Good Practices in Government Resource Planning Vendor Specialization

PFM Domain GRP IMPLEMENTATION & SUSTAINABILITY

Good Practice EFFECTIVE GRP SPECIALIZATION

Applicable ALL GOVERNMENTS, ALL LEVELS OF GOVERNMENT

FreeBalance®

Public Financial Management Good Practices

FreeBalance®

2

what is the need for PFM and GRP specialist organizations?

The quality of public financial management (PFM) systems is a key determinant of government effectiveness. The capacity to direct, manage and track public spending allows governments to pursue their national objectives and account for the use of public resources and donor funds.

Governments are increasingly adopting Commercial-Off-the-Shelf (COTS) software to replace legacy and custom developed software applications for financial, budget, expenditure, tax, treasury and civil service management.

Government organizations can chose to acquire Enterprise Resource Planning (ERP) software from large software firms whose software is used in multiple “vertical” markets or Government Resource Planning (GRP) software designed

exclusively for governments.

Research shows that there is significant risk of cost overruns, late delivery, poor Total Cost of Ownership (TCO), payment problems and failure to meet objectives in COTS software for PFM.

There is a need for organizations that provide PFM products and services to

help governments overcome risk factors.

FreeBalance®

3

what is the appropriate “business model” for GRP success?

In the book, Discipline of Market Leaders, authors Michael Treacy and Fred Wiersema suggest that successful businesses adopt “operational leadership” “product leadership” or “customer intimacy.” Treacy and Wiersema suggest that market leaders can only focus on one of these areas to become a market leader. Customer intimacy is defined as “selling the customer a total solution, not just a product or service.”

In the book, Blue Ocean Strategy, authors W. Chan Kim and Renée Mauborgne suggest that businesses should find new strategies that make competitors irrelevant. Traditional business methods should be questioned.

The emergence of the “social enterprise” model, in the global context, is an opportunity for businesses to create a sustainable business model.

The increase in open source infrastructure, global connectivity, social media, VoIP and mobile is an opportunity for organizations to rethink traditional business models.

The traditional business model for technology manufacturers is “product leadership” while many service providers focus on “operational leadership” or “customer intimacy.” The traditional technology supply chain creates incentives that add risk to GRP implementations.

A customer intimate and social enterprise approach that avoids the traditional supply chain can make competitors irrelevant. A “solution” focus enables organizations to rethink the business environment by tailoring products and services to meet customer needs.

FreeBalance®

4

what is customer-centric product

development?

There are many implications for software and technology manufacturers that wish to become customer intimate.

Product complexity needs to be reduced to make implementations more sustainable. That’s because rarely can you find a technical assistance related document that does not refer to the need for capacity building in developing countries and the retirement of the baby boom generation in more developed countries. Software designed for GRP needs to be intuitive and designed for PFM. The systems administration burden to manage change and troubleshoot should be reduced. Methods to reduce errors and help users should be added.

The GRP sustainability challenges, particularly in developing countries, necessitate different product designs. Connectivity is limited so large bandwidth computer applications do not translate well to the developing nation context. Access to electricity is also a serious problem, so there is a focus on low power solutions to make ICT sustainable. The environmental impact to generate electricity exacerbates climate change in fragile ecosystems. Inefficient software design draws hardware resources, power and bandwidth. This is known as software bloat: wasting power in smart phones to Enterprise Resource Planning (ERP) software. It’s also comes from squeezing more unneeded features into software.

The need to support Green IT is a consideration in more developed countries. Customer engagement for product enhancement is critical. Software companies

hoping to compete against traditional vendors must enable customers to adapt product roadmaps and release functionality when it is convenient to customers.

what does software architecture have to

do with GRP?

Most application software manufacturers sell the benefits of underlying technology. That technology is often “legacy” or designed for different industries. Any software architecture design requires compromise. The software infrastructure designed for the private sector may not meet the “non

functional” requirements for PFM.

Critical non-functional requirements for GRP include adaptability because governments change configurations to suit reform changes, optimal technical footprint and usability.

GRP software should also be designed to support functional needs. Modern software design includes techniques to articulate the general scope of a domain like PFM.

Functional and non-functional software design provides software manufacturers and government customers with potential to meet future needs, known as

“extensibility.”

FreeBalance®

5

The PFM Component Map was developed for the design of the FreeBalance Accountability Suite.

What are some relevant differences between public and private sector “enterprise software”?

General Private Sector Public Sector

Implementation

Customization is almost always required by software designed to apply to many markets.

Customization needed for private sector software in government. Core financial functions are similar among governments and government tiers so can be configured in GRP.

Modernization

Focus in creating efficient and effective relatively static “end state” including business process re-engineering. Limited changes in systems expected.

Many business process changes require legal reform. Reform and modernization on-going requiring frequent software changes.

Capacity

Private sector tends to have highly-trained knowledge workers. Learning to set-up, manage and use complex software considered “the cost of doing business”.

Public sector in developing countries tends to have fewer PFM and ITC experts. Developed countries see effect of baby boom retirement on institutional capacity.

