Financial Management Capability Model

Part II

Introduction

Part II of the Financial Management Capability Model provides the detailed knowledge that those using the Model will need to successfully apply its concepts.

More specifically, Part II outlines the general nature of the Financial Management Capability Model and describes the capabilities at each of the five levels. An organization would use the descriptions to assess where it is on the continuum, that is, whether it has achieved a particular capability level. To achieve a given level, an organization must meet all the requirements associated with that level and all those below it. We recognize that an organization at one level could demonstrate certain capabilities associated with a higher one. However, it would not be formally rated at the higher level until it has met all criteria for that level and all lower levels.

For each of the five levels we:

  • present an overview of the capabilities at the level;
  • provide an overview of the key process areas (KPAs) at each level, describing their purpose, outputs and outcomes;
  • depict graphically how each KPA interacts with the others at that level;
  • indicate, in general terms, the risks associated with remaining at that level; and
  • describe what an organization must do to achieve the capabilities at the next level.
Exhibit 7 illustrates the relationship between the key process areas and the Elements of Financial Management.

Level 1 - The Start-Up Level

The Start-up Level describes the financial management characteristics of an organization that has not yet established its key policies and practices or its control framework. At this level, in the absence of established practices, the organization's ability to achieve its business or program objectives depends on the often-isolated efforts and accomplishments of individuals. In these circumstances there is no certainty that such accomplishments would be repeatable or sustainable.

This situation might exist if an organization has experienced dramatic changes in its operations-for example, if it has implemented a new program or policy, amalgamated with another department or relocated its operations. If it has not effectively managed the increased risks associated with the change, the organization could be at the Start-Up Level of financial management capability.

The lack of repeatable, sustainable practices of financial management and control means that any data produced may not be complete, accurate or reliable. Similarly, without an adequate control framework in place, assets may not be adequately protected or resources adequately controlled.

The key challenge the organization faces in progressing to Level 2 is to develop realistic, useful financial and operational business plans and to establish a basic control framework that allows it to monitor and control resources and safeguard and protect assets.

The Start-Up Level, unlike other levels in the Financial Management Capability Model, is not a stable environment in which it is desirable to remain.

Level 2 - The Control Level

At the Control Level (Level 2), the focus is on ensuring that adequate resources are available, assets are safeguarded, data are reliable, and operations are monitored and controlled and conducted with prudence and probity. Organizations at the Control Level are able to meet statutory and regulatory reporting requirements.

Organizations that have instituted the key process areas for this level have established a control framework that provides a stable environment and ensures that control practices are repeatable and sustainable. The control framework includes financial, operational and management controls. When these basic controls are operating as intended, they will help the organization to control or reduce risks and to produce complete and accurate financial and operational data.

With sound financial and operational data, the organization can carry out its basic stewardship responsibilities and meet its reporting obligations. The integrity of the data supports operational planning decisions and monitoring activities. It ensures that sufficient funds have been obtained to meet budget and cash-flow requirements, and it satisfies statutory and operational reporting requirements.

An organization at the Control Level will be able to answer "Yes" to the following key questions:

  • Do we have a control framework to ensure that our assets are safeguarded, our data are accurate and reliable, and our operations are conducted with prudence and probity?
  • Are transactions processed and controlled in accordance with applicable legislative and/or regulatory requirements?
The primary activities that the organization's Finance group performs at the Control Level involve the traditional accounting functions - processing transactions, bookkeeping and general accounting functions. Finance focusses on ensuring that controls over the financial systems are adequate to produce complete, accurate and timely financial data and to provide functional guidance to operational groups as required.

At the Control Level, operational managers play a role in achieving basic financial management capabilities. This involves establishing realistic financial plans based on expected results, and estimating the resources required to achieve those results. At Level 2, the data on which these plans are based are typically historical in nature, drawn from past experience. At this level, operational managers would also track actual progress and resource use against planned results.

At the Control Level, reliable historical data are available. However, they are not generally available as "information". Although ad hoc analysis can be carried out, the effort to collect information may be extensive and time consuming to collect because it may be fragmented, scattered and not easily accessible.

There are 8 key process areas associated with the Control Level. Taken together, they help organizations to:

  • institute financial controls;
  • ensure the integrity of financial and non-financial data;
  • report in accordance with statutory requirements;
  • prepare operational and financial plans and budgets;
  • obtain funds; and
  • monitor and control operations.
The 8 key process areas are described below.

Organization Control Environment

Purpose
The Organization Control Environment is the fundamental building block that underpins and helps an organization reach the appropriate level of financial management capability to achieve its objectives. Its purpose is to provide the supportive climate that will help the organization achieve its control objectives. This includes a shared understanding of the organization's control objectives and a shared commitment to achieving them.
Essential Activities
Essential activities in this KPA include establishing, implementing and communicating the structure, policies and guiding principles of the organization.

