implementing

best practice
PART 4
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Chapter 8 – LESSONS LEARNED

IN OTHER PUBLIC SECTORS KEY POINTS

Re-inventing the wheel + refusal to learn from others’ experience in similar • The Commonwealth has a good
situations = Profound arrogance and much waste opportunity to reflect on the
lessons learned from other
jurisdictions that are further down
This chapter highlights the lessons learned from a jurisdictional perspective. While the reform path.
Commonwealth funding arrangements have some different features, these do not
• Commitment and leadership from
preclude the APS from benefiting from experiences elsewhere. In fact, now is the time,
politicians, senior public servants
early in the implementation of accrual-based output budgeting, when the
and central agencies are vital to
Commonwealth has a good opportunity to reflect on the lessons learned from other
get the reform process off the
jurisdictions that are further down the reform path.
ground. For the Commonwealth,
Some of the “big picture” issues covered in this chapter apply equally to implementing this commitment needs to be more
change on an individual agency basis. The challenges and opportunities that agency widespread and vocal.
heads face in bringing about the necessary changes in culture and operations required
• The Commonwealth’s legislative
under the Commonwealth’s new financial management environment are dealt with
framework does reflect that the
more fully in the next chapter.
Government is serious about public
The extent of the reform program implemented by New Zealand and the length of
sector reform.
time that these reforms have been in place offer valuable messages for the
Commonwealth. Lessons are also drawn from other international government sectors • Early pay-offs, not grand designs,
and, to some extent, Australian State and Territory Governments such as the ACT, are what capture the interest and
Victoria and South Australia. support needed to maintain
momentum. Keep stakeholders
Analysis shows that success depends on five key areas. These are:
informed of progress.
• commitment and leadership;
• vision and controversy; • Decision makers must be mindful
• maintaining the momentum; of the need to maintain the
• incentives, risks and the role of central agencies; and organisational strength of
• ownership interests. departments and agencies and
Each area examined provides a number of messages for the Commonwealth. should not jeopardise the long term
organisational capacity of
COMMITMENT AND LEADERSHIP departments and agencies by
focussing only on efficiency
“For reform to occur, there must be acceptance that there is a problem, agreement about its
objectives.
solution, and preparedness to commit to a process of implementation that may have to
overcome many obstacles before producing much in the way of visible results.”38
Clearly in New Zealand and Victoria, the problem was based on the need to turn
around bleak economic circumstances. While this factor is not as pressing at the
Australian Commonwealth level, the need for reform has been recognised by
Government Ministers and senior bureaucrats alike.
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“If the APS is to be further reformed, as I hope it will be, as a program of better
government, it will require strong collective leadership in the creation of a more innovative
APS, one that is able to play a continuing role in Australia’s system of governance for the
next century.”39

Message: While there is acceptance at senior levels within the Commonwealth that
the current reform program is needed, and there is commitment to its objectives,
the benchmarking results reported at Chapter 2 show that this acceptance and
commitment needs to be more widespread and vocal.

In some ways it is easier to light the torch of change than it is to lead the way and
maintain the light when obstacles are thrown in your path. Initial commitment to the
solution(s) is a necessary but not sufficient condition to ensure success. There must
also be a willingness on the part of the reforms’ most vocal or visible proponents to be
present for the duration of the change process and to reiterate the reforms’ key
message(s).
“...reform acquires momentum and a clear focus when politicians and senior public
servants play a determined leadership role.”40
The Government cannot achieve the change it is seeking without the support of senior
public servants. A passive attitude by an agency head leads to unsatisfactory results,
such as nominal compliance to the reforms and, in terms of financial management,
financial responsibility remaining with central finance areas rather than in the hands
of line managers. The importance of leadership in effecting change is discussed in
Chapter 4 of this report .
Political support is also an important driver of the reform program. There are “few
visible examples of the public service itself leading on reform without the involvement of
political leaders”.41 Further, in New Zealand, the legal force of the reforms “helped to
emphasize the message that the Government was insisting on changes to public sector
management” 42. Victoria and the ACT have followed New Zealand’s example and
implemented similar legislative frameworks.

Message: Legislative backing demonstrates that a high level of political will exists
to implement reforms. The Commonwealth’s legislative framework reflects that the
Government is serious about public sector reform.

