Creating Value through World-class Financial Management.

What enables an organization to achieve an excellent level of financial management? In order to answer that question, the General Accounting Office conducted a study of nine leading public and private-sector finance organizations to identify the success factors, practices, and outcomes associated with world-class financial management. The results of that study can help governments at all levels improve their financial management.

To help promote effective implementation of federal financial management reform, the General Accounting Office (GAO) studied the financial management practices and improvement efforts of nine leading private and public-sector finance organizations to identify the success factors, practices, and outcomes associated with world-class financial management. The six private-sector and three state organizations GAO studied have been recognized by their peers and other independent researchers for their outstanding financial management practices and successful finance reengineering efforts.

At one time, all of these organizations found themselves in an environment in which they were called upon to improve financial management while simultaneously reducing costs. This article discusses the goals, success factors, and practices associated with building a world-class finance organization. Specifically, GAO has identified four overall goals common to these leading organizations along with 11 practices that were critical to their ability to meet these goals.

World-class Finance Organizations

A world-class finance organization can best be defined in terms of the business outcomes it produces--outcomes such as improved business analysis, innovative solutions to business problems, reduced operating costs, increased capability to perform ad hoc analysis, and improved overall business performance. To build a world-class finance organization and help achieve better business outcomes, each of the organizations GAO examined set an agenda for transforming the finance organization by defining a "shared vision "--i.e., a mission, a vision for the future, core values, goals, and strategies--geared toward making the finance organization a value-creating, customer-focused partner in business results. Although the techniques used varied depending on the organization s size and culture and some efforts were more mature than others, the goals, practices, and success factors outlined in Exhibit 2 were instrumental in the organization achieving its vision.

Goal: Prioritizing

Making financial management a priority involves changing the organizational culture of a business or government. Although the views about how an organization can change its culture vary considerably, the organizations studied identified leadership as the most important factor in successfully making cultural changes. Top management must be totally committed in both words and actions to changing the culture, and this commitment must be sustained and demonstrated to staff.

The leading organizations studied made financial management improvement an entitywide priority by building a foundation of control and accountability that supports external reporting and performance management, providing clear strong executive leadership, and using training .to change the organizational culture and engage line management.

Practice 1. Build a Foundation of Control and Accountability that Supports External Reporting and Performance Management. Key characteristics of this practice are:

* the financial reporting and audit process is a basic management and oversight tool,

* accountability is part of the organizational culture and goes well beyond receiving an unqualified audit opinion, and

* internal controls meet both external financial reporting and performance management control objectives without significantly impacting efficiency.

A solid foundation of control and accountability requires a system of checks and balances that provides reasonable assurance that the entity's transactions are appropriately recorded and reported, its assets protected, its established policies followed, and its resources used economically and efficiently for the purposes intended. The private sector and state organizations visited built and maintained this foundation largely through the discipline of preparing routine periodic financial statements and annually subjecting them to an independent audit. However, senior executives at leading organizations recognize that the financial information demanded by decision makers to measure and manage performance requires greater precision and more timely access than that required to receive an unqualified opinion on the entity's financial statements. To ensure that decision makers have useful, relevant, timely, and reliable information, leading finance organizations establish accountability goals that extend well beyo nd receiving an unqualified audit opinion. In addition, the internal controls at these organizations are designed to efficiently meet the control objectives necessary for performance measurement and management as well as external financial reporting.

Strategies to Consider. To build a foundation of control and accountability, senior executives could:

* leverage audit resources and the financial statement audit process to improve data reliability and increase accountability,

* increase accountability by establishing goals for 1) producing financial and performance reports for major programs and/or business segments and 2) moving the organization toward more frequent financial reporting (e.g., quarterly, monthly),

* establish efficiency criteria that measure the cost associated with program outcomes, and develop an approach for assessing and improving internal controls over finance-related efficiency measures, and

* use accounting and operational performance data to support budget formulation and strategic planning.

