Traditionally, Federal agency CFO’s prepared budgets that demonstrate what each dollar will be used for (programs, staffing, technology, etc.). This does not ensure that the dollars appropriated will produce program or mission goals. Performance-based budgeting is critical for agencies to comply with regulations, ensure the proper stewardship of taxpayer dollars, and drive mission success. In theory, it makes sense. However, CFOs and their team struggle with performance-based budgeting due to many challenges.
Performance-based budgeting should be a part of day-to-day operations and every agency’s budget formulation, execution, and evaluation process.
Agencies that fail to adopt performance-based budgeting face critical issues, including:
- Waste and inefficiency in federal programs that undermine public confidence in government abilities
- Wasting funds on underperforming programs that could otherwise be directed to programs that generate results and align with the mission
- Insufficient articulation of program goals and inadequate program performance / results metrics can handicap program managers in improving program efficiency and effectiveness
- Without program performance and results, congressional policymaking, decision-making, and oversight are difficult
Below are best practices to help every OCFO to be more strategic in formulating and executing their budget to measure and demonstrate program and mission accomplishments at the department and enterprise level.
1. Identify the right data and data sources: Agencies struggle to report on program performance because of these and other issues:
- Big data issues, including data silos, inefficient data sources (on-premise databases) and legacy systems.
- Cost data exists in separate program budgets and under different expense categories from program to program. This makes it difficult to consolidate and compare costs across multiple programs within an agency for similar technologies or services to determine economies of scale opportunities and identify disparities.
- Gathering of comprehensive financial cost information can be difficult due to:
- lack of clarity of program performance requirements
- lack of access to detailed historical performance and financial data
- internal staff not trained and experienced on cost analysis
- current program status and the risk and uncertainty that may exist
2. Review internal controls: Internal controls should be reviewed to confirm that performance metrics are being correctly reported for performance-based budgeting accuracy.
3. It’s all about the data. Storing and analyzing data in spreadsheets is very time consuming, includes inherent lag times and stale data, and is not easily consolidated with performance data, leading to reactive decision making and other issues. It is critical to consolidate data into data management and analytics tools – data warehouse, reporting, visualization – to be able to effectively analyze and predict program performance and measure against goals.
Consolidating, normalizing, and reporting on data is not an easy task. Agencies must seek out companies with financial domain expertise that can implement a data analytics methodology that is both financial and non-financial audit-tested and based on best practices. Agencies should work with an experienced team that can develop procedures to verify data sets, transactions, and documentation, reconcile missing or inconsistent information, and make updates and corrective actions in financial systems.
Once the data is consolidated and accurate, OCFO’s can move to the next stage of analytics to collect, classify, analyze, and interpret data to reveal patterns, anomalies, key variables, and relationships. Developing visualization dashboards can help OCFOs to better communicate results and provide a user-friendly interface to allow users to query, report, and analyze data in their specific area. Having near real-time data and key performance indicators can help CFOs and program offices to measure program performance against goals and make proactive decisions when formulating and executing budgets.
4. Setting goals to measure performance. Most importantly, a strategic plan with mission objectives should be developed, including annual program budgets structured around specific objective outcomes. Periodic reviews and having a feedback loop to measure ongoing performance against goals and objectives is also vital to ensure programs stay on track and achieve the desired goals and mission objectives.
Characteristics of a good performance budget include, but are not limited to:
- A statement of performance goals covering four prior years, the current year, and the budget year.
- Goals and outcomes (and outputs if appropriate) stated in objective, quantifiable, and measurable terms.
- Performance indicators (metrics) to be used in measuring or assessing relevant program or activity outputs, against stated goals and outcomes.
- Inclusion of a description of the evaluation process, operational processes, and skills.
- Clear description of the procedures used to verify and validate measured values.
There are many benefits of performance-based reporting, including:
- Ensures agencies measure results against baseline plans and associated goals and outcomes.
- Visibility and transparency to motivate organizations to achieve goals and outcomes.
- Improved accountability.
- Accurate reporting and analytics for leadership to make informed PPBE decisions.
- Optimization of program spend so agencies can proactively shift funds from underutilized or problem programs to program priorities that produce results aligned with mission goals.
- Improved operations and staff productivity.
- Ability to reduce costs and fund unfunded priorities.