provided significant results with support
for many of the hypotheses. As expected, metric difficulties had a negative association
with development of performance indicators, while the other three factors technical
knowledge, management commitment, and legislative mandates had a positive
significant association. These supported findings in Cavalluzzo and Ittner (2004). For
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example, in their study, metric difficulties caused significant problems with the extent of
performance measurement development whilst their equivalent to management
commitment, legislative mandates and technical knowledge had a positive association
with development. Findings here also revealed that the variable legislative mandates
had a strong association with development of performance indicators. This indicates the
potential existence of coercive isomorphism in ILG as management tend to be more
concerned about legislative requirements than other more technical (metric difficulties
and technical knowledge) and normative (management commitment) factors. Bovaird
and Downe (2006) found that organisations within the field of UK local government were
homogenised in their adaptation of externally mandated institutional pressures. Here,
there is an indication that organisations in the field of ILGs developed performance
indicators more to fulfil regulatory requirements than to make their organization
more effective and efficient. This is also consistent with other prior research on coercive
isomorphism such as that by Arnaboldi et al. (2010) who found that the decision by
government to adopt performance appraisal systems was forced on them by legislation,
raising the presence of coercive isomorphism. As well, it supports our premise above
that one of the main reasons for implementing PMS is to gain legitimacy rather than
improve performance (Meier et al., 2006; Ashworth et al., 2009).
Contrary to expectation, H1b and H1c that metric difficulties have a negative
association with the use of performance indicators (both at managerial and higher level)
was not supported by the results. This finding indicates that issues related to
measurability did not affect the use of performance indicators by ILG managers one way
or the other. Mid- and top-level managers were impervious to how indicators were
developed and they only used indicators for formal reporting (legislative requirements)
or political/ceremonial speeches both reasons indicate strong support for the presence
of coercive isomorphism (and also supporting prior literature relating to isomorphism
and political concerns, such as de Lancer Julnes and Holzer (2001). Findings also imply
that metric difficulties are more troublesome when developing indicators than when
actually using them. Performance measurement was measured in two stages
development first and use second. Given this sequence, it is not surprising that the
problem with measurability did not affect the use of indicators as at this stage the
indicators had already been developed.
Whilst support was found for H2b, that the use of indicators at managerial level was
positively associated with technical knowledge, it was not the case for the use at higher
level (H2c). The implication here is that issues related to technical knowledge are more
PAR relevant at managerial levels than for higher levels. This may indicate that at managerial
24,3 level ILG officers are more concerned with technical indicators while higher level officers
normally use more macro (high level) indicators which are less technical, thus easier to
comprehend. Furthermore, technical training on performance measurement for ILG is
usually aimed at managerial and operational levels, not higher level managers. This,
in turn, provides support for normative isomorphism. Widespread training by audit
280 firms and universities, and the sharing of this knowledge, assist ILGs to maintain
legitimacy. This dissemination of information is most common at managerial level.
In line with expectations, the positive association between management commitment
and use of indicators both at managerial and higher levels (H3b and H3c) was highly
supported. This finding is not surprising given organizational commitment is extremely
valuable. What was surprising, given Cavalluzzo and Ittners (2004) findings, was that
use at managerial level was supported as their study only determined support for higher
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level use. Other literature, such as Fernandez and Rainy (2006), contends that successful
change relies on participation by employees along with direction and commitment from
management. de Lancer Julnes and Holzer (2001) also found that commitment has a
positive impact on the use of indicators. In a country (Indonesia) that is relatively
new to a decentralised form of government, commitment to use at both levels is an
encouraging finding.
With regard to legislative mandates, the results were mixed. Support was found for
H4b that managerial use of indicators was positively associated with legislative
mandates, but that was not the case for higher use (H4c). As in technical knowledge, the
concern about regulation is also more relevant at managerial level than at the higher
level. Again this differed from Cavalluzzo and Ittner (2004), where there was no
association found for use at either level. Since the emergence of regulation on LAKIP in
1999, more technical indicators were expected to be developed and then reported in an
ILG performance report. This requirement placed more pressure on managerial level
officers who deal with the use of technical indicators than higher level officers who are
expected to use higher level indicators that, again, are less technical. With pressure from
central government to comply with legislative requirements linked to funding, coercive
pressure is felt by those at managerial level.
Accountability
The research found that the existence of leadership was critical to the success of
developing and using performance indicators in ILG. It is generally expected that the
success of performance measurement implementation, in turn, will increase an
organizations internal and external accountability. Both internal and external
accountability were associated with management commitment. Wang (2002) found
associations between internal accountability and leadership or management commitment,
however, not between external accountability and management commitment. Support
here was also found for the variable legislative mandate. This indicates that one important
factor that makes ILG discharge accountability is legislative requirement. The pressures
from central government were still strong despite decentralization being in place for
a decade. This indicates the potential existence of coercive isomorphism.