VISION AND CONTROVERSY

“Vision, values and controversy are unavoidable features of change.”43

Proponents of reform need to clearly enunciate the vision of the reform agenda.
For example, the following are extracts from the “vision” statements of the government
reform frameworks of Victoria, the ACT, South Australia, and Queensland:
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“The Victorian Government has committed to a financial management reform

program to entrench changes to the way the State’s finances are managed. The
Government’s objective is to deliver appropriate high quality services to Victorians at
least cost...to manage funds and be accountable to taxpayers for decisions about the
allocation of funds...to provide a framework for more flexible and innovative delivery
of public services...” Reform of the Budget Sector, Victoria.
“The Government’s reform agenda is designed to increase the efficiency of the public
sector. This will lead to an improvement in living standards by delivering higher
quality services to the community at less cost.” Financial Management Reform, ACT.
“...further improving the public sector’s delivery of policy and services to Ministers and
the community” General Management Framework, South Australia.
“... to assist agencies achieve and maintain best practice in management and develop
highly effective organisations. The Framework details the management ethos and
directions that the Government believes will best deliver its strategic goal.”
Strategic Management Framework, Queensland.

Public sector reform generally looks to achieve a number of things simultaneously:

improving administrative and legislative structures; developing people; and improving
service delivery to the government and the public. In order for the parties effecting the
reform program to maintain credibility, these elements must be seen as part of
“the whole”.
Having a “vision” helps in planning the implementation strategy and in selecting and
ranking various reform initiatives. Presenting the various initiatives as linked solutions
on the path to a particular goal, or set of goals, will engage and maintain the
commitment of affected parties to see the reform program through.

Message: Clearly state the objectives of the reform process. This assists in
communicating the message about the nature and scope of the change and
provides affected parties with a level of assurance that the reforms are worthwhile.
The Commonwealth has yet to do this on the “public service wide” scale in relation
to the current reform agenda.

Questioning of the status quo leads to controversy which can lead to resistance to
change by some individuals or even entire agencies. Opponents of reform will seize
upon any early problems or difficulties in implementation associated with the new
system. It is vital to anticipate these “attacks”, intervene quickly to limit any damage
and correct the problem. This is not to say that criticisms should be dismissed out of
hand. It is important that any concerns, large or small, be addressed in a constructive
and helpful way.
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These are essentially change management issues that will need to be addressed by the
Department of Finance and Administration and by senior public servants. It extends
the previous point made in this section that the vision and benefits of the reform need
to be articulated clearly. Further, agencies need to know what is expected of them in
implementing the reforms and within what timeframe.

Message: Accept that questioning the status quo will be perceived as a threat from
some quarters. Be prepared to state the reform case. Acknowledge criticisms by
responding to them quickly. Don’t let them fester. Nip opposition in the bud.

MAINTAINING MOMENTUM

“ ‘We...went for the Next Steps [Program] bull-headed. We had political support, we just
went in, we had to get the show on the road, there was no other way of doing it.’ (Second
Permanent Secretary).”44
Once the decision for reform is taken, get the message out quickly. Be prepared to go
ahead with a reform process without necessarily knowing exactly how each step will be
achieved. Both Victoria and the ACT published timetables within a week of their
reform announcements, outlining how the reform would be implemented, by whom
and by when.
It is easy to allow the inevitable obstacles to slow or even stop the reform process
altogether. For example, a barrier that designers of government financial management
systems tend to create for themselves is “to seek to implement a grand design”.45 While it
is important to know what needs to be done to deliver a “reformed environment”, it is
vital that this is done in such a way that the interest of government and officials at all
levels is captured and retained. “The realities of day-to-day government are such that
grand designs rarely capture the interest of politicians, even when they have real problems
they want solved.”46
Implementing reform is an expensive business. Central agencies should aim to produce
“early pay-offs that will justify the costs and gain political support for maintaining the
pace of reform”.47 This will ensure continued government and managerial support, and
the recovery of financial and resource costs in a timely fashion.
When reform implementation timetables extend over several years, it is important to
keep stakeholders informed of progress. For example, a year after releasing the first set
of papers relating to its reform program, the Victorian Government released a
comprehensive package detailing the progress to date and the future reform program.
Among other things, the package restates the vision of the reforms into key result
areas, assigns responsibility for these areas to particular organisations and provides
readers with contact details.
Sometimes implementation is speedy. The ACT Government, for example,
implemented its reform program (including output-based accrual budgeting in an
owner/purchaser/provider framework) within a year. The framework provided an
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effective context for reaping benefits in terms of a real reduction in operating loss over
the past two financial years, no new borrowings and maintenance of its AAA credit
rating. In turn, the ACT community is receiving more focussed service delivery at a
lower cost to rate and tax payers.

