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  • Writer's pictureDigital Team

Are Government accountants holding back digital transformation?

Updated: Feb 3


Government accountant ticking boxes

Digital Government will never happen without an enabling Finance Ministry


Governments increasingly rely on digital services to fulfill their policy goals and enhance citizen services. Citizens expect these digital services to be faster, user-friendly, secure, accessible, and increasingly tailored to their needs. Living up to these expectations is challenging enough but it is made even more impossible with government finance departments that are resistant to change and modern digital ways of working.


In this article, we explore the need for a paradigm shift in the way Public Finance Mangement (PFM) functions approach digital government. To be clear this means the central government PFM function which may be the Finance Department, Ministry of Finance, or the Treasury, and not the PFM professionals sitting within government agencies.


This is one of a series of GJC posts about the topic of PFM and digital government.



The Finance Department barrier to better service delivery


While governments strive to transform services, a substantial impediment frequently lurks behind the scenes denying investment, dampening innovation, and holding back digital transformation.


... it is the accountants, or in the case of Government agencies, the central Government Finance function. Hiding behind a veneer of good PFM, these accountants perpetuate old processes that are no longer fit for purpose for digital investments...


While these government accountants are 'only trying to do their job' - it's time to acknowledge that traditional PFM models for digital services in the public sector are outdated and ill-suited for modern digital service design, development, and delivery.


Ironically, these old approaches are also blowing out costs, increasing risks, and maintaining an illusion of sound PFM. All the players in this system know their way around it and play along with the illusion. Agencies tick the boxes, consultants collect their enormous fees for doing voluminous business cases, and decision makers pretend they believe the governance and assurance activities will reduce risks and support better service delivery.


The need to accept the limitations of current PFM


To achieve efficient, citizen-centric, digitally-enabled service delivery, governments must confront the limitations of their current PFM methods. While agile methodologies have gained recognition in digital service delivery, PFM has not kept pace. It's crucial that governments seriously reevaluate the digital funding landscape. They may be surprised to learn that a digital mindset in PFM may not be not as revolutionary as they first thought and that no one is proposing to throw away the accountabilities, governance, or assurance required. It just needs to be done differently.


Government digital initiatives often fail due to a misalignment between digital teams and the Public Finance functions. While digital teams are usually blamed for the cost blow outs, it is evident that traditional funding models have some key shortcomings that frequently hinder the success of digital projects in the public sector.


The rigidity of the annual budget cycle


The annual budget cycle used by Public Finance functions is not appropriate for most digital investments. The annualised linear approach incentivises a concentration of effort around set piece timings and processes that do not support good digital investment outcomes. Rather than dynamically responding to user needs, risks, or opportunities to improve services, the emphasis is on the process and not outcomes.


The annual financial cycle has been designed for obvious and understandable reasons. Agencies need time to plan multi-year investments, adequate scrutiny needs to be applied, and decision makers (including Ministers) need time to consider. Unfortunately, such prioritisation of process over outcomes drives the wrong behaviour:

  • Agencies are incentivised to build the apparently 'perfect case' for their one shot each year to receive funding. They may feel compelled to make the investment bigger than it needs to be in order to justify coming for new funding or risk being told that they should 'find it from their baseline budget'.

  • The PFM function is incentivised to double down on rigid processes because they have no alternative methods for spend controls and oversight; and

  • Ministers are incentivised to go for big investments that they can announce and with a heavy paper trail to defend decisions and poor outcomes.


The emphasis on voluminous business cases.


The emphasis upon voluminous, templated business cases may also reduce the likelihood of good outcomes when it comes to digital investments. The notion that everything can be known up front is a well recognised fallacy.


Digital investments are not like physical infrastructure investments that have a long and relatively predictable asset lifespan. Digital investments are highly likely to need iteration as conditions and user demands change. The linear 'point in time' business case process drives agencies to undertake considerable effort to portrayal the investment as flawless and to hide variables that could derail the ‘one-shot’ that they have. This is as opposed to an honest disclosure of the opportunities and challenges and true reflection of the inherently dynamic nature of digital investments.


The voluminous and unrealistic business cases that agencies need to develop are also symptomatic of the broader lack of transparency between agencies and the PFM function. The fact that agencies cannot have honest dialogue with the PFM function to find pragmatic and proportionate pathways (i.e. smaller, iterative funding methods) to the funding that they actually need is telling. The PFM function should be questioning how confident they are regarding the overall financial position of the specific agency and of Public Finance more generally.


This raises questions around the resistance from Public Finance functions to move away from the linear business case processes? The answer probably lying somewhere between the embedded rigidity of the financial year, genuine concern about the loss of oversight, a lack of imagination as to how and what could replace it, to the comfort of familiar processes.


Focus on capital expenditure


The emphasis on large capital-centric (capital expenditure or CAPEX) investment in the annual budget process is at odds with modern digital service design, build, and delivery methods. The accounting treatment of CAPEX (as opposed to Operating Expenditure - OPEX) by many Public Finance functions stems from historical investment in physical infrastructure with its predictable asset lifecycle. CAPEX allows the PFM function to track the depreciation of assets and hence the health of the portfolio.