FreeBalance®

6

Budget Private Sector Public Sector

Chart of Accounts Simple COA except for very large companies. Typically includes object code, cost centre, organization segments.

Complex COA. Typically includes program, project, performance, object, responsibility, organization and more.

Budget Budget is a guideline for business. Budget control mechanisms in most businesses are loose and flexible

Budget is the legal embodiment of government plans and policy. Formal budget control mechanisms.

Appropriation Concept is not usually relevant. Authorization for government unit to

spend.

Budget window Typically budgets one year in advance. Typically budgets multiple years –

medium term.

Performance

Performance outcomes are indicators that the company believes that improves bottom line: profitability. Tends to be a simple relationship between indicators and profit. Multiple data sources where performance management stand-alone software often used.

Performance outcomes are the bottom line. Multiple measurements are needed because there is no “bottom line” like profit. All input information is financial related to budget and all output and outcome information needs to be directly tied to the GRP system. Performance management software is integrated with budget management.

Performance Linkage

Financial indicators linked to financial indicators. Non-financial indicators are often not linked to financial indicators.

All performance indicators need to be in the COA because all financial and non-financial indicators need to be linked to financial outputs.

Outcomes Outcomes are mostly achieved within a fiscal year.

Outcomes are mostly achieved in multiple years. Use of medium-term frameworks for multiple year planning.

Budget Complexity Relatively simple. Highly sophisticated with period controls,

multi-tiered and budget variance analysis.

Budget Modifications during Fiscal Year

Relatively simple. In-year modifications to the budget rare. Profit and opportunity justifies spending regardless of budget.

Complex governance structures. Material changes to budget during year often requires legislative act.

Budget Preparation Relatively simple, often accomplished on spreadsheets.

It can be very complex with different levels or approvals, laws and restrictions.

Budget Allocation Relatively simple approval processes. Conditions can be restrictive with

complex approval and tolerance rules.

FreeBalance®

7

Financials Private Sector Public Sector

Accounting Types Financial, Managerial, Cost and Tax. Commitment, Managerial, Financial and

Cost.

Budget Execution Little notion of “budget execution” in private sector financial management.

Budget execution and accounting functions fully integrated in GRP.

Emphasis Assess profitability and shareholder value. Assess accountability and stewardship.

Funds Rarely any notion of multi-fund accounting. Multi-fund accounting where each fund

can have unique rules and controls.

Projects Special projects are typically completed in a year.

Special projects last more than a year requiring multiple year commitments.

Commitments

Commitments and obligations do not hit the General Ledger, so are not critical. Managers approve expenditures based on approval workflow.

Commitments and obligations are critical to managing the budget of the government and determining forecast. Managers approve requisitions and purchase orders after budget availability is confirmed by GRP system.

Expenditure Management

Keep expenditures below budget. Cut costs and optimize revenue. Spend to generate additional revenue when applicable.

Keep expenditures at budget levels. Spend to achieve expected program benefits. Never over spend.

GL Synchronization Budgets do not affect the General Ledger (above the line vs. below the line).

General Ledger needs to be synchronized with budgets and commitments to ensure data integrity.

GL Posting Subledgers can be posted to GL at the end of fiscal periods – typically end of the month.

Sub-ledgers need to be posted immediately to the GL to show budget variance.

Controls

Managerial (approval), cash management. Segregation of duties.

Budget, appropriation, commitment, managerial and cash management. Segregation of duties. Often use “responsibility centre”. Different controls depending on purchasing vehicle.

Control Detail

Controls based on organizational structure. GRP supports multiple controls for annual budget, warrants and cash management. Controls range from line item to aggregate controls.

Ledgers Support of General Ledger, Accounts Payable, Accounts Receivable and Payroll sub-ledgers.

Support of General Ledger, Accounts Payable, Accounts Receivable and Payroll sub-ledgers.

FreeBalance®

8

Multiple currencies

Companies that operate in multiple countries have bank accounts in different currencies and treat cost centres based on the currency.

Governments must operate with reporting currency because of country laws and IPSAS rules. Governments can operate with foreign currencies, but this must all be converted to the national currency.

Statutory Reports

Balance sheet, profit and loss statement, cash flow, changes in working capital. IFRS and GAAP dominate. XBRL under increased usage.

Balance sheet, income statement, cash flow. IPSAS and GFS standards dominate in developing countries. IFRS adoption in many developed countries.

Transparency

Transparency is provided to shareholders. Publically held companies provide reports based on securities laws. Company intentions kept private except for tactical reasons. Corporate governance gaining visibility.

All citizens are shareholders. Typical requirement to publish government intentions in detail, such as budget book, and to report full results. Includes need to report on economic activity. Transparency and accountability are major themes in government.

Accounting Methods Must be accrual. Can be cash, modified cash, modified

accrual or accrual.

Special accounting concepts

Goodwill, revenue recognition. Recognizing parastatal organizations and Public Private Partnerships

Operational Management

Focus on profitability enables overspending to increase revenue. Cutting back on expenditures results from changes in economic conditions.

Cannot overspend budget except with special circumstances. Budget changes occur because of economic conditions.

Capital Expenditures Focused on maximum return. Governments have broad objectives.