Message: Market the benefits of the reforms widely. Be prepared to go ahead with a
reform process without knowing exactly how each step will be achieved. Early pay-
offs, not grand designs, are what captures the interest and support needed to
maintain momentum. Keep stakeholders informed of progress.

INCENTIVES, RISKS AND THE ROLE OF CENTRAL AGENCIES

“It makes sense for [central agencies] to play a role in any attempts to make the system
work better”.48
In New Zealand, the central agencies took a major role in developing output
definitions from the beginning. The two main reasons for this decision were:
• to prevent chief executives gaining excessive freedom through vague output
definitions. For example, “a department sought to have only one output for a huge,
complex government agency”.49
• to be able to rectify inconsistencies in output definitions across departments.
For example, “the definition of policy analysis varied across departments, which caused
confusion...Treasury is now coordinating the development of more uniform
definitions”.50
On the other hand, the New Zealand Treasury provided little in the way of advice or
training services beyond communicating the key principles of reform. Similarly, rather
than offering training services itself, the Victorian Department of Treasury and
Finance developed a panel contract for departments to select the level of training they
thought appropriate to their circumstances. In contrast, the ACT had a central output
committee advising both purchasers and providers on outputs.
New Zealand central agencies also avoided directing detailed accounting practices of
individual departments. Any variability in application of the generally accepted
accounting principles across departments was “a small price to pay for the efficiencies
and incentives of imposing the obligations directly on the departments”.51
“Departmental heads saw the removal of controls over their inputs as a positive change,
and this type of motivation can help to implement the reforms.” 52
Granting freedom in an ordered way to agency heads encourages ownership of the
reform program. Making agency heads both legally and transparently accountable for
output delivery provides incentives to improve internal financial management.
For example, agency heads can choose how much financial freedom is needed by line
managers to ensure outputs are delivered well. Consequently, the agency head can
determine the accountability and financial controls that will exist in the agency.
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Message: Good reform is about encouraging agency-based management. Central

agencies should concentrate on generating incentives for departments to manage
financial resources effectively. Essential controls should be targeted in areas of
greatest risk to the management of financial resources from a whole of government
perspective.

OWNERSHIP INTERESTS

“Ownership inevitably recedes in the face of the short-term influence garnered by

allocating resources and contracting for next year’s outputs.”53
The long-term organisational capacity of departments and agencies will be jeopardised
if the drive for efficiency is the only basis on which Ministers and central agencies
judge the cost of outputs provided to government. Decision-makers must be mindful
of the need to maintain the organisational strength of departments and agencies and
should “forbear from demanding so much by way of outputs and from pushing [funding
of outputs] down...”.54 Agency heads facing low funding levels or excessive work
demands may reduce or cease investing in the human and physical capital within their
organisations in order to deliver agreed outputs.
“The focus on ex ante specification has sometimes led to a checklist mentality which is
positive from the perspective of having managers take accountability seriously for tasks
they are expected to complete. It is less desirable if it narrows responsibility to simple
compliance with what is on the list, and prompts Chief Executives to disregard
responsibility for items not specified.”55
In New Zealand, monitoring of performance against targets does not wait until the
year is over. There exists a comprehensive range of reporting requirements prescribed
by legislation and via contracts with chief executives. “The monitoring arrangement
exerts enormous influence on the behaviour of chief executives and their departments.”56
The focus on the achievement of performance targets is so strong that many managers
keep a checklist to track the status of each item. However, the most valuable skill that
managers contribute to organisational performance is not compliance, but judgement
and leadership. This is another example where the short-term focus on output delivery
occurs at the expense of protecting ownership interests.
The ACT has instituted Ownership Agreements between the Government and Chief
Executives to maintain a focus on performance from the owner perspective.

Message: Protection of ownership interests is vital so that departments and

agencies are able to respond to future service demands. There exist two threats to
ownership interests: weakened organisational capacity and pervasive performance
monitoring. Both of these occur when decision-makers focus only on achieving
agreed outputs at lowest cost.
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Chapter 9 – CHANGE MANAGEMENT ISSUES

A good project plan + avoidance of known risks = Stress-free implementation
of change.

