PDF File: 

cfo3_web_wp_bearingpoint_land.pdf

BearingPoint

CFOs working in government need to become true strategic partners to their nonfinance colleagues to achieve agency goals.

Since 1990, leaders of both parties in Congress and the executive branch have agreed that federal agencies must improve their financial managment. Congress has repeatedly passed laws – including the Chief Financial Officer’s Act of 1990 and the Accountability of Tax Dollars Act of 2002 – mandating such improvements. Democratic and Republican administrations have established financial management requirements for agencies through initiatives such as Office of Management and Budget Circular A- 123, the National Partnership for Reinventing Government and the President’s Management Agenda. As a result, CFOs in the federal government have been forced into a reactive mode for the past 15 years in order to comply with these requirements.

At the same time, programs such as the Office of Management and Budget’s (OMB) Federal Enterprise Architecture framework have created mandates for CFOs and other federal executives to leverage technology tools to simplify processes and unify work across agencies and within the lines of business of the federal government. These initiatives are leading agencies to move toward service-oriented architecture systems and shared services.

The ultimate goal of these programs, of course, is to improve the performance of federal organizations, in particular by cutting costs, raising efficiency levels and creating a more citizen-centered and customer-focused operating model. These goals are made more urgent by the prospect of continued budget cuts and the pending retirement from federal service of thousands of experienced financial experts. This need for improved performance places yet another demand on federal CFOs. The best way CFOs can improve agency performance is by becoming strategic partners with agency executives.

How are CFOs of public sector organizations dealing with these concerns? According to survey research conducted for BearingPoint, they are working both within and outside the core finance function in ways different from their peers in other industries. They have made a great deal of progress in achieving the goals set by Congress and the executive branch. However, a close analysis of the survey responses reveals that, in at least one important area – strategic partnering – public sector CFO transformation appears to be falling short.

How Public Sector Finance Is Different

Compared with the overall study population, public sector CFOs and finance executives have placed more emphasis on complying with external mandates rather than supporting efforts to achieve their organizations’ mission goals. As a result, their efforts to become strategic partners with their colleagues outside of finance have not been as successful as those of their peers in other industries. It also appears that many public sector CFOs have yet to embrace the real meaning of partnership.

Strategic Partnering

• Compared with CFOs in other industries, public sector CFOs ranked becoming a strategic partner with their colleagues outside of finance as low on their priority list. Nevertheless, they believe they are excelling at doing so. Public sector CFOs ranked achieving cost reduction goals as the most critical metric of optimal performance, putting it above metrics associated with achieving mission or operational goals. They also ranked promoting the financial acumen of nonfinancial managers as very low. These findings support the notion that the role of finance in strategic partnering may not be fully understood by the public sector CFO.
• Public sector CFOs are more likely to be spurred to change by external factors such as new mandates or newly available technologies. They are less likely than their private sector peers to be spurred to change by their desire to support or challenge the organization on information requirements or cost management. The focus of public sector CFOs on responding to external factors may limit their capacity to make changes proactively.

Process Standardization and Data Quality

• Public sector CFOs are heavily focused on standardizing and automating activities to respond to the federal mandates. However, they identified accurately reporting quality data (which relates directly to their ability to close the books) as the area where they lag most behind their peers in other industries relative to performance.

Cost Management

• Public sector CFOs believe that the most effective short- and long-term cost-cutting strategies center on how well they manage their cash. This contrasts with the financial services sector, in which implementing consistent data definitions and related technology standards top the list of long-term CFO strategies. Gaining efficiency outside of human capital (i.e., supply and material costs) was ranked No. 1 in manufacturing and high tech.
• The public sector CFOs’ focus on cash also helps explain why they emphasize the improved use of planning and budgeting tools to manage spending. In the public sector, CFOs manage cash, particularly cash disbursements and outlays, much differently than their private sector counterparts, because of the special characteristics of the government appropriation and disbursement process. There are statutory restrictions on when and how funds can be used. These restrictions often force real-time decision making in order to disburse cash within specific periods. As a result, for public sector CFOs, the timing of cash distributions is an important aspect of managing costs.
• Compared with CFOs of financial services and manufacturing/high tech organizations, public sector CFOs were less likely to have initiated a shared services effort. At the same time, they ranked shared services highest in terms of its contribution to improving return on investment (ROI). The shared services operating model for finance processes has picked up steam within the public sector, driven primarily by the new mandates requiring common services to be shared across public sector enterprises. Agencies that are implementing shared service models are seeing dramatic and positive results.
• Public sector CFOs have been less willing than their peers to outsource finance and accounting activities, such as transaction processing and financial reporting. This reluctance is understandable given the political pressures to keep key government services in-house and onshore. Still, there is evidence that public sector CFOs are starting to view outsourcing as a potential contributor to improving ROI and reducing costs.
• All industry CFOs placed the planning and budgeting processes in their top three areas of high opportunity for cost reduction. Public sector CFOs identified it as the No. 2 area. CFOs across industries see how the planning and budgeting cycles can be used as a tool both to identify cost drivers and to manage efforts to reduce or optimize costs.

Knowledge and Performance Management

• Interestingly, public sector CFOs identified lack of knowledge as the least of the challenges they face in transforming their finance organizations into strategic partners. This is consistent with the previous finding that public sector CFOs believe they have already achieved “strategic partner” status. This finding stands in stark contrast with financial services CFOs, who viewed lack of knowledge as a significant challenge.
• Public sector CFOs identified the primary motivators for performance to be group behavior, collaborative culture and a sense of stewardship. CFOs in both the financial services and manufacturing/ high tech sectors view the primary motivator as financial rewards. These findings underline the culture of service in the public sector workforce and the lack of personal financial reward to drive behavior.

