Accounting and Information Management Division April 2000 EXECUTIVE GUIDE Creating Value Through World-class Financial Management GAO/AIMD-00-134 Preface To help promote effective implementation of federal financial management reform, we studied the financial management practices and improvement efforts of nine leading public and private sector finance organizations to identify the success factors, practices, and outcomes associated with worldclass financial management. This executive guide is intended to assist federal agencies in achieving the objectives of the Chief Financial Officers (CFO) Act of 1990 and subsequent related legislation by providing case studies of 11 practices critical for establishing and maintaining sound financial operations. The reforms laid out by the CFO Act and subsequent related legislation, when effectively implemented, will place the federal government on par with private sector corporations and state and local governments that have already made the necessary investment in financial management. While many agencies have made great strides toward generating more accurate and reliable annual financial statements, the process of preparing financial statements and subjecting them to independent audit is only the first step toward satisfying the requirements of the legislation. To reap the full benefits of financial reform, federal finance organizations must go beyond the audit opinion toward (1) establishing seamless systems and processes, (2) routinely generating reliable cost and performance information and analysis, (3) undertaking other valueadded activities that support strategic decisionmaking and mission performance, and (4) building a finance team that supports the agency's mission and goals. This executive guide was prepared under the direction of Lisa G. Jacobson, Director, Defense Audits. Other GAO contacts and key contributors are listed in appendix VIII. Questions can be directed to me at (202) 5122600, steinhoffj.aimd@gao.gov, or Linda Garrison, Assistant Director, by phone, email, or regular mail at the following: Jeffrey C. Steinhoff Acting Assistant Comptroller General Accounting and Information Management Division Contents Background Learning from Leading Organizations Background Creating a government that runs more efficiently and effectively has been a public concern for decades. In recent years, however, the push towards creating a smaller, more results oriented government has intensified the urgency to find ways to do more with less. To effectively evaluate and improve the value derived from government programs and spending, the Congress and other decisionmakers must have accurate and reliable financial information on program cost and performance. Further, they must be able to rely on federal finance organizations to provide analysis and insight about the financial implications of program decisions and the impact of those decisions on agency performance goals and objectives. Currently, financial data are not always useful, relevant, timely, and reliable enough to be used for federal decisionmaking, and many federal finance organizations are not yet well equipped enough to routinely provide analysis or advice related to this information. In the private sector, the role of the finance organization historically has centered on oversight and control, focusing on its fiduciary responsibilities and paying less attention to increasing the effectiveness of operating divisions. However, over the past decade, dramatic changes in the business environment have driven finance organizations to reevaluate this role. Increased competition resulting from an emerging global market has put pressure on finance organizations to find new ways to reduce administrative costs, add value, and provide a competitive advantage. At the same time, advances in information technology have made it possible for the finance function to shift from a paperdriven, labor intensive, clerical role to a more consultative role as advisor, strategist, analyst, and business partner. According to a 1997 study performed by a major public accounting firm,1 most CFOs in 1989 were spending 75 to 80 percent of their time on fiduciary issues, essentially external reporting. Today, the goal of many leading finance organizations is to spend about 20 percent of their time on fiduciary issues and the remaining time performing strategic support activities, such as cost analysis or business performance analysis. Also, a 1996 report by the Institute of Management Accountants found that over the previous 5 to 10 years, management accountants were increasingly being asked to supplement their traditional accounting role with more financial analysis and management consulting.2 Dramatic changes also have occurred in federal financial management in response to the most comprehensive management reform legislation of the past 40 years. The combination of reforms ushered in by (1) the CFO Act of 1990, (2) the Government Management Reform Act (GMRA) of 1994, (3) the Federal Financial Management Improvement Act (FFMIA) of 1996, (4) the Government Performance and Results Act (GPRA) of 1993, and (5) the ClingerCohen Act of 1996 will, if successfully implemented, provide the necessary foundation to run an effective, resultsoriented government. 1 Reinventing the CFO: Moving from Financial Management to Strategic Management (Coopers and Lybrand, New York, New York: 1997). 2 The Practice Analysis of Management Accounting, Institute of Management Accountants (Montvale, New Jersey: 1996). 4 The CFO Act and GMRA spelled out a long overdue and ambitious agenda to help the government remedy its lack of useful, relevant, timely, and reliable financial information. For the government's major departments and agencies, this legislation (1) established chief financial officer positions, (2) required audited financial statements annually, and (3) set expectations for agencies to develop and deploy more modern financial management systems, produce sound cost and operating performance information, and design results oriented reports on the government's financial condition by integrating budget, accounting, and program information. FFMIA built on the CFO Act and GMRA by requiring financial statement auditors to report whether agencies' financial systems comply with federal financial management systems requirements, federal accounting standards, and the U.S. Government Standard General Ledger. The Government Performance and Results Act of 1993commonly know as GPRA or the Results Actwas enacted to hold federal agencies accountable for achieving program results. It requires that agencies (1) set multiyear strategic goals and corresponding annual goals, (2) measure performance toward the achievement of those goals, and (3) report on their progress. Effective implementation of the Results Act, however, hinges on agencies' ability to routinely produce meaningful budget, accounting, and program information needed to manage performance and measure results. The CFO Act and other related financial reform legislation, if successfully implemented, will provide the basis for producing this information. To help insure that agencies effectively use information technology to achieve program results, the Congress passed the ClingerCohen Act of 1996. The ClingerCohen Act builds on the best practices of leading public and private sector organizations by requiring agencies to better link their information technology planning and investment decisions to program missions and goals. The ClingerCohen Act contains critical provisions requiring federal agencies to use investment and capital planning processes to manage their information management technology portfolios. Further, it requires that agencies modernize inefficient administrative and missionrelated work processes before making significant technology investments to support them. Implemented together, these measures provide a basis for improving accountability over government operations and routinely producing sound cost and operating performance information, thereby making it possible to better assess and improve the government's financial condition and operating performance. Learning From Leading Organizations To help promote effective implementation of federal financial management reform, we 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 worldclass financial management. The six private sector and three state organizations we studied have been recognized by their peers and other independent researchers for their outstanding financial management practices and successful finance reengineering efforts. For more information on the criteria we used to select these organizations, see appendix I. As federal agencies continue to improve their management and financial accountability, they will be able to draw upon the expertise and experience of these private sector and state government organizations. Leading Finance Organizations At one time, all of these organizations found themselves in an environment similar to the one confronting federal agencies todayone in which they were called upon to improve financial management while simultaneously reducing costs. The key practices drawn from the organizations we examined can provide a useful framework for federal agencies working to improve their financial management. This guide discusses the goals, success factors, and practices associated with building a worldclass finance organization. Specifically, we have identified 4 overall goals common to these leading organizations along with 11 practices that were critical to their ability to meet these goals. In addition, this guide includes examples from our case study work that best illustrate how each practice enabled the selected organization to achieve the desired outcomes. We preceded our case study work with an extensive review of financial management literature, guides, and reports. We also consulted with leading public and private sector experts in financial management. Case study data were collected through interviews and analysis of documentation. Further, the case study organizations reviewed all case study information included in this guide for accuracy and completeness. Appendix I provides a more detailed description of our research objectives, scope, and methodology. 