Practice 2. Provide Clear, Strong Executive Leadership. Key characteristics:

* the chief executive recognizes the important role the finance organization can play in improving overall business performance and involves key business/line managers in financial management improvement initiatives,

* the CFO is a member of the top management team, and

* top executives' sustained commitment to improving financial management is reinforced through both their words and actions.

A powerful, visionary leader can change the direction, culture, and perceptions of the finance organization. The chief executive officers (CEO) of leading organizations understand the important role the CFO and the finance organization play in improving the entity's overall business performance. Consequently, the CFO is a central figure on the top management team and heavily involved in strategic planning and decision making.

Strategies to Consider. To demonstrate and reinforce commitment to improving financial management, heads of agencies and senior executives could:

* form an executive management team (heads of component organizations and those reporting directly to the agency head) to establish a vision and fundamental goals and provide sponsorship for each major financial management improvement project,

* involve key program/business managers in driving financial improvement initiatives,

* develop a plan to ensure that all key constituents visibly support financial management improvement initiatives, and

* establish an expectation that top financial executives, as part of the top management team, provide forward looking analysis that creates a link between accounting information and budget formulation and contributes to strategic planning and decision making.

Practice 3. Use Training to Change the Organizational Culture and Engage Line Management. Key characteristics:

* nonfinancial managers are educated about the financial implications of business decisions and

* training and tools are provided to facilitate and accelerate the pace of change initiatives.

The key to successfully managing change and changing organizational culture is gaining the support of line management. To change the organizational culture and enlist the support of line managers, many organizations utilize training programs. Some are generic in nature and are intended to help people anticipate and cope with change and ensure that every person in the organization understands the need for change. Others are specifically geared towards providing line managers with a greater appreciation of the financial implications of their business decisions. Through these interactions, financial managers gain a better understanding of business problems and nonfinancial managers gain an appreciation of the value of financial information. This not only produces better managers, it also helps break down functional barriers that can affect productivity and impede improvement efforts.

Strategies to Consider. To engage line management and create a culture that values good financial management, heads of agencies and senior executives could:

* identify key financial and nonfinancial managers and staff whose support is critical to the success of financial management improvement initiatives,

* develop curriculum and provide training that teaches key nonfinancial managers and staff how to use financial information to improve operational planning and decision making, and

* for all key managers and staff, develop curriculum and provide training that provides a framework and tools that can be used to facilitate and accelerate the pace of change initiatives.

Goal: Redefine the Role of Finance

Leading finance organizations have redefined the role of finance to better support mission objectives by assessing the finance organization's current role in meeting mission objectives, maximizing the efficiency of day-to-day accounting activities, and organizing finance to add value.

Practice 4. Assess the Finance Organization's Current Role in Meeting Mission Objectives. Key characteristics:

* the percentage of resources spent on strategic support activities is used as an indicator of how well finance is supporting mission objectives and

* benchmarking and customer feedback is used to identify performance gaps and best practices.

Many leading finance organizations assess their current role in supporting mission objectives by comparing the percentage of staff time spent on strategic support activities, such as business performance analysis or cost analysis, with the percentage of resources spent on transaction processing, and other routine accounting activities. According to a 1995 Financial Executives Research Foundation report, transaction processing and other routine accounting activities, such as accounts payable, payroll, and external reporting, consume about 69 percent of costs within finance. Other studies indicate that these activities consume as much as 80 percent of finance's resources. While transaction processing will always exist, it does not have to drain the finance organization's resources. Therefore, many leading finance organizations have calculate and compared these percentages as a general indication of how well they supported the organization's business objectives. A goal for many leading organizations is to reduc e the time spent on transaction processing activities to 20 percent.

Strategies to Consider. To assess the finance organization's current role in meeting mission objectives, agency CFOs and senior finance executives could:

* identify all major functions performed by the finance organization (e.g., accounts payable, payroll, performance reporting, performance analysis) and group each function into meaningful categories (e.g., transaction processing, control and compliance, mission support),

* establish and monitor performance goals and measures that reflect the finance organization's role in meeting mission objectives (i.e., the percentage of time or resources devoted to mission support vs. transaction processing or control and compliance activities),

* benchmark financial management practices and processes with recognized industry leaders (e.g., the cost of finance as a percentage of total outlays, unit cost per accounting transaction) in order to measure performance and identify best practices, and

* periodically survey internal customers to obtain information related to the quality and value of the products and services they receive and use this information to guide improvement initiatives.

