The effects of formula funding in education; an exploratory case study research on financial management and management control at Dutch secondary schools

The effects of formula funding in education; an

exploratory case study research on financial

management and management control at Dutch

secondary schools

J.E. Goderie

Nieuwe Ebbingestraat 153a 9715 BB Groningen e-mail: j.e.goderie@gmail.com tel. nr.: 06 50856238 Student number: 1532421 Groningen, February 2012 University of Groningen

Faculty of Business and Economics MSc Business Administration

Specialization in Organizational and Management Control

PREFACE

With this report, my study Master of Science in Business Administration (MBA) at the University of Groningen comes to an end. I started at the faculty of economics and business in September 2005. After finishing my bachelor Economy and Management (Business-economics), I started the Master Organizational and Management Control within the MBA. During all these years I have gained valuable theoretical and practical knowledge about organizations, management, business economics, finance, accounting, bookkeeping, law and logistics. In these years I learned on top of this how to look at, and address different kind of issues.

In 2011 I started to look for an interesting subject for my Master thesis. After some struggling and some very helpful conversations with dr. Ben Crom I finally constructed a challenging research proposal. The main purpose was to explore the effects of formula funding for Dutch secondary schools concerning their financial management and management control. During my investigation dr. Ivo De Loo was my supervisor, who provided me with many comments and suggestions. I thank him for his intensive support and his permanent interest during these months. Throughout the investigation two schools were willing to cooperate for the collection of the required information. I thank these two schools and especially the financial directors of these schools for their time and openness.

I finally thank the following persons who were very helpful and inspiring for the realization of my master thesis; my girlfriend Elif, my parents Kees en Dorien, my sister Rosanne and brother Sebastiaan, Jan van Gulick and other family, friends and acquaintances who had a directly positive contribution or influence.

SUMMARY

TABLE OF CONTENTS 1. Introduction………... 5 1.1 Formula funding……….………5 1.2 Research question ………. 6 1.3 Thesis structure………... 7 2. Literature review………... 9 2.1 Introduction ……….…... 9 2.2 Budgeting………....….. 9 2.3 Formula budgeting/funding .………...… 11

2.4 Effects of formula funding ………...………….. 12

2.5 The framework .………..… 18

3. Research methods ………...……… 31

3.1 Introduction………...………….. 31

3.2 Case research………...……… 31

3.3 Aim of case research .….……….……… 32

3.4 Number of cases and selection criteria ………..……….……… 34

3.4.1 Single case versus multiple cases ……….…………. 34

3.4.2 Views in related literature ……….…………. 37

3.4.3 Number of cases ……… 38

3.4.4 Selecting the cases ………. 39

3.5 Respondents interviewed………. 41

3.6 Interview questions .……… 43

3.7 Processing information……… 45

3.8 Validity and reliability issues……….. 45

3.9 Results ……….. .….………...……… 46

4. Results………...……… 48

4.1 Introduction……….……… 48

4.2 Applied research methods………...……… 48

4.2.1 Selection of schools……….……... 48

4.2.2 Investigation at the schools……….….... 51

4.3 Main findings of the interviews……….…….. 51

4.3.1 Interview ‘small school’………. 51

4.3.2 Interview ‘large school’ ………. 56

4.4 Analyses of the results………. 60

5. Conclusion……….... 70

6. References………... 73

1. INTRODUCTION

1.1 Formula funding

In almost every firm budgeting plays a key role in the management of the organization. (Hansen and Van der Stede, 2004; Libbya and Murray, 2010). There are several definitions of the concept of budgeting. The most recognized description of a budget is "an instrument that enables the allocation of resources from one organizational unit to another" (Caruthers and Orwig, 1979, p.1). But a budget can also be seen as ‘a series of goals with price tags attached’ (Wildavsky, 1984, p.2). With a budgetary control in organizations, employees, mostly at management organizations level, are evaluated on whether or not they have achieved their goals with the given budget. In this way managers can be held fully accountable for their performance as measured by the budget (Van der Stede, 2000). A budget can therefore be seen as a statement of the future with which managers can be evaluated afterwards. But it can also be seen as a record of the past. It attempts to link proposed expenditures with desirable future events, but also reflects past allocations (Wildavsky, 1986). Budgets historically take a central position in most organizations’ systems of management control (Otley and Berry, 1994). However, for several years it has been the subject of considerable criticism according to Hansen and Van der Stede (2004). Budgeting systems often result in dysfunctional behavior and take large amounts of management time. In addition, the flexibility and adaptability to the increasingly unpredictable environment of organizations is less with the stronger focus on budgets. (Libbya and Murray, 2010). However, there are still several reasons why organizations make use of budgets. Hansen and Van der Stede (2004) mention four ‘reasons-to-budget’; operational planning, performance evaluation, communication of goals and strategy information. Not only in the private sector organizations are aware of these benefits of budgeting, also in the public sector budgeting is becoming more relevant.

has the autonomy to spend the budget for education of its students. However, a mechanism was needed to determine the budget for each school or school board. This was done by a funding formula, which is a set of pre-defined criteria to determine budget allocations (Levačić, 2008). This created lump-sum budget consists of two main compartments; a budget for personnel funding and a budget for material and operating funding.

1.2 The research question

Before the introduction of the lump-sum budget in 1996, schools had already been subjected to a certain type of lump-sum funding for material and operating funding which was called ‘funding system material’ (BSM)1. Also for personnel funding a midway step towards the lump-sum budget was applied which was called ‘formation-budget-system’ (FBS)2. With the introduction of the current lump-sum budget there is no separation between the funding of personnel and material expenses but one funding with both budgets at the same time. As a result, schools can make their own independent policies regarding the division of the lump-sum budget between material and personnel expenses, which implies a greater autonomy for secondary schools. (Goetheer, 2003). Because of the automation of Dutch schools, the Dutch government has less control on how schools spend their budget. In addition, schools have the possibility to spend their budget on activities that are important from their point of view. As a result, the effects of the formula funding (f.f.) method of the Dutch government may in that way be diverse. Karsten and Meijer (1999) mentioned in their study about the consequences of f.f. for secondary vocational education, several concerns regarding this phenomenon that would be important to explore. One of these concerns was whether schools would be able to find the right balance between ‘financial continuity’ and ‘enhancing educational results’. This study will focus on the ‘financial continuity’, which can be translated into certain aspects of financial management at schools. Also, aspects concerning flexibility and control systems in relation to financial management will be discussed. However, as Karsten and Meijer (1999) and several other studies (Ax et al., 1994; Edwards, 1995, 2000) that observed the effects of f.f. for schools relatively shortly after the implementation of the f.f. method, it would be interesting to find out if the effects are still visible at schools. In addition, Smith (2003) confirms the importance of persistent attention to f.f. at public services. He mentioned that it is a challenge for researchers and policy makers to devote sustained attention to design and implementation of f.f. methods necessary to maximize their effectiveness. With the aspects mentioned above in mind, the main objective of this thesis is to explore