This focus on CAPEX incentivises agencies to develop digital initiatives that are large scale 'big bang' and allow them to attract as much funding as possible. This in turn drives a procurement strategy by the agency to find prescribed digital solutions that apparently offer fixed, upfront, and predictable costs. This however removes the agility of the initiative and the ability to iterate development through its lifecycle to keep up with user needs and expectations.


This focus on CAPEX simply does not reflect the reality that digital is no longer on-site 'physical' assets that the agency owns and maintains. The agency is more likely to need to fund a third party to manage its infrastructure, and they will pay for it 'as a service' with OPEX. Cloud computing and the shift to 'infrastructure as code' have redefined the characteristics of digital assets and most PFM functions have not kept up. ]


Digital is not just another overhead


By treating digital as just a cost centre to be managed, the PFM function emphasis is primarily around cost management rather than the possibility that additional value can be created. This misses the reality that while digital may have a complex cost profile - it also has the potential to lower risks and create new value across other costs centres.


The PFM function needs to drive the awareness and understanding amongst PFM professionals that digital investment can produce wider outcomes for agencies. The digitalisation of parts of government could significantly improve the efficiency of an agency and wider government by lowering overheads (such as personnel costs), automating processes, and enabling inter-agency collaboration. These opportunities are unlikely to occur if the PFM function insists on a narrow approach to digital cost centres.


Siloed funding inhibiting cross agency collaboration


While it is increasingly recognised that cross-agency collaboration is essential for many government policy priorities (for example - government adaption to climate change), this work is frequently inhibited by fragmented funding, accountability, and governance structures. Government agencies are prevented from coordinating across various sectors by siloed funding approaches that stop the delivery of citizen-centered, cross-agency initiatives.


Frequently, the core problem of this siloed approach is the way the PFM function operates. Many PFM functions allocate their oversight based upon an agency, appropriation, or specific purpose allocation. For example, PFM function staff are given responsibility for an agency (such as the Department of Education), and these staff have no visibility or oversight of other agencies. This means these staff assess the digital investments for this agency in isolation and have no awareness of identical/similar investments in other agencies, the possibilities for efficiencies, lessons learnt, and with no awareness of inter-agency or wider government opportunities for interoperability.


PFM inhibiting experimentation


Experimentation is essential for innovation in any field and it is particularly important for digital. This is because the expectations, user requirements, and context for digital initiatives evolve rapidly and keeping up with new scenarios requires experimentation. COVID-19 and the way governments had to rapidly shift the way they worked has been the most recent example.


Traditional funding models do not usually enable experimentation. Government initiatives need to accept a greater level of risk-taking to facilitate digital innovation and the current risk-averse approach promulgated by PFM functions is stifling progress.


An example of this is the way the annual funding model works. The agency is incentivised to develop a large, highly prescribed business case that uses existing solutions that have defined offerings that appear to meet the (existing) needs of the agency and its users. While the agency knows its needs will continue to evolve (and hence a more experimental approach is needed), they also know that the ambiguity of a more flexible proposition will be seen as a weak business case by the PFM function and will not be supported,


Under pressure to deliver a solution by decision makers, agencies are forced to procure existing legacy solutions. Vendor lock in, contractural restrictions, and the outsourcing of capabilities then conspire to reduce the ability of the agency to experiment and iterate the solution to meet their evolving requirements. The solution then risks cost blow outs over time as the agency attempts to 'bolt on' changes and/or find completely new solutions with the original solution deprecating to legacy status.


The agency will then be criticised for not adequately scoping the investment and for requiring more and new investment. Some of this criticism may be accurate, however, the PFM function should also bear responsibility for setting the conditions that led to this scenario.


Traditional PFM functions no longer fit in a rapidly changing world


Traditional PFM functions and the processes and tools that they administer are simply too rigid to meet the rapidly evolving needs of the 21st century. While the focus of this article is the rapidly evolving 'digital' domain, other aspects of the modern world including the economic, political, environmental, social domains are also rapidly changing. Are PFM functions keeping up with the changes and expectations arising in all of these domains?


Digital ways of working are different than traditional methods and requires a new organisational mindset. Agile methods have been successful developed and used in the digital domain due to their customer-centric approach and flexibility. Like all methodologies, agile does not necessarily fit all situations and it seems probable that a pragmatic hybrid approach will be required. This means taking the advantages of digital ways of working and meshing them with the embedded outcomes that PFM seeks.


It is important to note that PFM outcomes are different to PFM processes. This means focusing on the need to provide confidence to decision makers that a digital investment has the appropriate probity, risk escalation processes, reporting, governance mechanisms, and that ultimately, it will deliver value. This means a shift in focus in the PFM function from the process being the 'end' to the process enabling value creation.


PFM leaders need to embrace change


PFM function leaders need to take ownership of the change in mindset required within their organisations. Rather than waiting for digital evangelists to make the case for change, PFM leaders should engage with the opportunity that digital offers and commission their own work programs in response. This should not be undertaken in a defensive manner but as a reflection of their embrace of experimentation, innovation, and new ways of working.