Barriers to Change

• Although all sectors put enterprise budget pressure in their top two barriers to transformation, only public sector CFOs identified lack of funds as the No. 1 barrier, with significantly higher percentages than the other groups surveyed.

New Technologies – An Enabler, Not a Driver

Why aren’t public sector CFOs moving to become strategic partners the way their colleagues are in other industries? The survey suggests one of the reasons may be an overreliance on technology. When asked to name the primary drivers in their decisions to launch an improvement or transformation initiative, public sector CFOs overwhelmingly chose “new technology implementation enabled ability to improve processes” (see Figure 1). This differed from both financial and commercial sector CFOs, who identified demands for better information and business insights as the top change driver. Meeting requirements to link to other business initiatives or a change in the business model ranked far down on the list for public sector finance executives.

New technology, especially the ability to do online processing, was also cited as the most important factor in promoting innovation across the organization and in increasing ROI.

Technology certainly plays a critically important role in promoting change. However, the most successful CFOs are those who see technology as an enabler but not a driver. That is, technology can be the impetus for organizational change, innovation, ROI, etc., but relying on technological change alone to create a true partnership between the CFO and agency executives will not get the job done.

The good news is that public sector CFOs are not only receptive to new technology, they strongly believe it should be used to promote innovation and change in the finance organization. For example, 57 percent said developing a set of technology tools that can provide real-time feedback on infrastructure, application and associated business processes was a requirement for optimal performance.

Standardizing and Consolidating Processing Th rough Shared Services

Accurate Data – The Performance/Success Gap
The study findings highlight a large gap among public sector CFOs relative to how important they believe it is to report quality data accurately and how successful they are at doing so. This gap is significantly larger than that of their peers in other industries (see Figure 2).

Process Standardization
Public sector CFOs are also positive about their ability to standardize financial processes. When asked how successful their organizations were at it, 83 percent said they were “successful.” Again, CFOs in other sectors were less confident of success in this area (see Figure 3).

Finally, when asked to rate how effective various cost strategies were in the long term (one to five years), 87 percent said that implementing consistent data definitions and technical standards throughout the organization was an effective way to reduce costs. This emphasis on process and data standardization most likely stems from agency attempts to comply with federal rules and regulations. For example, OMB Circular A-123, which has been called the government version of Sarbanes-Oxley, requires federal agencies to collect and report certain data in specific ways. The Federal Information Security Management Act (FISMA) of 2002, which was meant to bolster computer and network security within the federal government, also calls for data standardization.

There is clearly a link between standardizing data, consolidating processing via implementation of shared services, and improving efficiency. When implemented correctly, all of these activities improve data quality and accuracy and lower costs. Combining these activities will dramatically improve the finance organization’s performance and set the stage for improved strategic partnering with the agency management.

The CFO Checklist

Based on the study findings and drawing on insights from academic partners, clients and practice leaders, BearingPoint offers the following practical steps that CFOs and finance executives within the public sector can immediately take to align the finance organization’s priorities with the agencies’ goals.

Become a Strategic Partner

• Define an agenda for finance that links to the agency’s overall mission and policy goals. That agenda would, of course, include meeting the requirements of financial regulations. It would also include supporting the decision making of agency executives by controlling costs and providing quality accurate information related to financial performance.
• Provide tailored financial and program performance reporting. Develop outcome- based program performance measures and milestones that are meaningful to the program managers. Leverage the data that resides in the agency’s core business management information systems.
• Integrate budget, accounting and performance information so that planned program outlays can be compared with actual program outlays and the results can be used by program managers to support decision making and course corrections.
• Educate the nonfinancial management team on important aspects of financial decision making, leveraging both financial and non-financial data.

Focus on Costs

• Take the lead on process articulation and agencywide standardization, both within and outside of finance to increase organizational efficiency, improve quality and further reduce costs.
• Focus on standardizing and automating transaction processing, routine activity and other noncore competencies and position the organization to leverage further shared services, as well as outsourcing opportunities.
• Develop the business case for operating finance and administrative activities in a shared services environment. Such an environment can lay the foundation for cost reduction by streamlining operations and leveraging scale. Focus not only on the technologies that would support the shared service model but also on the operating model itself. The design and scope of the center, staffing, training and service agreements are critical to the success of its implementation.

Manage Risks

• Implement sustainable and effective control and compliance programs. Coordinate reviews and assessments required to fulfill agency compliance and reporting requirements in a single overarching program to avoid duplication and increase efficiency.
• Support the agency directive regarding broader risk management activity by providing accurate, real-time information, as well as by providing insights into risk management practices and programs based on financial rigor and acumen.

It’s not easy to cope with a steady drumbeat of demands for change. In general, CFOs in the federal government have done a tremendous job of putting effective financial systems in place, while also complying with the mandates from Congress and the executive branch. It is no wonder they have relied on technological change, which can be an effective way both to spur innovation and to comply with regulations.

However, CFOs must find ways to keep moving forward while they juggle all the demands placed on them. In particular, to help their agencies achieve their missions, they need to do more to become true strategic partners and then start taking steps to make such partnerships a reality.