Sustainable Public Financial Management

Doug Hadden, VP Products

IT cartels, IT innovation, and “metamovements.” What do these have in common? What does it have to do with Government information technology?

Strategic Inflection Point

I believe that this represents a “strategic inflection point” for Government IT. The same kind of strategic inflection point described by Andrew Grove when Chairman of the Board for Intel:

They represent, in my description of it, what happens to a business when a major change takes place in its competitive environment. A major change due to introduction of new technologies. A major change due to the introduction of a different regulatory environment. The major change can be simply a change in the customers’ values, a change in what customers prefer. … But what is common to all of them and what is key is that they require a fundamental change in business strategy, and that’s almost a definition of a Strategic Inflection Point. A Strategic Inflection Point is that which causes you to make a fundamental change in business strategy. Nothing less is sufficient.

This is a strategic inflection point for the way that governments manage information technology and the way in which software vendors support governments.

This “double dip” strategic inflection point is driven by:

1. Innovation Necessity: Budget constraints at a time of citizens demanding improved government performance and transparency at lower cost.
2. Value, Risk and Innovation Paradigm: Traditional methods to understand value have become obsolete in the age of social media.
3. Digital Darwinism: IT agility challenges incumbent Government IT providers.

1. Innovation Necessity

John Suffolk, the former UK Government CIO, suggested that governments should not waste a good financial crisis. It’s not just about finding innovative ways to reduce IT costs.  This crisis has seen the rise of what Umair Haque, Director of the Havas Media Lab and founder of  Bubblegeneration, calls the Metamovement:

The Metamovement is a movement of movements. Not all these movements are similar; no two are exactly like; each can be readily distinguished from the next. The Arab Spring is part of the Metamovement; the London Riots were part of the Metamovement; protests spreading across America, under the banner of Occupy Wall St, are all part of the Metamovement.

The Metamovement questions institutions. It demands a change in the status quo of how governments interact with citizens. This has a huge impact on policy and regulation. This is manifested in a demand for improved transparency through Government IT.

As Alex Howard of O’Reilly Radar has pointed out, recent cut-backs in the United States does not mean the death of open government.

Takeaway for Government IT: the government performance and transparency demand is a cornerstone of the Metamovement. Initiatives like the Open Government Partnership is likely the “end of the beginning” for open government data. IT information silos, proprietary technology and focus on IT “control” in government inhibit the ability for countries to respond effectively to citizen demands.

2. Value, Risk and Innovation Paradigm

Government IT decisions tend to be risk-adverse. Small steps are taken, primarily with incumbent software vendors. Yet, this can create an environment that limits innovation and cost savings through what former American Federal Government CIO Vivek Kundra calls “IT Cartels.”  This can result in attempting to find cost-savings through legacy technology“economies of scale” when  modern technology can generate technology can generate more agility while reducing costs and aligning performance with budgets.

As Harvard professor Clayton Christiensen has written, there are significant the differences between disruptive innovation and sustaining innovation. Successful leaders in any category, such as incumbent IT providers, are unlikely to challenge the status quo through disruptive innovation because it disrupts business models.

This fact is addressed in Geoffrey Moore’s new book, Escape Velocity: Free Your Company’s Future from the Pull of the Past. Moore, who developed the Crossing the Chasm technology analysis, addresses this lack of innovation among incumbents. As Mark McDonald of the Gartner Group summarizes:

Moore’s central premise in this well written, actionable and highly recommended book, is that companies have a structural bias for investing in things today that cause it to starve out the new products and services that will generate growth in the next 2 -3 years.

My sense is that this “starving out” reflects Government IT and incumbent vendor approaches to innovation.

Takeaway for Government IT: there needs to be a new approach to risk & results in increasingly transparent world. The Metamovement does not demand tweaking. It does not want a 10% improvement. Traditional approaches to risk in Government IT have become increasingly risky because it is almost certain that these approaches will not result in what citizens want.

3. Digital Darwinism

Brian Solis of Altimeter Group observes the change in the IT landscape. As he says in a blog entry promoting his upcoming book Digital Darwinism:

The reality is that we live and compete in a perpetual era of Digital Darwinism, the evolution of consumer behavior when society and technology evolve faster than our ability to adapt.

Nothing today is too big to fail nor too small to succeed. Disruption not only faces every business, its effects are already spreading through customer markets and the channels that influence decisions and behavior. What works against you also works for you. And, it is what you do now that defines your ability to compete for today and the future. You already recognize the importance technology plays in your business. That’s why you’re here. But recognizing the difference between emerging and disruptive technology and measuring its impact on your business, customer relationships, and products is a necessary discipline to successfully evolve.

