Making the Public Sector Finance Function More Strategic

1. Financial Management Advisory Making the Public Sector Finance Function More Strategic Presented to the Financial Management Institute of Canada - Ontario Chapter FMI Ontario – Controllership – Professional Development Day Feb 25, 2009 ADVISORY

2. Agenda • Issues faced by Public Sector • Challenges Facing Finance Functions • Transition to a Strategic Finance Function • Framework for Strategic Finance Functions • Roles of a Strategic Finance Function • Conclusion • Questions

3. Issues Faced by the Public Sector

4. Performance Agenda: An International Government Survey Recent international survey conducted by Economist Intelligence Unit for KPMG: • 254 public sector executives from five countries interviewed: Australia, Canada, Germany, the United Kingdom and the United States • 37% were heads of departments, financial chiefs, directors or deputy directors • 1/3 of respondents have departmental budgets greater than $1 billion, another half have budgets of up to $500 million

5. Performance Agenda: An International Government Survey Survey identified key issues encountered by Canadian public sector executives and their international counterparts: • Governments are under pressure to focus on performance to maximize value • Global skills shortage negatively impacts the creation of value through efficiency • Forecasting costs/benefits of new projects/programs is a major challenge to preserving value

6. How are the challenges impacting Public Sector Finance Function • Public sector finance function challenges can be classified into three main categories: • Governance: Preserving Value • Performance: Maximizing Value • Efficiency: Creating Value

7. Challenges 1. Governance: • Managing the regulatory environment • Optimizing organization risk • Best Practice Governance

8. Performance Agenda Governance: • Disparity between efficiency measures undertaken and benefits gained • Over 76% of executives indicated improved financial accountability was the most important operational issue to address • Importance of balance between central agency agendas and entities responsible for implementing/operating

9. Challenges 2. Performance: • Efficiency and cost optimization • Measuring operational performance • Addressing under-performance

10. Performance Agenda Performance: • Need to measure and analyze performance with financial and operational data • Obtaining appropriate balance between accountability and performance • Canadian respondents placed almost equal value between improved quality of service and greater transparency

11. Performance Agenda Performance (cont’d): • Two main barriers: • Compensation • Skills shortages • Most serious labour shortages are in professions of information technology and financial services • Canadian respondents indicated demographic changes play largest role in straining resources

12. Challenges 3. Efficiency: • Revenue growth through alternate sources • Meet increasing demand for services • Flexible internal structure for expansion

13. Performance Agenda Efficiency: • Keeping pace with workloads while improving operational efficiencies • Difficulty in measuring and assessing costs and benefits of programs and projects • Impedes efficient allocation of limited resources

14. Performance Agenda Efficiency (cont’d): • Limited appetite for tax increases requires innovative funding initiatives • Increasing pressure to deliver modern and effective services • Non tax revenue instruments preferred nearly 3 to 1 over tax revenues • Public-Private partnerships and initiatives are seen as best approach

15. Challenges FacingFinance Functions

16. Challenges faced by All Finance Functions PERFORMANCE MEASURES ORGANIZATIONAL STRUCTURE PEOPLE & CULTURE • Multiple Finance agendas – not aligned • No single version of the truth • Too much time gathering/reconciling data • Inadequate management information (KPIs) to support decision making • Communication to stakeholders of performance is constrained • Local autonomous functions not aligned • Confused roles / responsibilities / accountabilities and duplication of effort • Lack of objectivity and / or transparency • Shadow Finance functions • Limited mobility of Finance leaders • No formal Finance governance structures • Individuals not a Finance team • Lack of skills (beyond technical) • Ineffective communication / business contact • Low morale and motivation • Poor talent management • Inadequate succession plans PERFORMANCE MEASURES ORGANZATIONAL STRUCTURE MEASURES Shared PEOPLE & CULTURE FINANCE FUNCTION LEADERSHIP REPORTING TECHNOLOGY FINANCING/REVENUES TECHNOLOGY Services AND VISION CULTURE Shared Services • Inconsistent policies/ procedures/ controls • Significant reconciliation issues/errors • Too many late adjustments / JNLs • Close process is long / highly manual • Budgeting, planning and forecasting / capital management processes are ineffective and / or inefficient • Multiple consolidation layers/COAs & GLs • Inconsistent data models / reference data • Multiple systems / varying maturity with too many manual interfaces • Multiple sources for technology including maintenance and development • Limited / no scale or flexibility and reliance on end user computing is high • Poor integration between point of sale systems and reporting/GL systems • New product initiatives difficult to measure due to quality of information • No alignment of various revenue recognition systems used in subsidiaries • Lack of centralized strategy for revenue generation TRAINING AND FINANCING REPORTING DEVELOPMENT Sound familiar…?

