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The Future of the Finance Function –

Experiences from the U.S. public sector


PRESENTATION FOR GOVERNMENT FINANCE FUNCTION CONFERENCE
Sara Slayton O’Rourke, McKinsey & Company
January 2019

CONFIDENTIAL AND PROPRIETARY


Any use of this material without specific permission of McKinsey & Company is strictly prohibited
About McKinsey’s work on the future of finance in the US government

About me About our findings on the future of finance

In 2016 / 2017, we worked with the U.S.


Sara Slayton O’Rourke Department of Treasury, the Office of
Sara_O’Rourke@McKinsey.com Management and Budget, and CFOs /
+1 312 363 7336 financial managers across 25+ agencies

▪ Based in McKinsey’s Washington, DC office We focused on challenges and


opportunities facing financial managers in
▪ Core member of Public Sector Practice and Co-Leader the public sector, then identified trends
of Public Finance, Fiscal Management, and CFO across private and public sector CFO
Service lines functions to drive the next level of change
▪ Serves national / federal, state and local clients on
financial management, fiscal transformation, and
government performance Since then, we have refreshed our
findings through continued agency
▪ Degrees from Harvard and Johns Hopkins in social engagement as well as evolving trends
studies, international finance and economics coming out of the private sector
McKinsey & Company 2
Globally, government finance functions face a number of core challenges

Rising citizen Globally, citizen satisfaction with key state services (e.g., transportation,
expectations schools, healthcare) is less than half that of non-state providers

As of 2017, the world public sector deficit was almost $4 trillion a year –
Shrinking and/or highly
with uncertainty given impending recessions, About McKinsey’s work on
variable budgets the future of finance in the US government

Pressure to change Need to evolve finance talent to bring on new skills, allow for more flexible
the talent equation arrangements, and blend finance and mission expertise

Legacy technology Governments are still operating with myriad systems that are decades old,
and infrastructure with processes still heavily paper based

Limited historical role CFOs historically have played the role of transaction manager, without
for finance function expectation that they have a role in setting strategic priorities

1 Pew Research Center 2015; 2 Wall Street Journal, "US Government Struggles to Attract Young Savvy Staff Members," June 10 2014
SOURCE: GAO 2017, Federal IT dashboard 2017, Government productivity: Unlocking the $3.5 trillion opportunity, McKinsey; 2017 McKinsey Survey of Federal CFOs and DCFOs McKinsey & Company 3
As finance leaders address these challenges, they can shift from basic transaction management to
true value management
Does this represent your own aspiration? If so, where is your organization on the journey?

Value
Planning management
Business and analysis
Transaction control 04
management 03
02 ▪ Integral part of
Stage 01 ▪ Sound financial analysis leadership team to
▪ Processes and risk for financial and support value creation
▪ Reporting and minimization operating decisions
compliance functions
▪ Identifies opportunities
and provides
Focus information for
operating and strategic
decisions
▪ Transactional financial ▪ Management reporting ▪ Automation ▪ Superior decision
management support
▪ Shared services ▪ Digital enablement
Key ▪ Compliance (e.g., end-to-end ▪ Advanced analytics
capabilities ▪ Optimization of key
electronic processes)
processes ▪ Continuous innovation
▪ Cost reduction
▪ Routine analytics
▪ Enterprise risk mgmt.

McKinsey & Company 4


Most finance officers express a desire to shift more toward value management but are stuck spending
time on transaction management
U.S. federal CFOs spend the bulk of their time doing ▪ U.S. federal
transactional work rather than other value add activities CFOs/DCFOs spend 6%
of their time on strategic
Other 4
5 leadership but believe it
Org Transformation 6 constitutes 24% of their
Strat Leadership 32
14 role’s value
Reporting Other includes:
talent, financial ▪ 32% of U.S. federal
Specialty finance 16 system CFO/DCFOs’ time is
16
acquisition, tech spent on traditional
trends, system
finance, but they believe it
Budgeting 23 implementation,
24 analytics, only constitutes 9% of
performance their role’s value
4 management
Traditional Finance 5
(e.g., accounting, 32 10
controls, etc.)
9
Current time Most value add
spent on each activities according
activity by CFOs to CFOs
McKinsey & Company 5
To move toward value management, effective CFOs are adopting new technologies, and taking on a
new role in shaping strategy and performance
Implementing Robotic Process Automation and process digitization
Automating major finance activities
1 to enable new insight and efficiency
across core financial management processes to reduce time spent
on manual tasks and enable strategic analysis

