Adaptive Public Financial Management: a new approach for government financial systems

In partnership with independent, global affairs think tank ODI Global, we have co-authored a new working paper, "Better software options for public financial management: Some ideas on where to start." In this post we distill the core arguments of that research, exploring how we can move away from rigid, legacy systems toward a digital infrastructure that is actually responsive to the uncertainties of the 21st century.

In a world characterised by increasing instability, setting up governments to be more responsive to change requires a more flexible and adaptable digital infrastructure for financial management.

However, as in many areas, current approaches to making software choices for public financial management (PFM) make it difficult to meet the needs of today’s users, let alone tomorrow’s users, including the ability to sustain and continually improve systems, and the optionality to adapt and extend them.

Shifting from the current approach requires conceptual shifts in thinking about the IT architecture of PFM as well as shifts in funding practices. For example, governments can recognise how a broader range of commercial, in-house, and open-source options can fit together, instead of binary decisions between buying commercial solutions or building them. 

There are emerging trends, both within PFM itself as well as broader digital transformation and market trends, that can support this change in approach. There are important roles for government leaders, international organisations, and other funders (such as philanthropic foundations) in supporting this shift towards making better software choices for public financial management.

The focus of the paper is on public finance, but many of the ideas within it can be applied more broadly, to any space where the shape of the software market doesn’t meet either the constraints or the adaptations of what’s needed. Much of the thinking was developed before the recent explosion in AI capabilities, but its lessons apply more rather than less as AI further illustrates the need for adaptability in our software stacks.

The pressure on governments to manage funds more efficiently and transparently is ever present and ever changing, but the current environment of increasing threats and instability amidst limited fiscal space is placing an even greater onus on public finance systems to be more flexible and responsive to change.

Technology plays an important role in how governments manage public finances. There are a broad range of capabilities governments need to ensure they are continuously improving their digital infrastructure for public financial management. Amongst these, the capability to make good software choices, based on principles that recognise both current and future needs, is an important consideration.

Within PFM, these choices are often framed in terms of buying versus building software, and centralised versus decentralised architectures and systems. Technical, commercial, and funding arrangements often drive the framing of these choices in this manner. However, emerging trends are exposing these choices as false dichotomies, and it is increasingly possible to think about the architecture for financial management technologies as encompassing a range of commercial, custom-built, and open-source options.

The paper lays out a set of emerging trends that any leader in this space should track, and the conceptual shifts that will enable them to capitalise on those trends.

There are important roles for both senior government leaders, international organisations, and funders such as foundations, in making and driving these shifts in thinking and practice. Government leaders need to create the space for more innovation, and funders need to adapt their funding models to focus more explicitly on outcomes rather than functional specifications.

Finally, there are also further questions for research including:

• What is the state of the current market when mapped against these shifts in IT architecture and other characteristics?

• What existing software and/or standards could have greater impact if more broadly recognised and supported?

• How might governments and funders more actively use their buying power and/or market influence to shape the markets they want?

• Beyond technical assistance, how do we improve the supply of skills alongside that of software?

Our full working paper with ODI includes detailed case studies, an analysis of the current market gaps, and a roadmap for international organisations and philanthropic funders to support this transition.

If we want governments to be resilient in the face of the next global crisis, we must change how they choose, build, and fund their financial operation.