1

BSM; Bekostigingstelselmaterieel, schools acquired a budget for their material expenses based on normative assumptions,

the current effects of the Dutch f.f. method concerning financial management and management control issues at Dutch secondary schools. This gives rise to the main definition of the problem

that will be addressed in this research: What are the perceived effects of f.f. for Dutch secondary schools concerning their financial management and management control.

In order to generate an answer to this research objective, several sub-questions are defined that have to be answered.

1. What are the effects of formula funding on schools according to the literature?

2. What are the effects of the Dutch formula funding method, concerning financial management and

management control issues, at two specific schools?

3. Is there a difference between the effects based on the findings of the literature and the actual

effects, based on empirical findings at two specific schools?

In order to answer the sub-questions and eventually main question, different research methods must be used. The first sub-question can be answered with a literature research. Different national and international articles and books will be assessed to generate effects of f.f. at schools. To answer the second sub-question a case study will be performed at two schools. With the use of two schools, additional aspects concerning financial management at schools can come forward, compared to a single case study. In addition, with two cases it is still possible to conduct an in-depth study. Furthermore, the observed effects at the two schools will be compared with each other in order to assign possible differences in the financial management to specific characteristics of the schools. This could be valuable to answer the research question. However, the reasoning behind the number of cases and the selection of cases will be explained in detail later on. The main data source to acquire the information is semi-structured in-depth interviews at the selected schools. The personnel that were available for the interview at the schools were rather diverse. Members of the board of the schools as well as head teachers and administrative staff, concerned with the financial management and management control of the school. Therefore the staff that is involved in financial activities in the school could be interviewed for my research. However, also the decisions concerning the staff that could be interviewed will be explained more clearly later on in this thesis. When the first two sub-questions are answered, it is possible to answer the last sub-question. In the end it will be possible to generate a rather complete view of the situation at the schools and answer the research question, hopefully.

2. LITERATURE REVIEW

2.1 Introduction

In the previous chapter a short introduction of the phenomenon ‘budgeting’ was given. In this chapter some other aspects of budgeting will be brought forward (2.2). This includes the several types of budgeting methods used for funding schools. In addition, one of these types will be explained in more detail, which is formula funding/budgeting (2.3). However the main goal of this chapter is to answer the first sub-question which is to discuss the effects of the f.f. at schools mentioned in the literature. With these effects extracted from the literature a first impression of the impact of f.f. should become clear. To generate a clear view of the effects found, a framework will be created based on classification methods used in the literature. In order to create a framework, several classification methods from the literature are described. Subsequently, all the effects will be assigned to the created categories of the framework. In this way all the effects could be subscribed to a certain type of effects which could enhance the accessibility for researchers to focus on certain aspects of f.f.. After this, it is possible to select the category (categories) with the effects that is in line with purpose of my research.

2.2 Budgeting

As mentioned earlier, budgeting is becoming more important and is used in almost every, private and public organization. In this section different aspects of budgeting will be put forward. In addition, several budget methods will be explained.

The budget is a record of the past, but it is also a statement about the future. It reflects past allocations, but also attempts to link proposed expenditures with desirable future events (Wildavsky, 1986). However, the main factors of budgeting are planning and predicting (Wildavsky, 1986, p.7).

- Planning; “try to determine future states of affairs through a series of current actions”.

- Predictions; “they specify connections between words and numbers on the budget document and future human behavior”.

These plans and predications are mechanisms for allocating resources, whose aim are to obtain desired objectives at the lowest costs. A budget is therefore an instrument for pursuing efficiency (Wildavsky, 1986). In addition, Bruns et al. (1975) mentioned that through budgets, activities of different parts of an organization can be coordinated and controlled. Responsibilities are delegated to managers under the organization’s structure and become more accountable and responsible as decision-making authority is more decentralized.

These reasons have several similarities with the three general functions of budgeting according to Jones (1984). The three general functions of the budget can be recognized in; allocation of resources (operational planning), implementations of plans (communication of goals), and accountability for outcomes (performance evaluation). In the public sector the main purpose of budgeting is accountability. Because of the publicly linkage of government activities with expenditures, the clarity of the budget presentation in linking expenditures to activities and to responsible officials, is crucial. Another aspect of budgets in the public sector is that, in contrast to the private sector, the efficiency-objective as mentioned above is less important. However, in the public sector the given level of effectiveness of achieving certain results is from greater importance. While in the private sector efficiency is the most important factor (Wildavsky, 1978).

There are several budgeting methods used in the private and public sector. Every method has its merits and demerits. Therefore it is difficult to state which method is best. For every situation or organization a different method could be appropriate. The methods I will describe are commonly used in (higher) education authorities (Zierdt, 2009) and interesting to mention with the purpose and background of my research in mind.

• Incremental budgeting

Incremental budgeting (‘line-item’ budgeting) is the oldest and most widely used system. This method focuses on percentage adjustments (increments) to the base budget. The budget of previous year is the basis upon which changes will be made for the following year (Linn, 2007).

• Formula budgeting

This method relies on ‘quantitative measures to distribute resources’ (Goldstein, 2005). This is especially used by government bodies, where one or several formulas are created to distribute the budget. In several countries governments apply this method to distribute the budget to elementary and secondary schools. (Linn, 2007)

• Zero-based budgeting

With this approach the contribution of every activity or program to the achievement of the organization’s mission is reconstructed. The budgets of every line must be justified every year, which is very time-consuming but generates a deep understanding of the organization (Linn, 2007).