“…most civil servants never face real consequences. If they do a great job, they see little
benefit; if they do a poor job, they experience few repercussions. Somehow, managers have
to create a feeling that what people do day-to-day to advance the mission of their agency
really is important. And public leaders have to create budgeting and other systems that
reward success and force weak performers to improve. Government workers are no
different than other employees; they want to see their efforts matter and their progress
measured.”57
The implementation of best practice in financial management in the public sector can
create important by-products. The two most important by-products are better
performance management frameworks at both the whole of government and agency
level, and the creation of a more commercially astute public sector.
The implementation has two complementary dimensions. The first is the
establishment of a best practice financial management environment for which central
agencies, especially the Department of Finance and Administration, will largely be
responsible and accountable. The changing role of the Department of Finance and
Administration is examined later in this chapter.
The second dimension is the establishment of best practice within agencies. Successful
implementation will require strong sponsorship both from the Chief Executive and the
senior management team. The importance of, and the need for, this sponsorship and
leadership cannot be overstated.
This chapter focuses primarily on two change issues. The first relates to the changing
environment, involving the implementation of accruals-based output budgeting.
The second relates to the implementation of best practice financial management
within agencies. The first is not optional, but given the experience of agencies in other
jurisdictions, there are many change issues that need careful planning and
management. Arguably, elements of the second are optional but, for best practice in
financial management, it is strongly recommended that the features discussed in this
chapter be implemented.

THE CHANGING ENVIRONMENT – IMPLEMENTING ACCRUALS-BASED

OUTPUT BUDGETING

Implementation of accruals-based output budgeting is a given, by 1999-2000. Agencies

need to plan their implementation strategies now, realising that they are not strategies
designed solely by corporate finance sections. For effective implementation, senior
management commitment and involvement is essential from the outset.
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Important steps in the implementation process will involve:

• the scoping of the project and definition of the project implementation plan, with
clear milestones and deadlines;
• appointment of an appropriate senior manager, or external resource, with relevant
skills and credibility to manage the changes;
• development and definition of the agency’s outputs which will contribute to agreed
outcomes;
• development of performance measures which will demonstrate delivery of the
outputs in the year ahead, in terms of quantity, quality, timeliness and location;
• agreement of the outputs with the Government/Minister and how they will be
measured;
• making a reasonably accurate estimate of the cost of each output (based on full
accrual accounting);
• to the extent necessary, changing accounting systems to transaction-based accrual
systems (this may or may not involve new/changed hardware and software);
• changing accounting processes and procedures to capture accruals at the transaction
level;
• development of procedures for month-end closure and reconciliation of ledgers;
• establishment of the new cash management and banking processes, including the
opening of bank accounts (if appropriate);
• setting up the processes for estimating and managing working capital needs, in order
to manage cashflow, maximise interest receivable and minimise interest payable;
• training finance and administrative staff in the operation of the accrual accounting
system and the new processes and procedures, including cash management and
banking;
• education of other staff members and managers about the change of focus and
accounting;
• assessing and, where appropriate, changing the accountabilities of managers to
include specifically the accountability for the delivery of outputs and for managing
costs at or below price;
• estimation of the opening balance sheet for the year ahead and planning the closing
balance sheet for the year (this should include specific plans to achieve the planned
movement of balances);
• preparation of the agency’s submission for the Government’s Budget Process on the
basis of priced (costed) outputs; and
• agreement with central agencies, about the reporting processes and formats.
Throughout, management has to be assured that the project is properly managed, that
deadlines are met, problems solved and transition costs kept within budgeted amounts.
Most importantly, agencies need to be ready to operate under the new environment, by
the “live” date. This will include having the appropriate systems and resources in place to:
• manage using accrual accounting information;
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• produce performance measures which demonstrate the delivery of outputs;

• bring to account the revenue due in respect of that delivery;
• be able to cost outputs to assess profitability;
• report budgeted and actual financial results; and
• produce monthly financial information, by output, by part of the organisation and
for the whole of the agency, materially accurately and on time.

