The Era of Integration Linking Budget, Finance and Performance Management C. Morgan Kinghorn, CGFM, Chief Operating Officer, Grant Thornton Global Public Sector August 22, 2007 Agenda • Focusing on Results – the State of the Current Art • Meeting the Integration Challenge – Advancing the State of the Art • Integration in Action: the Fish and Wildlife Story 2 Increasing focus on results • Citizens and stakeholders expect results from their government • Government Officers report results using the following: – President's Management Agenda (PMA) – Program Assessment and Rating Tool (PART) • All 50 states have requirements for performance budgeting • Local governments lead the way in responding to citizens' needs for services • Environment of limited resources and competing priorities forces agencies to make hard choices regarding program funding • Increasing pressure to achieve the greatest quantifiable result at the lowest cost 3 What do we today… Strategic Cost Performance Budget Plan Management Metrics Budget, Performance and Financial organizations operate in "Silos" with no alignment or integration 4 Results focus propels change • Environment of limited resources and competing priorities forces agencies to make hard choices regarding program funding • Increasing pressure to achieve the greatest quantifiable result at the lowest cost • New method for success: Integrate cost and performance information into the budget formulation process Link resources requested to expected strategic and programmatic outcomes Transition from an inputs/outputs focus to outcomes focus 5 Integration is the need of the hour Strategic Plan Budget Performance Cost Metrics Management 6 What does an integrated approach require? Structure Data Alignment of budget, Timely, accurate and relevant performance, planning and cost cost and performance data People Leaders with focus and vision of results management Managers who support and foster the use of financial and performance information to make decisions Good working relationship across Performance, Accounting, Policy, Program and Budget offices 7 Strategic Planning: Aligning program outputs and outcomes to agency mission 8 Budgeting: Moving beyond the traditional line item budget for improved integration Unit cost and workload data informs budget requests Agencies leverage outcome-oriented performance results to strengthen budget justifications Budget decisions support performance plans to increase efficiency and effectiveness of limited resources Resource distribution aligns with agency priorities outlined in the strategic plan Technology-enabled solutions promote improved efficiency in the budgeting process and provide one version of the truth 9 Cost Management: Enhancing management decisions using cost information • Cost management infrastructure provides an organized framework for capturing agency costs to enhance planning and cost control • Use cost management to obtain Reliable, Relevant and Regular cost information to support management decision- making • Build an infrastructure that provides predictive capabilities such as scenario planning and "what-if" analyses to enhance the accuracy and effectiveness of resource distribution 10 Performance Metrics: Measuring what is relevant to achieving the agency mission Develop a Align the Track balanced set of lowest level of measures that measures with performance break down clear targets measures with organizational and the strategic “stove piping” accountability goals of the and support organization optimization of work flow across organizational boundaries Horizontal and vertical integration of measures to enable management for results 11 Budget, cost and performance integration ensures better management of limited resources • The coming together of budget, finance and performance, people, processes and technology: Enables managers to better understand and manage their "as-is" environment Propels efficiency and resource allocation improvements Allows forecasting of cost required to achieve strategic performance goals Provides agency performance rationale to support budget requests Helps agencies successfully fulfill reporting requirements 12 Meeting the Integration Challenge 13 Budget and Performance Integration (BPI) Maturity Model: Roadmap for successful integration Initial Early project Basic capability Enhanced Transition to continuous assessment gains/compliance Implemented Capability Implemented improvement Initiating Operating Integrating Optimizing Innovating Budget control Workload control Performance Strategic Internal Alignment "Don't overspend" "Operate" goals Innovation Have a compliant and governed Provide enough resources to Demonstration that results Performance optimization, Continuous improvement budget and cost management deliver upon the mission of are or are not being achieved performance-aligned and