Practice 5. Maximize the Efficiency of Day-to-day Accounting Activities. Key characteristics:

* inefficient processes are eliminated or streamlined,

* transaction processing activities are consolidated, standardized, and reengineered at shared service centers, and

* the cost and benefits of outsourcing routine accounting activities are considered.

As part of an overall strategy to reduce the cost of finance and better support business objectives, many leading organizations have reduced the number of staff required to perform routine transaction processing activities by eliminating or streamlining inefficient processes and/or consolidating these activities at shared services centers. Similarly, some federal agencies are aggressively expanding their use of electronic funds transfer to include contract payments and travel payments as a means of increasing the efficiency of their routine accounting activities.

Strategies to Consider. To maximize the efficiency of day-to-day accounting activities, senior executives could:

* identify high-volume processes or transactions that do not directly support the agency's mission (low-value, low-risk) and evaluate opportunities for:

* consolidating, standardizing, and reengineering transaction processing and other routine accounting activities at a shared service center, initially by department and then across departments;

* eliminating, streamlining, or reengineering costly, inefficient transaction processing and routine accounting activities, or

* outsourcing transaction processing and routine accounting activities.

Practice 6. Organize Finance to Add Value. Key characteristics:

* the finance organization s mission supports the entity's business objectives, and

* the organizational structure and human capital strategies support strategic business unit needs as well as traditional controllership and transaction processing needs.

Currently, most functions within finance organizations are focused primarily on 1) establishing and administering policy, 2) tracking, monitoring, and reconciling account balances, or 3) ensuring compliance with laws and regulations. While they recognize the need for change, according to CFOs surveyed, many questions remain unanswered regarding how best to scope, define, and organize finance office responsibilities. When it comes to organizational design, the study found that leading finance organizations often had the same or similar core functions (i.e., budgeting, treasury management, general accounting, payroll). However, the way these functions were organized varied depending on individual entity needs.

Strategies to Consider. To organize finance to add value, senior executives could:

* define the finance organization's mission, vision for the future, core values, goals, and strategies to support the agency's overall mission objectives, and

* develop an explicit workforce planning strategy that is linked to the agency's strategic and program planning efforts to ensure that financial managers and staff with skills for analyzing and interpreting financial data will support the agency's strategic planning and decision-making needs at both the field and headquarters level. (See practices 10 and 11 for information on attracting, retaining, and developing financial professionals).

Goal: Provide Good Information

Financial information is meaningful when it is useful, relevant, timely, and reliable. The leading finance organizations GAO visited enhanced their capabilities for providing meaningful information to decision makers by developing management information systems that support the partnership between finance and operations, reengineering processes in conjunction with implementing new technology, and translating financial data into meaningful information.

Practice 7. Develop Systems That Support the Partnership Between Finance and Operations. Key characteristics:

* the general ledger system is integrated into business processes and is adequate for financial reporting and control,

* automated system(s) are designed and deployed that 1) accurately measure the costs of activities, processes, products, and services and 2) provide line managers with timely, accurate financial and non-financial information on the quality and efficiency of business processes and performance, and

* an enterprise-wide system integrates operating, financial, and management information and allows decision makers to access relevant information easily and perform ad hoc data analysis.

The leading finance organizations GAO visited have long had general ledger systems capable of generating auditable financial statements efficiently and routinely, thereby providing information on stewardship and accountability at a high level. However, over the past decade new technology has made it possible for these organizations to integrate these systems and provide more relevant, accessible information that meets the changing needs of decision makers. Many leading organizations already have implemented, or are in the process of implementing, an enterprise-wide system to integrate financial and operating data to support both management decision making and external reporting requirements. Some abandoned their legacy systems altogether and turned to state-of-the-art integrated architectures, while others used well-functioning legacy systems and tied them together with a data warehouse. Regardless of the approach, these systems provided financial analysts, accountants, and business unit managers access to th e same cost, performance, and profitability information.