6 Characteristics of a Worldclass Finance Organization A worldclass finance organization can best be defined in terms of the business outcomes it producesoutcomes such as improved business analysis, innovative solutions to business problems, reduced operating costs, increased capability to perform adhoc analysis, and improved overall business performance. To build a worldclass finance organization and help achieve better business outcomes, each of the organizations we 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 valuecreating, customerfocused 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 the following illustration were instrumental in the organization achieving its vision. Goals, Practices, and Strategies To Consider This section summarizes the results of our research and case study work. Specifically, it contains the 4 overall goals and 11 practices we identified as critical for building a worldclass finance organization. To facilitate the practical use of this guide, information is organized into four sections-each summarizing one of the four goals as well as those practices that have enabled leading organizations to achieve these goals. Further, for each of the 11 practices, we provided (1) a summary of key characteristics, (2) illustrative case study examples, and (3) strategies for federal agencies to consider when implementing the practice. 8 Make Financial Management an Entitywide Priority The quality and image of federal financial management has suffered from decades of neglect and an organizational culture that has not fully recognized the value of good financial managementnot even at its most basic levelas a means of ensuring accountability. Making financial management a priority throughout the federal government involves changing the organizational culture of federal agencies. Although the views about how an organization can change its culture vary considerably, the organizations we 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 we 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 • 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. • 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 we 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 decisionmakers 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 decisionmakers have useful, relevant, timely, and reliable information, leading finance organizations establish accountability goals that extend well beyond 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. Similarly, according to a 1998 survey of federal CFOs,3 federal finance organizations continue to expand their focus from audited financial statements to include performance measurement and strategic planning. For example, the CFO Council and the Office of Management and Budget (OMB) are aggressively working on eight priority initiatives outlined in the1998 Federal Financial Management Status Report and FiveYear Plan. Although one of the eight priorities focused on obtaining an unqualified opinion on agency financial statements, the eight priorities taken as a whole aim at improving the financial and performance information needed to make and implement effective policy, management, stewardship, and program decisions. 3 CFO Survey: Preparing for Tomorrow's Way of Doing Business, Grant Thornton LLP and the Association of Government Accountants (Alexandria, Virginia: March 1998). GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 10 Goals, Practices, and Strategies to Consider ♦ Make Financial Management an Entitywide Priority ♦ Practice 1 Case Studies Accountability goals and an effective control structure provide the basis for a more resultsoriented 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 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 statements. The remaining agencies now are required to certify the accuracy of financial information that feeds 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 longrange plans drive budget decisions, the state has set goals, including implementing an activitybased accounting and budgeting system, for enhancing its performance budgeting process. Texas Similarly, in Texas the performance management system is an integral part of agency and statewide planning structures, evaluation and decisionmaking processes, and accountability systems. Creating and maintaining a performance management system required close, consistent, and coordinated attention above and beyond that required for external financial reporting purposes. In Texas, the ability to produce fairly stated external financial reports was only the first step in building a more effective, resultsoriented government. An unqualified opinion on the state's CAFR provided, assurance that financial information was accurate and reliable for evaluating its overall financial position. However, an unqualified audit opinion by itself does not ensure that the information needed to measure and manage performance is useful, relevant, timely, or reliable. The internal controls that were considered adequate for external financial reporting were not always sufficient for performance management. For example, internal controls over expenditure data met the control objectives for aggregating and reporting this information on the financial statements; however, they did not meet the objectives for calculating perunitcost efficiency measures required for performance management. Therefore, state agencies, with the help of the State Auditor's Office, reevaluated and redesigned agency internal controls to meet both external financial reporting and performance management control objectives. Because the state routinely receives an unqualified opinion on its CAFR, the State Auditor's Office and agency internal auditors no longer spend the bulk of their time on control issues related to external financial reporting. Instead, their focus is on improving the reliability of performance management information. 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). • As part of the agency's GPRA performance planning process, (1) establish efficiency criteria that measure the cost associated with program outcomes and (2) develop an approach for assessing and improving agency internal controls over financerelated efficiency measures. • Use accounting and operational performance data to support budget formulation and strategic planning. 12 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. • 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 decisionmaking. In addition, the senior executives at these organizations demonstrated their sustained commitment to financerelated improvement initiatives by using key business/line managers to drive improvement efforts, attending key meetings, ensuring that the necessary resources are made available, and creating a system of rewards and incentives to recognize those who support improvement initiatives. In fact, the committed support of the CEO and line management are critical to the success of financerelated improvement initiatives. In the same way, federal financial management reform has recently gained momentum through the committed support of top federal leaders. For example, the President has made financial management improvement a top priority and established a goal to obtain an unqualified opinion on the government's financial statements. To achieve this goal, he directed the head of each agency without an unqualified audit opinion to submit to the OMB (1) an initial plan for resolving financial reporting deficiencies and (2) quarterly progress reports for achieving the goal. Further, OMB is required to periodically report to the Vice President on the agency submissions and governmentwide progress. In addition, many federal CFOs have primary leadership responsibility for implementing the Results Act at the department or agency level. The CFO Council has played a key leadership role in establishing financial and performance improvement goals and priorities for changing the way federal agencies plan, budget, manage, evaluate, and account for federal programs. To ensure that federal financial management improvement efforts succeed and that the President's and the CFO Council's priorities are achieved, the support and involvement of key nonfinancial executives and managers is critical. This commitment starts with the heads of agencies establishing priorities and setting expectations and continues with the active involvement of program/line managers and executives in driving financial improvement initiatives. 