innovations, cross- process. Remediation projects and the organization. for the funds expended. resources Agency insights staff support services. Budget Formulation (Traditional) •Traditional budget formulation •Workload analysis (financial and Budget and Performance Integration support (base+) non-financial) •Data collection processes support •Scenario analysis (what-if • BPI assessment and • Benchmarking • Marginal cost of (automation/templates) analysis) implementation strategy • Earned value outcomes capabilities •Program and policy analysis (to •Budget allocation and execution • Integrated management • Cross-Agency or cross- support budget) performance/business • Capacity Planning and organizational insights Budget Execution (Traditional) framework/strategic Optimization hierarchy • Performance-based •Standard Operating procedures •Modeling and analytical support •Internal controls •Outlay analysis • Program performance budget prioritization •Status of funds reporting measurement/management/ • Scenario-based planning •Budget projection analysis assessments • Risk based budgeting • PART support • Predictive budget models Cost/fee management. • Workload Studies • ABC/M and cost and analyses • Fee Studies management • Pilot Studies • Enterprise Implementation • Statistical analysis Assessment/Strategy • Strategic planning • Organizational change • Risk-based budgeting management Performance Management • Scenario-based planning • ABC/M and cost •Requirements analysis and regulatory •Performance measurement – • Results studies management compliance support (e.g., GPRA) workload/ operational measurement • Performance budgeting • BPI Solution (formulation of perf. budgets) Implementation Data cleansing, Integration & mining • BPI solution implementation •Data reconciliation •Data management • Requirements •Current state, systems inventory, •Requirements Analysis analysis, design source of record •Tools/models • COTS evaluation •Data cleansing and integration 14 BPI Maturity Model provides a framework to view best practices across phases Initiating Operating Integrating Optimizing Innovating Budget control Workload control Performance Internal Strategic "Don't overspend" "Operate" goals Alignment Innovation Lifecycle Phases Budget formulation Budget execution Work Streams Cost/fee management Performance mgt. Data cleansing/integ. Integration 15 Sample of best practices and techniques in budget and performance integration Initiating Operating Integrating Budget control Workload control Performance "Don't overspend" "Operate" goals Performance mgt. PMMM profile Activity-based Change Cost/fee mgt. Readiness profile costing Performance Integration budgeting 16 Activity Based Costing – Moving away from the traditional cost view General Ledger View Activity-Based Costing View Salaries $300,000 Tag species $100,000 Benefits 25,000 Harvest samples 35,000 Travel 55,000 ABC Drivers Maintain tanks 75,000 • Hours Communications 20,000 • % Time Survey populations 10,000 Contracts 90,000 • Square Ft. Acquire water 290,000 Equipment 60,000 Develop plans 160,000 Supplies 40,000 Restore wetlands 20,000 Total $590,000 Total $590,000 Reports WHAT is spent Reports HOW it is spent Expense categories Processes ABC models can also assign activity costs to strategic goals, outputs and/or customers 17 Change Readiness Assessment Sample Hypothesis Change Readiness Profile The Change Readiness The organization is flat, 1 Assessment leverages work less bureaucratic, and 29 30 5 2 3 from the industry thought has a process- 28 4 4 orientation 27 5 leader in cost and performance The organizational 26 3 6 management, CAM-I Each structure is stable and 25 2 7 question on the Changes has relatively low 1 Readiness Assessment survey employee turnover 24 8 addresses one or more of 20 0 Management effectively 23 9 key hypothesis. The communicates the 22 10 assessment determines which purpose and value of of these hold true for an 21 11 system changes and organization and which do not. 20 12 improvement initiatives Those that are further from to all levels of the 19 13 18 17 15 14 being true are the areas that organization 16 represent the greatest risk to Management solicits implementation. and responds to feedback on new initiatives 18 Risk mitigation strategies are identified to address high-risk areas • Inadequate communication High-Level Risk Mitigation Actions Risks causes implementation of significant change initiatives to Identify and charter Executive Steering Committee with oversight be problematic for the agency authority Inadequate Identify and charter cross-functional working group to assist with communication program-level communications and training on objectives FHWA Change Readiness Profile Develop and sustain website with information and updates and Develop and conduct executive, management, and senior analyst expectations