17. Applicability to Public Sector Finance Functions Shared Services PERFORMANCE MEASURES ORGANIZATIONAL STRUCTURE Primary focus is quality of services and improved productivity rather than profitability Distribution of Finance Function among departments, ministries, agencies, boards and crown corporations. PERFORMANCE PERFORMANCE MEASURES ORGANZATIONAL STRUCTURE MEASURES PEOPLE AND CULTURE TECHNOLOGY Shared PEOPLE & CULTURE FINANCE FUNCTION LEADERSHIP Human capital management: attracting and retaining experienced and trained professionals Difficulties in determining costs and benefits associated with IT initiatives, and lack of choice in available technologies TECHNOLOGY Services AND VISION CULTURE TRAINING AND FINANCING REPORTING FINANCING REPORTING DEVELOPMENT Increasing demand and cost of service delivery will require innovative financing options. Public expectations for accountability and transparency are higher relative to the private sector

18. Transition to a Strategic Finance Function

19. Transitioning the Role to Strategic NON–STRATEGIC VALUE ADD STRATEGIC Collecting budgeting and forecasting information GUIDANCE DIRECTION EXPERTISE ACCOUNTABILITY AUTHORITY CONTROL EFFICIENCY Provide instructions and analysis of budgets and forecasts Prepare/provide financial information and financial statements as requested Prepare and analyze financial and operational performance Design financial controls and meet audit requirements Provide leadership and direction in transparency and accountability Prepare an process journal entries Support accurate and complete journal entry processing Scorekeeper COMMUNICATION Strategic Partner

20. Framework for StrategicFinance Functions

21. Key to Effective Strategic Finance Function Governance & Risk Management Organization Technology Decision Support Delegation Limits • Internal: • Relevant, reliable & timely information • Integration of financial and non financial data • Forward looking (planning & forecasting) • Focus on KPIs and value for money • External: • Transparent • Efficient production of Public Accounts • Appropriate Authority • Financial Management culture • Strong planning & monitoring functions • Effective Policy Framework • Effective management of Assets, Liabilities, Revenues, and Expenses • One Integrated System • One Version of the Truth • Limited Use of Spreadsheets/ Offline Tools • Efficient data capture at source • Information integrity Documented processes and controls Valued Partner within Organization Regular Monitoring for effectiveness and efficiencies Transactions People Clear documented oversight • Leading practices in transaction processing • (efficient and effective) • Accurate, timely and relevant data • Standardized and simplified processes • Proper authorization • Well defined Roles & Responsibilities • Clear lines of accountability • Capacity & competence (technical finance skills) • Documented goals and objectives • Strong team and change management skills Enterprise Risk Management Internal Control Framework Strong Stewardship role

22. Effective Strategic Finance Functions TECHNOLOGY: • Appropriate processes and systems to produce and deliver accurate and timely financial data • Integrity of information through controls and policy compliance • Automation and integration promotes efficiency Technology Technology • One Integrated System • One version of the “Truth” • Limited Use of Spreadsheets/ Offline Tools • Efficient data capture at source • Information integrity

23. Effective Strategic Finance Functions ORGANIZATION: • Organizationally independent from ministry program delivery • Oversight role and responsibility over ministerial or governmental activity • Requires constant relationship management with valued partners Organization • Appropriate Authority • Financial Management culture • Strong planning & monitoring functions • Effective Policy Framework • Effective management of assets, liabilities, revenues & expenses

24. Effective Strategic Finance Functions DECISION SUPPORT: • Key strategic support to departmental or program decision maker • Enhance financial and operational data into “intelligent information” • Prioritize initiatives for reliable forecasting and focus on value for money Decision Support • Internal: • Relevant, reliable & timely information • Integration of financial and non financial data • Forward looking (planning & forecasting) • Focus on KPIs and value for money • External: • Transparent • Efficient production of Public Accounts

25. Effective Strategic Finance Functions People • Well defined Roles & Responsibilities • Clear lines of accountability • Capacity & competence (technical finance skills) • Documented goals and objectives • Strong team and change management skills PEOPLE: • Accredited financial and accounting professionals with experience • Clearly defined roles and responsibilities with appropriate authority • Culture of development and opportunity that rewards initiative and innovation

26. Effective Strategic Finance Functions Transactions • Leading practices in transaction processing (efficient and effective) • Accurate, timely and relevant data • Standardized and simplified processes • Proper authorization TRANSACTIONS: • Accountable for enterprise financial system architecture • Consistency and standardization of accounting policies and procedures for transaction processing • Formalize and manage the centralized service delivery model

27. Roles of the StrategicFinance Function

28. Defining the Role of the Finance Function SENIOR MANAGEMENT FOCUS ON PERFORMANCE FOCUS ON GOVERNANCE Public Reporting Budgeting and forecasting Initiatives and agenda Capital Asset Management (Infrastructure) Stakeholder relationships Governance / stewardship Value for money based management Variances analysis Accounting policy & procedures Strategic planning Quality and level of service Operational Statistics GL / COA Maintenance REGULATION & CONTROL PERFORMANCE & EFFICIENCY Transactional Processing Management reporting Audit Basic financial information Sourcing Information Technology Cost optimization Service Delivery Treasury / ALM Risk management Public service users FOCUS ON EFFICIENCY FOCUS ON CONTROL Decision support for value creation Control optimisation Sourcing Financial control to protect value Transactional processing Information Technology Internal Control and Design Human Resources Direct (lead / own / accountable) Influence and guidance SERVICE PROVIDER