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. • Actively market the program benefits of financial management improvement efforts to secure the necessary resources and Congressional support. • 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 decisionmaking. Practice 3 Key characteristics Use Training to Change the • Nonfinancial managers are educated about the financial implications of business Organizational Culture and decisions. Engage Line Management • Training and tools are provided to facilitate and accelerate the pace of change initiatives. Improving federal financial management hinges upon leadership's ability to manage change and create an organizational culture that values good financial management. Legislation starting with the CFO Act of 1990 has been directed at enhancing the finance organization's responsibilities in supporting the management of federal activities. Although acceptance by the program offices has sometimes been slow, according to a recent survey of federal CFOs,4 program directors are starting to look to the finance organization for help. They attribute the change to a joint effort by program and finance offices to implement the Results Act and develop strategic plans. In addition, the CFO Council's numerous outreach efforts and GPRArelated education events have helped to win the acceptance of program managers. 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. In addition, these organizations provide tools to facilitate and accelerate the pace of the change initiative. According to one executive we met with, change initiatives that are implemented slowly generally fail because staff have too much time to contemplate the potential negative effects that change might bring and rally opposition that ultimately undermines the effort. 4 CFO Survey: Preparing for Tomorrow's Way of Doing Business, Grant Thornton LLP and the Association of Government Accountants (Alexandria, Virginia: March 1998). GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 16 Goals, Practices, and Strategies to Consider ♦ Make Financial Management an Entitywide Priority ♦ Practice 3 Case Study Training programs teach nonfinancial managers the value of financial information and facilitate the pace of change The Boeing Company To ensure that nonfinancial managers at all levels understand the value of financial information, Boeing has developed an education program that teaches managers basic business competence. Using a threestep development planning process, managers assess their current capabilities, determine their specific development needs, and build and execute a development plan. (See appendix II.) Depending on individual need, Boeing offers a variety of learning experiences including selfpaced, team, classroom, case study, and simulation. For example, through Boeing's Creating Value learning project, managers learn how to recognize the importance of cash flow and its influence on business decisions, understand shareholder expectations and the consequences of not meeting them, and identify the relationship between individual decisions and actions and shareholder value. The information is presented in a "multiple media" format in order to accommodate different learning styles and to allow learning to occur in different environments and in periods best suited to the learner. Other learning experiences include course work, such as Elements of Product Cost, in which participants analyze and use cost element information to support decisionmaking related to improvement efforts, ensuring that resources are applied to those activities that return the greatest benefits and provide the highest value to customers. During the class, participants learn to apply unit cost principles to the products they produce as well as how process, activity, and individual cost elements, such as labor, materials, and overhead, are accumulated to become unit or product cost. General Electric General Electric's (GE) education and training programs have played a crucial role in changing the organizational culture and facilitating both financial and nonfinancial improvement initiatives. One of the most successful programs is the Change Acceleration Process (CAP) workshop. During the CAP workshop, GE managers and professional staff are given tools and taught strategies for removing cultural barriers to change. GE's finance organization has used these tools and strategies to facilitate improvement initiatives, ranging from organizational restructuring to changing the role of the internal audit function. To be successful, the project teams spearheading these initiatives had to achieve each of the following objectives: (1) lead change, (2) create a shared need, (3) shape a vision, (4) mobilize commitment, (5) make change last, (6) monitor progress, and (7) change systems and structures. To ensure that each objective would be accomplished, the team used a survey to profile the change process and measures its progress. Staff and managers were surveyed periodically and asked to score each of the five dimensions from 100 percent to 0 percent based on how well they think each is being accomplished. For change to be successful, most dimensions must be rated high. The profile directed the team's efforts so that they could develop a strategy to address the areas that needed the most attention. For example, mobilizing commitment, especially from those outside the finance organization, was often one of the more difficult objectives to accomplish. However, the team used a method, learned in the CAP workshop, for analyzing and increasing stakeholder commitment levels. First, the team listed the names of those individuals whose support was critical for the success of the project. Then, they assessed each stakeholder's level of commitment based on their perceived level of agreementto what degree does the individual agree that change is needed? If the team perceived a person did not agree, it developed an individual plan to get this person's support. Plans were developed by addressing questions such as: Why are they resisting this change? Do they have a vested interest in the status quo? What new opportunities will they have when the change is implemented? and Who influences this person and what is their level of acceptance? 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 decisionmaking and • how reform legislation (e.g. CFO Act, GMRA, FFMIA, GPRA) will affect operating unit roles, responsibilities, and processes within the context of specific agency operations. • 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. 18 Redefine the Role of Finance To Better Support Mission Objectives In the private sector, the role of the finance organization historically has centered on oversight and control, focusing on its fiduciary responsibilities and external financial reporting requirements. However, over the past decade dramatic changes in the business environment have forced finance organizations to reevaluate this role. The pressure to reduce administrative costs resulting from competition in an emerging global market drove many finance organizations to find more efficient ways to deliver their services. Nonetheless, becoming more efficient is not enough to remain competitive. Today, leading finance organizations are focusing more on internal customer requirements by providing products and services that directly support strategic decisionmaking and ultimately improve overall business performance. Similarly, competition has changed the environment in which federal agencies operate. Shrinking budgets have increased competition for scarce resources, requiring managers to make tough resource allocation decisions that may affect program delivery. Without the support of federal finance organizations, program managers may not be able to determine or defend the cost associated with or benefits derived from government activities. We found the leading finance organizations we visited had 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 daytoday 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. • 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,5 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 calculated 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 reduce the time spent on transaction processing activities to 20 percent. To further assess the efficiency and effectiveness of specific products and services, many of the leading finance organizations we studied relied on benchmarking6 and customer feedback. For example, comparisons against worldclass benchmarks, such as closing the books in less than 4 days or processing payroll at $1.39 per transaction, were used to identify activities or processes in need of improvement. (See appendix III: Worldclass Performance Metrics.) In addition, these organizations used feedback from their internal customers to gather specific information related to quality and customer expectations. For example, HewlettPackard's finance organization conducted a detailed survey of about 200 internal customers worldwide in which customers were asked to rank certain components, or services, as either high or low in terms of both importance and satisfaction. The survey results were then used to guide improvement initiatives. 