Improving the organizational architecture of public enterprise: An investigation of the effect of the federal government's latest effort through the Veterans Health Administration

As part of a government-wide initiative to increase effectiveness and efficiency, the United States' VHA (Veterans Health Administration) recently radically restructured its organizational design and management processes. This study uses clinical and financial data for the 1990–1998 period to examine the effect of this reform on performance.; Many previous government attempts to introduce private sector management practices, such as management by objectives (MBO) or program planning and budgeting system (PPBS), have been largely unsuccessful. This paper argues that the latest reform initiative is more likely to succeed because, in contrast to prior reforms, it emphasizes coordinated changes in the three legs of the VHA's organizational architecture. Specifically, changes in the authority, resource allocation and rewards, and performance measurement have been aligned with the VHA's organizational strategy.; Following recommendations from the National Performance Review (NPR) and the Government Performance Results Act (GPRA), the VHA: (1) established strategic objectives; (2) decentralized authority to networks of hospitals; (3) introduced performance incentives for networks and network directors; and (4) made corresponding changes in performance measurement. By delegating operational authority to networks, the VHA intended to better utilize local specific knowledge. By aligning performance incentives with the decentralized authority and strategic objectives, the VHA communicated its goals while providing network directors with the authority and the incentives to act in accordance with these objectives. By defining specific strategic objectives and performance goals and by communicating performance targets and results regularly throughout the organization, the VHA mobilized the organization towards these goals and provided directors with information to assess their progress and adapt their operational strategies.; I document a strong response to organizational architecture changes. The VHA improved on most of the targeted internal measures of performance in areas of cost efficiency, quality and access. While the reorganization apparently induced some dysfunctional behavior, it also created significant cost reductions from more efficient resource utilization while also improving quality on most dimensions of quality analyzed in this study. These results emphasize the importance of coordinating performance measures with the assignment of authority and incentives to obtain superior performance in a public enterprise.