With regard to organizational capacity (i.e. MIS, human resources capability), results
were mixed which was unexpected. Organisational capacity is crucial to ensure
success of an organisation, including achieving accountability goals. Strong support for
the relationship between organisational capacity and accountability was consequently Performance
expected however, this was not found to be the case here. Organisational capacity had measurement in
a strong relationship with external accountability but not with internal accountability.
One explanation for this inconsistency is that it does not require many resources to Indonesia
increase internal accountability, but rather it needs commitment from both the leader
and the subordinates. Therefore, any ILG, regardless of its organisational capacity,
has the potential to improve internal accountability within its organisation. Conversely, 281
it is not an easy task for many ILGs to fulfil external accountability. Discharging
accountability to external stakeholders is risky and more complex than that to internal
management. Accountability can be perceived by stakeholders to exist when human
resources receive further training and education. Interacting on a professional basis with
others at this training coincides with normative isomorphism.
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8. Conclusion
From the study we can answer RQ1 that in an ILG environment there is evidence that
four organizational factors (metric difficulties, technical knowledge, management
commitment, and legislative requirements) have an impact on the development of
performance indicators. Of these four factors, legislative requirement has the strongest
effect. This implies that the main reason for developing indicators is simply to comply
with central government regulation. In other words, the motivation is more about
conformance than performance, and coercive pressure is strongest from central
government. This, and the further suggestions of isomorphic pressures discussed
below, helps answer RQ2 implying that ILGs are not using the indicators effectively.
Second, metric difficulties is the only factor that has no effect on using performance
indicators at managerial level. Technical knowledge through formal (e.g. training) or
informal (e.g. professional group meetings) means had an impact on managerial level
officers use of performance indicators. Normative isomorphism played a positive role in
the understanding and sharing of knowledge at this level. On the other hand, management
commitment had an effect on the use of performance indicators at both levels, managerial
and higher level ILG managers. This was contrary to much of the prior literature and an
important contribution of this research study. Third, all three independent variables
tested management commitment, legislative requirement, and organizational
capacity are evidenced to have influence on external accountability. Similar to the
results achieved analysing the use of performance indicators, in regard to both internal
and external accountability the strongest factor is management commitment.
Institutions need to confirm their legitimacy to their various stakeholders and hence
top-level managers in ILG need to give their full commitment to using PMS.
If stakeholders, whether they be the citizens or central government, can see ILGs are
committed to using performance indicators, funding and recognition via awards can be
forthcoming. As indicated earlier, Meyer and Rowan (1977) claimed that isomorphism
had three consequences for organisations; those three consequences have been found to
be relevant here. First, PMS was implemented so that the ILG could be legitimated
externally; second, the fact that central government based their funding and award
criteria on the submission of the performance report influenced the ILGs decision to
implement; and finally, implementation meant being part of an organisational field that
was dependent on central government and hence this reduced turbulence and
maintained stability (Meyer and Rowan, 1977, p. 348).
PAR Academically, the model as adapted and modified for this study can now be used
24,3 in other developing countries to analyse similar factors. As well, with its unique use of
SmartPLS in the given context, this paper lays the foundation for further exploration of
other theories. In saying that, in this particular environment, institutional isomorphism
provided an excellent lens through which to explore and explain the possible motivations
behind the development and use of PMS. Although there have been many recent
282 suggestions (Schneiberg and Soule, 2005; Falkman and Tagesson, 2008; Lounsbury,
2008) of other ways institutional theory can be relevant, this should not detract from the
work of the early authors such as Meyer and Rowan (1977) or DiMaggio and Powell (1983,
1991) and the strength of institutional isomorphism as shown here.
Practically, a major contribution of this research is that it provides an understanding
of factors influencing the development and use of performance measures in Indonesia
and, in particular, in local government. Cavalluzzo and Ittner (2004) found that
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Notes
1. A list of acronyms is available in Appendix 3.
2. If you would like a copy of the survey please contact the author.
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24,3
288
PAR
Table AI.
in the model
Constructs used
No. Construct Items
Indonesia
Table AI.
289
measurement in
PAR Appendix 2
24,3
Characteristics Frequency Percentage
Post-graduate 63 64.3
Missing 2 2.0
Field background Accounting 2 2.0
Others 87 88.8
Missing 9 9.2
Work experience ,2 1 1.0
2-5 3 3.1
6-10 6 6.1
11-15 32 32.7
.15 43 43.9
Missing 13 13.3
Type District 76 77.6
Table AII. City 22 22.4
Demographic information Location In-Java 43 43.9
of respondents (n 98) Outer-Java 55 56.1
in Indonesia.
Dr Robyn Pilcher is an Associate Professor in the School of Accounting at Curtin University,
Australia. Robyn Pilcher is the corresponding author and can be contacted at: r.pilcher@curtin.
edu.au
Dr Brian Perrin is a Senior Lecturer in the School of Accounting at Curtin University,
Australia.
1. Rusdi Akbar, Robyn Ann Pilcher, Brian Perrin. 2015. Implementing performance measurement systems.
Qualitative Research in Accounting & Management 12:1, 3-33. [Abstract] [Full Text] [PDF]
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