5 Reengineering the Finance Function, Financial Executives Research Foundation, Executive Report, Vol. 2, No. 3 (June 1995). 6 Benchmarking is the continuous process of measuring products, services, and practices against the toughest competitors or those organizations recognized as industry leaders. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 20 Goals, Practices, and Strategies to Consider ♦ Redefine the Role of Finance to Better Support Mission Objectives ♦ Practice 4 Case Study Assessing and revising the organization's charter, processes, products, and services enables finance to better support business objectives The role of Pfizer's finance organization has changed significantly over the past several years, from an organization focused primarily on control and compliance, to one that is integral to making strategic business decisions. About 6 years ago, under the leadership of Pfizer's CEO and CFO, Pfizer's corporate finance organization embarked on a reengineering initiative to transform its charter, processes, products, and services. The CEO and CFO's vision was to make Pfizer " the preeminent corporate finance organization in the industry." At the heart of this vision was the concept that the finance organization should actively support the strategic imperatives of Pfizer Inc. Unlike many finance organizations going through this type of transformation, Pfizer's change effort was not in reaction to a crisis. In fact, given the company's long history of profitable growth, there seemed to be little reason to change. Pfizer's CFO, on the other hand, saw an opportunity to do things more effectively and efficiently and thereby redeploy resources from transactional activities (e.g., closing the books, preparing tax returns, paying invoices) to value added activities (e.g., operations, treasury and tax planning). The finance organization, for example, was producing too much data and not enough information. To build a case for change, Pfizer's CFO initiated a benchmarking survey to determine exactly how his organization stacked up against the other leading finance organizations. The results dramatized the magnitude of the opportunity. For example, Pfizer took 7 days to close its books versus the 3 to 4 day worldclass standard. Further, it cost Pfizer twice as much as the benchmark average to pay an invoice. This sobering news served a vital purposeit created a sense of urgency surrounding the need to change and helped the CFO rally the organizational support needed to institute a comprehensive reengineering initiative To facilitate change within the finance organization, several crossfunctional process improvement teams were established. Through comprehensive revisions to its charter, processes, organization and systems, Pfizer has reduced the cost associated with transaction processing activities by up to 50 percent in certain functions and shifted its focus to activities that directly support Pfizer's business objectives. The shift in focus and resources has allowed Pfizer's finance organization to become a " growth enabler" on behalf of the company by: • supplying the necessary resources (from information to capital); • providing increased opportunities to invest (redeploy financial gains or savings on behalf of the business); • offering business solutions (" how," not " why not"); and • assisting in making the right business decisions. 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 agency specific 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. • To the extent that operating in a federal environment affects specific benchmarks, compare financial management practices and processes with other federal agencies to provide a context with which to interpret benchmarking results. • 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. 22 Practice 5 Maximize the Efficiency of Daytoday Accounting Activities Key characteristics • Inefficient processes are eliminated or streamlined. • Transaction processing activities are consolidated, standardized, and reengineered at shared service centers. • 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. Each of the six private sector finance organizations we visited consolidated, standardized, and reengineered routine processes, such as accounts payable, fixed asset accounting, and payroll at shared service centers. The primary objective for moving to shared services is to reduce operating costs. However, other benefits included better control and standardization of processes, more costeffective technology deployment, and an enhanced position for continual improvement and customer service. Although their approach varied depending on the size, culture, and industry, leading organizations have realized the benefits of shared services by completing each of the following stages. The first stage is consolidation and includes changing the organizational structure and gaining control over processes. The second stage is standardization and entails changing processes, adopting a common technology platform, and continuous improvement. The final stage is reengineering and involves changing workflow and leveraging technology through the use of electronic commerce, data warehousing, and document imaging. Similar to the findings in our previous report on outsourcing the finance function,7 we found that although outsourcing is considered an option for reducing costs and improving efficiency, none of the leading organizations we visited were currently outsourcing any significant aspect of their finance organizations. The primary reason for not outsourcing is due to the limited capacity of outsourcing vendors to perform larger, more complex finance and accounting operations. However, these organizations indicated that they are continually evaluating opportunities to reduce costs and improve quality; therefore, as the outsourcing market evolves and the capacity and quality of outsourcing vendors improves, outsourcing may become a more attractive alternative. 7 Financial Management: Outsourcing of Finance and Accounting Functions (GAO/AIMD/NSIAD9843). GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Case Study Effectively implementing shared service centers can result in reduced operating costs and better customer support Over the past decade, hightech companies have seen their gross margins shrink smaller and smaller as a result of increased competition and the steady introduction of newer, faster, and more advanced technology. To remain competitive and ensure continued growth, Hewlett Packard formed a task force to find ways to reduce the cost of the finance organization. At the time, the cost of finance was 2.8 percent of company revenues and accounting transaction costs were more than two to three times that of comparable companies. The task force recommended that Hewlett Packard consolidate its transaction processing activities such as accounts payable, accounts receivable, payroll, and fixed assets accounting from over 100 decentralized centers into just 8 Financial Service Centers worldwide. As a result, the number of employees needed to process accounting transactions was reduced by more than halffrom about 2,500 to only 1,200 employees worldwide. By implementing the Financial Service Centers, Hewlett Packard reduced the costs of its finance organization from 2.8 percent of revenues in 1989 to 1.4 percent in 1994 and to less than 1.0 percent by 1998. The company's finance costs are now in the top quartile of comparable organizations. However, creating a shared service center was much more than simply centralizing activities and cashing in on economies of scale. To achieve these cost savings and provide innovative, costeffective shared business services, Hewlett Packard not only had to consolidate its activities, but it also had to reengineer its processes and change its organizational structure. At one Financial Service Center, processreengineering initiatives alone have resulted in cost savings of $36 million since 1990. Through the use of electronic data interchange, document imaging, and common software platforms, the center has maximized its use of human resources. Each month the center's 295 employees process 165,000 invoices, 15,000 travel expense reports, 44,000 checks, 77,000 payments, and 122,000 electronic transactions, reimbursements, and deposits. In addition, the center performs general ledger and fixed asset accounting and responds to customer inquiries. As part of its overall effort to reduce infrastructure costs, the center also redesigned its organizational structure using a selfdirected, teambased approach. Each of the fourto eightperson teams is responsible for a number of tasks, such as timecards, overtime, and discretionary budget management. The benefits of a team concept include ownership of customer problems, higher morale, and increased creativity/problem solving. 