Maximizing return is often not the primary reason for capital expenditures.

Asset and Liability Management

Complex asset management, complex tax rules on depreciation, write-off.

Generally simple with depreciation functions. However, contingent liabilities are much more difficult to characterize with any degree of certainty.

Revenue Complex sales processes – discounts, price discrimination, volume purchasing etc.

Simple sales processes, highly complicated taxation calculations and processes.

Project Management Requirement for project accounting for some private sector organizations.

Requirement for project accounting for some public sector organizations.

FreeBalance®

9

Procurement

Can be informal or formal. Focus in on “spend management.

Highly formal. Different purchasing vehicles and methods. Complex procurement processes. WTO and EU rules require publicizing tenders. Spend management is one objective. Some government procurement is aimed at economic development such as promoting local small businesses.

Audit

External audit typical. Need for financial compliance (i.e. SOX).

Internal audit, usually through a Supreme Audit Institution. Also external audit by IFIs. Additional legislative audit requirements: travel expenses, civil service salaries, citizen reporting. New focus on performance audits.

Grant Management

Largest companies have foundations, but grant management software rarely used.

Governments provide grants, contributions and loans. Multiple types of grants from simple eligibility to highly complex. Also complex post-award administrative functions.

Civil Service Private Sector Public Sector

Human Resources

Simple to complex human resource management requirements depending on company. Budget forecasts not required in HR software.

Complex human resource management requirements. Many salary scales. Complex workforce management. Budget forecasts required. Requires budget tracking and variance forecasting to prevent over-spending.

Payroll

Only large companies have complex payrolls. Electronic Funds Transfer (EFT) and cheques used.

Complex payroll across many salary scales and rules. Complex payment methods in many countries including pay masters, debit cards, cheques, EFT and vouchers.

HR Benefits Health, dental, pensions, bonuses. Health, dental, pensions, loans, bonuses.

Recruitment

Different methods used. Recruitment highly regulated. Need for transparency to ensure meeting complex civil service rules. Must ensure recruitment of disadvantaged groups.

FreeBalance®

10

how does the technology supply chain impact reform?

The traditional approach to GRP implementation using third-party systems integration firms with little or no involvement of the software manufacturer increases implementation risk in developing countries.

Some systems integration firms find incentives to increase costs and reduce financial sustainability. Some software manufacturers form part of “devil’s

triangle”

Standard project management techniques have not overcome difficulties in implementing software in developing or developed countries. GRP implementations require more concentration on capacity, communications and change management.

GRP solutions that rely on code customization add complexity and cost. This complexity reduces momentum to the point where technology inhibits rather

than enables government transformation.

Software manufacturers who hope to achieve success in GRP must have appropriate governance mechanisms whereby governments drive product

enhancements.

Holistic methods can provide reform roadmaps based on the country context. Lessons learned can be used to improve GRP products.

FreeBalance®

11

how does a “solution” focus change the services approach for software

manufacturers?

Holistic process to integrate product development directly with support and implementation enables customer-centric product development with a solution rather than product focus. Systems integration firms are engaged to ensure sustainable reform.

Customer support must be enabled as a key company distinctive competence. This means more than an empowered customer support organization – it means action to bring experts from all parts of the company to solve problems. It also means a linkage to product implementation to address problems before they start and end the “hand-off” culture of most companies.

Implementation Services need to be directly aligned to product and support. Customer needs must smoothly, without friction, pass into the product development organization. And, professional services processes need to adapt beyond simple Project Management 101 and product expertise to provide holistic solutions. This is a critical factor because many companies, when faced with a customer problem or opportunity, drop the ball because they think it’s outside their business. Customer-facing staff must advocate product and process changes to satisfy customer needs.

FreeBalance®

12

what typical industry processes

can be improved?

Organization structure: eliminate barriers between support, services and product development groups

Marketing: focus on understanding the GRP domain to develop unique tools to align with government needs and engage with the PFM community at conferences

Implementation: software vendors should take part in implementations to reduce customer risk while using lessons learned to improve product suites

Partnerships: Selecting partners based on government experience, skills and commitment to sustainability

Customer engagement: leverage customer steering committees with strong governance structures rather than user groups

Troubleshooting: escalate critical problems to company executives and cross functional SWAT teams

Performance Management: build company performance structure aligned to customer satisfaction and engagement with customer-centric development, the improvement of internal PFM knowledge and sharing of lessons learned with the PFM community

FreeBalance®

13

what are good practices for specializing in GRP and PFM?

Conclusions

1. Adjust organizational structure and processes to address key GRP success factors such as usability, capacity building and adaptability.

2. Adopt a customer-intimate, social enterprise strategy and question typical technology practices.

3. Implement methods to ensure that products and processes are aligned with customer needs.

4. Build technology to suit government needs rather than use generic design. 5. Seek partners who add value and are focused on sustainability. 6. Create an internal performance culture aligned with customer needs.

There are very few “best practices” but many “good practices” in Public Financial Management.

FreeBalance, a global provider of Government Resource Planning (GRP) software and services shares good practices from experience with developed and developing country governments

around the world.

www.freebalance.com