• Performance-based budgeting

• Responsibility-centered budgeting

‘Until recently, responsibility-centered budgeting was primarily used by private institutions, but is being embraced by more and more public institutions as a result of the ‘budget reform’ era.’ (Zierdt, 2009, p.348). Responsibility-centered budgeting has also been referred to as value-centered management, cost-centered budgeting, profit-centered budgeting and revenue responsibility budgeting (Goldstein, 2005; Lasher & Green, 2001). With this method every responsibility center is accountable for all of its expenses and revenues.

2.3 Formula budgeting/funding

Several budgeting methods have been described above. However, one of these methods will be explained in more detail. This research will focus on the effects of f.f. at schools. Therefore there will be further clarification of formula budgeting (funding) in this section.

The Dutch government introduced f.f. for the allocation of resources for secondary schools. According to Smith (2007), the essence of f.f. is that the size of the funds to each section in a certain period depends on advanced mathematical rules, and there are no provisions to change the allocation rules after the budgetary period. These rules may be very simple or very complex. However, the objective of f.f. is to contribute to the creation of a budget for local institutions or entities. There are two broad approaches to f.f. mentioned by Smith (2007). The first approach compensates the local entity on the basis of a measure of local activity (number of service users). This approach is often used for payment mechanisms in education (number of pupils) and healthcare (number of patients) and are practical when unambiguous indicators of service user’s needs can be established. The second approach to f.f. focuses on the expected level of local activity. This method ‘takes a measure of the size and characteristics of locality’s population, and infers the expected level of local service expenditure without reference to local service use’ (Smith, 2007, p.5).

introduction of f.f., the formula provided a more certain basis of planning. However, ‘as the formula evolved to an exclusively allocation device, it became less useful as a means of determining the adequacy of overall levels of support’ (Darling et al., 1989, p.582). With this knowledge, it is not clear what the relevance of the formula is considering the decreased ability to evaluate performance and accountability. The discussion concerning the relevance of the formula is also discussed by Heald and Geaughan (1994). They mentioned a different aspect of f.f.. Besides the increase of autonomy and retention of control, which are contrasting policy objectives, also the increasing costs of the government became important. Therefore, the emphasis of f.f. according to Heald and Geaughan (1994) is to secure cost reductions with the refinement of central control. This argument is in line with the statements of Smith (2003). His research stated that there are several reasons for national and local governments to introduce f.f.. However, the main driving force behind f.f. according to Smith (2003, p.303) is ‘the desire of payers (governments) to limit the magnitude of aggregate expenditure, and to share that limited expenditure in an acceptable fashion’. With this in mind governments in several countries introduced f.f. for the allocation of resources to schools.

According to Ross and Levaĉić (1999) the funding of schools using a formula can be seen as part of a contract between the government and schools. Schools are paid sums of money determined by the formula and in return will provide educational service to students and enable them to achieve desired educational results. Subsequently, the introduction of a funding formula can influence the behavior of school managers, teachers and parents ‘through providing financial incentives and actions, and also by conveying powerful policy messages’ (Ross and Levaĉić, 1999, p.9). The impact on schools, however, depends to a great extent upon the power of governments to set policy aims and objectives that have to be achieved via performance of schools (Ross and Levaĉić, 1999). The impact varies from country to country, depending on the powers of central and local governments. A small number of authors researched the effects of f.f. of schools. In the following sections the effects mentioned in these studies will come forward. In order to generate a clear view of all of the founded effects, a framework will be created. With a framework it is easier to focus on a certain category of effects. This makes it possible to conduct research concerning a specific type(s) of effects instead of a broad view about all the effects at schools. A second reason is that it is also easier for other researchers to focus on a certain type of effects. In the following section, the framework will come forward. However, in order to create that framework several aspects have to be discussed. These aspects will be discussed first.

2.4 Effects of formula funding

classification ideas and methods obtained from the (related) literature must be discussed. Subsequently the most appropriate methods will be selected to create the different categories of the framework for the classification of the effects. Therefore, the classification methods will be explained and selected first. Subsequently, the categories and the corresponding effects will be discussed.

To classify the effects of f.f. at schools mentioned in the literature, we must take a closer look at the way other authors categorize their observed effects. This is difficult because many authors do not construct a clear classification of the effects. Although some authors mention a distinction or several types of effects, there is no theoretical framework in which the effects are classified. One reason is that the several studies have other purposes than observing effects. An example is the study of Levaĉić (2008), who observed some effects of f.f. but because this study was focused on the formula itself, there was no intention to generate a clear view of the effects. Also Heald and Geaughan (1994), who mentioned ‘consequences’ of f.f. that could be useful, but the purpose of their paper was to explore f.f. models. A second reason is that several studies already focus on a certain type of effects before the research is actually carried out. For instance, Edwards et al. (1996), whose main topic of interest was aspects about budgeting at schools and therefore did not generate a clear distinction between the observed effects. An additional reason is that some studies focused on specific cases. Edwards et al. (1996, 2000) explored effects at certain (groups of) schools and compared these effects, but made no attempt to generalize the effects in a theoretical framework. However, this can be seen as the first step in the theorizing of the effects of f.f. at schools. The comparison of Edwards et.al (2000) made clear what effects are common or have a deep impact on schools. Therefore the study by Edwards et al. (2000) can be considered more suitable for theorizing the effects of f.f. at schools, even though they made no attempt to generate a further meaning to these effects. However, in order to generate a framework, other possibilities have to be investigated. Not only literature concerning f.f. for schools will be discussed, additional literature in the field of management accounting and control as well. This is because a significant part of the research about the effects of f.f. has been done in the field of management accounting and control. Most articles are published in journals like Management Accounting Research, Accounting, Auditing & Accountability

Journal School of Management, Financial Accountability & Management. It would therefore be

Classification method Karsten and Meijer (1999) and Edwards et al. (1995)

As mentioned above, some authors made or found a distinction between certain types of effects. With these studies it may be possible to generate a framework that classifies the effects obtained from the literature. The most common division of effects in the literature is the division of effects considering

financial management and educational management. This must be seen in a broad perspective, because

different studies explain it in different words. The study of Karsten and Meijer (1999), who studied the consequences of f.f. at vocational secondary education, highlights two important changes. These two changes can be seen as a rough categorization of effects. The first one is, because of the fact that actual costs incurred no longer count, but standard grants instead, changes in the financial position of schools and the consequences considering internal functioning occurred. The second type of effects arise because of the fact that the funds can be spent in different ways. Therefore schools have more freedom in the way they organize their primary (educational) process. Another study (Edwards et al., 1995) does not explicitly make a categorization of the effects but focuses on the ‘financially inspired culture’ and ‘its impact upon education in the classroom’. Also this distinction can be seen as a division between financial and educational management. Both studies made use of interviews and questionnaires in order to obtain the information. Multiple schools were investigated with multiple sources of information to acquire a view of the situation at schools.