Strategies to Consider. To develop systems that support the partnership between finance and operations senior executives could:

* acquire and install a general ledger system adequate for external financial reporting purposes,

* develop managerially relevant cost information systems and strategic performance management systems that access data from financial transaction systems and relevant operating systems, and

* integrate the agency's financial (including budgetary), operating, and management systems and equip decision makers with the tools to easily access relevant information and perform ad hoc analyses.

Practice 8. Reengineer Processes in Conjunction with Implementing New Technology. Key characteristics:

* commercial off-the-shelf software packages implemented with limited modification,

* processes and controls adapted to fit commercial off-the-shelf software, and

* processes are reengineered across functional lines.

At many of the leading finance organizations visited, the vast majority of financial applications were commercial off-the-shelf (COTS) packages that were implemented with limited modification to the basic application package itself. The advantages of using COTS software include 1) COTS software is less costly than developing in-house applications, 2) software upgrades are affordable and are regularly available, and 3) COTS software is designed to include best practices.

The key to successfully implementing COTS systems and best practice processes, according to leading finance organizations, is reengineering business processes to fit the new software applications. In fact, productivity gains typically result from more efficient processes, not from simply automating old ones. Effectively reengineering business processes, however, requires moving from a functional-based organization to a process-based organization.

Strategies to Consider. To reengineer processes that support new technology, senior executives could:

* form cross-functional teams to 1) examine existing core business processes and 2) define user requirements,

* compare COTS products against the agency's requirements and identify the COTS packages that most closely match the agency's needs,

* reevaluate user requirements not supported by COTS software and determine, before customizing software, whether each requirement is still valid or whether alternatives exist that may be more cost-effective,

* where software modifications are required, implement an effective configuration management system that includes 1) clearly defining and assessing the effects of modifications on future product upgrades before the modification is approved, 2) clearly documenting software products that are placed under configuration management, and 3) maintaining the integrity and traceability of the configuration throughout the system life cycle.

* implement a quality assurance process that ensures that project activities and software products adhere to management's established plans, standards, and procedures. This includes ensuring that the configuration management process is effectively implemented and that product changes are clearly documented and tested before being placed into production, and

* implement an effective risk management strategy to ensure that project risks, such as customization and vendor's ability to deliver a given system, are adequately identified and effective mitigation strategies are implemented.

Practice 9. Translate Financial Data into Meaningful Information. Key characteristics:

* reports are designed around key drivers such as markets, products, and customers, and

* relevant financial information is presented in an understandable, simple format with suitable amounts of detail and explanation.

Traditionally, finance organizations have used voluminous paper reports, based primarily on the prior month's activity, to communicate financial information. Further, management reports often were designed around current organizational structures. Consequently, as organizational structures changed over time, many management reports became irrelevant.

Today, leading finance organizations have eliminated, reduced, and/or redesigned much of their old management reporting formats to better meet the needs of the user. These organizations have designed new reporting formats around key business drivers rather than organizational structures to provide executives and managers with relevant, forward-looking information on business unit performance.

Strategies to Consider. To improve management reporting of financial information, senior finance executives, as part of the top management team, could:

* meet with key policymakers and managers on an ongoing basis to define key business drivers and determine what key business information is needed for management and oversight of the agency's mission and objectives,

* determine what information is needed by program executives and managers to meet and support key business information requirements, and

* present various reporting format and content options to executives and managers.

Goal: Build a Strong Finance Team

As the finance function has evolved over the past decade, from a paper-driven, labor intensive, clerical role to a more consultative role as advisor analyst, and business partner, many leading finance organizations have seen a corresponding shift in the mix of skills and competencies required to perform this new role. To respond to these changing business needs, the leading organizations GAO visited developed finance teams with the right mix of skills and competencies and built finance organizations that attract and retain talent as part of an overall strategic approach to human capital planning.

