Sustainable Public Financial Management

This is section 3.2.5 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

Countries are decentralizing decision-making and fiscal responsibilities. According to the United Nations Global Forum for Reinventing Government, “”political devolution,  de-concentration, delegation, and transfer to non-governmental organizations, promotes democracy and good governance by providing an institutional framework to bring decision-making closer to the people.” There is a significant amount of literature to support this view. However, there have been mixed results.An earlier posting called “towards a framework on legal governance” provides additional insight.

IFMIS Implications

Fiscal decentralization is a major theme in public sector reform. The decentralization of fiscal and service delivery responsibility to line minitries and sub-national governments needs to be supported by the Integrated Financial Management Information System (IFMIS). And, the implication of fiscal decentralization often includes the financial system. This is in conflict with the trend in private sector enteprise software for centralization where all systems are hosted centrally with the same configuration. Implementation challenges include:

• Legal reform: devolution may require that information systems are separated from the central government to reflect the legal separation of governance duties among governments.This introduces system administration costs for maintenance and management. The IFMIS must optimize systems administration across multiple implementations.
• Capacity: levels of accounting and technical capacity differ among government organizations. Line ministry and local government capacity can be lower than larger ministries. The administration of the capital city may have more capacity than some line ministries.The IFMIS must be able to support different configurations across the country that reflect local capacity and must support the ability to progressively activate as capacity improves.
• Separation of governance duties: the needs of line ministries and sub-national governments differ from the Ministry of Finance. The concerns for these governments may not have been considered with the original IFMIS implementation. The IFMIS needs to configure to support the needs of these government organizations.
• Network infrastructure: not all countries support high-bandwidth, always-on networks. Some countries do not have reliable access to power. The IFMIS must be able to be installed centrally, through hubs and stand-alone. Data transfers among government organization such as budget transfers or expenditure reports must support low bandwidth connections and physical media.

This is section 3.2.2 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

Public Financial Management is budget driven. The budget represents the legal embodiment of government intentions. Government organizations utilize software applications to satisfy many or all of the steps in the budget cycle.  Governments are moving to support and integrate the entire budget cycle within an Integrated Financial Management Information System (IFMIS).

Supporting the entire budget cycle enables more effective public financial management through:

• Linking budget and accounting processes to ensure that expenditures seamlessly match the budget law
• Identifying outcomes from previous fiscal years to improve results for the current year
• Integrating forecasts, trends and commitments to improve the use of cash and investments
• Determining key performance indicators to enable improved budget execution

The Budget Cycle

The budget cycle consists of three main stages:

1. Budget Preparation or Formulation where government objectives are translated into budgets and appropriations. The budget preparation process includes comparisons with previous year budgets, actuals and outcomes. Multiple year budgets are typically prepared because many initiatives and programs require many years before results can be effectively measured. There is often multiple budget proposals prior to legislative approval and the creation of the Budget Law.
2. Budget Execution represents public financial management functions that are budget-centric and are not accounted in traditional accounting. This includes up to two levels of commitments or encumbrances that sets aside funds from the budget. It also includes adjusting budgets to reflect macroeconomic changes, cash availability, forecasted budget variance and unexpected needs. Budget funds are transferred based on government legal requirements.
3. Financial Management and Reporting represents the public financial management functions that are typically supported by traditional private sector accounting. Revenue and expenditures are accounted for in the appropriate ledgers. Revenue and Expenditures are accrued if the government is using a form of accrual accounting. Government cheques and electronic funds transfers are supported.

Missing Elements of the Budget Cycle

Some elements of the budget cycle are typically not automated or fully supported in government systems. These include:

• Aid managementis often not integrated within the budget preparation, execution or management systems.  Many governments receive partner funds and intergovernmental transfers that are not accounted for in the IFMIS in any way. This restricts the government ability to effectively plan, especially if there is overlap in programs. It also prevents the government from effectively measuring the outcomes in any financial sector. And, it does not match any conditions associated with these funds that must be managed by the government.
• Forecastingbudget variances and running scenarios is often relegated to spreadsheet applications relying on data exporting.  Expected budget variances should be presented to IFMIS users in real-time to enable improved decision-making. Scenario planning to determine the affect of currency exchanges, prices for common goods or changes to union collective agreements should be built into the system from budget preparation through execution.
• Commitments and obligationsare sometimes not supported in government systems. A commitment (or soft commitment or pre-encumbrance) is used to identify the beginning of an expenditure cycle such as when a purchase requisition is produced. An obligation (or hard commitment or encumbrance) is used to identify when the government has entered into a contractual agreement such as the issuing of a purchase order.  Governments that track both steps can better forecast budget variances and cash requirements.
• Cash and debt management systems are often not integrated within the IFMIS. This prevents governments from using cash effectively to generate interest. It prevents governments from effectively tracking debt obligations and adjusting budgets.
• Revenue and expenditure subsystems are often not integrated. Governments can be faced with lower revenue from taxation than planned. This requires budgetary adjustments to reflect budget deficit rules and cash requirements.
• Extra budgetary and parastatal revenue and expenditures are often not integrated with government financial information. The government may not have budget control over all entities or budget centres. Nevertheless, the government may benefit from revenue collected, is obligated to make up budget shortfalls or is subject for conditions from external partners.

Management Decision-Making

Government organizations are moving to the full support of the entire budget cycle. Full automation of the budget cycle provides necessary information to decision-makers. It enables comparing across multiple years and among governments. It dramatically improves budget execution to enable meeting government objectives and improving results.

This is section 3.2.3 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

To paraphrase Lily Tomlin,  ”I’m concerned that the person who invented the term ‘performance management” thought that if you didn’t manage it, performance would just get out of hand.”  Many today think that “government performance management” is an oxymoron like “military intelligence” or “business ethics”.

Why Government Performance Management?

Government Performance Management has been a topic of concern in the public sector for many years. Some view it as a fad – soon to be replaced with something else. Yet, the move to improve government results has taken hold. There are compelling drivers for improving results:

• Globalization has created competition among countries. Businesses want to operate in countries that provide efficient and effective services to citizens.
• Inefficiencies in government have been exposed thanks to improved accountability.  Citizens are demanding more effective and efficient government services.
• Tight budgets require governments to do more with less.
• Results from government activities can improve development outcomes in health, education and economic development. Civil servants recognize that the government mandate can only be effectively achieved through improved performance.
• Citizen and business confidence increases as governments improve results.

Public and Private Sector Differences

Organizations in both the public and private sector are attempting to improve results.  Both public and private sector organizations attempt to increase performance by selecting Key Performance Indicators (KPI) and using techniques such as the Balanced Scorecard. Nevertheless there are important differences in performance management that distinguish government from private sector organizations:

• Profit:  All outcomes in the private sector map to corporate profit. Companies can determine the effect of measurements to achieve profit. Outcomes like customer satisfaction are leveraged in that they can improve profit.  In government, outcomes like citizen satisfaction, are the end goals. This makes it much more difficult to map inputs, outputs and outcomes in the public sector.
• Budget:  Budgets are guidelines in the private sector. The budget is the law in government. Government activities need to be linked to the budget.
• Consequences:  Companies tend to operate in finite markets where the major consequences of any performance initiative such as reducing price operate within a narrow band of possibilities. Governments can realize broad unplanned positive or negative consequences of any initiative.

Learning from Corporate Performance Management

The software category for reporting and analytical tools was primarily known as “Business Intelligence” (BI). This market has matured further to become known as Corporate Performance Management (CPM). CPM is distinguished from BI in that tools focus on KPIs and exception reporting.  Many of the CPM techniques are useful for governments including:

• Development of logic models that describe the interaction between inputs (money invested and items acquired), outputs (items or people affected) and outcomes (non-financial measurements).
• Continuous improvement of outcome measurements to determine effectiveness and efficiency. Governments can determine the net cost to improve a unit of output (such the cost to add a student) or unit of outcome (such as the cost to increase mathematics test scores by 1% per student).
• Use of visual tools like the balanced scorecard to enable improved results during budget execution.
• Use of different types of measurements. Many governments focus on efficiency measurements. This may not always provide insight into effectiveness.

Sequencing Government Performance Management

Many government organizations wish to adopt performance management quickly. There are no “short-cuts” to effective Government Performance Management. Civil servants can develop methods and structures to improve performance management through a series of steps. The phases of Government Performance Management include:

• Standardized budget preparation to develop the structure of justifying expenditures based on government plans.
• Multiple year budget preparation, often called “medium term”.  Outcomes often require years to develop. Credible budgets require this medium term view.
• Program budgeting where budgets are associated programs and goals. Viewing programs within the Chart of Accounts enables accounting for inputs and expenditures.
• Objectives added to the Chart of Accounts. Government financial management is all about spending to the budget. Government objectives can be mapped from a logic model against programs and projects. This enables governments to associate expenditures against objectives.
• Development of input and output measurements. Inputs and outputs are easier to articulate and measure than outcomes.
• Development of outcome measurements.