Classification method Ax et al. (1994)

Next to Karsten and Meijer (1999), also Ax et al. (1994) studied the effects of the lump-sum budget for vocational secondary education. They distinguish three main factors that are influenced by the introduction of the lump-sum budget. These factors are

• Policy making; effects about influence distribution, which means that schools try to find the optimal

position between policy making that attempts to benefit optimally from new economies of scale possibilities (with no unfair differences between the different parts of the organization) on the one side. And decentralization, in order to generate more possibilities for education oriented policies on the other side.

• Scope of policy; effects in the field of additional space for organization of education, personnel policies and material provisioning. Also possibilities for making shifts in expenditures.

• Innovation policy; effects on the decision making regarding choices for certain innovation activities.

information. In addition, internal information of the schools is used to acquire information concerning the planning and control of the schools.

Classification method Laughlin et al. (1994)

Another way to categorize the effects of f.f. is not an approach that is specifically used to categorize effects of f.f., but is used to conceptualize pathway changes. This method creates understanding of process dynamics within organizations engendered by environmental disturbance. Laughlin et al. (1994) uses this method in his study to look at the way the new financial responsibilities, as a result of f.f. in England, are managed in a number of different schools. There are two major types of pathway changes. Although different labels are given in the literature, the most common is ‘first and second order’ change (Laughlin, 1991a; Levy, 1986). The first order change involves shifts in the managerial arrangements in the organization but in such a way that the interpretative schemes remain undisturbed. Second-order change involves major shifts in the organizational value systems, at the “core” of organizations often known as the “interpretive schemes” which will have lasting effects on the whole nature and future of the organization. Laughlin (1991a), building on this key distinction, highlights four alternative pathways: two first-order and two second-order. The two first-order changes;

• Rebuttal involves a repulsion of the disturbance such that, while the eviction may involve some change in the organizational arrangements, these are very temporary.

• Reorientation involves having to internalize the disturbance, through often permanent organizational

changes, but in such a way that the interpretive schemes remain untouched and undisturbed by the alteration.

The two second-order changes;

• Colonization involves major change in the interpretive schemes, led by a number of organizational participants initially engendered through changes in the design model.

• Evolution involves deliberately chosen change in the interpretive schemes, with subsequent shifts in

the design model.

However, that was focused on specific characteristics of the study and not related to the focus of my thesis.

Classification method Edwards et al. (2000)

Another way to organize the effects of f.f. stems from the management control literature. Edwards (2000, p.312) mention that; “the concept of management control has been viewed as having three components, operational, managerial and strategic, each of which component is assumed to be the preserve of different hierarchical management tiers within the organization”. These components were originally mentioned by Anthony (1965), Edwards et al. (2000) however related these components with the management of schools.

• Strategic (planning); develops the strategy an organization will follow to achieve its objectives of profitability, quality, and service. Strategic planning assists decisions about fundamental issues of what business to be in and how to conduct it. (Davis, 2003)

• Management (control); the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives (Hofstede, 1981). • Operational (control) the process of assuring that specific tasks are carried out effectively and

efficiently (Hofstede, 1981).

In this way the effects can be divided into the different components. The effects will be assigned to a component that corresponds with the hierarchical level it has its impact on. Every effect could therefore be placed in one of the three categories. Also with the focus on management control in this study, this could be an interesting categorization. Edwards et al. (2000) used semi structured interviews at 17 schools to obtain the qualitative information about the planning and budgeting processes at the sample of schools. Additionally, also secondary research instruments were used; questionnaires were constructed and school documents investigated to acquire the needed information.

Classification method Raaijmakers (2005)

The components mentioned by Edwards et al. (2000) are mainly similar to the levels stated by Raaijmakers (2005). This study about planning and control at schools in practice, includes three management levels that cover all the functions of a school; strategic, tactical and operational management level.

• Strategic level; this level includes the school’s policies and principles. Additionally, it accentuates the aspects of the environment on which the school could anticipate.

• Operational level; using budgets, with contents and financial responsibilities attached to it, the funds will be divided to everyday activities.

Raaijmakers (2005) constructed a theoretical research in which financial theory and concepts concerning the financial management of schools are investigated. Subsequently, using examples and models the different themes of the financial management of schools are explained.

In table 2.1 a summary is given of the different methods explained above. Next to the author(s) of the article (or book), the method that is used to classify the effects or other aspects investigated in that article is given (‘Classification’). ‘Background’ explains the purpose and context of the study, and ‘Research method’ clarifies the methods used for the relevant research. From these classification methods one or more will be selected to classify the effects found in the literature.

Table 2.1: Summary practical classification methods

Author(s) Classification Background Research method

Karsten and Meijer (1999)

Two important changes; - Financial position and the consequences considering internal functioning - More freedom in

organizing primary process, educational consequences

Relationship between financial position and primary process under this new funding system for vocational secondary education.

Analyzed early data and data from government, survey via telephone, in-depth interviews at four schools. Edwards et al.

(1995)

Mention the relation between a ‘financially inspired culture’ and ‘impact upon education’.

Development of local management at schools in England. Semi structured interviews at 17 schools. Structured postal questionnaire. Examined internal school documents. Ax, Bosma and

Wieringen (1994)

Three main factors that were influenced by the lump-sum budget. - Policymaking - Scope of policy - Innovation policy

Effects of the lump-sum budget considering policy space and education for vocational secondary education Interviews at eight schools and investigated internal information. Laughlin et al. (1994) Pathway changes; - first order changes (Rebuttal and Reorientation)

- Second order changes (Colonization and Evolution)

Looks at the way these new financial responsibilities are managed in different schools.