Practice 10. Develop a Finance Team with the Right Mix of Skills and Competencies. Key characteristics:

* a defined set of technical, management, and leadership skills and competencies is developed as part of the entity's overall approach to strategic human-capital planning and is used as a foundation for all human-capital management activities and decisions,

* training and career development programs use both classroom instruction and rotational assignments, and

* opportunities to "learn the business" are provided.

At leading finance organizations, developing a finance team with the right mix of skills and competencies starts by defining a set of skills and competencies that will enable the finance team to meet the current and future technical, management, and leadership needs of the business. The resulting competency profile is used to assess gaps in individual or group competency levels and develop human capital strategies to address current or expected future deficiencies. This practice discusses the training, career development, and succession-planning strategies leading finance organizations use to develop a team with the right mix of skills and competencies.

The training and career development programs of the leading finance organizations provided intensive two- to three-year entry level programs as well as mid-career and executive-level programs that used both classroom instruction and rotational assignments to develop technical, management, and leadership skills and competencies. The programs' coursework focuses initially on the tools and techniques of advanced accounting and finance as well as general business skills. Then, the focus shifts to the strategic application of these tools within business-specific environments. However, the key to implementing a successful career development program is to complement course work with real-life business experience through the use of planned rotational assignments.

Strategies to Consider. To develop a team with the right mix of skills and competencies, senior executives could:

* As a part of an agency-wide strategic approach to human capital planning 1) determine the leadership, management, and functional/technical competencies required for the finance organization to support agency missions, goals, and objectives, 2) evaluate the finance organization's current and future human capital capabilities, 3) identify skill gaps, 4) develop human capital policies and practices that will allow agencies to fill the identified skill gaps, and 5) evaluate these efforts and use performance data to continually update human capital strategies.

* As a first step, assess the finance organization's human capital policies, programs, and practices to determine whether they support the organization's mission and vision for the future.

* Using both classroom training, planned staff rotations, and interagency assignments, design a career development program geared toward:

* improving leadership, management, and traditional financial management competencies, including the analytical skills needed to support program decision making; and

* understanding overall agency operations, including program implications of financial decisions.

* Establish continuing professional education requirements for financial managers similar to those required for auditors.

Practice 11. Build a Finance Organization that Attracts and Retains Talent. Key characteristics:

* top financial leadership participates in the recruitment of new talent,

* a variety of clear career path opportunities are offered and staff development programs are used as a means of exposing staff to different career opportunities, and

* competitive compensation and benefits packages are available.

As discussed in practice 10, sound training and career development strategies are needed for the finance organization to meet the current and future human capital needs of the business. Equally important, however, are recruitment, retention, and reward strategies that enable the finance organization to attract and retain talented financial professionals at all levels. Although their styles and strategies varied, the leading organizations agreed that several key factors were important in attracting and retaining talent.

First, recruiting a talented workforce requires the commitment of top leadership. The CFOs at these organizations are often heavily involved in talent assessment, and senior executive leaders are actively involved in on-campus recruiting.

Second, attracting and ultimately keeping a highly qualified and motivated workforce involves providing meaningful career opportunities, such as the opportunity to 1) participate in exciting groundbreaking projects, 2) build a portfolio of new skills, and 3) choose a variety of career paths.

Third, compensation is a key factor in any career decision. While, according to employee compensation surveys, compensation is fairly comparable between the private and public sectors for entry-level and middle-management positions, executive compensation in the private sector far exceeds that of government executives. However, other factors such as the desire to effect change and make a difference may attract senior executives to public service.

Strategies to Consider. To build an organization that attracts and retains talent, senior executives could:

* actively work with colleges and universities to 1) market the opportunities available for financial professionals and 2) include a federal accounting and financial management curriculum that will not only prepare students for careers in federal accounting but will also help promote federal career possibilities,

* continue to work with the Office of Personnel Management to provide more flexible career paths that provide opportunities for movement throughout the finance organization and agency program offices, and

* utilize staff development programs and planned staff rotations to expose financial managers and staff to a variety of career paths.