Introducing new digital tools like SaaS tools and distributed ledger
Using new digital tools to modernize
2 processes and transactions
technology, and taking a citizen perspective to modernize the
operating model

Employing data and analytics Using big data, machine learning, artificial intelligence to drive new
3 to enhance performance insights to reduce cost and enable performance

Evolving the finance talent Attracting and developing new types of talent to succeed in the
4 equation for a digital world digital age

Transforming the operating Partnering with the business and using insights to drive strategy to
5 model to be a strategic leader position the finance function as a strategic leader

McKinsey & Company 6


1 Several technologies allow for automation at scale

Robotic process Smart Natural language Cognitive


automation workflows generation agents
Automate routine tasks Integrate tasks Synthesize textual Build a virtual workforce
through existing user performed by groups of content by combining capable of supporting
interfaces (e.g., data humans and machines data and analytic output employees and
extraction and cleaning) (e.g., month end with contextualized customers (e.g.,
processes) narratives (e.g., data to employee service
story translation) centers)

McKinsey & Company 7


AUTOMATION AND ROBOTICS

1 Several major financial processes are over 50% automatable PRELIMINARY DRAFT

Potential for automation using currently demonstrated technologies (%)

Top processes for automation Fully Automatable Highly Automatable Somewhat Automatable Difficult to Automate

Procure to Pay 42 40 6 12

Bill to Collect 36 52 4 8

Book to Reimburse 33 16 26 25

Request to Procure 27 22 25 26

Acquire to Dispose 22 27 26 25

Apply to Perform 15 20 15 50

Budget Formulation 10 20 20 50

Agree to Reimburse 10 10 10 70

Hire to Retire 10 10 10 70

Apply to Repay 10 10 10 70

Record to Report 9 5 32 54

1 Based on Common Core definitions ; 2 % automatable based on private-sector benchmarks; “fully” automatable defined as 75%+; “highly” defined as 60%+; “automatable” defined as 40%+
SOURCE: Automation Metrics 2016 McKinsey & Company 8
NEW DIGITAL BUSINESS MODEL

2 Finance organizations are employing new digital tools to modernize the operating model PRELIMINARY DRAFT

SaaS-based Enterprise Performance A focus on citizen transactions in Distributed ledger technology for
Management Tools digital innovation transactions and ownership
User-friendly budget planning, modeling, Focus on citizens through mobile / digital Ownership &
Smart Intra-govt
consolidation, and monitoring payments, common authentication transfer
contracts transactions
platforms, and benefits administration of assets
▪ Real-time access and personalized use /
visual for each person U.S. federal agencies have
Piloting a common
▪ Zero-based budgeting and linking invested $8.4M to pilot
authentication platform, where
funding levels to program results blockchain for
citizens can go to review status ▪ Digital asset management
▪ Customized per agency with “hyper- of all govt transactions and ▪ Anti-forgery and counterfeiting
block” that rolls up into an organization- services capabilities for digital
wide standard format documentation
▪ Real-time planning, reporting, tracking, Pursuing a “fast payments” Delaware and Illinois have
scenario modeling initiative to keep up with the launched initiatives testing out
likes of Venmo, Zelle, etc. blockchain in land records and
digital commerce
Uses behavioral tactics to
nudge unemployment insurance
West Virginia has piloted the
claimants toward honest
technology for mobile voting
responses
McKinsey & Company 9
3 Data and advanced analytics can be employed through the organization to improve performance,
drive down cost, and lead to new financial insights
Potential use cases
Identification of Spend analytics
Project selection Capital allocation Performance Digital interactive
Scenario planning fraud, waste and on vendor
and prioritization optimization drivers exploration dashboards
abuse management

Tackling fraud, waste and abuse (FWA) in Using data visualization to drive performance Using analytics for risk-based grant application
Veteran’s Affairs Department within Dept. of Interior review in the Department of Justice