Edwards et al.(2000), Components of management control - Strategic planning - Management control - Operational control

The connections between the planning of educational strategies and the budgeting of resources in schools Semi structured interviews at 17 schools. Structured postal questionnaire. Examined internal school documents. Raaijmakers (2005) Management levels at schools - Strategic level - Tactical level - Operational level

Planning and control at schools in practice after initiation of the lump-sum budget. Financial

management at schools.

Theory and concepts are investigated.

In the following section, some of the classification methods are selected that will be the fundamentals of the framework. This selection is based on several arguments that will be explained in detail. With the selected methods it is possible to create a framework with a certain amount of categories in which every perceived effect of f.f. at schools can be subdivided into.

2.5 The framework

To construct a framework in which each effect can be classified, some of the previous mentioned classifications will be selected. The selection will be based on the extent to which the content and background of the classification corresponds with the purpose and background of this thesis. This is to explore the effects of the f.f. on secondary schools in the Netherlands, whereby the focus will be on effects in the field of financial management and management control.

One of the articles that can be very useful for my research is the article of Karsten and Meijer (1999). Their research was the first study that explores the relationship between the financial position and primary processes under the new funding system. Before this, not very much was known about f.f. method used in the Netherlands and the consequences of that method. Although this article reports about the situation for vocational secondary education, the same method is used for primary and secondary education. One of the main purposes of the article is to examine how schools adapt to significant changes in funding strategy that give more responsibility to the individual school. This purpose is to a certain extent similar to the purpose of my research. Considering all these aspects of the study of Karsten and Meijer (1999) mentioned above, it is plausible to see this paper as a key paper for my research and therefore it will be used to classify the effects in a theoretical framework.

generate a framework with several types of effects. Subsequently a second classification method, which is obtained from the literature, is required.

The second classification that will be used is mentioned by Raaijmakers (2005). This classification has been chosen for three reasons. The first reason is that the study of Raaijmakers, as well as the study of Karsten and Meijer (1999), is focused on the implementation and consequences of f.f. for schools in the Netherlands. The three levels in that classification by Raaijmakers (2005) are particularly mentioned in the context of the organization of schools. In that way, the context in which the classification is made corresponds with the context of this paper. The second reason is based on the fact that this classification can be applied to the financial process as well as the educational process at schools. Therefore, the three levels are appropriate for the two categories mentioned by Karsten and Meijer (1999), financial management and educational management. The last reason for the preference of this classification is because it is to a great extent similar to the classification mentioned by Edwards et al. (2000). This study mentions three components, which are mainly used in the field of management control. Because the literature, from which the effects are extracted, is also to a great extent in the field of management control, this classification would be useful as well. However, since this classification is not specifically mentioned in the context of funding of schools, it is less suitable than the classification mentioned by Raaijmakers (2005).

An aspect that was also considered when the classification methods were selected was the research methods. With the theoretical study of Raaijmakers (2005) and a more practical view of Karsten and Meijer (1999) this could be an appropriate combination of classification methods. The decision to use the classifications of Karsten and Meijer (1999) and Raaijmakers (2005), does not imply that other types of classification are of less use. There are possibly other well-reasoned approaches in order to generate a solid theoretical framework. However, for this research, which focuses on effects at Dutch schools and is located in the field of management accounting and control, the classifications by Karsten and Meijer (1999) and Raaijmakers (2005) are certainly suitable.

1. Classification effects by Karsten and Meijer (1999): - Financial

- Educational

2. Classification effects by Raaijmakers (2005): - Strategic

From these classifications, the following categories can be constructed. In the text below every category will be explained, followed by the effects that are assigned to that category. This is based on the correspondence between characteristics of the effects (explained in the literature) and the characteristics of the category. These effects must be seen in a broad perspective. This means that some effects have been described in the literature as directly the result of the new budgeting method of the government(s), while other effects have been explained as potential or expected effects of the budgeting alteration. In the end of this section a framework is created with each category and the corresponding effects.

Strategic effects concerning financial management (1)

This category deals with effects concerning the school policies and principles regarding financial issues. On the strategic level, decision making of the school board and ways to anticipate to the environment are important. The outcome of the decisions and important environmental aspects will be presented in budgets. Therefore, the effects that concern fundamental financial issues will be assigned to this category. An example of a study that specifically focused on aspects in this category was the study of Edwards et al. (2000). They identified three groups of schools that have different approaches of budget and planning issues. The specific focus on planning and budget issues corresponds with the aspects of this category. Also Ax et al. (1994) explained this category, even though it was not used as a classification method for the framework. The factor of Ax et al. (1994) is ‘policy making’, which means for one part, trying to find the optimal position between policy making and optimally benefit from new economies of scale possibilities. The aspects mentioned by Ax et al. (1994) explained there, correspond with the topics in this category. The following effects can be assigned to this category.

offered by the lump-sum budget. This is in line with several studies in the United Kingdom (Levaĉić, 1995; Simkins, 1993). Karsten and Meijer (1999) continue about the opportunities offered by the introduction of the lump-sum budget, although their findings are rather diverse. They state that several schools get entangled in a financial downward spiral, especially when schools have to pay large salaries to former staff. According to their study the larger the number of teachers with old contracts the greater the deficit. And schools with large and subsequent budget deficits have problems to overcome these budget deficits. However, Karsten and Meijer (1999) also mentions that several schools have managed to release extra resources. The deployment of its staff creatively and flexibly led to extra resources for educational changes or other purposes. These schools were able to manage their finances adequately and succeeded in making necessary additions which resulted in additional (educational) opportunities for schools. In addition, the use of contract activities as extra funding is also becoming more important for schools to avoid deficits or to make use of certain opportunities (Karsten and Meijer, 1999). The differences between financially well managed schools and schools that get entangled in a financial downward spiral arise as a result of the way they use their standard grant, according to Karsten and Meijer (1999). In the next category the use of the grant will be discussed in more detail. Others aspects of this category are aspects concerning policies and principles regarding financial issues. An effect of the