24 Strategies to Consider To maximize the efficiency of daytoday accounting activities, senior executives could: Identify highvolume processes or transactions that do not directly support the agency's mission (lowvalue, lowrisk) 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. Key characteristics Organize Finance to Add Value • The finance organization's mission supports the entity's business objectives. • The organizational structure and human capital strategies support strategic business unit needs as well as traditional controllership and transaction processing needs. According to a recent survey of federal CFOs,8 the federal finance organization of the future will have fewer people, with a greater percentage of analysts than clerks. Currently, however, 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 the CFOs surveyed, many questions remain unanswered regarding how best to scope, define, and organize finance office responsibilities. When it comes to organizational design, we 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. In practice 5 of this guide, we discussed how leading organizations reduced the number of resources required to perform financial management activities by (1) consolidating activities at a shared service center and (2) eliminating or streamlining duplicative or inefficient processes. Their goal was not only to reduce the cost of finance but also to organize finance to add value by reallocating finance resources to more productive strategic support activities. To accomplish this, leading finance organizations have realigned their mission and organizational structure to better support the entity's business objectives. Specifically, many leading organizations have (1) organized around core business processes to simplify work and flatten hierarchies, (2) consolidated certain transaction processing activities to gain economies of scale, and (3) moved functions, such as cost accounting and financial analysis, to the business units to support business units' strategic planning and decisionmaking needs. In addition, these organizations have created a coherent human capital strategythat is, a framework of human capital policies, programs, and practices specifically designed to steer the organization toward its shared visionand integrated this strategy with the organization's overall strategic planning. (See practices 10 and 11 for information on attracting, retaining, and developing financial professionals.) 8 CFO Survey: Preparing for Tomorrow's Way of Doing Business, Grant Thornton LLP and the Association of Government Accountants (Alexandria, Virginia: March 1998). GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 26 Goals, Practices, and Strategies to Consider ♦ Redefine the Role of Finance to Better Support Mission Objectives ♦ Practice 5 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. • 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 decisionmaking needs at both the field and headquarters level. (See practices 10 & 11 for information on attracting, retaining, and developing financial professionals). 28 Provide Meaningful Information to Decisionmakers Financial information is meaningful when it is useful, relevant, timely, and reliable. However, many federal agencies lack the systems and processes required to produce meaningful financial information needed for management decisionmaking. For example, many agency financial and management information systems do not routinely provide adequate, timely cost or performance information needed to manage cost, measure performance, make program funding decisions, and analyze outsourcing or privatization options. Similarly, many private sector and state organizations have struggled to overcome some of the same management information issues that now face federal agencies. Over the past decade, global competition and advances in information technology have changed information requirements and users' expectations regarding the availability and usefulness of financial information. Financial information that, in the past, was considered adequate for decisionmaking is now considered overaggregated and too late to be useful. The leading finance organizations we visited enhanced their capabilities for providing meaningful information to decisionmakers 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 nonfinancial information on the quality and efficiency of business processes and performance • An enterprisewide system integrates operating, financial, and management information and allows decisionmakers to access relevant information easily and perform adhoc data analysis. As federal agencies develop plans for acquiring and installing financial systems, the ClingerCohen Act of 1996 and related executive branch guidance will provide a framework for designing and deploying information technology. The ClingerCohen Act requires agencies to better link their information technology planning and investment decisions to program missions and goals. If implemented effectively, this legislation will provide a foundation that will help federal agencies improve the interoperability of financial, operating, and management systems. The leading finance organizations we 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. Further, they historically have had adequate systems for measuring and managing cost and performance. However, over the last 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 decisionmakers. Many leading organizations have already implemented, or are in the process of implementing an enterprisewide system to integrate financial and operating data to support both management decisionmaking and external reporting requirements. Some abandoned their legacy systems all together and turned to stateoftheart integrated architectures, while others used wellfunctioning 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 the same cost, performance, and profitability information. Similarly, the CFO Council, JFMIP, OMB, Treasury, and individual agencies are working to improve the integration of budget, accounting, and program information and systems. To support this process, a Program Management Office was recently established to develop financial systems requirements, address system integration issues, and generally facilitate the system selection and procurement process. This and other measures are important to ensure that federal systems provide meaningful information for managing and measuring cost and performance as well as preparing external financial reports. 30 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. • Integrate the agency's financial (including budgetary), operating, and management systems and equip decisionmakers with the tools to easily access relevant information and perform adhoc analyses. • Ensure that financial systems comply with federal financial management systems requirements, federal accounting standards, and the U.S. Government Standard General Ledger by • establishing the goal of using a single general ledger chart of accounts (the U.S. Government Standard General Ledger) and • developing an interim approach to convert general ledger accounts not consistent with the U.S. Government Standard General Ledger. This approach should use automated crosswalks performed by those business segments responsible for the data. 32 Practice 8 Reengineer Processes in Conjunction With Implementing New Technology Key characteristics • Commercial offtheshelf software packages implemented with limited modification. • Processes and controls adapted to fit commercial offtheshelf software. • Processes are reengineered across functional lines. At many of the leading finance organizations we visited, the vast majority of financial applications were commercial offtheshelf (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 inhouse 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 functionalbased organization to a processbased organization. For example, the procurement process in a processbased federal organization would start when a solicitation is issued, continue through contract award and signature, as well as the issuance of purchase/work orders and receipt of goods, and end when the vendor properly received payment. The business processes would be designed to maximize the efficiency and accuracy of the entire process. The ClingerCohen Act contains provisions requiring federal agencies to modernize inefficient administrative and missionrelated work processes before making significant technology investments to support them. As a result, federal agencies are beginning to consider the merits of information technology approaches that involve reengineering business processes in conjunction with implementing COTS software without significant modification. According to a report by the Financial Systems Committee of the CFO Council, most agencies favor an approach that uses COTS software for core financial systems and other financial management applications. However, agency efforts to use COTS products have been hampered by the government's failure to communicate requirements and functionality effectively to the vendors and a proclivity on the part of agencies to modify software to meet existing business processes and to replicate previous system functionality. To encourage the use of COTS, OMB and JFMIP are working to improve (1) the testing and certification of COTS systems, (2) existing procurement schedules, and (3) processes to obtain COTS systems. Case Study Reengineering core business processes across functional lines is the key to successful COTS implementation When implementing its new financial management system rather than fitting new technology to outofdate processes, Owens Corning redesigned its business processes to fit the new