Sustainable Public Financial Management

Doug Hadden, VP Products

Phasing of Public Financial Management (PFM) “reform, through achieving gradual manageable steps (DFID 2005)” is considered a good practice. In fact, if any thing in PFM is considered a best practice – it’s the phased implementation of PFM reform and supporting information systems as we’ve pointed out before and validated at numerous conferences.

The sequence of reform depends on the country context. “Implementing public finance reforms of any kind requires an understanding of the entire public finance system in place in that country. It requires an understanding of the institutional arrangements (Rodin-Brown 2008).” As a vendor specializing in the government domain, Government Resource Planning (GRP), FreeBalance has developed a methodology called progressive activation that enables governments to modernize over time. That’s because, unlike the private sector, technology solutions like GRP need to follow reform. A company can easily change a chart of accounts to improve performance tracking or adopt secure electronic cheques with electronic signatures. Governments often need to change the law to support these “business process” improvements.

There is no established sequence of reform (Allen 2009) except at a fairly high level. David Nummy from Grant Thornton provided a good PFM framework at our FreeBalance International Steering Committee meeting in 2008.

It is rather frustrating to government PFM practitioners to determine the sequence of technology adoption to follow reform. Some technology adoption does not require legal reform. As I discovered in the Kyrgyz Republic, there is an appetite to understand the benefits of financial, budget and civil service automation to help determine priorities for legal reform. We have always identifed the three dimensions of sequencing GRP technology:

1. Modules or functionality that is implemented by governments. We’ve created a PFM component map that provides an overview of general modules used in government GRP.
2. Decentralization or the rolling out of functionality to other government entities.
3. Modernization or reconfiguration of existing modules to support reform.

We have our first draft of a simplied scorecard to help identify the level of maturity of a government financial management software system. I’d very much like input and ideas. This will help all PFM practitioners regardless of software technology used.  The items in the “modernization” column may imply the acquisition of additional modules or it could be activating functionality that already exists. Governments can utlize the scorecard to show what is current implementd and what could be implemented in the future.

Recent financial shocks have led to accelerated adoption of Government Resource Planning (GRP) and Public Financial Management (PFM) reform in emerging countries. What about more developed countries? There has been some examples of fiscal reforms in countries like Korea, and changes in regulations for the financial sector in OECD countries. Yet, governments in Iceland, Greece and Ireland are experiencing significant fiscal shortfalls.

How can GRP help governments to adapt more effectively to unexpected financial crisis? Freezing spending and public sector wages is a typical approach. How can emerging country governments expect to better manage budget shortfalls if the budget management software in use in developing countries appears so ineffective?

Financial Stress and the  ’Budget Problem‘

Government financial management is budget driven, unlike the private sector. Government budgets are complex. And, constrained:

• Capital expenditures often span multiple years and generate multi-year commitments. Slowing in-progress capital expenditures can result in half completed bridges, buildings, internet infrastructures.
• Recurrent expenditures often have minimum costs that provide little room for reduced spending. Hospitals need electricity and medical supplies.
• Public Private Partnerships (PPP) bring expenses off the government balance sheet. However, governments are often liable to pick up on these projects when the private sector partner encounters financial difficulty.
• Legal constraints often mandate expenditures, such as the results of  ’propositions’ in the the American State of California. These expenditures cannot be reduced. Many governments are unable to reduce the size of the public service even when jobs are identified as redundant, as in the case of India.
• Donor projects executed by the government or outside organizations often require a legal commitment for the government. Governments may need to contribute funds to projects or provide specific deliverables. Cutting back on the government expenditure can cancel donor funded programs.
• Wages often represent a significant portion of government expenditures. Governments are often the largest employer in countries.  This is why salaries are often reduced or frozen when governments encounter budget deficits. Yet, this method often demoralizes public servants and reduces the quality of government services.
• Government objectives and priorities are difficult to manage during financial crisis. New priorities such as stimulus packages are introduced. Medium and long-term objectives often take a “back seat”.

Effective Budget Management for Governments Under Financial Stress

Many budget preparation software applications used by governments are ineffective in handling financial crisis.  Applications developed for the private sector do not have necessary features for modeling multi-year budgets. Custom applications typically manage the ceremony of budget proposals. Spreadsheet applications are not able to handle whole-of-government budget analysis.  These solutions are often unable to forecast budget surpluses or deficits during the fiscal year.