development of the policies at schools as a result of f.f. is mentioned in a study of De Grauwe (2005). This

study, concerning the improvement of school-based management, stated that the increase of local decision-making power lead to more relevant policies. With the introduction of the f.f. schools have become more autonomous. This means that schools have more freedom in the way they spend their budget, but also means that financial information has to be prepared better and made understandable for everyone. Unlike the situation before, when financial information was just for accountability afterwards (Raaijmakers, 2004). Therefore, this change in decision-making power leads to more relevant policies concerning the provision of financial information. Supplementary to this policy, also additional formal procedures must be followed to ensure probity and accurate financial records in particular; separation of duties, requirements signature on checks, maintenance of accurate inventories and formal and transparent procedures for making contracts and disposing of or writing down assets(Levaĉić, 2004). However, the implementation of the formal policies and procedures in several cases in the United Kingdom were implemented in a smooth and easy way so that schools were not over-burdened with complex, time-consuming arrangements for monitoring and reporting (Edwards, 2000). The increase in policies and procedures is in line with the next effect that will be discussed. This effect concerns the change into a

managerial style of organization, ‘managerialism’ (Heald 1994), whereby accounting numbers shape

makes it difficult for schools to change their culture in a managerial style of organization. The last effect concerns the planning of schools. As mentioned before, with the introduction of f.f. the autonomy of schools increased. According to Edwards et al. (2000) this increase in autonomy lead to an increase in planning activities. Edwards et al. (2000) mentioned that some schools had to put more emphasis on planning. However, this focus on planning caused some problems, referring to the study of several schools in the United Kingdom. Some schools had difficulties with the planning of curriculum based objectives. Furthermore, “there was little time for precise financial planning or deliberation, which undermines the role of the budget as a means of co-coordinating strategy” (Edwards, 2000, p.320). This was because schools were planning close to the beginning of the new financial year.

Tactical effects concerning financial management (2):

On the tactical level the main topics discussed in the strategic level will be translated in an activity plan. This translation accentuates the topics mentioned at top levels of the school and is financially focused. Therefore, effects that have an impact on the translation of the strategic plans and policies into financial activities will be placed in this category. Although the main focus is on financial aspects also effects about administrative decisions and responsibilities concerning these financial aspects will be assigned to this category. Examples of issues on which effects will have impact on are resource allocation, control systems and accountability. The articles of Karsten and Meijer (1999) and Edwards et al. (2000) focus on the aspects in this category, especially the financial activities as a consequence of the new funding method. Although both studies also mentioned effects that are in line other categories. The effects that are in line with the characteristics of this category will be described below.

schools are unable to maintain the level of spending on social needs (as mentioned in ‘Strategic effects concerning financial management’). Assuming these statements, schools become flexible in spending their resources, although social need schools have more difficulties to be flexible in spending the budget as a result of the lower level of compensation after the introduction of f.f. at schools. A study of Karsten and Meyer (1999) in the Netherlands agrees with the increase of flexibility of resource allocation. They mention that several schools manage their resources creatively and flexibly. However, their study also observed schools that were not able to manage their resources efficiently and became more reactive to situations instead of active management in advance of the situation. They also mentioned that these schools are at risk of having insufficient defensive capacity to deal with unexpected issues. Another effect that is in line with the effects concerning the increased flexibility of financial activities is that schools are

better judges of their expenditure needs than their funding authorities. Schools will, because of the better

concerning the control of financial management at schools is that control systems used at schools, dominated by accounting techniques, are too narrow in focus (Emmanuel et al., 1990). In addition, Fischer (1996) mentioned that this is mainly relevant when the environment is uncertain. The relevant measure of environmental uncertainty is not some objective physical environment. Many schools look upon the environment as more uncertain and risky as a consequence of the budget devolution. Subsequently, Edwards (2000, p.328) stated that; “As opposed to the internal targets which traditional accounting and control systems use to measure performance, the comparisons between competitor schools, league table positions and average costs incurred per pupil educated, are relatively more risky and uncertain”. Another measurement problem that schools face is mentioned by Edwards et al. (2000). They state that schools faced measurement problems when attempting to link strategy for effective education to specific resource allocation. In their study head teachers reveal that they do not know how to measure the effectiveness of strategic plans. The last measurement problem discussed here is also found in a study of Edwards et al. (2000). Before the introduction of f.f. for schools in the United Kingdom, schools heavily relied on feed forward control systems which depend upon standardized operating procedures. As a consequence, they mention that a mismatch between control systems and the schools’ mission statements may be identified, because these traditional performance measures at schools are too

aggregate and untimely to provide effective feedback (Chenhall and Langfield-Smith, 1998).

Operational effects concerning financial management (3):

In this category effects concerning daily operational activities will be discussed. Using budgets made in the strategic level and the activity plans in the tactical level, every activity on the workplace generates its share. It is to the people on the workplace to work effectively and efficiently in such a manner that budgets are spent in an adequate way. Therefore, the effects that have an impact on the execution of the financial activities will be assigned to this category. Examples of the topics are efficiency, behavior towards financial issues and execution of control. An article of Laughlin et al. (1994) focuses on the aspects in this category, although it is also slightly in line with aspects of the last category (concerning educational management). The following effects can be assigned to this category.

on-the-job learning of school-directors and support from accounts assisted the school councils to get familiar with school finances (Levaĉić, 2004). A second effect that had an impact on the school administrators that manage the finances is the increase in regular meetings (Laughlin et al., 1994). Also according to Edwards et al. (1995), schools attempt to have more regular meetings to discuss the budget situation. However in reality, these effects have not been carried out to the operating level. The interviewed school advisors assert they are more concerned with maintaining the quality of education than with financial monitoring. Although these meetings hardly ever take place in reality, head teachers are becoming more financially aware and decision are made from a more financially perspective (Edwards 1995, 2000; Laughlin et al., 1994). “This financial awareness … has become a central component of the organization and management of schools including staff involvement and in setting schools objectives” (Edwards, 2000, p.317). According to their study almost everyone in the school has to deal with certain aspects of financial management as a result of the increased importance of financial management at schools. However this focus can also be exaggerated, in a study of Laughlin et al.(1994, p.64) a head teacher stated that; “…my worry is that with finance you become blinkered, see everything from a financial perspective, forgetting about the relevance for the kids and seeing pound notes instead”. Looking at the previous mentioned studies, the activities of the staff of the school are in a way affected by the stronger focus on finances as a result of f.f. for schools. Several authors (De Grauwe, 2005; Laughlin et al., 1994; Agyemang, 2010) also mention that not only the activities are more financially focused, but also the workload has increased. Life is harder for school principals and head teachers, because of the