Communication is a key activity of this KPA. Senior management must communicate these principles and clearly demonstrate its commitment to living by them. In essence, senior management must set a prime example ("walk the talk").

Outputs and Outcomes
The outputs of such activities would include such things as:
  • mission, mandate and objective statements for the organization;
  • a code of ethics;
  • an organizational structure; and
  • clearly established roles, responsibilities and accountabilities within the organization.
The outcomes to be achieved by instituting this key process area are:
  • a senior management team that is responsible and accountable both for promoting high standards of ethics and integrity and for establishing an organizational culture that emphasizes and demonstrates to all levels of personnel the importance of the control framework;
  • an organizational structure, policies and control systems that provide assurance to the deputy minister/CEO and other senior officials that accountability relationships are clear;
  • employees who understand their role in the control framework and are fully involved in and committed to the process; and
  • resources and authority assigned to managers are commensurate with their delegated responsibilities and the results they are expected to achieve.
The ultimate outcome of this key process area is a climate and an organizational culture that foster financial management, promote the achievement of the organization's objectives and include a set of guiding principles according to which the organization conducts its affairs.

Internal Controls Management

Purpose
The purpose of the Internal Controls Management (ICM) KPA is to establish an internal control framework that will provide management with reasonable assurance that all transactions are completely and accurately recorded on a timely basis; that assets are safeguarded and protected from fraud and losses of all kinds; and that resources are received and used in accordance with applicable laws and regulations.
Essential Activities
The essential activities in this KPA include:
  • establishing, maintaining and communicating internal control policies;
  • developing cost-effective controls - that is, balancing the need for controls against the costs of developing and maintaining them;
  • implementing and monitoring internal control activities and procedures; and
  • correcting any errors that may occur.
Outputs and Outcomes
The output of the Internal Controls Management KPA is a control framework that serves the entire organization, and includes such things as:
  • policies and guidelines on control;
  • control-related activities - system edits, physical safeguards, approvals;
  • reports, for example, exception reports such as receivables past due; and
  • functional advice and support from the Finance Group.
Ultimately, the Internal Controls Management KPA provides a framework that assures senior management that controls inside the organization are operating as intended. More specifically, as the outcome of this KPA, management has confidence that:
  • data are reliable;
  • the organization is in compliance with applicable legislative and regulatory requirements; and
  • assets are safeguarded and protected against losses.

Data Management

Purpose
The purpose of the Data Management KPA is to control and safeguard both financial and non-financial data as assets of the organization to ensure their integrity, reliability and availability. This involves instituting controls and a structure for accessing, processing, storing, purging and manipulating data.
Essential Activities
Essential activities in this KPA include establishing the data management structure of the organization and implementing control procedures to ensure the integrity of its data. This would involve restricting access to data and to the organization's databases; monitoring program changes; and instituting controls over systems that record and store data to ensure that the data accurately reflect the transactions processed.
Outputs and Outcomes
Outputs of the Data Management KPA include a framework for the management of financial and non-financial data, a coding structure for data input, data libraries for the available types of data and the databases in which data are stored.

The immediate outcome of the Data Management KPA is that data elements and the systems used to collect and protect the data and ensure their continued availability within the organization are precisely defined, controlled and understood. The ultimate outcome is that senior management can have confidence that the integrity, reliability and timeliness of the organization's data will provide support for making decisions, controlling operations, and fulfilling their stewardship obligations.

General Accounting

Purpose
At the Control Level, the purpose of the General Accounting KPA is to ensure that the organization maintains proper books that record its financial transactions accurately, completely and promptly. This KPA is designed to ensure that complete accounting information for financial decision making is available when it is needed.
Essential Activities
Essential activities in this KPA include:
  • establishing and communicating accounting policies;
  • establishing procedures and assigning responsibility for processing general accounting transactions (revenues, receivable and receipts, purchases, payables and payments, reconciliations);
  • meeting financial processing and reporting requirements; and
  • providing functional guidance and advice throughout the organization.
Activities would also include implementing general accounting activities, ensuring that all transactions are authorized, and monitoring and controlling general accounting processes.
Outputs and Outcomes
Outputs of the General Accounting KPA include such things as accurate, complete, timely and reliable financial data, books of account, and financial reports.

The immediate outcome of the General Accounting KPA is that all authorized accounting transactions are completely, accurately and promptly recorded. The ultimate outcome is that decision-makers can rely on the financial data produced by the organization to support their decisions.

Stewardship Reporting

Purpose
The purpose of the Stewardship Reporting KPA is to satisfy legislative or statutory reporting requirements and support decision making, by both requiring managers to account for their use of resources, and producing timely and reliable operational and financial reports that do so.
Essential Activities
The essential activities of this KPA include:
  • defining reporting requirements;
  • communicating requirements and deadlines;
  • assigning responsibility for preparing reports;
  • monitoring, reviewing and approving the reports; and
  • producing and distributing the reports.
Outputs and Outcomes
The outputs of the Stewardship Reporting KPA include the organization's financial statements or Public Accounts documents, annual Performance Reports, and any other reports needed to satisfy legislative, regulatory or central agency requirements.