Solis also connects the Metamovement with this change in IT in video trailer.

Kay Plantes from the Plantes Company describes some of the fundamental ways that the information age has transformed the economy. She describes the movement from closed to open markets where  ”there was protection for leaders and leading products.” Plantes observes:

In this world, the old strategies of protecting positions through cost cutting, innovating products, branding and marketing just don’t cut it anymore.

Citizens are looking for what Ray Wang, founder and CEO of Constellation Research, calls the “consumerization of IT.” Wang points out that the CIO focus on safe and secure IT limits organizational effectiveness.

For the next generation of knowledge workers, entering the workplace often feels like entering a computer science museum

Takeaway for Government IT: There are significant limits to innovation among many Government IT providers. Make no mistake, governments will innovate the relationship with citizens. The key is that Information Technology should enable these changes. Old models, legacy technology can ensure that ‘big’ will fail.

Doug Hadden, VP Products

The Government of Timor-Leste has taken another step towards leading-edge government transparency with the launch of an eProcurement portal. The Timor-Leste transparency portal was first launched in March of this year with budget transparency. The World Bank has commended the government commitment of revenue transparency as the first country in Asia/Pacific to fully support and be certified for the Extractive Industries Transparency Initiative (EITI).

What does this mean for Corporate Social Responsibility (CSR)? How does it align with being a social enterprise?

Real Social Responsibility

There is a debate about CSR. Critics suggest that CSR is fake, just feel-good marketing. Others see CSR as a cost with few benefits. My sense is that what we understand as CSR is maturing to something else. There is a significant difference between how social enterprises like FreeBalance approaches the world compared to companies who sell similar software.

For example, there is a well-known software company sponsoring a yacht in a famous yacht race. (FreeBalance sponsored a 5K run to raise money for cancer research). Another well-known company uses some social responsibility to purchase modern art. (FreeBalance collects art from children as SOS Children’s Villages). Why the difference? Social responsibility is at the core of what we do: helping country growth through improving governance.

Making a Difference as an Innovation Motivation

Umair Haque has made a strong case of meaningful and sustainable capitalism. Followers of his blog entries and twitter feeds often disagree with this notion. Yet, I see it almost every day at FreeBalance.

A colleague at a company I worked for previously confided in me: “what am I going to tell my grandchildren, that I helped insurance companies become more profitable?” Don’t get me wrong, my time with that company was rewarding. I learned a lot and made some lifelong friends. However, the motivation to innovate was intellectual. We didn’t internalize the angst of insurance company executives. Working long hours, as we often did, was not a cause of celebration. I rarely woke up at 3 in the morning with eureka moments. (Mostly nightmares.)

Yet at FreeBalance, we’re actually doing something meaningful. Our teams in Canada, Portugal and Timor-Leste worked around the clock. They did so because they believe that this contribution will have a cumulative effect in making the lives of the Timorese better. And, consequently, the world a better place.

Yes, but what about the Business?

Our transformation from a traditional software vendor to a For Profit Social Enterprise (FOPSE) has resulted in more profit and rapid growth relative to the industry. It seems to be superior to the traditional notion of “the business of business is business.”

And, it’s not because people are motivated to work harder – rather to work smarter.

What happened to that company I worked for? After a series of acquisitions, they are part of that software company that sponsors the yacht.

Proper Government 1.0 Also Required

Doug Hadden, VP Products

Public sector unions have been demonstrating in Greece and Wisconsin because of public-sector austerity measures. The debate about these measures seem to rely more on dogma than fact. Unions and politicians leverage old media and industrial methods to present cases to the public. A so-called “court of public opinion.” And, not an open court.

So, it’s come to this….

The “winner” in these disputes might be the side that loses the least credibility. Losing trust in politicians or public employees results in losing trust in government across the board. The winner and loser both become losers. That’s why transparency and citizen engagement are cornerstones for 21st. century governance. Government 2.0 is needed to overcome this environment of political partisanship that turns citizens angry of apathetic.