Governments can use effective budget preparation and budget execution software components of GRP to more effectively deal with financial crisis. These applications, like the FreeBalance Accountability Suite, can support the following:

• Scenario planning and what-if analysis during budget preparation and execution. Financial crisis can be modeled in budget preparation software. Governments can leverage these models should a crisis occur. Governments can also update these scenarios with actual figures to enable more effective reaction to problems.
• Forecasting provides early warning on revenue shortfalls. Governments can react quicker and more effectively.
• Wage forecasting is particularly important when managing deficit situations. Wages include salaries, benefits, training, travel, bonuses and other civil services expenses. So, wages can vary significantly from plans. Human Resources applications rarely have budget visibility. Wage forecasting and variance is critical. Elements of salary costs other than wages could be reduced.
• Multiple year visibility to budgets, budget types and budget constraints to enable decision-makers to find more effective methods of expenditure management.
• Objectives management for budgets enable governments to link expenditures with objectives and priorities.  Every expenditure is linked with one or more objectives. Priorities change during a financial crisis. Objectives management enables governments to recast budget plans during the fiscal year to focus on priorities.

It’s obvious that acquiring financial management software for governments is no mean task. The benefits are clear: efficiency, effectiveness and good governance. Yet, from planning to implementation to execution and use, the potential pitfalls are numerous. For a function as crucial to governments as financial management, these pitfalls are especially important to avoid.

We wish we could say otherwise, but the unfortunate truth is that the statistics are not all that comforting. As we pointed out in an earlier blog post, one study shows that only 34% of enterprise software projects in the public sector can be categorized as successful, while another reveals that they take on average twice the agreed cost and time to implement. So much for the sustainability of the products of our industry! But that is why here at FreeBalance, ensuring the long-term sustainability of Government Resource Planning (GRP) solutions is our primary goal. And, we have experienced a high success rated.

Although the success rate of our implementations might indicate otherwise, the fact is that there’s no one algorithm out there to determine what route a government should take in acquiring a sustainable GRP solution. Certain questions endure, not least of which is the one we discussed yesterday: should a government buy an off-the-shelf GRP solution or develop one in-house? This is the “build vs. buy” debate encountered by many governments.

As with all good debates, there are merits to both sides of the argument. And as with any viable solution, all sides of an argument must be taken into account. Our latest GRP solution was developed with this very principle in mind.

It’s as simple as ABC

In our 25 years of experience with governments around the world, we have come to one particularly important realization: no two governments operate in the same context, so any sustainable GRP solution must provide far-reaching value to governments on all fronts of the argument.

In response, the FreeBalance Accountability Suite was developed as a Commercial Off-the-Shelf (COTS) GRP suite of applications, which in turn is built upon a specialized GRP foundation: the FreeBalance Accountability Platform. Governments can “buy” the Suite or “build” using the Platform.

FreeBalance thus offers the best of both worlds to governments; we call this our A-B-C Approach to maximizing government value. The generic advantages and disadvantages of each approach are tabled below, followed by the value of the FreeBalance solution in each context.

Adopt

Adopt software already in use elsewhere by government or another government that operates in a similar manner and context.

Buy

Buy COTS financial management software that can be configured or customized to meet government needs.

Customize

Customized software developed by governments.

The FreeBalance solution thus provides increased value to governments regardless of whether they choose to adopt, buy, or customize their financial management software. It’s easy to be dogmatic and push only the most ‘profitable’ solution as the right one. But with our 25-year experience as vendors of government-specific financial management software, we made sure to develop a solution as flexible as the needs and goals of our government clients. The art of sustainability is never quite as simple as ABC, but at FreeBalance we take pride in keeping it as close as possible to a science.

We participate at numerous public financial management events such as ICGFM and CLAD.  We often point out the benefits of the FreeBalance approach – software that configures for Government Resource Planning. Often met with skepticism. Sometimes laughter. Many say that government requirements are so different that it is impossible to configure to meet the unique requirements.

It’s no wonder that we get this skeptical reaction. There has been a poor record of success in implementing COTS software in governments around the world. (Although, we have had a very high success rate compared to alternatives.)