technology. The objective was to improve customer service and, at the same time, cut logistical costs related to various business processes. To achieve these objectives Owens Corning formed crossfunctional process improvement teams for each major business process to improve or replace longstanding and often ineffective business processes. During this effort, the improvement teams used many common reengineering tools, such as process mapping and process modeling. However, successfully reengineering its business processes had more to do with the parameters Owens Corning placed on its process improvement teams. For example, the teams were given compressed schedules for completing " as is" modeling to prevent overanalysis and to force decisions. Documenting current processes should be accomplished in a matter of a week or two. The bulk of time should be spent on defining user requirements and designing new processes. Another important aspect of Owens Corning process improvement effort was its use of a process reengineering management council. The council was made up of key process and business unit executives that acted as arbitrators when conflicts developed. By reengineering business processes in conjunction with implementing new technology, Owens Corning increased its ability to meet customer needs. In the past, for example, many of the company's computers were not linked, making it impossible for sales people to check on the availability of products or address problems on a customer invoice. Now, all activities that occur from the time a customer places an order to the time Owens Corning receives payment are part of the Customer Fulfillment Process. In addition, new technology has integrated functions related to the Customer Fulfillment Process, such as sales, ordering, production, shipping, billing, and accounts receivable, providing users with greater access to data. As a result, Owens Corning's salesforce not only has access to uptodate information, but more efficient processes allow sales staff to respond immediately to customer inquiries, instead of handing the problem off to another department. Other outcomes related to process improvement included (1) reducing the time it takes to close the books from 13 days to 5 dayswith a target of 1 day, (2) reducing the chart of accounts from 2,400 to 900, and (3) standardizing reporting, which allows comparisons to be made between operating divisions. 34 Strategies to Consider To reengineer processes that support new technology, senior executives could: • Form crossfunctional 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 costeffective. • 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. • 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. Key characteristics Translate Financial Data • Reports are designed around key drivers into Meaningful Information such as markets, products, and customers. • Relevant financial information is presented in an understandable, simple format with suitable amounts of detail and explanation. While new technology has made financial data more available, without the ability to translate that data into relevant, understandable information, decisionmakers are left powerless. Traditionally, finance organizations have used voluminous paper reports, based primarily on the prior month's activity, to communicate financial information. Further, management reports were often 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, forwardlooking information on business unit performance. During this process, one company we visited actually stopped distributing selected management reports to determine whether anyone would miss them. They used the subsequent lack of reaction as an indicator that the information in the report was no longer relevant. Further, standardized reports are designed to present information that is analyzed to bring out pertinent and fundamental points with suitable amounts of detail and explanation. For example, Owens Corning's executives and managers access a standardized monthly financial report via the company's internal area network. The report's executive summary is 10 pages long and contains executivelevel reporting, forecasting, and budgeting information. However, multiple levels of detail are available, and decisionmakers can drill down to the desired level of detail. Similarly, efforts are currently underway across government to develop a meaningful, userfriendly accountability report on individual departments and agencies. These reports consolidate and integrate audited financial statements and reporting under the Results Act and other related laws to (1) show the degree to which an agency met its goals and at what cost and (2) aid the reader in determining whether the agency was well run. 36 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. • Present various reporting format and content options to executives, managers, and Congressional Committees. 38 Build a Finance Team That Delivers Results As the finance function has evolved over the past decade, from a paperdriven, 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 we 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. Similarly, the CFO Act, GMRA, and GPRA have placed new demands on federal finance organizations. Accordingly, federal agencies need to reassess their human capital practices to ensure that federal financial professionals are equipped to meet these new challenges and support their agencies' mission and goals. This executive guide, along with our 1998 report on the training and qualifications of key financial management personnel and our 1999 human capital selfassessment checklist,9 can provide a framework to strengthen the qualifications, skills, and competencies of federal financial management personnel.10 Vision: To be a ValueCreating, CustomerFocused Partner in Business Results 9 Human Capital: A SelfAssessment Checklist for Agency Leaders (GAO/GGD99179, September 1999). 10 Financial Management: Profile of Financial Personnel in Large Private Sector Corporations and State Governments (GAO/AIMD9834, January 1998). GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 39 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 humancapital planning and is used as a foundation for all humancapital management activities and decisions. • Training and career development programs use both classroom instruction and rotational assignments. • 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. In this practice we discuss the training, career development, and successionplanning 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 we visited provided intensive 2to 3year entry level programs as well as midcareer and executivelevel programs that used both classroom instruction and rotational assignments to develop technical, management, and leadership skills and competencies. The programs' course work 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 businessspecific environments. However, the key to implementing a successful career development program is to complement course work with reallife business experience through the use of planned rotational assignments. The leading finance organizations we visited provided opportunities for staff to rotate through various positions throughout the finance organization as well as the operating divisions. Such opportunities are critical not only in developing employees that understand the whole business and, in turn, provide greater value to their customers in the operating divisions but also as a way of ensuring that an adequate supply of wellprepared financial professionals is available to fill key positions. Similarly, federal finance organizations are recognizing the need to provide a broad range of experience to its financial professionals. For example, as a way to develop a cadre of experienced and diverse leaders, the CFO Council Fellows Program was initiated in April of 1998 with the selection of nine fellows to serve 1year appointments at host organizations. 40 Strategies to Consider To develop a team with the right mix of skills and competencies, senior executives could: • As a part of an agencywide 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. (See GAO's human capital selfassessment checklist.11) • 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 decisionmaking; • understanding how reform legislation (e.g., CFO Act, GMRA, FFMIA, GPRA) will affect the finance organization's roles, responsibilities, and processes within the context of specific agency operations; 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. 11 Human Capital: A Self Assessment Checklist for Agency Leaders (GAO/GGD99179, September 1999). 42 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. • 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 we visited 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 talent assessment and senior executive leaders are actively involved in oncampus recruiting. This sends a powerful message to potential new recruits that the position is important enough to the organization that it warrants senior executive attention. 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. These organizations often used their staff development programs to provide these opportunities. For example, as discussed in practice 10, career development programs often include rotational assignments and not only provide excellent growth opportunities but also expose staff to a variety of career path opportunities. 