A Government 2.0 Prescription

with a touch of back-office government financial systems

1. Are public employees properly compensated? Full salary spend information, including benefits and travel expenditures needs to be tracked in back-office systems and presented to the public. Are public employees properly compensated?That’s up to the public to decide.
2. Is public employee talent optimized? Training, performance appraisal and certification program information fro back-office civil service management information needs to be presented to the public. Merit systems must be transparent. The public service needs to be a career option for the very best in any country. Is public employee talent optimized. That’s up to the public to decide.
3. Is government effective? Government outputs and outcomes need to be tracked for efficiency and effectiveness. The political debate is often about inputs (the amount spent) rather than performance. Is government effective? Is it too big? That’s up to the public to decide.
4. Is government improving over time? Financial information collected from back-office systems needs to be presented in open data formats to citizens for visualization. Government financial management is complex. Government reports and documents make comparison difficult. Are governments improving over time? That’s up to the public to decide.
5. Is government focused on what is important? Government needs to engage citizens on a regular basis. As Umair Haque points out. “voting is the most brittle kind of democracy, built on the tiniest of conversation.” In particular, budget and policy processes need to be opened up. Participatory budgeting that engages experts and citizens beyond those who traditional wield influence is necessary to improve government trust. It will also improve government performance. Is government focused on what is important? That’s up to the public to decide.

But at What Cost?

Transparency isn’t free. Many question the return on investment of open data and Government 2.0. It can be considered a “nice to have”. Yet, Gartner analyst Andrea di Maio has pointed out that Government 2.0 could be effective should the US federal government funding end next month.

Labour disputes cost everyone. Lack of efficiency and effectiveness costs everyone. Should the public be prepared to fund these current costs through taxes? Or, is the public purse better served with transparency?

Doug Hadden, VP Products

Umair Haque, a next-generation economic thinker, has published a mind-provoking “New Capitalist Manifesto: Building a Better Business.” The debate around the role of business in society has been subject to some very parochial thinking especially around the concept of Corporate Social Responsibility (CSR). It’s welcoming to find someone who can articulate sustainable future for business rather than be anchored to the past, or in Haque’s words: “firmly ensconced in the industrial age.” This is a wake-up call for those who think that the “business of business is business”.

Style

Haque uses some techniques that are familiar to business book readers. There are anecdotal examples, a technique that dates back to In Search of Excellence. It’s not my favourite technique, but, in all fairness, it is difficult to describing an emerging trend using the kind of long-term data analysis used in Built to Last. Haque writes in a direct manner – there’s no passive tone here – no boring stuff to skim over. At a touch over 200 pages of text, it’s not like most business books: magazine articles stuffed into 400 pages.

Compelling Argument

Haque’s argument that a new mode of sustainable capitalism or “constructive capitalism” is necessary is compelling, current and well-articulated. Sprinkled with effective touches of hyperbole. He explores the cornerstones for industrial-era and constructive capitalism and provides assessment tools. One of the most effective moments of compelling cognitive dissonance in this post-cold war period is Haque’s point that “if companies were countries, we’d say they had centrally planned, dictatorial economies.”

The notion of “thick value” that does no harm – doesn’t extract value from “people, communities, society, the natural world and future generations” is particular interesting and useful for FreeBalance, as a For Profit Social Enterprise (FOPSE). Haque also delves into the concept of customer innovation, something that we strive for here. The of “deliberation” in customer relationships is particularly valuable because it uncovers the reasons for preferences.

If I have any particular criticism of the examples used in the book, it’s mostly big company examples. It seems to me that there is more constructive capitalism afoot among smaller companies.

Lessons for the Global Software Industry

FreeBalance sometimes competes against larger companies whose techniques are often to hold customers “hostage”. As Haque points out “if we’re locking users in, chances are there’s no sense of urgency to innovate and make product better.” Ironically, many software firms seem to use this industrial-age technique in the digital world. There is very thin value when customers have to ramp up data centres to support bloatware and are forced into expensive upgrades with limited incremental benefits. Or, constantly employ high-priced consultants to keep systems operational.

Haque also points out the value of simplicity and asks how business can provide solutions to “chronically and consistently underserved, ignored, or marginalized” customers. This is an area where FreeBalance has innovated by adapting processes to better serve developing nation governments.

Many software companies do not explore Haque’s recommendation to “go deeper” to determine real impact. These companies seem to follow passing fads of “compliance,” CSR or “public private partnerships.” They provide software to evaluate company carbon footprints yet propagate big applications that suck energy while sponsoring sporting events.

Accounting for Sustainability

The concept of “sustainability” is most often associated with environmental sustainability. Haque provides more food for thought about accounting for real sustainable value. This is a step beyond “triple bottom line reporting“.  Haque points out that accounting really hasn’t changed since the invention of double-entry bookkeeping. Accrual accounting  provides the “true value” of a business. Perhaps the next generation accrual will measure the full impact of a business, or a real “true value”.