Many governments cannot standardize processes within line ministries because of differences in mandates. It’s no surprise that most governments in Latin America opt for custom developed systems. Custom systems can meet 100% of the design requirement.

But there is a build to requirements dilemma. By building to 100% of the design, custom systems are not built to meet future requirements.  As we all know, governments are constantly modernizing.

For example, a custom financial systems built to operate on a cash accounting basis is difficult and expensive to adapt to run on an accrual basis.

When is Unique really Unique?

FreeBalance provides software for the entire budget cycle. We have implementations around the world – Africa, Asia, Caribbean, Latin America, Europe and North America.  Supporting over 10 languages and 3 character sets. National and sub-national levels.  We have been able to configure the FreeBalance Accountability Suite to meet unique government requirements. We have found that some government application rules and processes vary little among governments while others vary widely.

Applications with high variability require clever solutions to enable configuration and reconfiguration to support government modernization.  We have found that many core elements to a Government Resource Planning system can be configured while some require customization.

We’ve developed methods to support flexible workflow in applications with medium and high variability like our Performance Procurement and Civil Service Management applications.

When Unique is Unique

We know the benefits of COTS software: built-in quality control, robust feature set, and code maintenance.  Governments in Latin America can benefit from the approach in the FreeBalance Accountability Suite. Sometimes, unique is unique. Governments need to develop custom applications. Our alternative is the FreeBalance Accountability Platform – a government platform for the creation of custom developed applications that we’ve described in a previous blog post.

The Government Platform Alternative

Governments in Latin America develop custom financial management software. Commercial Off-the-Shelf (COTS) financial management software is rarely acquired in Latin American countries. FreeBalance is a provider of COTS Government Resource Planning (GRP) software. The benefits of acquiring COTS software are well understood.  But, we recognize the benefits of custom developed software for governments as described in an earlier blog posting and recent technical notes by USAID and the IMF:

• Improves technical and IT capacity
• Adapts to the unique requirements
• Reduces costs for on-going maintenance
• Retains intellectual property with the Government

Custom government financial management software is developed using technical platforms. The platform consists of programming languages, infrastructure (typically Java or .Net), Relational Database Management Systems (RDBMS), Integrated Development Environments (IDE), modeling, building and testing tools. Open source and commercial tools are available. These tools are robust and capable of producing enterprise-class applications.

But there are disadvantages to using technical platforms.

Technical software platforms require government organizations to model and develop application components. The initial development cycle from specification through to pilot implementation is lengthy. Subsequent changes to the software code to support reform and modernization can also take a lot of time.

Is there are better way for the custom development of government financial applications?

The FreeBalance Accountability Platform is a government financial management platform. It forms the basis for the FreeBalance Accountability Suite. Unlike technical platforms, the FreeBalance Accountability Platform includes a reusable set of government financial management components. And it includes a complete technical platform.

The FreeBalance Accountability Platform includes a Technical Framework and a Comprehensive Set of Government Entities

FreeBalance government customers are able to leverage the FreeBalance Accountability Platform to more rapidly develop custom government financial management applications. This platform includes:

• Open-source Java-based low-cost robust technical platform
• Robust adaptable Chart of Accounts and fiscal controls base
• Re-usable set of planning, accounting, revenue, expenditure, assets, procurement, treasury, payroll and human resources business objects
• Adaptable business rules and workflow management
• Integrated reporting, analytics, content management and messaging
• Multi-language, multi-currency, multiple-year structure
• Build, test, deployment and security infrastructure
• Modern Service-Oriented Architecture and component assembly approach
• Optimized technical footprint enabling local, regional and national government implementations
• Multiple tier scalable architecture including the ability for multiple configurations to support government shared services
• Parameter method to enable reconfiguring for future requirements

Advantages to Using a Government Resource Planning Platform

The use of the FreeBalance Accountability Platform enables government IT departments to accelerate the development of Public Financial Management applications. The technical framework accelerates system design, technical development, migration and deployment. Reusable government entities accelerate business analysis, systems analysis and application development. Quality assurance is accelerated because the platform itself has been fully tested. Upgrading and refactoring is accelerated through the parameterization approach in the FreeBalance Accountability Platform.

A better way

Government IT departments can develop custom applications using the FreeBalance Accountability Platform. The infrastructure supporting the Web Services standard enables integrating with existing government software. The source code developed by the government is owned by the government.