The immediate outcome of the Stewardship Reporting KPA is that senior management can have confidence that the quality of stewardship reports is adequate for decision making purposes. Another outcome is that stewardship reports comply with applicable legislative or statutory reporting requirements.

Planning and Budgeting

Purpose
The purpose of the Planning and Budgeting KPA is to support strategic planning and decision making and to serve accountability by enabling managers to plan for the resources needed to deliver a product or service. In the organization as a whole, this KPA provides a basis for allocating financial resources based on operational plans and objectives.
Essential Activities
The essential activities in this KPA involve establishing operational goals and objectives. This includes:
  • determining the activities, schedules and resources needed to achieve established objectives;
  • developing action plans to meet those objectives; and
  • establishing a realistic budget for the activities and resources.
In an organization that has Level 2 capabilities, these activities typically are based on historical data and past experience. Key activities also include monitoring the organization's progress toward goals and objectives and revising its operational and financial plans and budgets as necessary.
Outputs and Outcomes
The outputs of the Planning and Budgeting KPA include approved operational and financial plans, operating budgets for individual units and for the organization as a whole, and results that reflect operational goals and objectives.

The outcomes of this KPA are that the organization can allocate approved resources according to the needs identified in its financial and operational plans and objectives. In addition, the plans provide a basis for controlling operations and holding managers to account for their use of resources to achieve the organization's objectives. The ultimate outcomes of this KPA are strengthened accountability within the organization, support for strategic decisions, and assurance that the organization is compliant with authorities and that its assets are safeguarded.

Funding

Purpose
The purpose of the Funding KPA is to ensure that the organization has the necessary funds (resources) to carry out its mandate and meet its operational requirements.
Essential Activities
Activities in this key process area include estimating needed funding, preparing and approving requests for funding and monitoring ongoing needs for funding.
Outputs and Outcomes
The immediate output of the Funding KPA is a statement of the funding needed by the organization to meet its requirements.

The immediate outcome of this KPA is that the organization has sufficient resources to meet its operational and program needs. The ultimate outcome is the financial viability of the organization.

Operations Control

Purpose
The purpose of the Operations Control KPA is to enable the organization to ensure that adequate resources are available to achieve its planned results.
Essential Activities
The essential activities in the Operations Control KPA include tracking and monitoring progress and use of resources against operational and financial plans, analyzing variances or departures from planned accomplishments and correcting any problems.
Outputs and Outcomes
The outputs of this KPA include:
  • control of budget and resource commitments;
  • monitoring of resources consumed;
  • tracking of products or schedules;
  • management reports that compare actual progress with planned accomplishments; and
  • analysis of any variances.
The immediate outcome of this KPA is that management is always aware of whether the organization can deliver products or services as planned, and that the resources required to achieve established objectives are available. The ultimate outcome is that planned products or services are delivered on time and within budget.

Financial Management Capabilities at the Control Level (Level 2)

In summary, organizations that have mastered each of the key process areas described above are capable of:
  • establishing and maintaining a framework to monitor and control the use of resources toward the achievement of planned objectives;
  • developing realistic financial plans;
  • controlling financial plans;
  • producing accurate and reliable data; and
  • reporting what has happened.
At this level, departmental reporting includes both financial and non-financial data, but the two types of data are neither linked nor integrated. Management therefore lacks information on, for example, the cost of delivering a given level of service. Since information is not routinely generated at the Control Level, the organization's ability to make cost-effective decisions (such as trade-offs between cost and quality) could be compromised.

At this level, while ad hoc analytical reports may be produced it is generally time-consuming and inefficient to do so because data are compartmentalized, dispersed throughout the organization and may not be maintained in a form that allows it to be combined for analytical purposes. It may take time to collect and manipulate data in order to transform them into useful information.

Risks faced by organizations at the Control Level

Organizations operating at the Control Level typically operate in relatively self-contained or separate (stovepipe) units, with no obvious linkages between financial resources consumed and level of outputs produced. Therefore, there is a risk that management will make decisions without knowing their full financial implications or consequences. While both financial and operational data exist within the organization, they are managed separately. Operational managers plan and track their inputs and outputs in different ways. Furthermore, their ability to plan and track activities can vary widely. Since planning and tracking are not done uniformly across the organization, and because there are only limited links between data on operational results and data on financial costs, operational information may be inconsistent or incomplete.

Challenges for progressing to the Information Level (Level 3)

The primary challenges facing an organization trying to progress to Level 3 include:
  • integrating financial and operational processes across the organization; and
  • establishing a coherent view of financial management across the organization.
Exhibit 8 shows the interactions among the various key process areas at Level 2.