Government performance management will continue to change over time because:

• Developments in the country macro-economic conditions will change objectives and measurements.
• Changes in governments will bring in new mandates.
• Civil servants will develop more effective measurements over time and be better prepared to identify additional consequences from government programs.

“Government should be run like a business.” James Chan examines this myth in “A Comparison of Government Accounting and Business Accounting” in the International Journal on Governmental Financial Management. Chan focuses on the American experience from the days of Thomas Jefferson who wanted the “finances of the Union as clear and intelligble as a merchant’s book.”

Unlike business accounting, public financial management is budget driven. “Budget specialists tend to view accounting as part of financial management, and financial management as part of budget execution. ..(T)he budget serves as the basis of management control and legislative oversight,” according to Chan. He points out the conflicting objectives of budget specialists and accountants in government.  His chart, “Contrasting Views of Two Financial Specialists,” provides an excellent synopsis. This need to satisfy budget and accounting requirements results in more complex charts of accounts and control mechanisms in the public sector.

Chan -A Comparison of Government Accounting and Business Accounting

Chan points out the benefits of many accounting practices that derive from the private sector including double-entry bookkeeping.  However, as described by Norvald Monsen in the same publication, there is a single-entry bookkeeping method in operation in German speaking countries called “cameral accounting.”  Cameral accounting is a single-entry system that provides accrual reporting capabilities.

Monsen – Enterprise Cameralistics

There is significant debate about the need for accrual accounting in government. This controversy increases when considering accrual budgeting . “Government budget specialists greet the introduction of accrual into budgeting with considerable skepticism, ” asserts Chan. The costs to adopt accrual accounting in government can be significant. For example, valuing property and assessing contingent liabilities can be onerous. And, the benefits of accrual accounting can be a disincentive for politicians. Politicians are keen to present budget “inputs” – the amount spent in their districts, not the value of the investment. The true value of government initiatives, including long term liabilities like pension plans, are not of interest to politicians looking for re-election.

Chan attempts a big picture view showing how elements of both business and government accounting are similar or converging. The need for transparency is an important trend in both the public and private sectors. This is a very interesting point given the complexity of business reporting requirements, particularly for publicly-traded companies in the United States. Unlike accrual accounting, there are incentives for politicians to support transparency. Transparent and financial facts show whether governments have executed on promises. Without these facts, opponents or the press are free to present misleading information.

by Doug Hadden VP Products

I was surprised.  ”I’ve heard that FreeBalance has poor customer support, ” said an expert in public financial management. “You don’t leave anyone in country after the implementation.” It was particularly surprising given our improvements in customer support. And, that we have been leaving people in countries after implementation for the past two years. And, we received ISO-9001/2000 certification for these processes in November of 2007!

It has been challenging to transform a company to provide global support. One of our first blog entries described some of the changes made in the road to a customer-centric company.  FreeBalance has made important strives in improving the sustainability of Integrated Financial Management Information Systems.  In particular, we have been able to improve support by recognizing the unique challenges in our global market.  It is clearly time to share results, actions and lessons learned.

Results

FreeBalance uses a dashboard to monitor open cases. We began to use this dashboard in March of 2008. Every executive has real-time access to the dashboard. And, the dashboard is e-mailed every Monday morning. I’ve taken the data related to open cases to demonstrate improvements.

Orange line reflects one year of using support metrics dashboard

We have reduced the number of open cases since March of 2008 by over 56%. The number of emergency open cases, this morning, was zero. FreeBalance tracks software defects, data problems, service, sales and enhancement requests as open cases. Less than half of the cases reported are software defects. Many of these cases are often not software defects. The number of open cases has begun to stabilize over the past few months. Recreating problems often requires significant time and effort.

FreeBalance has retained the ISO-9001 certification in November of 2008.  The processes continue to improve.