A year-end look at the “big picture” on technology-driven transformation of government

Doug Hadden, VP Products

Technology transforms the nature of government. From the phonetic alphabet through Web 2.0. From ‘yellow journalism‘ to Wikileaks. Transcending short-term news-worthy fads.

It’s an era of seemingly different and overhyped stories about government.  So many technologies over such long periods that we fail to notice the transformation.  Or the pattern of technology-induced transformation.

(For those of you unfamiliar with this notion of technology changing the nature of government, consult the work of Harold Innis, who described how the medium used for writing determined the nature of ancient empires, and Marshall McLuhan, who described the effects of technology on society.)

2010 exposed three interrelated government transformation trends:

1. Change of the government to citizen power relationship though increasing mobile, Internet and social networking usage
2. Global re-alignment, known as the “new normal” enabled through improved automated governance tools and ICT for Development (ICT4D)
3. Devolution of the nation state partly as a consequence of social networking and DIY content 

1. Government – Citizen power relationship

Key concepts:  privacy, transparency, data-based journalism, governance, surveillance

Key technologies:  Government 2.0, mobile, social media, encryption

Key stories:

• Wikileaks releases US government secret information
• Mark Zuckerberg of Facebook becomes Time person of the Year
• Perennial Internet transparency and privacy debates
• Research in Motion and encryption in India, and the UAE
• Bloggers take on governments in the Middle East
• Use of mobile technology to monitor elections in Sudan
• Impact of social media on the 2010 US Mid-Term elections
• Little Brother is Watching: Government 2.0 and Transparency

As the Las Vegas Sun reported, 2010 was a very digital year: “Ecuador’s president announced a state of emergency because of civil unrest via a tweet… People were engaged through social media, connecting to politicians, charities and causes. The American Red Cross raised nearly $33 million for the earthquake relief effort in Haiti via text messaging.”

Will Social Networking Transform Government?

What this means

1. Citizens can band together for social change or monitoring governments using untethered mobile technology leveraging existing civil society networks or self-organizing through social networking. Citizens can track even opaque governments meaning that transparency becomes the only way to present the government view: the emperor has no clothes.
2. Surveillance technology has become affordable and is starting to bridge a different digital divide. The gap between government and citizen surveillance capabilities will continue to narrow especially as citizens gain asymmetrical advantages. This will create more focus on performance in government. Long-term prediction: the debate over government size and cost will transition to the value of government. Dogma and opinion will be replaced by data and facts.
3. Technology generates more concerns over balancing privacy, surveillance, security and transparency. Should anonymity be promoted to encourage freedom of expression or should radical transparency, following the Facebook ethos, be used to encourage thoughtful debate? Is Julian Assange a hero for transparency or a criminal?
4. Slow migration from the “command and control” efficiencies from the analog world to improved efficiencies and effectiveness of the network model. Government organizations will continue to adopt Government 2.0 technology to improve internal processes and engage external citizens.

2.  Global Re-Alignment of the “New Normal”

Key concepts: technology leapfrog, governance risk & compliance, financial crisis, currency wars, aid effectiveness, ICT4D, globalization, competitiveness

Key technologies: mobile, aid management, government resource planning, transparency portals, government 2.0, government performance management

Key stories:

• Explosion of social networking in Africa
• Investment in technology clusters, particularly in the European Union
• Increasing impact of BRIC and emerging countries in international organization governance
• Recognition of the impact of ICT for Development
• Technology leapfrog in developing countries
• Increased focus on technology for transparency in developing countries
• Transparency and the “new normal” driving public financial management reform in developing countries
• Emerging economies driving global growth
• Push for aid effectiveness through aid transparency
• Government 2.0 as driver for economic innovation
• Currency wars as countries attempt to pump domestic growth
• World Bank opens up development information

Governance Matters

What are the incentives for government transformation? Globalization. Competition. Good governance. Transparency and accountability have become a competitive value. It’s part of the Global Competitiveness Report. Governance  and ease of business indicators are published by the World Bank. Transparency International Corruption Perceptions Index is highly publicized. The Millennium Challenge Corporation uses indicators to track effectiveness at meeting the Millennium Development Goals.

