5 Obstacles to Better Public Sector Decision Making: Lack of Strategic Financial Management

"Strategy is about making choices, trade-offs; it's about deliberately choosing to be different.".

- Michael Porter, Famous author of many books on business strategy and economics. Best known for his Five Forces.

 Introduction

Strategic planning helps organizations articulate the framework for making informed, and preferably data-based, decisions. When done effectively, it provides a reference and guiding framework for making better decisions, faster, and with less chance of missteps. Overall, the strategic planning processes is designed to help organizations:

• Articulate their goals, directions, and priorities,
• Define the actions and initiatives necessary to achieve success against its goals
• Align resources to their priorities to enable the plan to be executed.

Given this, it is important to understand how various roles – especially finance and accounting – can serve as an enabler or inhibitor to the execution of a strategic plan. In the public sector especially, with long planning cycles, colors of money, and well-established programs, finance may often – by dint of their role in doling out funds – dictate the strategy. 

Finance as an Arbiter of Strategy

 When demand for resources outstrips supply as is often the case in government, finance plays the role of hard-liner constraint. In these cases, it serves as the limiting factor in the execution of the strategic plan. While constraints often help organizations sharpen the pencil with respect to their priorities, they can also become the driving force for scope reductions, limited value realization and the overall success of initiatives. Who maintains authority to control spending often has an outsized role in ultimately deciding which elements of the strategic plan get executed, often becoming the arbiters of the strategy itself.

Naturally, constraints seem to impose a limit on an organization’s ability to realize its strategic goals and intent. It requires dealing with two vastly different questions.

• Question 1: How do we align the money we have to initiatives and projects that enable us to realize our strategy and achieve our goals?”  
• Question 2: How do we ensure we stay within the constraints and limitations of our budget and accounting framework regarding what we can and cannot do?

To resolve the contradictions in these questions, many organizations’ approaches are to apply the peanut butter spread allocation strategy. In this way, finance professionals fund a little of everything to either avoid hard trade-off calls or because they are not enabled to make the calls.

The result is a dilution of organizational effectiveness due to the complexity of too many diverse objectives of the initiatives being pursued at suboptimal funding levels. Executing the strategy takes a second stage to simply spend. While this approach does not disrupt the apple cart, it does little to ensure the strategy is being realized.

Instead, finance must play an important role as partners to planners and leadership to ensure that the strategy is funded and the mission is met. Unfortunately, this idea of finance as an enabler is something infrequently encountered in the public sector. 

The outcome is more of the same, an approach which makes organizations complacent. Being stuck in a comfortable state of mind; if we keep doing what we are doing, let's let people believe we will keep getting what we are getting. This may be true if the context around us does not change, but the world is changing rapidly, requiring constant revisions to strategy and execution.  

The sunk cost fallacy

One of the critical outcomes of strategic planning is to keep a central idea or vision for an organization alive while evolving it to realize that vision in rapidly changing conditions and contexts. Awareness of the sunk cost fallacy does not keep us, however, from being a prisoner of it in a great many cases. In the extreme, the legacy spending patterns and capital structure can handcuff an organization to climb far too high on the diminishing returns curve, missing the critical time when a pivot to a new curve was essential to long term success and achieving its goals.

This occurs when organizations continue to invest resources into a project because they have already invested so many resources – especially in the public sector – which continues to fund projects well beyond their useful life due to inertia or simply for political and not strategic reasons, regardless of the result.

Many times, it may be clear the project or initiative is failing to achieve results or may no longer be relevant given changing circumstances. The goal becomes recouping the return on investment or saving political face rather than making the tough trade-off decisions to stop the project and pivot spending onto current and future needs. If finance was empowered to provide alternative ways to spend the money to meet the mission, leaders and Congress may be more willing to pull the plug on some projects and fund new ones instead. 

This failure to adapt to changing circumstances when an organization is already deeply financially committed creates a blind allegiance to a project which is no longer viable. This behavior is at the core of the concept in the book “The Innovator’s Dilemma” by Clayton Christensen.

His basic premise is that organizations can be resistant to change and innovation as they focus on doing better at what they already do, rather than pursuing new innovations that may put them at risk and threaten their own success as defined by their current operations. The irony is that when those new directions and innovations are made real by competitors, they often spell the end of the entrenched incumbent who was resistant to the change. In the case of the DoD, those competitors are our near peer adversaries seeking global influence at our cost. Yes, it is indeed a dilemma.

So how do we remedy these situations in our financial planning and management processes? One key component is to empower finance to be true partners in the allocation of resources and the execution of spend plans. Enabling these individuals to plan for serious, changing constraints requires a shift in mindset and increased diligence to achieve the desired results.

Developing a Mission Aligned Fiscal Strategy

First, Prioritization is critical to success. Without agreed upon priorities rooted in a strategic vision, articulated into a decision framework, and informed by data (often in the form of project requirements, proposals and strategic fit assessments), organizations will find it very difficult to resist the temptation to have each initiative look as good as the next and avoid the sunk cost fallacy, thus limiting their ability to pivot and reallocate money to emerging and future needs. Gaining enterprise agreement on this framework allows financial professionals to make more informed tradeoff decisions as they fund (or don’t fund) the strategic plan. 

Second, the rigor of prioritization can allow organizations to look at initiatives in a separate way, and prioritize not only what, but how projects and initiatives will be funded. Scarce resources in the organization's control can be put against the most compelling strategic initiatives, while alternate means and sources of funding can be sought for lower, but still important projects. As Michael Porter said, "The essence of strategy is choosing what not to do." Reallocation is a critical part of any strategic plan that requires a pivot to meet a need to stay current with evolving technologies and changing strategic landscapes.

Third, within the sources of funding available, resource optimization becomes critical. Many times, organizations have an ‘over the wall’ process where priorities and desired directions are outlined and thrown ‘over the wall’ for the fiscal management team to fund.  Without intricately linking the financial managers with the strategic decision makers along the planning process, tighter iterations and better insights into the need for reallocation to alternative funding strategies can become limited or altogether missed. 

Finally, continuous scenario planning must be utilized to monitor and adjust to the evolving realities of a plan’s execution. This ensures the plan remains viable within the budget constraints and can provide an ‘early detection system’ for when money and resources are misaligned or underutilized and become available for difficult to fund or unfunded initiatives. As we noted at the outset, strategy is about making decisions and trade-offs and choosing to be different. 

Strategy evolution and realization is an ongoing concern. Far from the paper pushing, annual lock and load process of yesteryear, strategic decision makers, analysts and financial planners must integrate their questions, concerns, and priorities into a framework for continuous iterative and integrated planning.

By designing the planning process to support ongoing trade-offs, monitoring and adapting by reallocation decisions is no longer a pipe dream wish for the future, but an essential and critical step to the success and capability of top performing organizations. By using the planning process to set the direction, inventorying the strategic drivers to create a framework for prioritization and decision making, and collecting data to support how initiatives, programs and projects fit within the strategic landscape, an essential foundation for enabling financial optimization and strategy realization can be achieved. 

Read the 5 Obstacles to Better Public-Sector Decision-Making Series

• Too Much Data, Not Enough Insight
• Organizational Disjointedness
• A Culture of Low Risk
• Excessive Complexity

Related Links

https://www.mosaic.tech/post/strategic-finance

https://www.grammarly.com/blog/sunk-cost-fallacy/

http://www.asymco.com/2013/08/26/the-innovators-curse/

https://www.wired.com/insights/2014/12/understanding-the-innovators-dilemma/

https://www.accountingformanagement.org/theory-of-constraints/

https://www.bookkeepers.org.uk/out/?dlid=24909