increased administrative and managerial workload and additional responsibilities. In addition, Laughlin

et al. (1994, p.81) stated that; “The increased workload means that more teachers are being absorbed by this management role and indeed the head teacher is pushed further from education as the administrative hierarchy grows”. A different effect about the execution of financial activities is the opportunity to manipulate certain numbers in order to acquire a higher budget (Levaĉić, 2008). If schools can get a higher budget if they have a higher number of students with lower results for instance, it could be tempting to change certain numbers in order to acquire a higher budget (Levaĉić, 2008). If the funding formula is the only instrument of control for the government, difficulties associated with the agency

problem might arise (Smith, 2003). This means that the behavior of the staff of school may change as a

knowledge. However it also increases the potential of local opportunistic behavior according to Wößmann (2003). This means that the school staff that deals with financial issues is guided by opportunism and not by standard settings and performance control.

Strategic effects concerning educational management (4):

These effects deal with aspects about the schools policies and principles considering educational issues. On the strategic level, decision making of the school board and ways to anticipate to the environment come forward. This is in a certain way similar to the financial effects, although in this category the outcome of the decision making is solely based on aspects that have an influence on education. Therefore, the effects that will be assigned to this category have an impact on fundamental educational issues. Examples of topics in this category are rules and procedures toward educational staff, educational changes and student selection methods. This category is, just like the first category, in a certain way in line with one of the main topics that are influenced by the Dutch f.f. method mentioned by Ax et al. (1994). In their study one important factor is policy making, which implies for the other part of the ‘policy making’ as mentioned in the first category, that schools try to generate more possibilities for education oriented policies. The aspects mentioned in the research of Ax et al. (1994) in that part corresponds with the topics in this category. The effects that are in line with the characteristics of this category will be described below.

As mentioned in the first financial category, schools were subjected to increasing emphasis on formal

procedures and planning (Edwards et al., 2000). More private sector techniques were applied at schools.

However, not only did the emphasis on financial issues increase, also the focus on several formal education aspects improved. An example mentioned by Edwards (2000) is that with the publication of the schools’ league tables, the conduct of schools is linked with the political objective of improving educational standards. In addition, Levaĉić (2008) mentioned that the funding formula can serve as a direct function to promote specific education policies. An example is the promotion of specialized education or providing enhanced educational opportunities. Another effect of f.f. is that head teachers identified the benefits of f.f., especially at secondary schools (Edwards et al., 2000). These secondary schools had strong organizational structures with defined hierarchical roles and responsibilities for the

head teachers. Also this can be seen as the increase of ‘managerialism’, as mentioned before (‘Strategic

competition is generally viewed as a ‘necessary evil’ and not as an opportunity. As Edwards et al. (2000, p.325) mentioned; “Many head teachers would prefer to maintain their public sector orientation to recruitment of local pupils and to avoid the private sector notion of competition”. However, Levaĉić (2008) agrees with the increase of competition between schools, but stated that this has led to a substantial improvement in efficiency for secondary schools as measured by examination results at school level. Schools are therefore more focused in the way they perform compared to other schools, especially schools with tight budgets. However, this does not have to be a negative effect of the introduction of f.f. at schools according to Levaĉić (2008).

Tactical effects concerning educational management (5):

On the tactical level the main topics discussed on the strategic level will be translated in an activity plan. This translation accentuates the topics mentioned at the top level of the school. The effects in this category are therefore based on educational activities, determined by decisions made at the strategy level. Other topics of effects are educational responsibilities and agreements between the school and teachers. Laughlin et al. (1994) raises three important questions concerning the value of f.f. at schools in England. One of the concerns is the performance of key senior teaching staff. This corresponds with the aim of effects concerning tactical activities about educational aspects, located in this category. The effects that are appropriate to assign to this category will be described below.

favorable in times of strong competition. Therefore, schools have a benefit to obtain better results than the other schools in their area. With the refusal of ‘riskful’ students, students with bad manners or results, schools will get a better image and better results compared to other schools. A whole different effect that is not really about the education of the students, but more about the ‘education’ of the teachers is mentioned by De Grauwe (2005). In that research is stated that capacity-building initiatives cover few staff and the professional opportunities for promotion are scarce. Head teachers, especially in remote schools, receive little support from the administration level to improve their capabilities/qualifications.

The incentives to become or remain a head teacher are decreasing because of the fact that there is little support of the principals at schools to develop. In addition, the increase in the principal’s administrative and managerial workload reduces the opportunities of the (head) teachers to be trained by their supervisor (De Grauwe, 2005).

Operational effects concerning educational management (6):

In this category effects concerning daily operational activities will be discussed. The main aspect is the effectiveness and efficiency of the educational activities. Therefore the effects that have an impact on the execution of the planned educational activities will be assigned to this category. In this category also aspects concerning the motivation of employees (teachers) and control come forward, because this influences the performance of the teachers and other staff. Also the operational educational activities are discussed by Laughlin et al. (1994). One of their main concerns is the effect of f.f. method on the educational results. Below, the effects that can be assigned to this category will be explained in detail.

mentioned before. Also Edwards et al. (2000) agrees with this statement and points out that since the introduction of f.f. in the United Kingdom, head teachers are acting more as managers of the school. A different aspect of this category next to the workload of the (head) teachers is the quality of education. The empirical results concerning a study of Levaĉić (2008) show that financial autonomy, as well as additional resources, has not let to better education quality. This is also according to Laughlin et al. (1994), who states that there is an effect on the quality of education, but mentions that there is a minimal

effect on improvement of education. Wößmann (2003) also studied the influence of school autonomy, but

in relation with student performance. In that study there are three types of autonomy; budget, personnel and full autonomy. Budget autonomy was negatively related to student performance, while personnel and full autonomy are positively related to student performance. In case of f.f. at schools, full autonomy is

most applicable and gives a positive relationship with student performance. Subsequently, school

autonomy increases the potential of local opportunistic behavior (Wößmann, 2003), as mentioned in the second category. This is also applicable to the control of education. When the control is executed by its own staff, as a result of the increased autonomy, it may be not as sufficient as when other authorities/institutions execute the performance control.