Potential Output Budgeting Implementation Risks

In having identified the steps involved in moving to a new environment it is also

important to identify the potential risk areas and problems which Commonwealth
agencies might face during implementation. The risks and problems identified are
drawn from actual examples in other jurisdictions.
Planning Risk
The implementation of accruals-based output budgeting is a major task requiring
considerable resources and careful planning. Agencies that do not devote adequate
resources to the project, fail to commence their planning at the earliest possible stage,
or do not carefully work out each step in the implementation sequence run a
significant risk of being unable to carry out the implementation in accordance with
plan. This will result in sub-standard implementation. The message from this is clear:
• start planning at the earliest opportunity;
• ensure that senior management devotes adequate resources to the project; and
• develop a detailed plan, with a clearly laid out sequence of events.
Project Management Risk
Project management risk is closely aligned with planning risk. While a well-conceived
implementation plan is an essential requirement for success, it must be accompanied
by adequate project management. Some major problems in this area, noted in other
jurisdictions, have been:
• failure to obtain a sufficiently skilled and experienced project manager to lead
the project; The implementation of accruals-
• inadequate senior management support and sponsorship of the project; based output budgeting is a major
• failure to get an adequate budget and suitably skilled team members to fulfil the task requiring considerable
tasks (this may often mean sourcing additional temporary help from outside the resources and careful planning.
agency, and /or recruiting additional staff); and
• failure to achieve deadlines (once deadlines start being missed, regardless of the
reason, the impetus for achieving the plan erodes).
Accounting Systems Implementation
The installation of an appropriate accounting system has traditionally caused the
greatest difficulty for agencies during the implementation phase. Ways to overcome
such problems include:
• select an appropriate system (not too complex a system for the agency’s needs);
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• do not make unnecessary enhancements to an off-the-shelf software package which

can add cost and unwarranted complexity;
• be clear about what the system is required to do and how it should be set up;
• do not cater for perceived user wants, rather, identify and meet genuine user needs;
• recruit and retain a skilled systems accountant to set up and maintain the system;
• ensure that the systems project is not run by the information technology division,
rather, the financial management project team should manage the project (thereby
keeping control over the end product);
• keep the system simple in the first instance (the system should evolve with user
experience);
• plan adequate time to install and test the system before commencing live operations;
and
• provide training and documentation.
Output Specification and Performance Measurement
The adoption of a result-focussed management culture will not be achieved if the
output specification and performance measures are inadequate. Risks associated with
this task include:
• failing to specify outputs in a way that is relevant to managing the organisation.
Managers must be held accountable for the production of outputs;
• failing to find adequate performance measures to monitor output delivery (this is
often the most difficult part of the output environment to implement – agencies
must consider how they can measure and cost outputs during the output
specification stage); and
• failing to link outputs to outcomes. For the new environment to work effectively,
output specification must be linked to the achievement of Government outcomes.
Cash Management and Banking Systems
At the time of writing this report, final decisions had not been announced about
banking arrangements in the Commonwealth under accruals-based output budgeting.
Notwithstanding the announcement of the arrangements, it should be noted that
many agencies in the ACT and NZ jurisdictions were particularly weak in the area of
cash management and banking. Devolution of responsibility for these functions has
the potential to improve substantially management of cash resources across the public
sector, but agency management currently has little incentive to properly manage these
functions. The main sources of concern are:
• lack of cash management skills within the finance section;
• low priority placed on cash forecasting, creditor and debtor management,
investment opportunities;
• failure to set up a corporate treasury function in large agencies; and
• lack of incentives.
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CHANGING FINANCIAL MANAGEMENT PRACTICE IN AGENCIES

Undoubtedly, the implementation of accruals-based output budgeting will drive

changes in financial management practice within agencies. There is a risk, however,
that those changes may not realise their full potential, limiting the gains possible from
more fundamental improvements to internal performance management.
Implementation of best practice financial management within agencies, the attributes
of which have been highlighted throughout this report, may involve some, or all, of the
following:
• a change in the management process and the management culture of the agency.
This will involve a move away from focussing on process and compliance to
focussing on results. If the agency and its Chief Executive are to be held accountable,
primarily, for results, that needs to be accompanied by an internal culture equally
focussed on those results. This will ideally encompass the recognition and
celebration of success and, where appropriate, the rewarding of success. Depending
upon the degree of cultural change required within an agency, the changes would
need to be planned, “marketed”, led and well managed;
• accountability for results will need to be focussed, direct and personal, to individual
managers. Although teamwork will continue to be one of the keys to success, one
person must have responsibility for each decision and result;
• all managers, from the CEO down, will need to take 100% ownership of the financial
performance of the agency and for their part of the organisation. It needs to be
recognised, by all, that financial management is the responsibility of managers, not
of accountants. This shift may require an extensive marketing and education
program within some agencies;
• equally, the finance staff need to understand clearly their role, which is the provision
of first class financial information and professional financial advice to managers,
(and others – e.g. external reporting). This will involve, for some agencies, finance
staff understanding that financial management is not their direct responsibility,
although they have a vital role to play in the process;
• external reporting should have as close as possible to a zero compliance cost.
Two “golden rules” of reporting should apply:
– both the organisation and its Minister should need essentially the same
information, and they should agree on that in order to avoid the unnecessary
overhead costs of duplication; and
– the degree of intrusiveness by the “owner” into the detailed performance of the
agency should be inversely proportional to the agency’s success (see the section on
the changing role of central agencies at the end of this chapter).
The balance will need to be agreed in liaison between the agency and Ministers
and between the agency and the Department of Finance and Administration;
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• internal financial information should be:

– materially accurate;
– presented on time (available within 2-5 days into the next period);
– complete, in terms of all the manager needs to know (e.g. full costs of her/his
operations, including attributed overheads), and excluding all extraneous
information;
– tailored to the needs of managers (content and presentation);
– offering differing levels of detail to different levels of management;
– inclusive of full balance sheet information (budget and actual) to the CEO and any
parts of the organisation separate enough to have their own balance sheet; and
– contain no surprises.
A process, fully involving all managers, will need to be put in place to develop the
internal financial information requirements and the changes to procedures to deliver
on the above;
• strategic and business plans need to have an appropriate financial basis and be fully
resource-linked. A budget is merely a financial plan, and a strategic plan without a
financial plan is unrealistic and uncertain. The planning processes of the agency may
have to be adjusted to include full financial plans;
• while it may be necessary, from time to time, to adjust some elements of budgets,
“updating” of budgets to match actuals must be avoided, as it will remove positive
incentives within the organisation. This may involve a cultural change as well as a
new discipline;
• best practice financial management will rely heavily on excellence in financial
information and advice. To achieve this excellence, finance sections will need to be
properly resourced. This is not necessarily about numbers or dollars, but it is about
quality. There will need to be an appropriate proportion of professionally qualified
staff working in the finance area. There is a strong argument that the CFO should be
fully professionally qualified in every case.
It may take some time to resource the agency adequately with an appropriate
proportion of professionally qualified finance staff and this needs to be planned.
External sourcing could be a short-term answer or perhaps, for smaller agencies,
outsourcing could be the right longer-term solution;
• senior line managers probably need, or would substantially benefit from, financial
advice being directly ‘on-hand’. One element of emergent best practice is the
outposting of finance professionals to senior line managers (e.g. branch/division
general managers). This would be particularly relevant to distributed, multi-site
organisations and need not entail additional overheads for the agency as a whole.
Again, as this may involve recruitment or contracting, as well as some restructuring
of the finance section, achieving the right skills mix will need to be planned and
managed; and
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• the finance and business skills of managers will need to be adequate if they are to
understand and use the financial information optimally. Sufficient training should be
provided in the use of financial information and in effective financial management,
in the absence of adequately skilled managers.
Depending on the financial skills in-house, such training could either be provided
in-house, or brought in.

Potential Best Practice Implementation Risks

This section examines some of the potential risk areas and problems which
Commonwealth agencies face when implementing aspects of best practice financial
management.
Finance Staff Skill Base A major risk area for many agencies
A major risk area for many agencies attempting to adopt best practice financial attempting to adopt best practice
management is the failure to obtain the appropriate staff skill base. Some ways to financial management is the failure to
overcome the risks include: obtain the appropriate staff skill base.
• careful consideration of the required professional qualifications and the regular
reporting arrangements for the head of financial management;
• where necessary, recruitment of external financial expertise to supplement the
existing financial skill base, if it is deficient;
• train/update the existing staff in best practice accrual accounting and budgeting
skills; and
• appoint a systems accountant to manage the new accounting system.
Management Education
Best practice financial management is heavily dependent on agency managers learning
and practising the financial management tasks demanded by the reforms. Areas for
consideration include:
• the need to ‘sell’ the advantages of better financial management to line managers;
• provision of adequate training and skills development to equip managers to operate
effectively in the new environment;
• provision of suitable financial management information and financial advice to
support line managers; and
• the need to reward/recognise good financial management by line managers.
“Locking In” Cultural Change
One problem facing many agencies is how to achieve the change in organisational
culture that is necessary to adopt best practice financial management. There is a
significant risk that the financial management changes introduced will be carried out
mechanically and superficially, without any underlying change in management
thinking and behavior. Agencies in other jurisdictions that have been successful in
changing organisational culture have exhibited some of the following characteristics:
• the CEO and CFO are both firmly and publicly committed to the adoption of
financial management reform;
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• comprehensive guidance and training material is provided for management and staff
during the implementation phase;
• selective recruitment of private sector financial and management expertise has taken
place, particularly in large agencies; and
• there has been ongoing financial management training and education, after the
implementation phase had finished.

