Enhancing the finance function to support government modernization
by Andy Potter
Government modernization is in full swing around the globe. Wherever one looks, the overriding themes are consolidation and rationalization of resources combined with enhancing public access. These initiatives are creating new challenges for the finance function since resources and financial information are being brought together from previously siloed parts of government.
As part of the renewal of the public service, governments must overhaul their core financial management processes surrounding planning, budgeting, reporting and analysis. In many jurisdictions, underlying information systems must also be addressed. In short, the finance function needs to become part of the modernization agenda, creating streamlined processes that deliver more accurate information for decision-makers.
There are several factors that impact the finance function’s ability to support modernization. With decentralized operations, it is difficult for governments to adopt standard approaches to costing and new funding models. As well, financial systems are either disparate or single charts of accounts that are not operated in a standardized fashion. Perhaps the biggest challenge governments face is that there is ‘no single version of the truth’ when it comes to reporting. There is a perpetual struggle to balance the needs of reporting against legislative spending authorities with day-to-day budget and reporting structures that are increasingly focused on ‘results’ and ‘outcomes’.
These challenges make it harder to develop accurate financial analysis to support modernization decisions. Business cases are always complex to prepare and the tracking of tangible benefit realization is very difficult. This potentially results in four undesirable outcomes:
§ Less reliable information on which to base decisions
§ Less transparency on the achieved results or the opportunity cost of decisions
§ A lack of true accountability for the achievement of stated benefits
§ A greater focus on the short-term financial implications related to the remaining term of the existing government’s mandate.
This situation is not sustainable if governments are to drive long term, tangible change with accountability and transparency for results. It is important, though, that initiatives to improve the finance function are not viewed in isolation from the ‘whole of government’ modernization. There is a link between improving the finance function and organizational performance.
The private sector provides some interesting case studies. Lessons learned show that more sophisticated finance capabilities and enhanced financial leadership can drive higher performance. For example, a recent survey by Deloitte in conjunction with the CFO Publishing Corp. identified that 81% of respondents felt that timely access to higher quality information would improve profitability. A majority also saw a direct link between having access to better information and higher investment returns. It is possible to draw parallels with the pubic sector, which, despite the absence of a profit motive, maintains similar objectives for cost reduction and the need to link investment decisions to improved outcomes. Perhaps the greatest lesson learned for government is that a majority of respondents in this survey felt that the benefits of investing in improved information quality more than offset the costs.
The public sector is starting to pay attention to these motivations. The Government of Canada is in the planning stages of a major shared services initiative. Bruce Deacon, the former assistant secretary for the Corporate and Administrative Shared Services initiative, notes that "while the traditional object of implementing shared services is around productivity and cost reduction, the key objective for the federal government shared services initiative is to improve management information. Our goal is to enable a standardized information and reporting framework with decision support tools to provide improved management information for enhanced decision-making for departments and the whole of government."
Figure 1 provides an illustration of the key components within a top-down and integrated approach to financial management. Historically, these components have either been largely absent, such as performance scorecards, or have evolved in an incremental fashion, such as the Estimates process.
At the top level, governments need to articulate clearer strategic objectives and identify the key dimensions against which to report financial information. The federal government has made progress in this regard with the development of Program Activity Architectures that are assisting departments in moving to a greater outcome focus.
The next level is to define the financial information to meet those requirements. Examples include information to support costing assessments as well as non-financial information to support resource allocation decisions. Emerging practice for the latter of these is beginning to employ portfolio management techniques that compare targeted outcomes for a given level of investment. However, defining the integration points and relationships between these points is where the challenge occurs. For example, it took Ontario a number of years to implement a single financial system with a common chart of accounts.
With the foundation established, the next priority is to deliver greater value to all users of the system through improving approaches to costing and financial reporting.
Manitoba is also in the early stages of advancing the role and impact of finance across government. Betty-Anne Pratt, the provincial comptroller, explains, “several years ago, the province developed a comptrollership framework to serve as a guide for financial managers across the province. While this was a good first step, our goal now is to move to the next level through the development of more detailed processes and policies. Ultimately, we want to increase the role of the internal audit function to monitor departmental compliance to the new framework.”
Interestingly, Pratt also notes, “the ultimate driver for this initiative is the expected eventual requirement for governments to provide management certification of compliance with internal controls.”
Where should government finance managers start in the quest to provide better support for the modernization agenda? I would argue that there are five basic principles that should be adopted as a starting point:
1. Standardize and improve reporting: Reporting processes have frequently evolved based on specific requests and an overall desire to track information at the lowest level of detail possible. While many governments have a single financial system, the lack of standardization in reporting creates too many accounts and an inability to easily consolidate information for horizontal reporting purposes. Central agencies must develop standards on the level of detail of financial information that should be maintained within core financial systems across government.
2. Evolve from cost containment to investment management: With increasing healthcare costs across the system, budget containment has never been more important. Governments need a re-orientation from cost incrementalism to investment management. The relationship between investments and outcomes must be better understood by finance managers when strategic and operational resource allocation decisions are being made. Governments can learn from ‘value-based management’ practices of private industry. This will enable investment appraisal processes to identify and force trade-off decisions.
3. Define a consistent approach to costing: A critical enabler to support government modernization decisions is robust and consistent costing information. While there are numerous approaches to costing that can be applied, the standardization of approach is more important than the approach itself. This will provide more robust information to managers on which to base alternate service delivery decisions.
4. Develop a holistic plan: There are often too many disconnected initiatives underway at the same time that impact financial management. For example, projects covering areas such as shared services, revenue management and costing all have a direct impact on financial reporting, yet these are frequently being conducted in isolation. A holistic plan that identifies and plans for linkages across related projects is critical. Techniques such as portfolio management are very useful in providing a ‘whole of government’ perspective.
5. Identify a single point of accountability: There are a variety of governmental structures that demonstrate varying degrees of role separation between those responsible for recording transactions, planning, budgeting, reporting financial information and reviewing or approving funding requests. The absence of an overall position with single point accountability for financial management, synonymous with the role of the Chief Financial Officer in the private sector, is a major obstacle.
The modernization of government is a complex undertaking that will continue to evolve and take many years to show widespread benefits to citizens. Financial management must now be elevated within this agenda and viewed as a key supporting mechanism that enhances decision-making. The road ahead will not be an easy one since it will challenge many legacy structures, processes and resource allocation practices. However, the provision of transparent, consistent and accurate information should be viewed as a fundamental of ‘good government’ for both internal and public-facing purposes.
Andy Potter is a senior manager in Deloitte’s Public Sector Consulting practice. He specializes in assisting clients improve financial management and operational processes (andpotter@deloitte.ca).