Level 3 - The Information Level

At the Information Level (Level 3), key process areas focus on integrating the organization's financial and non-financial systems, practices and procedures to provide information that can be used to manage resources with prudence and probity and in an efficient and economical manner.

At Level 3, an organization will be capable of both measuring and managing its risks, and can tailor management practices within its various operating units to manage and reduce risk cost-effectively. At Level 3, the organization will have information on the cost of producing a product of a given quality or delivering a service at a given level.

A key aspect of Level 3 is the changing role of Finance. The role begins to move away from performing only the traditional accounting functions to performing as a team player providing valuable support to operational managers. Finance works with operational managers to develop a financial structure that provides them with cost-effective controls and information which meets their day-to-day needs - for example, information on product costs.

At the Information Level, operational managers have a broader understanding of their financial management responsibilities. They also recognize their responsibility to contribute to the organization's financial management capabilities.

Critical to achieving this level of capability is a climate that institutionalizes financial management practices throughout the organization's culture. This would require that senior management explicitly demand and promote effective financial management and demonstrate its value. Such a culture is developed by formalizing financial management policies and practices across the organization and supplementing them with appropriate training - and a system of rewards, recognition and sanctions that reinforces the culture.

In addition to being able to answer "Yes" to the Control Level questions, an organization at the Information Level will be able to answer "Yes" to the question, "Do we have the financial management systems, practices and information that we need to measure and monitor the cost and quality of our outputs and the use of our resources?"

At the Information Level, organizational standards for all processes and activities have been established to allow for measurement and comparison between similar business units across the organization. These standard financial management practices can be tailored to each unit's nature and unique risks.

One of the key processes at the Information Level is to provide consistent and comparable financial and operational (non-financial) information and reports that meet the needs of managers. This information provides a basis for developing performance indicators, cost and quality measures and monitoring performance, to ensure that intended results are being achieved and to demonstrate accountability.

There are 8 key process areas at the Information Level. Taken together, these KPAs help organizations to:

  • establish a climate and culture that foster good management;
  • identify and manage the organization's risks - at both an organizational and an operating unit level - in a systematic, comprehensive and cost-effective manner;
  • establish linkages and alignment between financial and operational (or non-financial) systems;
  • provide managers with the information they need to manage day-to-day operations, support decision making and demonstrate accountability;
  • develop detailed measures of the organization's performance;
  • measure and monitor the cost and quality of the organization's products and services at key stages of the production or delivery process; and
  • manage resources with prudence and probity and due regard to economy and efficiency.
The 8 key process areas are described below.

Financial Management Environment

Purpose
The purpose of the Financial Management Environment KPA is to establish a climate and culture in the organization that fosters good financial management practices by managers and staff throughout the organization.

The organizational climate and culture are key elements in institutionalizing financial management. They also help to ensure that financial management activities are aligned with the organization's goals and objectives.

Essential Activities
The essential activities in the Financial Management Environment KPA include:
  • developing a financial management framework that includes financial management standards, policies, roles and responsibilities, senior management commitment, reward, and recognition, and a monitoring regime;
  • identifying the organization's competency requirements and its existing capabilities, and developing a plan to address any gaps (hire, train, or develop);
  • identifying and addressing individual training/development needs;
  • establishing mechanisms to co-ordinate inter-group requirements or issues; and
  • establishing mechanisms to provide financial management guidance, advice and support.
Outputs and Outcomes
The outputs of the Financial Management Environment KPA include a corporate framework for financial management that sets out established objectives, policies, standards, accountabilities and incentives; identifies existing capabilities, skills and competency requirements, along with plans to address any gaps; includes plans for ensuring co-ordination among different groups in the organization that address inter-group requirements and issues; and provides functional guidance, advice and support to managers and staff in their financial management responsibilities.

In the long run, the outcomes of this KPA include:

  • a supportive climate and culture in the organization that encourage and foster good financial management practices;
  • managers and staff with the necessary knowledge, abilities and skills to discharge their financial management responsibilities; and
  • the necessary guidance, advice and support for managers and staff in carrying out financial management activities.

Risk Management

Purpose
The purpose of the Risk Management KPA is to ensure that risks to the organization's ability to achieve its objectives are understood and managed in a systematic, comprehensive and cost-effective way throughout the organization.
Essential Activities
The essential activities in this KPA include:
  • developing and implementing a risk management philosophy and an awareness of risks at all levels of the organization;
  • developing a risk management framework and guidelines for assessing and managing risks;
  • applying standard systems and processes in analyzing and managing risks; and
  • analyzing the costs and benefits of risk management options.
Outputs and Outcomes
The outputs of this KPA include a framework and guidelines for assessing and managing risks; standard systems and processes for identifying, assessing and managing an acceptable level of risk; and plans for co-ordinating risk management activities.