Responding to Incentives
Best practice financial management involves line managers using financial information
to assist in decision-making. Despite the additional freedoms and incentives provided
under the new financial management environment, there is a risk that some agencies
will not take advantage of the opportunities. Chief Executives who are committed to
improving the financial management of their agencies should look for the following
danger signs:
• no change in the mix of quantity, quality or cost of outputs being offered in the
budget process;
• no line managers identifying cost saving opportunities;
• no plans for asset rationalisation being presented;
• no changes in the speed or relevance of management information being provided;
• unpredictable financial results; and
• failure to achieve operating result, cash flow and balance sheet targets.
Responsibility for failure to exploit the potential of better financial management
practice rests with the Chief Executive. Potential problems can be avoided, however,
through adoption of the majority of steps outlined in this chapter, together with
appropriate project leadership, education and communication.

THE CHANGING ROLE OF CENTRAL AGENCIES

“The traditional role of the central budget office is incompatible with the management
reforms unfolding in various Member [OECD] countries. The traditional role for the
budget office has been to function as a central command and control post, specifying the
items of expenditure, monitoring compliance with regulations, ensuring that the inputs
are those agreed in the budget, and intervening as deemed appropriate. This role cannot
coexist with the discretion accorded managers in the new public management.”58
The introduction of the current suite of financial management reforms in the
Commonwealth provides an opportunity to build upon the earlier running cost
reforms that have been instrumental in re-defining the role of the Department of
Finance and Administration from that of regulator to one of facilitator.
The Performance Framework outlined in Chapter 1 of this report highlights the
linkages between the elements of effective financial management and the government’s
desire for a competitive, efficient and effective public sector. The changing
accountabilities and responsibilities of Secretaries/CEOs and central agencies within
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PART 4 IMPLEMENTING BEST PRACTICE

this framework are beginning to crystallise. Now, with the Financial Management and CASE STUDY: ACT OFFICE OF
Accountability (FMA) Act and soon, with the introduction of the accruals-based output FINANCIAL MANAGEMENT (OFM)
management framework, far greater responsibility for financial administration and
Costing outputs has been one of the real
decision-making rests with agencies and agency heads. Within the Budget framework,
drivers of change to OFM’s management
agency heads will be required to run their operations without undue outside
culture. For the first time, managers
interference, but will be held accountable for meeting performance objectives.
have been given a clear picture of the
This new framework will see the traditional role of supply/budget officers in the costs of delivering goods and services.
Department of Finance and Administration undergo a necessary shift. While their focus It also provided a structure to assess the
will still be on maintaining aggregate fiscal discipline and on monitoring ownership value of the activities performed in the
interests, in line with this role they will be required to determine and agree fair output agency and what each contributed to
prices with agencies. In doing so, they will need to focus less on inputs and more on achieving the government’s objectives.
understanding the relationship between the cost and quality of output production and The benefit of implementing these
achievement of Government outcomes. reforms have been to focus management
The skill set of budget officers will need to be commensurate with the new operating on one crucial responsibility, financial
environment. Accounting skills will need to complement economic skills. Budget management. The culture of the
officers will need a clear understanding of the benefits and use of accrual information, organisation is now beginning to see
together with a working appreciation of its use in management and cost accounting. senior managers ask, and expect
In the new environment of devolved management responsibility, the way the three answers to, questions on:
ongoing roles of the Department of Finance and Administration – controlling the • knowing what the organisation is
totals, establishing priorities, and seeking efficiency59 – are managed will need re- supposed to be doing;
examination.
A lot has been achieved to date in the Commonwealth to enhance accountability for • what it is doing to achieve those
outcomes and remove unnecessary control by the centre. But there needs to be an goals; and
evaluation of the relationship between budget officers and the portfolio agencies for • how much those activities are
which they are responsible to ensure that it will continue to be consistent with the costing.
intent of the reforms. Inevitably, there will need to be less focus on operational control
and a greater focus on strategic policy issues embracing both performance
improvement at the agency and whole-of-government level, and across both output
delivery and administered funds.