29. Defining the Role of the Finance Function SENIOR MANAGEMENT FOCUS ON PERFORMANCE FOCUS ON GOVERNANCE Public Reporting Budgeting and forecasting Initiatives and agenda Capital Asset Management (Infrastructure) Stakeholder relationships Governance / stewardship Value for money based management (EVA) Variances analysis Accounting policy & procedures Strategic planning Quality and level of service Operational Statistics GL / COA Maintenance REGULATION & CONTROL Transactional Processing PERFORMANCE & EFFICIENCY Management reporting Audit Basic financial information Sourcing Information Technology Cost optimisation Service Delivery Treasury / ALM Risk management Public service users FOCUS ON EFFICIENCY FOCUS ON CONTROL Control optimisation Sourcing Information Technology Internal Control and Design Human Resources SERVICE PROVIDER Focus on Performance: • Assist and support partners to effectively and efficiently manage and complete budgets • Improve ability to determine costs and benefits of programs and projects • Relevant forecasting to prepare for future challenges to public services • Assist in planning for innovative funding initiatives to meet growth in demand for services

30. Defining the Role of the Finance Function SENIOR MANAGEMENT FOCUS ON PERFORMANCE FOCUS ON GOVERNANCE Public Reporting Budgeting and forecasting Initiatives and agenda Capital Asset Management (Infrastructure) Stakeholder relationships Governance / stewardship Value for money based management (EVA) Variances analysis Accounting policy & procedures Strategic planning Quality and level of service Operational Statistics GL / COA Maintenance REGULATION & CONTROL Transactional Processing PERFORMANCE & EFFICIENCY Management reporting Audit Basic financial information Sourcing Information Technology Cost optimisation Service Delivery Treasury / ALM Risk management Public service users FOCUS ON EFFICIENCY FOCUS ON CONTROL Control optimisation Sourcing Information Technology Internal Control and Design Human Resources SERVICE PROVIDER Focus on Governance: • Manage and control formal relationships between partners • Lead and direct internal initiatives and agenda related to financial information • Ensure appropriate service level agreements are issued to formalize relationships • Development of standardised control and accounting policies • Improve consistency of reported information

31. Defining the Role of the Finance Function SENIOR MANAGEMENT FOCUS ON PERFORMANCE FOCUS ON GOVERNANCE Public Reporting Budgeting and forecasting Initiatives and agenda Capital Asset Management (Infrastructure) Stakeholder relationships Governance / stewardship Value for money based management (EVA) Variances analysis Accounting policy & procedures Strategic planning Quality and level of service Operational Statistics GL / COA Maintenance REGULATION & CONTROL Transactional Processing PERFORMANCE & EFFICIENCY Management reporting Audit Basic financial information Sourcing Information Technology Cost optimisation Service Delivery Treasury / ALM Risk management Public service users FOCUS ON EFFICIENCY FOCUS ON CONTROL Control optimisation Sourcing Information Technology Internal Control and Design Human Resources SERVICE PROVIDER Focus on Control: • Provide leadership and guidance on continuous risk management process • Central agency with actual and/or perceived authority to maintain sound financial and operational information • Support partners with accurate and timely reporting of financial and performance information • Elevate government transparency in reported information

32. Defining the Role of the Finance Function SENIOR MANAGEMENT FOCUS ON PERFORMANCE FOCUS ON GOVERNANCE Public Reporting Budgeting and forecasting Initiatives and agenda Capital Asset Management (Infrastructure) Stakeholder relationships Governance / stewardship Value for money based management (EVA) Variances analysis Accounting policy & procedures Strategic planning Quality and level of service Operational Statistics GL / COA Maintenance REGULATION & CONTROL Transactional Processing PERFORMANCE & EFFICIENCY Management reporting Audit Basic financial information Sourcing Information Technology Cost optimisation Service Delivery Treasury / ALM Risk management Public service users FOCUS ON EFFICIENCY FOCUS ON CONTROL Control optimisation Sourcing Information Technology Internal Control and Design Human Resources SERVICE PROVIDER Focus on Efficiency: • Integration of financial and operational performance data • Assist in properly assessing the effectiveness and efficiency of public service delivery • Improve ability to manage assets and liabilities • Increase the access to and sharing of information between partners • Promote gains through economies of scale and leveraging through procurement and sourcing

33. Conclusion

34. Conclusion Challenges: • Public sector organizations under pressure to operate more efficiently • Requirement to focus on performance and improve quality of service Opportunities: • Finance Function strongly influence and control government agendas, departments and agencies

35. Conclusion Keys: • Effective management of financial resources critical to meeting expectations of service users and future challenges Results: • Provide stakeholders with tools to effectively and efficiently perform in accordance with public expectations

36. QUESTIONS?

37. Presenter’s contact details Daniel Zbacnik, CPA (Illinois), MBA, FCMA KPMG Canada Canadian Lead Partner, Financial Management Advisory KPMG LLP Tel: (416) 459-7751 Yonge Corporate Centre Fax: (416) 228-7123 4100 Yonge Street Suite 200 Toronto, Ontario M2P 2H3 dzbacnik@kpmg.ca www.kpmg.ca