The outcomes include an understanding by senior management of the organization's financial and operational risks and a strategy to address them; a culture in which risk management is embedded as a "mindset", so that managers and staff are conscious of the need to manage the risks inherent in the production of their products or the delivery of their services; and the management of risks with due consideration of the costs and benefits.

Integrated Financial Management Systems

Purpose
The purpose of the Integrated Financial Management Systems KPA is to establish linkages and alignment between financial and operational (or non-financial) systems. These linkages are necessary to reduce the cost of acquiring data and to promote data consistency. They also reduce the number of systems that need to be accessed to develop information.
Essential Activities
The essential activities in this KPA include:
  • identifying and analyzing the organization's needs for financial management information and processing;
  • preparing and implementing a strategy and plans to integrate financial and operational systems, including communication plans, roles and responsibilities, priorities, resource requirements, project scheduling and budgets;
  • monitoring progress against the integration plan; and
  • applying a standard systems-development/acquisition model in systems-development projects.
Outputs and Outcomes
The outputs of this KPA include efficient, economical and effective financial information systems, and an information management framework that links financial and non-financial information.

The outcome of this KPA is that the organization's financial management information systems are aligned with operational systems and meet the information needs of users.

This key process area supports decision making, provides timely information and improves efficiency and economical use of resources.

At Level 3, both financial and operational managers are responsible for integrating and aligning the various organizational systems and processes.

Management Information and Reporting

Purpose
The purpose of the Management Information and Reporting KPA is to provide managers with the information they need to manage day-to-day operations, support decision-making and demonstrate accountability.

Such information is essential for managers to fulfil their accountability and stewardship obligations, establish the necessary linkages between financial and non-financial information, and understand and demonstrate the organization's performance (results achieved with resources consumed).

Essential Activities
The essential activities in this KPA include:
  • identifying managers' reporting needs and requirements;
  • providing managers with relevant information and reports on a timely basis;
  • designing reports to meet the needs of users and key stakeholders; and
  • monitoring the use of management information and reports for continued relevance.
Outputs and Outcomes
The outputs and outcomes of this KPA include a range of reports that provide the relevant, reliable and timely information managers need to discharge their management responsibilities and accountabilities.

Performance Measurement

Purpose
The purpose of the Performance Measurement KPA is to ensure that the organization has instituted a performance measurement system that will produce information on its results and on the extent to which it has achieved its strategic objectives.

This key process area will establish:

  • reliable and useful information to decision makers;
  • focus, motivation and accountability;
  • the rationale for the organization's activities; and
  • a basis for communicating to external stakeholders and internal employees the outcomes and performance drivers by which the organization will achieve its strategic objectives.
Essential Activities
The essential activities in this KPA include:
  • identifying organizational and program objectives;
  • determining what activities need to be measured;
  • developing performance measures (input/output ratios, productivity measures);
  • establishing performance targets;
  • developing systems to monitor and measure performance; and
  • evaluating the cost effectiveness of the performance measures.
Outputs and Outcomes
The outputs of this KPA include a framework for measuring organizational performance - including meaningful indicators and measures of performance; monitoring processes and a performance reporting regime; and data that provide meaningful information on the organization's performance.

The outcomes include an understanding by all employees of the organizational and program objectives and how day-to-day operations work toward their achievement. Managers are able to use the performance information to monitor activities and results against established objectives, to make informed decisions and to demonstrate their accountability.

Quality Measurement

Purpose
The purpose of the Quality Measurement KPA is to measure and monitor the organization's processes that affect the quality of its products or services.
Essential Activities
The essential activities in this KPA include:
  • establishing standards of service and quality for each process;
  • measuring the quality of products or services at different phases of the production or service delivery processes; and
  • monitoring adherence to established standards of quality and taking corrective action when quality falls below those standards.
Outputs and Outcomes
The immediate output of this KPA is data on quality measurement (amount of waste, scrap or rework; frequency of inaccurate information; number of times quality levels not met) at key stages of a program or service delivery process.

As outcomes flowing from these activities, management and staff understand the organization's quality standards and there are processes to ensure that those standards are met. The information on quality helps managers to make more informed decisions which, in turn, contribute to the quality of the product or service and ultimately affect the achievement of the organization's objectives and the sustainability of its results.

The measurement data collected also provide a building block for making informed trade-offs among such factors as cost, quality and schedule, and for making other management decisions.

Cost Management

Purpose
The purpose of the Cost Management KPA is to ensure that managers understand the costs of producing products or delivering services, and that they use the cost information to manage their programs or deliver services as efficiently and economically as possible.
Essential Activities
The essential activities in this KPA include:
  • developing accurate information on product and service costs;
  • using a cost management system to capture costs throughout the production or delivery process;
  • aligning cost management systems with the organization's financial and operational systems and its financial and management reporting practices;
  • monitoring actual costs against established expected or standard costs, at various stages of production;
  • monitoring the cost management system on a regular basis, ensuring that the cost structure remains relevant and that cost information is produced/obtained in the most efficient and cost-effective way; and
  • using cost information in decision making.
Outputs and Outcomes
The outputs of this KPA include costing systems; information on the cost of the organization's products, services and activities; and cost analysis that can be used to support management's decisions. Ultimately, this KPA allows the organization to make informed choices and decisions. For example, cost information can be used to:
  • control costs of programs/services;
  • support decision making; and
  • set user fees for cost recovery.

