When accounting wrongs the public mission

For years, many countries have been experimenting with the idea of linking resources to performance - the so-called pay for performance. But the international literature teaches that if the metrics are wrong, the incentives produce perverse effects: you maximise the indicators, not the impacts. You 'win' the accounting game, but lose sight of the public mission.

The same applies to the definition of standard costs. When the 'price' assigned to a service does not reflect its true structural cost, the system rewards the most profitable activities on paper, not those most useful to the community.

In the health sector, for example, recent studies show that the Time-Driven Activity-Based Costing (TDABC) method can improve the accuracy of cost measurement, because it takes into account the time and resources actually used. But its adoption is still limited, partly because of the difficulty of translating accounting data into consistent operational choices.

The first step is simple only on the surface: understand what you are measuring. 'A home care' or 'an environmental inspection' are not cost objects, but labels. Behind each item are different operational steps, specific resources, times, constraints and interdependencies.

Doing process mapping means reconstructing the operational flow of a service - the activities, the sequences, the critical moments - and attributing the relevant costs to each step. It is analytical work, but decisive for constructing realistic and transparent costs.

The pitfalls are not lacking: many 'invisible' activities (preparation, coordination, control) are not mapped; there is often a lack of shared data between the different actors involved; and the right granularity is difficult to find. Too much detail makes the system unmanageable, too much synthesis makes it blind.

Superficial process mapping produces wrong standard costs, and these, in turn, misguide decisions.

After defining cost objects, standard volumes and performance mixes must be established. This is where the ability of a system to hold efficiency and fairness together is measured.

Italy is a mosaic of contexts: housing density, infrastructure, social and health needs vary enormously. A 'national average' mix risks being an abstraction that penalises everyone. Better to construct 'classes of similar contexts' and calculate differentiated standards, based on transparent criteria such as geographical complexity or demand for services.

The same applies to the inputs: the number and time of operators involved, the materials used, external services. We need solid empirical data, interregional comparisons and a governance system that ensures consistency and up-to-dateness.

A 'top-down' approach with arbitrary coefficients only generates accounting injustices: those who are more efficient lose, those who are inefficient are rewarded.

It is not enough to standardise quantities and times: you also need a consistent input price. But market costs vary with purchasing conditions, economies of scale and the efficiency of procurement processes. That is why you need a dynamic updating and verification system, not a fixed price list.

Alongside the numbers, there is a need for strong managerial oversight. Companies and provider agencies must be active participants in the definition of standard costs, not mere enforcers of rules decided elsewhere. Only operational involvement ensures that standards are credible, that local differences are understood, and that accounting remains aligned to real organisational capacity.

A public system that only measures 'how much' it produces, and not 'what it generates', risks betraying its mission. The real challenge is to anchor costs tooutcomes: health, inclusion, environmental quality, quality of life.

Building trust in the system requires transparency, feedback and a link between results and incentives. In other words: shifting the focus from performance accounting to value accounting.

If standard costs are constructed without technical rigour, without transparency and without participation, LEPs risk widening the inequalities they are supposed to reduce. Weaker or more efficient regions will be penalised; resource allocation decisions will be based on 'artefactual' numbers; and politicians will find themselves chasing accounting conveniences instead of social outcomes.

The lesson is simple and challenging: count well to govern better. Because accounting technique is never neutral. It means choosing - consciously or unconsciously - who can do what, with what resources and with what consequences.

LEP can only be a real opportunity if the country invests in data quality, managerial skills and value metrics. Otherwise, we risk an administrative federalism based on wrong numbers. And no equation, no matter how sophisticated, will be able to straighten out the result.

(*) Associate Professor of Practice in Government, Health and Not for Profit, SDA Bocconi