In table two the framework based on classifications in the literature is given. Subsequently, all the generated effects mentioned in the literature are subdivided into the different categories. The effects, in the table only described in a few words, are in the same order as described above.

Table 2.2: Framework effects obtained from the literature

Effects of formula funding at schools

Financial Effects Educational Effects

Strategic (1)

- Budget deficit social needs school

- Heavy mortgages and building up reserves - Financially downward spiral

- Extra resources

- Dependent contract activities - More relevant policies

- Increasing emphasis on formal procedures and planning

- Cultural change to ‘managerialism’

- Increase in planning activities caused problems

Strategic (4)

- Increasing emphasis on formal procedures and planning

- Educational policies

- Head teachers with defined hierarchical roles and responsibilities.

- Schools compete

Tactical (2)

- More cost efficient

- Efficient allocation of resources - Lack of flexibility to target key areas of

spending due to increased flexibility - More reactive management of resources

Tactical (5)

- Extensive methods of teaching - Educational changes

- Refusing student at risk

- Insufficient defensive capacity

- Better judges of their expenditure needs - Central management team

- Directly accountable

- Lack of any measurement criteria - Control systems narrow in focus - Measurement problems

- Traditional performance measures are too aggregate and untimely

Operational (3)

- Training sessions and a range of published materials

- Regular meeting

- More financial awareness

- Increased administrative and managerial workload

- Agency problem

- Management control exercised in judgmental and political ways

- Local opportunistic behavior

Operational (6)

- Shift from “freedoms” to a considerable and overwhelming workload

- Classroom teachers are too occupied - Head teachers are more acting as managers - Financial autonomy not led to better education

quality

- Minimal effect on improving the education - School autonomy negatively related to student

performance

- Local opportunistic behavior

3. RESEARCH METHODS 3.1. Introduction

In this chapter the research approach to be used in this study will be set out and discussed. First, some of the different research methods available will be compared using the framework of Yin (2009). In addition, the most appropriate method will be selected for this thesis. Subsequently, the types of case studies that can be carried out will be discussed. After that, there will be a clear description of the number of cases that are appropriate for my research. This mainly concerns the discussion between a single case study and a multiple case study. But before the actual number of cases will be clarified, first the related literature will be discussed. In this analysis the number of cases and the selection of these cases used in related literature will come forward. This makes it possible to make a well informed decision concerning the number of cases. Also for the selection of the case(s) a solid decision can be made after the analysis of the related literature. This is explained in detail in the subsequent section. The following part of this chapter will discuss the personnel of the school that have to be interviewed and the main topics of the interview. At the end of this chapter, the processing of the acquired information and a view of the validity and reliability of this thesis will be clarified. After this, a clear sight of the research methods used for this research will arise.

3.2. Case research

In order to select the appropriate research method for my research, I will first discuss the different research methods mentioned by Yin (2009). Each method is a different way of collecting and analyzing empirical information (‘data’) and has its advantages and disadvantages. There are three important conditions that distinguish the different methods. However, Yin (2009) proceeds by stating that the boundaries, concerning the clarification of the methods, are not always clear. And even though each method has its characteristics, some methods may have large overlap. In table 3.1 the different methods are explained by answering the three conditions stated by Yin (2009). The three conditions are;

1. Type of research question posed; ‘who’, ‘what’, ‘where’, ‘how’, ‘why’ – questions. 2. Extent of control the investigator has over actual behavioral events.

3. Degree of focus on contemporary as opposed to historical events. Table 3.1: Research methods explained by the conditions of Yin (2009)

Method Form of research

question? Requires control of behavioral events? Focuses on contemporary events?

Survey Who, what, where, how many, how much?

No Yes

Archival Analysis Who, what, where,

how many, how much?

No Yes/no

History How, why? No No

Case study How, why? No Yes

From the table above it can be seen that for my research, the most appropriate method is the case study. This is primarily, because there is no control over the behavioral events. In my research there is no control over the (financial) management of schools that could influence the results. Secondly, the focus of my study also concerns contemporary events as opposed to historical events. The current effects of f.f. at schools will be compared with the effects acquired from previous studies.

My research question is: what are the effects of the Dutch f.f. method concerning financial management and management control issues? Yin (2009) stated that ‘what’ questions are also appropriate for exploratory research and therefore also appropriate for case study research, even though this is not mentioned in the table above. Another reason for using a case study is that I want to generate a wide range of effects within certain topics. In order to realize this, ‘who’ and ‘why’ questions have to be used. For example, “who is accountable for the financial activities at the school?” And, “why are certain decisions concerning financial management made in this particular way? A survey study has also characteristics that are appropriate for my study (last two conditions in table 1). However, in order to generate that deeper understanding of the effects at schools, exploratory ‘how’ and ‘why’ questions are more appropriate. Which implies that a case study is favorable compared to a survey study. For the same reasons an archival analysis would be less applicable. Another method that has similarities with my research is the experimental method. And even though it also focuses on contemporary events and applies ‘how’ and ‘why’ questions, this method requires control of behavioral events and is therefore more usable for testing. The history method would not be appropriate because it focuses on the past, while in my research current effects will be investigated. When taken all these different options in mind, the case study is most appropriate for my research.

3.3. Aim of case research

of case studies will come forward. According to Scapens (2004), there are five different types of case-studies used in accounting research;

• Descriptive; descriptions of management accounting practices, providing information concerning the

nature of contemporary accounting practices.

• Illustrative; an illustration of new and innovative practices that have been developed, but cannot provide a justification for, nor can it test the validity of, this assumption of the practice.

• Experimental; examine implementation problems and to evaluate potential benefits.

• Exploratory; a preliminary investigation, which is intended to generate ideas and hypotheses for rigorous empirical testing at later stage.

• Explanatory; explain the reasons for observed accounting practices.