Resource Management

Purpose
The purpose of the Resource Management KPA is to ensure that the organization manages its resources with prudence and probity and due regard to economy and efficiency. Resources consist of:
  • assets (physical assets, cash, receivables, investments, inventory);
  • liabilities (debt);
  • expenditures; and
  • revenues.
Essential Activities
The essential activities of this KPA include:
  • establishing goals and strategies for managing resources (revenues, expenditures, liabilities, or assets);
  • establishing performance indicators and performance targets;
  • managing the resources according to the established plan or strategy;
  • monitoring the usage and performance of resources against established performance indicators to ensure that goals and targets are achieved; and
  • monitoring the continuing relevance of the resource management strategy.
Outputs and Outcomes
The outputs of this KPA include strategies, plans, processes and systems for managing the organization's various resources.

The outcome is that managers are able to manage resources with prudence and probity and due regard to economy and efficiency.

Financial Management Capabilities at the Information Level

In summary, organizations at the Information Level are capable of:
  • establishing an organizational culture and climate that support and promote financial management as an integral part of the overall management framework;
  • anticipating and managing risks;
  • integrating financial and operational systems and information;
  • measuring cost, quality and performance of products and services to produce relevant information for management decision making and accountability; and
  • managing resources with prudence and probity and due regard to economy and efficiency.
Exhibit 9 shows the interactions among the various key process areas at Level 3.

Challenges for Progressing to Level 4

Primary challenges facing an organization trying to progress to Level 4 include:
  • developing quantitative information on the relationships or interdependencies among various factors (cost, schedule and delivery), based on past performance measures;
  • using quantitative information (such as baselines) to set reasonable standards or indicators of financial and non-financial performance and to understand the financial implications of decisions; and
  • balancing competing objectives - such as cost, quality and schedule or cost, risk and opportunities.

Level 4 - The Managed Level

At the Managed Level (Level 4), the organization uses the information developed at Level 3 to balance two competing objectives: using its resources economically and efficiently, and producing cost-effective results - for example, goods or services of acceptable quality. The organization understands the financial implications of the choices and trade-offs it makes between these objectives. Such information also allows the organization to better account for the way that it uses the resources entrusted to it.

An organization at the Managed Level can better manage its financial and operational performance because it has - and uses - the "right" information. It has information and analyses on the relative costs of different approaches to achieving its objectives. An organization with Level 4 capabilities uses that information and impact analyses to make informed decisions on cost versus quality and risk versus opportunities, or decisions on levels of service.

An organization with Level 4 financial management capabilities also has mechanisms for measuring the impact of variables such as cost, quality, productivity and degree of success in achieving its stated objectives. This capability flows from a history of having measured and managed organizational performance, which includes, for example:

  • managing the organization's information and knowledge resources as assets, so that information needed to make informed decisions is available (for example, by using simulations, historical trends and manipulating variables to see how they affect results);
  • defining the relationships among variables that affect cost, quality and level of service and understanding how they impact on the organization's desired results;
  • using information to make informed choices among competing objectives like cost, quality and schedule;
  • understanding the financial implications of decisions before making them, and monitoring their outcomes;
  • using quantitative information to control variances (for example, fluctuations or changes) in the organization's production or service delivery processes; and
  • using quantitative information to balance among competing business line objectives (for example, to reduce cost, increase productivity, improve quality, reduce risk, increase opportunities).
An organization at the Managed Level will be able to answer "Yes" to the question, "Do we know what it cost to achieve a given result, and did we follow the most cost-effective approach in achieving it?"

The five key process areas are described below.

Information Management

Purpose
The purpose of the Information Management KPA is to provide support to the organization by managing information and knowledge as assets. This includes providing technical assistance to managers so they can analyze and use the available information.
Essential Activities
The essential activities in this KPA include:
  • designing, implementing and maintaining an information management system;
  • identifying and providing tools to help managers analyze information - for example, tools for detecting patterns in data or tools for statistical analysis; and
  • providing functional guidance on the way information is defined and maintained in the organization and on how it can be used.
Outputs and Outcomes
The outputs of the Information Management KPA include a knowledge library and information tools for managers so that they can analyze and use the available information in decision making, as well as gain more comprehensive insight into the organization's performance. This KPA also establishes an information management group, which ensures that the organization's information and knowledge are well managed and that internal and external users can readily access the information (for example, by using technology). The outcomes of this KPA are that managers have the knowledge required to make sound decisions, and the organization fosters learning and values knowledge as an intellectual asset.