The FreeBalance Accountability Platform enables governments to more rapidly develop financial and civil service management software than technical platforms. It supports creating comprehensive Government Resource Planning (GRP) systems meeting unique needs. And, the FreeBalance Accountability Platform is sustainable through enabling future adaptation to meet changing government requirements.

The GTEC 2009 conference was held in Ottawa from October 5 – 8. One of the main themes of the conference was finding the right mix of Web 2.0 technologies to support Government 2.0 initiatives.
 
It’s clear that governments are excited about the prospect of using new technologies to engage and interact with citizens and civil servants. The conference featured numerous speakers including Tim O’Reilly who spoke about Government becoming a Platform to fuel innovation by citizens and civil servants.
 
Government Resource Planning is about designing, implementing, executing and adapting plans to meet government objectives. In this context, plans will continuously evolve and improve. Government 2.0 allows governments to be more transparent. Platforms that support government resource planning allow governments to share meaningful, up to date information with citizens and civil servants. Government 2.0 technologies can be used to present information and to gauge the reaction to information presented.
 
It’s clear that governments understand that the Web 2 services that are attractive to the public today could quickly change tomorrow. It’s also clear that governments understand that no single Web 2 service will appeal to all of its customers. This means that Government Resource Planning initiatives must factor the great Web 2 technologies of today and have a platform that can easily adapt to the Web 2 technologies of tomorrow.
 
Government Resource Planning needs Government 2.0 to present accurate information to citizens and civil servants in an engaging manner. Government Resource Planning needs Government 2.0 to monitor public response to government performance, and adapt to the needs of citizens and civil servants.

FreeBalance will be showcasing its Government Resource Planning (GRP) technology at Canada’s Government Technology Event (GTEC). GTEC takes place at the Westin Hotel in Ottawa from October 5-8.  The GTEC conference is focused on leveraging and integrating Government 2.0 technologies to drive service transformation. This year’s theme is “Government 2.0 Service Mash-ups” and organizers hope to demonstrate how the private sector concept of mash-ups applies to public sector services.
 
The theme and focus of GTEC 2009 is well aligned with the FreeBalance vision for financial management in governments around the world. The FreeBalance Accountability Suite is designed specifically for public financial management and covers the entire budget cycle including budget preparation and budget execution.  FreeBalance solutions are built using technology that supports the unique and evolving requirements of government, including the need for enhanced Government Resource Planning (GRP), Government Performance Management, Government 2.0, Shared Services and Service Oriented Architecture (SOA). 
 
The unique FreeBalance vision for the future of Government Resource Planning combines transaction management with content and collaboration. Accountability can be effectively achieved through GRP systems that integrate collaboration, documents, content, budgets and transactions.
 
Members of the FreeBalance team will be available at Booth 1010 on October 6th and 7th from 9:30 a.m. to 4:30 p.m. to discuss the FreeBalance web-based solutions for public financial management and to introduce clients to the new FreeBalance Customer Exchange. The customer exchange was launched to meet a growing demand for collaboration and knowledge transfer among FreeBalance customers. The on-line community engages members with advanced Web 2.0 technologies designed to promote user interaction, information sharing and awareness of good practices.

We’re excited about the future of public financial management. We’ve just announced the world wide commercial availability of the FreeBalance Accountability Platform version 7, the underlying technology platform of our flagship product the FreeBalance Accountability Suite.  We’re showing it at the Canadian GTEC conference in Ottawa.
 
The FreeBalance Accountability Platform is the foundation for the development of pure web based government resource planning (GRP) applications. We’ve used the platform to extend the capability set of the FreeBalance Accountability Suite. We’re able to build government grade products faster than ever before, and we’re uniquely positioned to transfer these cost savings to our customers.
 
Freebalance and FreeBalance development partners are using the FreeBalance Accountability Platform to modernize existing implementations, and develop  web based public financial management solutions to meet the requirements of governments around the world. The FreeBalance Accountability Platform extends public financial management good practices and Web 2.0 collaboration and content to modernize government public financial management. Core to the FreeBalance Accountability Platform are multiple tiers of configurable business logic that establish use, workflow and context. Coupled with hundreds of reusable government objects and Web 2.0 dynamics, the Government 2.0 generation of public financial management will be exciting and rewarding.