▪ FWA within VA has been major focus of media ▪ Dept struggled with how to communicate the ▪ Office of Justice Programs distributes $2B in
attention impact of their services public safety grants to 2000+ grantees
▪ Secretary tapped CFO to create Fraud, Waste ▪ Now, they use real time, automated visual ▪ Used to be fully manual process
and Abuse Analytics Center of Excellence maps, charts and graphs to show service ▪ Now use disparate data systems together, and
▪ Pulled together analytics talent, mission- delivery and financial info automated its review processes to increase the
focused employees, and payments / program ▪ Has led to: accuracy and consistency
– Improvement in grants impact monitoring
data to identify top cases of potential FWA,
– Resolution of accounts payable issue and ▪ Grant reviews can now be performed quarterly
e.g., rather than annually, and take seconds versus
identification of missing funds
– Providers charging for services not 30 minutes to load grantee info
delivered, or overcharging for services
– Identify or eligibility fraud to receive benefits
McKinsey & Company 10
3 There are 5 major ingredients for successfully employing analytics at scale

A shared vision and culture that fosters a commitment to collaboration, analytics,


and improving outcomes and efficiency

Access to broad Analytic tools and Domain Ability to operation- Strong executive
sets of quality data skillsets expertise alize insights sponsorship

▪ Access to internal, ▪ Access to data/analytics ▪ Breadth of in-house ▪ Analytics-centered ▪ Alignment at the very
external data that is tools with sufficient subject-matter experts solutions teams and top that analytics are a
integrated, computing resources / (SME) to engage in processes that provide priority, budget
standardized, and environment knowledge sharing continuous, holistic allocated accordingly
structured to enable ▪ Integrated cross- ▪ SMEs that are coverage of leakage ▪ Clearly defined
automation functional team of data understand the areas ownership of payment
▪ Privacy and legal scientists, engineers, business and analytics ▪ Commitment by all integrity outcomes with
framework for access product owners, and ▪ Structures to support parties to execute appropriate
and use of data technologists skill development and remediation actions reporting/escalation
▪ Data scientists and maintenance through system & path
engineers that cover a process changes, in
broad variety of order to adapt to new
analytical techniques FWA threats
McKinsey & Company 11
4 When developing talent, the CFO should consider how its finance workforce of the future will need
to be retooled to embrace digital

Resources Skills Operating model


From homogeneous to diverse From “hands” to “brain” From structured to agile
▪ Wider range of experience and  Finance Data Engineering teams ▪ Agile pool of Finance professionals
background established with advanced Analytics, ▪ Centers of Excellence bundling deep
Collaboration, Digitization skills expertise
▪ More diversity of geography with
local Finance Value Leaders  “Problem Solvers” with both finance ▪ Core shared service center for all
embedded and deep business knowledge highly transactional processes
▪ New roles required to link advanced  Investments in activities core for the ▪ Finance value leaders
analytics with true insights for the future of Finance
business Graph of time demanded from various skills
▪ Higher focus on flexibility to attract
32 28
and retain talents 22
7 -4
-12
▪ Increasing importance of temporary -10 -11
staff to access specific skills Social, creative, problem solving and
coordination skills are top needs
SOURCE: McKinsey, Expert interviews, McKinsey Global Institute, press search McKinsey & Company 12
5 Financial managers can move into more of a leadership role by bringing new insights to major
strategic / operating model challenges and major transformation efforts

Regulatory agency CFO drives change in operating model to evolve the organization
▪ A regulatory agency was facing major tumult in their industry and it was threatening their overall
business model
▪ The CFO brought together cost and revenue data in a new way to show the investment and impact of
each new entity regulated, and what impacted those factors
▪ As a result, the agency is re-evaluating its operating model to evolve to face industry needs

DHS and DOT CFOs provide insights to offer steady change leadership in time of uncertainty
With recent uncertainty in budgets and a White House push to drive major reorganization from OMB,
many CFOs in the U.S government brought stability and clarity

 Department of Homeland Security finance function formulated a plan to drive affordable changes to
long-seated problems, allowing a focus on the long-term while meeting short term targets

 Department of Transportation finance team sized and scored openly sourced creative ideas for
change, bringing clear prioritization to strategic plan

SOURCE: McKinsey, Expert interviews, McKinsey Global Institute, press search McKinsey & Company 13
In groups of 3-4, take 5-10 minutes to answer the following questions – we will then discuss and note
common themes

What are your Which of these What major What will you or
priorities for specific initiatives actions can you or your organization
innovation within do you believe will your team take to need to
the finance have the most enable the successfully
function? What impact in helping adoption of some implement relevant
issues are you you innovate or high impact initiatives?
finding hard to address major initiatives?
resolve? issues within the
finance function?
McKinsey & Company 14

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