The implications of a truly digital approach to PFM may well be revolutionary in terms of the machinery of government, accountabilities, organisational roles and structures and the legislative and policy base underpinning it. Many embedded structural changes may need to be considered and evolved over multiple years.


The size of the prize, however, should always be at the forefront of PFM leaders minds when considering the opportunities of government efficiency, and effectiveness from the adoption of new ways of working. Digital investments have a poor history that suggests the current approaches are seriously failing and that any improvement could provide government with significant savings.


There are a number of different metrics that show how problematic digital investments are:

  • 18% of IT projects have cost overruns above 50% in real terms with the average overrun of 447% (Bent Flyvbjerg & Dan Gardner, 2023);

  • The average overrun of IT projects is 27% and one in six projects had a cost overrun of 200% and a schedule overrun of almost 70% (Flyvbjerg & Budzier, 2011)

  • 50% of all large IT projects (>$15 million) run 45% over budget, 7% over time, delivering 56 % less value than predicted (McKinsey, 2012)

  • Public-sector IT projects are also more likely to miss time and cost parameters compared with private-sector projects. 80% of public-sector IT projects overran schedules compared to 50% of private-sector projects. Cost overruns were three times higher for public-sector than private-sector (McKinsey, 2022)


Reimagining PFM for digital government is not just for PFM function and needs the sponsorship of Ministers, other central agency officials, as well as agencies Chief Financial Officers, and digital leaders. There needs to be no illusion that the potential of digital technology will remain unlocked unless PFM mechanisms are significantly reformed.


Ministers will be crucial to these changes and they will also need to think about digital investments differently. The focus should become outcomes based rather than budget day announcements. This does not mean Ministers should be any less concerned with delivery risks or the positive news stories but should think about playing their role in a different way. This could mean for example, being involved earlier in developing digital initiatives, and 'showcasing' pilots or lighthouse projects rather than just making vacuous statements about funding.


The key things that PFM reform will need to consider


The reform of PFM mechanisms need to line up with digital ways of working but also meet the rigorous requirements of good governance, transparency and probity. The PFM legislative, policy settings, and processes need to be meshed against digital ways of working. The kinds of issues that PFM will need to work through will include:

  • Funding digital investments more frequently and with smaller amounts;

  • Funding cycles that align with the iterative cycles of digital development and delivery to support experimentation and innovation;

  • New ways of working that may challenge existing governance models while still providing the delivery confidence needed by decision makers.

  • New ways of working that empower autonomy at lower levels and allow digital teams greater flexibility and the space to develop capability;

  • An acceptance of the advantages of the 'fail fast and innovate' mindset;

  • Building greater levels of trust and transparency between the finance and delivery functions;

  • The embrace of modern technology with digital and data seen as critical enablers;

  • Specific finance and accounting policies and practices around the treatment of assets and funding that may need to change (such as the capital expenditure centric processes);

  • The opportunity for PFM to be optimised at agency and all-of-government levels with digital/data integration and collaboration;

  • The underlying barriers from PFM professionals attitude, culture and behaviours that inhibit PFM considering digital PFM issues and opportunities.


The benefits of digital funding to PFM


While the case for a fresh approach by PFM to digital government transformation frequently stresses the significant failings of the current approach - the benefits of digital ways of working should also be highlighted.


Like all parts of government, PFM professionals will support the idea of developing government services that genuinely meet user needs and transforms the efficiency and effectiveness of government overall. PFM professionals should also welcome the advantages of digital initiatives that show value early, minimize cost overruns, empower development teams, and accelerate the delivery of benefits. Finally, PFM professionals will undoubtedly support methods that give government bigger 'bang for buck' and provide decision makers more choices for where scarce public finances can be directed.


Partnership between digital and finance


It is clear that the reform of PFM so that it is fit for purpose in the modern, digital era will necessitate a strong partnership between digital and financial professionals in government. Neither discipline have all the skills needed to undertake the long term ongoing reform needed and hybrid teams will need to be built.


This means a new level of partnership between PFM and digital government from the highest levels down. The Minster of Finance and the Digital Government Minister will need to drive the agenda through senior PFM and digital government officials. This reform should be seen as part of a broad modernisation of the Public service and reflect the vision of 'government as a platform' and a unified government accordingly.


Conclusion,


For digital transformation to occur at scale across government, significant change is required with PFM and how governments fund and manage digital initiatives. Governments serious about transforming government services so that they are efficient and citizen-centric will need to look closely at how their PFM function supports government digital transformation. It is likely that most PFM functions are currently inhibiting digital government transformation both wittingly and unwittingly. This will be through a range of structural, organisational, technological, and cultural reasons frequently underpinned by legislative and policy settings. PFM leaders need to step up and embrace the opportunity the paradigm shift offers for government transformation. If not for the benefits to citizens and the economy, then just to stop it getting any worse than it already is.





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