Actions

The Move to Customer-Centric

Manuel Schiappa Pietra, our President and CEO, joined FreeBalance in March of 2006. In the Spring of that year, Mr. Pietra mandated changes to support a customer-centric model. These organization changes included:

• Simplification of the management structure to ensure that support issues reach executives
• Re-organization of the company as a matrix organization to enable better use of people to solve customer problems
• Development of improved enhancement processes
• Creation of special SWAT teams to respond to emergency issues
• Improvement in global support including the establishment of a full support centre in Pristina Kosovo so that we could handle 24/7 customer support

I can say that we’ve had six SWAT teams since that time.  We’ve resolved all of these issues. I am personally involved in every SWAT team.

In Country Support

FreeBalance did usually keep staff in countries after implementation in the past. The thinking at the time was that the software was focused and simple. Governments could easily sustain these implementations. However, we encountered some difficulties. As a result, we leave small teams in countries or regions to support our customers.  The current in-country support includes:

Canada (full support centre), the United States, Guatemala (covering Central America), Antigua (also covering Guyana), Kosovo (full support centre), Sierra Leone, Mongolia and Timor-Leste.

Other support initiatives

There have been numerous customer-centric initiatives since 2006 including:

• FreeBalance International Steering Committee including annual meetings
• Customer-satisfaction surveys
• Customer engagement program that collects customer issues
• On-line customer portal that enables tracking of issues and provides the basis for the support dashboards
• Assignment of support staff to customers and employee appraisal based on support performance
• On-line customer support knowledge base
• On-line Customer Exchange – a real-time user group for customer collaboration
• Increased training for FreeBalance staff
• Customer engagement program to ensure that FreeBalance staff meets every government customer on an annual basis

Lessons Learned

The challenge for FreeBalance was significant – support government customers around the globe.  With varying degrees of financial management and information technology capacity.

Some headquarters locations supported by FreeBalance

Companies can only improve that which is measured. Measuring cases and satisfaction rates has made a big impact to FreeBalance.  Many of our customers have commented on how open and responsive we have become.

Some important lessons learned include:

• The number of open cases and similar metrics are important but are only inputs.  Connecting these inputs with customer outcomes is difficult, but is required.
• SWAT teams benefit from outsiders with different points of view. This can question conventional thinking and provide creative solutions.
• Customer support can always be improved.  Our metric for the number of open cases needs to be reduced by around 15% to meet our goals.
• Improving customer support begins with eliminating information barriers.  Bottlenecks are exposed. New processes can be engineered.
• Staff can be defensive because implementing customer-based metrics can place blame on people. Management must communicate that customer initiatives are about improvement, not blaming.
• Surveys are not as effective as face-to-face meetings. The use of brainstorming techniques such as the “six thinking hats” provides important insight. The customer engagement program has been particularly effective. This standard approach with discussions with FreeBalance users and managers has resulted in important insight.

A Note on the Customer Engagement program and Customer Exchange portal

FreeBalance created a Customer Exchange portal to foster collaboration among FreeBalance customers and staff.  The portal is located at http://www.freebalancecustomerexchange.com and is limited to FreeBalance staff, customers, users, partners and PFM experts.  This is still early days with about 100 members, of which 2/3 come from outside FreeBalance. We’ve seen some interesting discussions generated.  (The shared photo album is global.)  I hope that this portal will build on the Customer Exchange program.

We created the Customer Engagement program because so much of our in-depth management-level discussions with customers were specific to sales or support. Or, the discussions were in groups with other customers like the FreeBalance International Steering Committee and the FreeBalance Government of Canada Cluster.

We created a set of standard materials and questions for our customers. Sales, support and services staff visit customers to determine issues, product ideas and better ways for support.  We are still in progress.  Most of our Canadian customers have been visited. American customer meetings are scheduled this week. We also have meetings this week and next with important international customers. This program has proved to provide important insight:

• Meeting with customer teams provides a larger picture of organizational goals and issues.
• Customers are very happy to see us and have reacted very positively to the engagement.
• Many meetings generate follow-up special-purpose meetings on product and technology opportunities.
• Customers have remarked that FreeBalance has become very open. Customer satisfaction is higher than expected, but there remains room for improvement.
• We are able to see patterns for product and service improvements thanks to this standardized approach.

Conclusions

But, this remains a journey of continuous improvement.  Companies can become too satisfied with improvement and not maintain the discipline. We discovered that the most important discipline is to question conventional thinking. Just because software companies do something in a particular way does not make it right!