LISA G. JACOBSON is the Director of Defense Audits at the U.S. General Accounting Office. This article was adapted from the original GAO report (#GAO/AIMD-00-134) and can be viewed in its entirety at www.gao.gov.

ACCOUNTABILITY GOALS AND AN EFFECTIVE CONTROL STRUCTURE PROVIDE THE BASIS FOR A MORE RESULTS-ORIENTED GOVERNMENT

Commonwealth of Virginia 

To build a foundation of control and accountability, senior government leaders in the Commonwealth of Virginia had clear goals and objectives that went beyond receiving an unqualified audit opinion. With the passage of the Single Audit Act in 1984, the Commonwealth of Virginia had to produce and have audited Comprehensive Annual Financial Reports (CAFR) for the first time. Although not required by the act, the state comptroller had each state agency also produce audited financial statements, thereby ensuring accountability at every level of government rather than solely at those levels considered material to the CAFR. The goal was to ensure that managers and lawmakers would have useful, relevant, and timely information for assessing and managing program performance. Now that Virginia routinely receives an unqualified opinion on its CAFR, only those state agencies with a specific need (e.g., agencies' operating trust, enterprise, and internal service funds) are required to produce auditable financial statement s. The remaining agencies now are required to certify the accuracy of financial information that feeds the CAFR. By subjecting all state agencies to the rigorous discipline of preparing financial reports and having them audited, the comptroller increased accountability for data accuracy beyond that required to receive an unqualified audit opinion. State officials continue to raise the bar and seek new ways to increase accountability and improve the state's performance. For example, the Department of Planning and Budget currently performs trend analysis and prepares fiscal impact statements for the state's legislature, using useful, relevant, and timely financial information from the state's integrated budget and accounting systems. Also, to ensure that performance data and long-range plans drive budget decisions, the state has set goals, including implementing an activity-based accounting and budgeting system, for enhancing its performance budgeting process.

INFORMATION DATA WAREHOUSE PROVIDES DECISION MAKERS WITH A SINGLE SET OF FINANCIAL AND PERFORMANCE INFORMATION

In 1994, the Massachusetts Office of the State Comptroller embarked on a groundbreaking project--to build an information warehouse that would integrate fiscal, budgetary, human resource, and program data, and to make the data available to decision makers throughout the state. However, what made this project possible actually began seven years earlier when the state implemented its first statewide management accounting and reporting system. Although data entry is decentralized at agencies across the state, all processing for accounting and financial reporting is done centrally using one chart of accounts on a mainframe computer.

The state's accounting system houses a wealth of data, but as with many mainframe-centered applications, data access is a problem. As fast as reports are designed and built, data needs change and users are left with only half the data they require. Trend analysis was difficult at best and state financial managers were forced to make decisions using out-of-date, estimated, or anecdotal information. To complicate matters, the state also had a long history of dueling systems--budget numbers were maintained in one system and accounting numbers in another. The business case for better information access was clear and, in 1994, funding was received to build information access improvements.

The technical and business managers had four primary goals in mind when designing the warehouse: 1) make it useful by putting the right data into it, 2) make it usable so that decision-makers could and would use it, 3) make it expandable so that it could be adapted to future needs, and 4) make it sensible--don't buy a Cadillac when a Chevette is what you need. During the design, development, and implementation of the warehouse, many organizational and technical issues were hotly debated, but the most critical design decision related to the level of detail to be stored in the warehouse. The greater the detail, the more flexible and accurate the report will be. However, storage, processing, and maintenance costs become significantly greater. The team ultimately opted for transaction-level detail, thereby providing enormous flexibility in meeting changing users' needs.

The information warehouse project has resulted in numerous benefits to a wide range of executives, legislators, managers, financial analysts, budget analysts, accountants, and operations personnel. For example, managers can now project spending rates, based on previous experience, and determine if a department will overrun its allocations in time to take corrective measures. For the first time, the state has one set of books with one set of universal data. With the warehouse, users spend much less time explaining why numbers from one department are different from another department and more time developing solutions to business problems.