Organization Performance Information

Purpose
The purpose of the Organization Performance Information KPA is to provide management with information on the relationship among the various performance measures such as cost, quality and schedule, and on the impact of these variables on the organization's achievement of its stated objectives. Management uses this information to improve planning and decision making. The quantitative information also provides operational managers with insight into fluctuations in the financial and operational processes so they can manage them efficiently and cost-effectively.
Essential Activities
Essential activities in this KPA include:
  • selecting the core processes to be measured;
  • identifying the key factors or variables that contribute to the performance of the selected processes;
  • determining the correlation between those variables (for example, cost, quality and schedule) and developing quantitative measures of results/outcomes;
  • reviewing and approving quantitative models; and
  • monitoring their continuing relevance.
Outputs and Outcomes
The output of this KPA is information on the relationships among the various components (cost, quality and schedule) of the financial and operational processes and how they affect the organization's performance.

The outcomes of this KPA are that management has the knowledge to make more informed decisions, and the improved performance information it needs to demonstrate what the organization has accomplished with the resources entrusted to it.

Enhanced Decision Support

Purpose
The purpose of the Enhanced Decision Support KPA is to ensure that organizational decisions are based on analysis, documented and tracked, and that their results are monitored.
Essential Activities
The essential activities in this KPA include:
  • determining the information needed for decision making;
  • finding functional advice and support to develop and interpret information, as required;
  • performing and evaluating cost-benefit analyses of various alternatives;
  • considering client needs (for example, timeliness and quality);
  • considering the financial implications of decisions;
  • documenting and approving decisions; and
  • monitoring the results of decisions and measuring their impact.
Another key activity is taking appropriate action (such as modifying plans or assumptions) if a decision appears to be producing unintended results.

At this level, the basis for making decisions (assumptions about risks, costs and expected results) are documented and tracked to determine whether they remain valid. In turn, the ability to link results actually achieved to the rationale for decisions made improves the organization's decision-making process in general. Tracking results also provides a basis for predicting future performance and ensuring that the financial implications of decisions were as expected.

Outputs and Outcomes
The output of the Enhanced Decision Support KPA would include documentation supporting a decision, such as the rationale for the decision, key assumptions and expected results and outcomes. As well, analysis (for example, cost, benefit and risk analysis) of the various options would be included. The outcome of this KPA is that managers can make informed choices or decisions that reflect an understanding of their financial implications.

At the Managed Level, decision-makers have financial and non-financial information available to them to make informed decisions. This information may include analysis of alternatives, with associated costs and benefits and expected results, and the financial impact of both financial and non-financial decisions.

Quantitative Process Management

Purpose
The purpose of the Quantitative Process Management KPA is to enable the organization to use information on past organizational performance (developed in the Organization Performance Information KPA) to measure and monitor fluctuations in the factors that affect the production process (such as cost, quality and schedule). By using statistical techniques such as control charts to measure and analyze variations in production or service delivery, managers know when to take corrective action and when to simply leave the process alone.
Essential Activities
The essential activities in this KPA include:
  • monitoring the program or service-delivery process and assessing whether it is under control (for example, whether fluctuations or variances are normal);
  • identifying any variations in performance;
  • initiating corrective action, if required; and
  • providing input for decision making.
Outputs and Outcomes
The outputs of the Quantitative Process Management KPA would include information such as reports on variances in the quality, cost and schedule of a production process. The outcome of this KPA is that risks and variances in a program or service delivery process are managed cost-effectively and managers know when to take corrective action and when to leave the process alone.

Business Line Management

Purpose
The purpose of the Business Line Management KPA is to determine the optimum balance among competing business objectives (for example, cost, quality and schedule performance) and to streamline the process for providing a service or producing a product.
Essential Activities
Essential activities in this KPA include:
  • clarifying the goals and objectives of business lines and aligning them with organizational objectives;
  • identifying and defining critical factors for successfully achieving objectives;
  • using a balanced set of performance indicators; and
  • integrating performance indicators into the management process and using them to streamline and manage business line processes.
Outputs and Outcomes
The output of this KPA is a balanced set of performance measures that managers understand and use to manage their business lines and to deliver a cost-effective product or service. The outcome is ultimately the management and use of financial resources with due regard to economy, efficiency and effectiveness.

Financial Management Capabilities at the Managed Level

In summary, an organization at the Managed Level is capable of:
  • measuring, managing and controlling the processes that affect it's performance;
  • understanding and measuring the financial implications of decisions before they are made; and
  • monitoring or tracking the results of decisions to determine whether they have produced the expected results, and initiating appropriate corrective action.
Exhibit 10 shows the interactions among the various key process areas at Level 4.

Challenges for Progressing to Level 5

The key challenge for progressing to Level 5 is to strategically focus the organization on continuously improving the way it operates.