of 2 30b 30d 30c 4 3 4a 4b 29d 30a 29e 4c 4d 4e training sessions and/or “brown bags” 29c 5 MCA at all 29b 6a 29a 3 6b Develop and distribute quarterly newsletter 28 6c levels 27 6d 26d 26c 2 7a 7b Communicate regularly with immediate updates on critical changes 26b 8a 26a 8b 25 1 8c 24b 8d 24a 23 9a 9b Create overarching integrated performance management 0 22 21 9c 10 Inadequate methodology for FHWA, that provides ink between cost and 20 19d 11 12a linkages performance between cost Integrate strategic planning goals and metrics into the ABC 19c 12b 19b 12c 19a 12d 18f 18e 12e 12f and model, as the first iteration of cost objects 18d 13a 18c 18b 18a 13c 13d 13b performance Communicate the ABC as a solution to federal requirements for 17 13e 1615d 15b 15c 15a 14d14c14b 13f 14a information budget and performance integration (PMA) and performance budgets (A-11) • The agency does not currently provide good linkages between cost and performance across or up/down the organization 19 PMMM Profile: Allowing agencies to assess their current state against key performance standards Performance standards • Leadership 5 Strategic • • Planning Performance Budget Integration • Resourcing/Enabling Support Degree of Change to Business Model • Information/Data OUTCOME INTEGRATION • • Delivery Measurement 4 Internal • Assessment/Evaluation Alignment OUTCOME ORIENTED Performance 3 Goals INTERMEDIATE OUTCOME ORIENTED 2 Workload Control PROCESS ORIENTED 1 Budget Control INPUT ORIENTED Evolution of Enterprise Performance Management Improvements 20 An integrated framework for success (1) Mission (1) Why are we in business? start Mission (2) What outcomes do we want (2) Goals this financial period? (3) What amount of product or (3) Demand Goals service will customers require? and capacity How much demand can be fulfilled in current state? (4) Performance Demands (4) What are measurable measures & Capacity behaviors to obtain goals? What and targets are desired measurement Leadership levels? Management (5) Cost drivers (5) What variables drive revenue and expenses? Costing Performance Cost drivers (6) Costing method measures (6) How do we capture cost to method compare to performance? 21 The Fish and Wildlife (FWS) Story - Starting from a different perspective 22 Guiding principles for integration at the Fish and Wildlife Service • Alignment • Identification of measurable agency and program outcomes • Aligned from top-to-bottom • Linkage • Integration with financial systems • Historical cost data • Integration with program management systems • Performance data • Integration in decision making • Budget formulation • Resource allocation 23 FWS integration framework 24 ABC costs associated with performance hierarchy and goals Resource Protection Mission $395,640,668 Components Cost Flow From CSFs up to DOI Mission Components Improve Health of Water, Landscapes & Marine DOI Goals Resources $183,962,479 (46%) DOI 1 Wetland, Riparian and Upland Areas: % of acres or stream/shoreline miles achieving desired conditions where DOI End Outcome condition is known and as specified in Measures & Costs management plans $144,905,593 (79%) OP 1A restore/enhance X acres of wetlands, Y acres of uplands, and Z FWS Ops Goals riparian stream/shoreline miles $32,269,529 (22%) CSF 1.3 Riparian stream/ CSF 1.1 Wetland acres CSF 1.2 Uplands acres Critical shoreline miles restored/ restored restored Success enhanced $7,481,229 (23%) $20,156,303 (63%) Factors $4,631,997 (14%) Activities Activities $32,269,529 25 Performance budgeting approach: Step 1 -- Set priorities using Operational Goals Directorate Homework Sample Data Directorate Average -$50M Target Bank Account OP 1A – Restore/Enhance Wetlands, Uplands, and Riparian OP 1B – Manage/Protect Wetlands, Uplands, and Riparian OP 4 – Contaminated Sites Remediated on FWS Lands 26 Performance budgeting approach: Step 2 -- Determine Best Investment for Maximum Results Sample Data n/a n/a $107/acre $48/acre Avg. 2 to 1 dollar match, more performance for the same Federal Dollars 27 Performance budgeting approach: Step 3 -- View FY08 Results by Performance Goal Sample Data 60,000 acre increase in Performance, no change in Federal dollars 28 Performance budgeting approach: Step 4 -- View Results by Budget Activity & Subactivity Sample Data budget structure Output of exercise by 29 Key learning points from the FWS implementation • Align individual program plans to overarching Bureau goals and measures • Measure key performance metrics – Allow alignment/structure to guide what matters – Assess usefulness of current measures – Include financial component in measurements • Don’t just capture performance information, use it – Link to budgeting, individual performance plans • Look below measures to gauge effectiveness of program delivery 30 Questions or comments?
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