What this means

1. International organizations will be further re-aligned to reflect the growth in developing countries. (And, the ability for business to rapidly support the global market will be a competitive advantage.)
2. Governments will continue to focus on technology incubation to improve economies.  At the same time, governments will increasingly release government information to encourage economic activity as described by Tim O’Reilly as “government as platform”.  The impact of releasing government collected data to economic development cannot be understated. O’Reilly has pointed out the impact of GPS as an incubator for private sector innovation. There will be a gradual move away from traditional manufacturing incubation in developed countries.
3. Governments will become more transparent. There will be a higher adoption of budget plans, budget execution, civil service spending, civil service recruitment and procurement portals. Governments will leverage more transparency and accountability to become more efficient and effective. This will improve stability.
4. Technology will begin to bridge the information gap between producer and speculator. The farmer in the field will have the same commodity price information that the trader has.
5. There will be increased use of using country systems by donors in order to improve aid effectiveness. The pressure for transparency will increase on donors and citizens demand better results.
6. Government performance management will become a competitive advantage. The ability to achieve desired results, not just spend money on programs, will become a key element in political debate. This will transcend the dogmatic cleavages we see in many countries.
7. Information systems used by government will change to something that works rather than what vendors say works.  Governments will increasingly recognize where government-specific solutions should be used.

3. Evolution of the Nation State

Key concepts:  devolution, sovereignty, global village, corporate social responsibility, zombieconomy, old media

Key technologies:  Web 2.0, international public sector accounting standards, IPSAS, XBRL

Key stories:

• Eurozone crisis, yet Estonia joins Eurozone
• Croatia close to EU Accession
• Tea party impact on US Midterm elections
• Support of XBRL by governments like around the world
• Rise of the networked non-profit
• Trends in decentralization continue
• Kosovo declares independence
• Increasing importance of sustainability to consumer buying decisions
• Backlash to bonuses in the financial sector and to high CEO pay
• Maturing of Corporate Social Responsibility
• IPSASpalooza at the ICGFM Winter Conference

How Far Will Government Transform?

What this means

1. Continued evolution of the nation state

Marshall McLuhan predicted a global village created through an always present electronic age.

The printing press enabled mass production of books and newspapers in national languages. Languages were standardized. This technology led to the creation of the nation state. Radio, a “hot media”, enabled radical nationalism. Digital technology enables self-organizing. It enables political devolution and decentralization. It also provides the ability to manage at the supranational level. This supports the economies of scale for freer trade and regional organizations. Despite the current Eurozone crisis, countries continue to move towards EU accession and adoption of the Euro.

This global village with DIY organization will change the nature of government and the nation state. It’s still early days. Perhaps government become a competitive provider of services in the physical and virtual worlds as envisioned in the science fiction classic Snow Crash.

2.       More rapid impact on business and non-profit

The impact on the for-profit and non-profit world is more apparent. Non-profit NGOs with hierarchical structures are getting dis-intermediated. Networked non-profits and methods for direct donation from individuals to recipients are rises. Meanwhile, the concept that “the business of business is business” has been wildly refuted.  Business has come to recognize the need to have sustainable customers to have a sustainable business. Business also has become to understand the impact of practices on society. (Kind of a corollary to the impact that government has on business.)  New business models that focus on sustainability and real value, rather than what Umair Haque calls the “zombieconomy”.

Red Herrings

These represent a few elements of discourse that can distract us from what is really going on.

1. Outsourcing. Outsourcing could be a seen as an expression of the centre-periphery model in operation. Yet, effective use of outsourcing has been shown to have economic advantages in the short term to developed countries. In the long run, outsourcing increases stability in developing countries, raises living standards and, ultimately, will provide a more equitable environment. Salaries will increase in developing countries.
2. Globalization radicals. There is some validity that developed countries have exploited trade negotiations. Technology and transportation has created a global environment. The cat is out of the bag.
3. Tablets. Tablet, eReader, netbook and smart phone wars are unimportant in the big picture. These technologies reduce costs, reduce the digital divide and make citizens more agile. (In some ways, the real takeaway is that usability can dramatically improve adoption.)
4. Cable News. The increasing sensationalism of cable news is indicative of the loss of television impact on citizens. It’s the last desperate moves of an industry in decline.
5. Cloud Computing. Cloud computing is about deployment, agility and does not appear to have any material impact except as an enabler of citizen surveillance and Government 2.0.
6. Government will never Change. Lack of apparent Government 2.0 uptake and prevailing view that government culture  will never change suffers from a very short term
7. CSR Backlash. This backlash to CSR with the notion that it reduces profit or a scam are criticisms of the early days of a broad trend.
8. Donors and Country Systems. Donors will transition from thinking country systems are, as Richard Allen calls “courageous”, to realizing that this will reduce high transaction costs and encourage capacity building and anti-corruption. Also, many of the country systems have better use of public financial management good practices than donor systems.