Level 5 - The Optimizing Level

An organization at the Optimizing Level (Level 5) uses information from inside and outside the organization to set and achieve strategic targets or objectives for improvement. Achieving these targets enables the organization to increase the value of its services or products to clients or consumers.

Thus, at the Optimizing Level the focus is on continuous improvement. The organization uses what it has learned from past experiences to identify areas for future improvement. This involves:

  • developing prospective information to anticipate both internal and external changes that may affect the organization's performance (instead of reacting to changes) and making the necessary strategic or tactical decisions to manage their effects;
  • measuring the organization's performance against that of others in the same industry and setting strategic targets for improvement;
  • finding best practices and learning from other organizations (benchmarking); and
  • finding ways to minimize costs and maximize revenues, and to improve the quantity and quality of outputs, by introducing new technology or improving existing processes.
The key question that an organization at the Optimizing Level asks itself is, "How can we as an organization improve our performance?"

There are four key process areas at the Optimizing Level. Taken together, these KPAs help the organization to:

  • develop prospective information;
  • set strategic targets for improving its performance;
  • improve the quality of its products or services; and
  • optimize financial management by improving processes and adopting new technology.
These four key process areas are described in greater detail below.

Prospective Information

Purpose
The purpose of the Prospective Information KPA is to generate prospective information for senior management and key stakeholders. This information includes contextual/external factors that could affect the organization's performance or its ability to realize its strategic vision. Using this kind of information to predict possible outcomes, the organization can anticipate them and prepare accordingly and improve the quality of its strategic and tactical decisions.
Essential Activities
The essential activities in this KPA include:
  • identifying and reviewing external environmental factors that could affect the organization's performance in the future;
  • quantifying the effects of those external environmental factors to forecast their impact on future performance;
  • creating and maintaining simulation models; and
  • monitoring the relevance and usefulness of strategic information.
Outputs and Outcomes
The output of the Prospective Information KPA is information that supports strategic improvement. The outcome of this KPA is that the organization is flexible and ready to make the strategic or tactical decisions necessary to manage the effects of changes that may affect it.

Strategic Improvement Targets

Purpose
The purpose of the Strategic Improvement Targets KPA is to define desired long-term outcomes, set ambitious targets and to close the gap between the organization's current position, and where it would like to be (its vision). This involves determining where the organization needs to excel in order to survive and grow in a changing environment.
Essential Activities
The essential activities in this KPA include:
  • establishing and communicating the organization's vision;
  • identifying and developing critical success factors (for example, organizational capabilities);
  • defining acceptable levels of risk; and
  • communicating and aligning strategic objectives and ensuring that day-to-day operations help the organization achieve them.
Outputs
The output of this key process area is a clearly articulated vision of what the organization would like to achieve, together with a strategy for doing so.

Quality Improvement

Purpose
The purpose of the Quality Improvement KPA is to reduce the cost of achieving a given level of quality by refining processes to get maximum value for money. The emphasis is on eliminating anything in the organization's processes that could compromise or reduce the quality of its programs, products or services.

This involves analyzing the factors that have resulted in poor quality in the past and ensuring that these factors will not cause quality problems in the future.

Essential Activities
The essential activities in this KPA include:
  • identifying and prioritizing quality problems that have arisen in the past;
  • analyzing relevant data;
  • developing possible solutions to deal with the most significant causes of quality problems; and
  • taking specific action (for example, changing a process) to eliminate the occurrence of these quality problems in the future.
Activities would also include measuring and evaluating the effects of corrective actions and changes.
Outcome
The outcome of this KPA is a higher level of quality in the organization's services, programs and products and in the process as used to achieve it.

Optimizing Financial Management Processes and Performance of Resources

Purpose
The purpose of the Optimizing Financial Management Processes and Performance of Resources KPA is to continuously look for opportunities to learn new ways and adopt new techniques and new technology in order to:
  • measurably improve the efficiency and effectiveness of the organization's management processes and practices (to be the "best in class"); and
  • optimize the efficient and economical use of limited resources to minimize costs and maximize payback.
Essential Activities
The essential activities in this KPA include:
  • assessing the organization's current practices;
  • developing and implementing a strategic improvement plan;
  • identifying opportunities to improve processes;
  • implementing and changing processes to take advantage of new technologies;
  • benchmarking the organization's performance (for example, the cost of quality) against other organizations; and
  • incorporating best practices and lessons learned into future plans.
Outcome
The outcome of these activities is that the organization's business processes are "best in class" and contribute to the achievement of its strategic targets.

Financial Management Capabilities at the Optimizing Level

In summary, organizations at the Optimizing Level are capable of continuously improving their financial performance by optimizing the use of their resources at the levels of both the operating unit and the organization. Organizations at this capability level continually learn from themselves and others how to better achieve the visionary goals set for the organization by senior management.

Exhibit 11 shows the interaction among the various key process areas at Level 5.