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 federal executives, thereby limiting federal agencies' ability to attract and retain federal executives. (See appendix IV for compensation survey results.) However, other factors such as the desire to effect change and make a difference may attract senior executives to public service. In addition, opportunities may exist that will enhance agencies' ability to attract and retain talent at all levels. For example, the revolutionary changes that are taking place as a result of the CFO and Results Acts provide an ideal occasion to revamp the opportunities available to federal financial professionals and to market the possibilities offered by a career in federal financial management. Strategies to Consider To build an organization that attracts and retains talent, the CFO and 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. • Utilize staff development programs and planned staff rotations to expose financial managers and staff to a variety of career paths. Appendix I Research Objectives, Scope, and Methodology The objectives of our research were to (1) define and describe the characteristics of a worldclass finance organization, (2) identify the factors that are essential for finance organizations to improve their financial management and move towards worldclass standards, and (3) provide case studies which illustrate the efforts of leading finance organizations from private sector companies and state governments to improve their financial management and the overall performance of their organizations. We formed an advisory group to assist with job design, our overall scope and methodology, and case study selection as well as to critique our research findings and comment on our draft report. The group consisted of private sector executives, state and local comptrollers, academicians, and other experts and consultants outside the federal government. (Key contacts and project advisors are listed in appendix VII.) We also consulted with members of various CFO Council committees and representatives from OMB and Treasury. To meet our research objectives, we performed an extensive literature search on the subject of financial management best practices using commercial best practice databases, the Internet, prior GAO reports, trade journals and magazines, federal guidelines, private sector studies, and other resources. We synthesized and analyzed the numerous documents acquired from our literature search and case study organizations to determine the objectives essential for organizations to improve their financial management. Based on consultations with our advisory group and our case study entities, we consolidated and refined the factors to those presented in this guide. We selected six private sector companies and three state governments to serve as our case studies. We selected the private sector companies based on (1) recognition for outstanding financial management practices and/or successful financial reengineering efforts, (2) size and complexity comparable to federal government agencies, and (3) discussions with members of our advisory group. We selected the state governments based on (1) the 1995 "The State of the States" report issued by Financial World magazine and (2) discussions with members of our advisory group and the CFO Council. We interviewed various officials, including chief financial officers, chief information officers, business unit executives, state executive and legislative branch officials, treasurers, controllers, internal auditors, agency administrators, and human resource specialists. We also reviewed various company documents, including vision statements, strategic plans, core competencies for finance personnel, training and development guides, key financial reports, performance metrics, and other documents related to reengineering efforts of the finance organization. We asked officials at the private sector companies and state governments profiled in the case studies to verify the accuracy of the information presented on their respective organizations and incorporated their comments as appropriate; however, we did not independently verify the accuracy of that information. In addition, we provided a draft of this entire guide to OMB, members of the CFO Council, and our advisory group for their review and comment. 46 Appendix II Supplemental Case Study Information The Boeing Company's Personal Planning Guide for Developing Business Competence (excerpt) Performance Expectation: Include business process and financial information in decisionmaking Key elements Supporting actions Rating Importance/Personal* Use appropriate facts • Locate sources of company information �� and data from company • Operate selected information systems �� information systems to • Select appropriate data and information �� support accomplishment • Make decisions based on analysis of data �� of business plans • Manage information resources to ensure ready access to information �� Make informed • Apply company integrity, values, and ethics �� decisions • Identify key components of decisions �� • Collect pertinent data �� • Analyze alternatives �� • Use selection criteria �� • Apply wisdom, judgement, and experience �� • Take action �� Create business • Lead the estimating and budgeting process �� forecasts • Develop schedules �� • Apply target costing (should cost) �� Apply total cost • Monitor budgets, costs, and schedules �� management principles • Apply variance analysis �� • Reallocate resources to meet objectives �� • Predict management estimate at completion �� • Use earned value �� Recognize cost • Apply unit cost practices �� structure (elements of • Apply process cost practices �� product cost) • Identify cost elements �� • Use life cycle costing to identify present and future costs �� • Identify components of rates �� Note 1: Importance Rating of the supporting action to your specific assignment (H = high, M = medium, L = low.) Note 2: Personal Rating of your level of competence for the supporting action. Use a scale of 1 to 5 (1 = weak, 5 = strong.) GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Appendix III Worldclass Finance Performance Metrics Table 1: Comparison of Performance MetricsAverage vs. Worldclass Companies Performance metric Average Worldclass Cost as % of revenue 1.4% 0.97% A/P productivity per FTE 12,500 15,900 Processing locations >3 1 Systems per process 23 1 Budget cycle 95 days 60 days Closingcycle 58days <4days Source: The Hackett Group. Table 2: Comparison of Labor Costs per TransactionAverage vs. Worldclass Companies Process Measure Average Worldclass Payables Invoice $3.55 $1.98 Receivables Remittance $0.36 $0.14 Travel & expense Expense report $6.05 $3.96 Payroll Paycheck $1.91 $1.39 Source: The Hackett Group. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 48 Appendix IV Comparison of Selected Federal Agencies & Case Study Entities Table 1: Total Revenues/Outlays at Case Study Entities and Federal Agencies for 1998 Agency/company Total revenues/outlays (in millions) Social Security Administration $393,311 Department of the Treasury 379,345 Department of Health and Human Services 339,535 Department of Defense 288,604 General Electric Company 100,469 Boeing Company 56,154 Department of Agriculture 52,547 Hewlett Packard Company 47,061 Office of Personnel Management 45,404 State of Texas 43,816 Department of Transportation 39,832 Department of Veteran Affairs 39,280 Commonwealth of Massachusetts 31,249 Department of Labor 30,458 Department of Education 30,009 Department of Housing and Urban Development 27,527 Commonwealth of Virginia 19,245 Chase Manhattan Corporation 18,656 Department of Energy 14,467 Pfizer Inc 13,544 Owens Corning 5,009 Department of Commerce 3,783 Federal Emergency Management Agency 3,326 National Science Foundation 3,130 Source: 1998 company annual reports, 1998 state comprehensive annual financial reports, Budget of the United States Government, Fiscal Year 1999. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Source: 1997 company annual reports, 1997 state comprehensive annual financial reports, 1997 U.S. Office of Personnel Management. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Appendix IV ♦ Comparison of Federal Agencies and Case Study Entities Table 3: Comparison of Revenues/Outlays In Millions with CFO Compensation (Salary and Bonus) at Selected Case Study Entities for 1997 Company Revenues/outlays CFO Bonus Total salary General Electric Company $100,469,000 $1,100,000 $2,000,000 $3,100,000 Federal Agency $72,568,000 $151,800 $151,800 (average) (max.) (max.) Boeing Company $56,154,000 $392,261 $137,700 $529,961 Hewlett Packard Company $47,061,000 $997,625 $147,804 $1,145,429 Chase Manhattan Corporation $18,656,000 $628,846 $1,168,750 $1,797,596 Pfizer Inc $13,544,000 Not available Owens Corning $5,009,000 $371,875 $795,000 $1,166,875 Source: 1998 company annual reports; Budget of the United States Government, Fiscal Year 1999; 1999 company proxy statements; 1998 Senior Executive Service pay schedule. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Appendix IV ♦ Comparison of Federal Agencies and Case Study Entities Appendix V Related Resources, Information Links, and Tools GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 52 Accounting and Financial Management International Federation of Accountants- www.ifac.org IFAC is an organization of national professional accountancy organizations that represent accountants employed in public practice, business and industry, the public sector, and education as well as some specialized groups that interface frequently with the profession. This site provides access to publications and technical guidance related to accounting, auditing, financial management, and information technology. American Institute of Certified Public Accountants-www.aicpa.org This site provides online access to accounting publications like the Journal of Accountancy and the CPA Newsletter. In addition, " CPA Links" provides a gateway for online users who wish to visit other accountingrelated sites on the Internet. Association of Government Accountants-www.agacgfm.org AGA is an educational organization dedicated to the enhancement of public financial management. AGA serves the professional interests of financial managers from local, state, and federal governments as well as public accounting firms. Business Finance Magazine- www.businessfinancemag.com This site maintains links to academic resources, accounting organizations, accounting and auditing resources, accounting software, business and management resources, government resources, and other noncommercial web sites. FinanceNet- www.financenet.gov FinanceNet serves as a vehicle and catalyst for continual improvement and innovation, at all levels of government, by impacting financial management resources, practices, policies, and professional standards through the electronic sharing of best practices and dissemination of electronic information. This site provides links to other federal financial management related sites such as the Federal Accounting Standards Advisory Board, Joint Financial Management Improvement Program, CFO Council, and federal finance offices. Financial Accounting Standards Board- www.fasb.org The mission of the Financial Accounting Standards Board is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. Governmental Accounting Standards Board- www.gasb.org GASB's mission is to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for users of financial reports and guide and educate the public, issuers, auditors and users of reports. Institute of Management Accountants- www.imanet.org The IMA is a professional organization devoted to management accounting and financial management. This site provides for its members access to research databases, custom bibliographies, and fulltext articles related to accounting and financial management. Rutgers Accounting Web- www.rutgers.edu/Accounting/ This site includes a database of accounting research and publications. Other accounting organizations on this site include: Association of Government Accountants, American Accounting Association, Institute of Internal Auditors, Inc., Institute of Management Accountants, Financial Accounting Standards BoardFASB, and Governmental Accounting Standards BoardGASB. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Appendix V ♦ Related Resources, Information Links, and Tools Treasury Board of Canada Secretariat- www.tbssct.gc.ca This site highlights the reports and assessment guides associated with Canada's initiative to modernize its comptrollership function. Auditing AuditNet- www.auditnet.org This site provides information links, tools, and resources developed for the benefit of the audit profession, including audit programs, best practices, and research services. The Institute of Internal Auditors-www.theiia.org For IIA members who are internal auditing practitioners, executive management, boards of directors, or audit committees, this site provides standards, guidance, and information on internal auditing best practices. Internal Auditing World Wide Web- www.bitwise.net/iawww/index.html This site promotes the sharing information and knowledge pertaining to the internal auditing profession across associations, industries, and countries. Performance Management The Balance Scorecard Institute- www.balancedscorecard.org The Balanced Scorecard Institute is a web clearinghouse for managers to exchange information, ideas, and lessons learned in building strategic management systems using the balanced scorecard approach. This site provides guidance, information and tools to government and nonprofit managers as they attempt to design and implement measurementbased management in state, local, and federal government environments. Hackett Benchmarking & Research- www.answerthink.com/hackett/ Hackett Benchmarking & Research maintains comprehensive, ongoing benchmarks of finance, human resources, information technology, planning/performance measurement, procurement, customer contact centers, and shared services centers. Information Technology The International Institute of Business Technologies, Inc.- www.iibt.org IIBT is a nonprofit educational and research institution for advancing the management of business technologies in the public and private sectors in order to improve performance. IT Governance Institute- www.itgovernance.org/itgi/ This web site is designed enhance the vital link between IT and enterprise governance by offering information and resources for efficiently and effectively deploying secure, reliable information and applied technology, and providing best practice guidance on the management of ITrelated risks. Carnegie Mellon Software Engineering Institute- www.sei.cmu.edu The purpose of the Software Engineering Institute (SEI) is to improve the practice of software engineering. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Appendix V ♦ Related Resources, Information Links, and Tools Appendix VI Bibliography Buckingham, Marcus and Coffman, Curt. First, Break all the Rules: What the World's Greatest Managers Do Differently, The Gallup Organization, 1999. Camp, Robert C. Benchmarking: The Search for Industry Best Practices That Lead to Superior Performance. ASQC Quality Press, 1989. Conference Board, The. " Benchmarking In the Finance Function: A Council Report," The Conference Board, 1994. Cooper, Robin and Kaplan, Robert S., Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance, Harvard Business School Press, 1998. Davis, Henry A. and Militello, Frederick C. " The Empowered Organization: Redefining the Roles and Practices of Finance." Financial Executives Research Foundation, 1994. Dunleavy, John, Hjelm, Elizabeth, Johansson, Henry, and Walther, Thomas. Reinventing the CFO: Moving From Financial Management to Strategic Management. Coopers & Lybrand, 1997. Gates, Stephen. " The Changing Global Role of the Finance Function." The Conference Board, 1994. Heian, James B., Jablonsky, Stephen F., and Keating, Patrick J. " Business Advocate or Corporate Policeman? Assess Your Role as a Financial Executive." Financial Executives Research Foundation, 1993. Hackett Group, The. " Reengineering the Finance Function." Financial Executives Research Foundation, 1995. McLemore, Ivy. " The New And Improved Business Analyst." Controller Magazine, 1998. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Appendix VII Leading Organization Contacts and Project Advisor Acknowledgements We would like to acknowledge the following private sector and government executives whose advice and assistance throughout this project has been invaluable. Key contacts at leading organizations Bruce H. Adams Senior Vice President, Global Services Administration The Chase Manhattan Bank David Devonshire Chief Financial Officer Ingersoll Rand Corporation (formerly with Owens Corning) Lynn L. Saylor General Electric DirectorCorporate Finance General Electric Company Boyd E. Givan (Retired) Chief Financial Officer The Boeing Company Richard L. Hoddeson Vice President, Operations Planning and Analysis Pfizer Inc Larry Lazicki Executive AssistantFiscal Mgmnt. Div. Comptroller of Public Accounts State of Texas William Landsidle Comptroller Commonwealth of Virginia William C. Steere, Jr. Chairman of the Board & Chief Executive Officer Pfizer Inc William Kilmartin Vice President American Management Systems, Inc. (formerly with the Commonwealth of Massachusetts) Project advisors Julia Carroll Chief Financial Officer Naperville, Illinois Thomas V. Fritz President & Chief Executive Officer Private Sector Council Edward J. Mazur Vice President Virginia State University John L. Puckett Assistant Vice President Information Technology www.toysmart.com Gerald R. Riso (deceased) Chief Executive Officer Riso & Riso Cornelius E. Tierney Professor of Accountancy George Washington University Patricia M. Wallington Vice President & Chief Information Officer Xerox Corporation GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management 56 Appendix VIII GAO Contacts and Staff Acknowledgements ♦ Linda P. Garrison (404) 6791902 ♦ Diane G. Handley (404) 6791986 Acknowledgements In addition to those names above, Francine M. Delvecchio, Marshall L. Hamlett, and Elizabeth M. Mixon made key contributions to this report. GAO/AIMD00134 ♦ Executive Guide: Creating Value Through Worldclass Financial Management Ordering Information The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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