Originally Broadcast Saturday, May 12, 2007

Washington, D.C.

Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business. The Business of Government Hour is produced by The IBM Center for The Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness.

You can find out more about the Center by visiting us on the web at businessofgovernment.org.

And now, The Business of Government Hour.

Mr. Morales: Good Morning. I'm Albert Morales, your host, and managing partner of the IBM Center for the Business of Government.

Today, the U.S. Department of Labor is one of only two federal agencies to have Green ratings across the board on the President's Management Agenda. Labor can also boast to be the first of all federal agencies to achieve such an accomplishment. Its diligent efforts to instill the importance of sound financial management and internal controls throughout the organization have transformed Labor into a financial management leader. This success has not gone unrecognized, as evidenced by its tenth consecutive clean audit opinion this year.

With us this morning to discuss such an achievement is our special guest, Sam Mok, Chief Financial Officer at the U.S. Department of Labor.

Good morning, Sam.

Mr. Mok: Good Morning.

Mr. Morales: And joining us in our conversation, also from IBM, is Steve Watson, partner in IBM's financial management practice.

Good morning, Steve.

Mr. Watson: Good morning, Al, and good morning, Sam.

Thanks for joining us this morning.

Mr. Mok: Thank you.

Mr. Morales: Sam, perhaps you could share with us a sense of the history and mission of the U.S. Department of Labor. When was it created, and what is its mission today?

Mr. Mok: Well, the Organic Act that established the Department of Labor was passed in 1913. In the words of the Organic Act, "the Department's purpose is to foster, promote, and develop the welfare of the working people, and to improve the working conditions and to enhance the opportunities for profitable employment."

Labor Department is not only about labor. It's really an economic engine, because we provide job training. We provide employment security. We try to effect a safe workplace, and we also try to effect a positive workplace, and also prepare the American workforce for the 21st Century.

We promote and foster the welfare of the jobseekers, the wage earners, the retirees of the United States, by improving their working conditions, advancing their opportunities for profitable employment, and protecting then certain groups of retirement benefits, and helping employers find workers, strengthening free collective bargaining, and tracking changes in employment prices and other national economic measures, through the Bureau of Labor Statistics.

And in carrying out this mission, the Department enforces a variety of federal labor laws that include a guarantee of workers' right to safe and healthy working conditions, a minimum hourly wage and overtime pay, freedom from employment discrimination, and unemployment insurance and other income support.

We also administer almost over 180 federal laws. These mandates and regulations that implement them cover the workplace activities of about 10 million employers and 125 million workers, and we also administer numerous job training programs, which I talked about earlier, including something that most of you are familiar with, the Job Corps. And then our Bureau of Labor Statistics, which I talked about earlier, calculates important figures such as the Consumer Price Index.

So we are not only a service providing organization, we are also a benefit delivery organization. At the same time, we also have an enforcement arm that inspects the workplace conditions and enforces wage laws. So we are a very complex organization.

Mr. Watson: Sam, that's obviously a very, very broad mission set. How is the Department organized, and can you give us a sense of scale in terms of the size of the budget, the number of employees, and the geographic footprint of the organization?

Mr. Mok: Of course. The Department of Labor accomplishes its mission through 19 component agencies, or supporting agencies and offices. And these agencies and offices administer various statutes and programs which the Department is charged with the responsibility. We carry out these programs through a network of regional offices and smaller field and district and area offices, as well as through grantees and contractors.

The largest program agencies are headed by an Assistant Secretary or a Commissioner or a Director. And these agencies, I will give you some examples: ETA - Employment Training Administration; ESA - Employment Standards Administration; everybody's heard of OSHA - Occupational Safety and Health Administration; Employee Benefits Security Administration; the Pension Benefit Guaranty Corporation, otherwise known as PBGC. And the one that has most impact on economic statistics and in some way affects the stock market with its reports is the Bureau of Labor Statistics.

The Department of Labor requested a budget of about $50 billion, and about 17,000 FTE for FY 2008. 80 percent of our budget is for mandatory programs. The fiscal year 2008 budget for the Department of Labor is basically focused on securing our workers' futures and supporting three key priorities:

First, protect the workers' safety and health; second, protect the workers' pay and benefits and pension; third, increase the competitiveness of the American workforce.

As you can see, our mission is very broad. The program we administer is very complex, and we affect every American in many different ways.

Mr. Watson: Sam, now that you've provided us with a sense of the larger organization, can you tell us more about the office of the Chief Financial Officer? What are your specific responsibilities and duties? How is your office organized? What's the staff size and your budget size? And I guess most importantly, how does your office support the mission of this Department?

Mr. Mok: The Office of the Chief Financial Officer, which we affectionately call OCFO, is a product of the CFO Act of 1990. In accordance with the CFO Act, my office is charged with the responsibility of developing comprehensive accounting and financial management policies, and assures that all of the Departmental financial functions conform to the applicable standards.

We provide leadership and coordination to the Department's trust and benefit funds and other financial processes. We also monitor the financial execution of the budget in relation to the actual expenditure. Part of our very important responsibility is to enhance the knowledge and skills of the Departmental staff working on the financial management operations. We also manage a comprehensive training program for the accounting and financial support staff. The Office of Chief Financial Officer requested for fiscal year 2008 a $5.6 million budget; plus, it also received funding through the Department's Working Capital Fund and other sources. We have an authorized FTE of about approximately 100, so we are not a very big organization.

The CFO's primary focus in the last five years is to support the program agencies to achieve their goals by providing information that is relevant and useful in their decision-making. OMB's priorities are more global in nature in addressing the integrity of the overall financial management, including supporting various federal agency achievements and goals. We at Labor Department, the OCFO, take that down to a working level, and making sure that my peers and my counterparts and their staff receive proper guidance, support, and also help in whatever way we can to make sure that the Department of Labor has the highest financial fiscal standards and best practices of our federal government.

Mr. Watson: Sam, you've outlined a broad range of responsibilities and duties for your office. What in your estimation are the top three challenges that you face in your position, and how do you go about addressing those challenges?

Mr. Mok: Well, that is one of my favorite subjects, again. Thanks for asking that very important question. The biggest challenge -- this is by the way my second time being a CFO. In the '80s, I was CFO for five years-plus at U.S. Department of Treasury, and here I am at Labor for another five and half years.

Having been a CFO twice, this is how I see the challenges facing the CFO at U.S. Department of Labor, and to a large extent many federal Cabinet-level agency CFOs. The first one is what I call a proliferation of CXOs. Now everybody is a chief. You have the CFO; you have the Chief Information Officer. You have the Chief Human Capital Officer. You have the Chief Acquisition Officer. And who knows, next you have Chief Procurement Officer.

So what happens is everybody is a chief. I'm not really sure all chiefs are created or should be created equal. And one of the big issues that needs to be harmonized over time is financial systems and the ownership. For example, CFOs under the CFO Act have the responsibility of financial systems, and therefore, all its attendant responsibilities.

But on the other hand, the Klinger-Cohen Act gives the CIO ultimate responsibility on system architecture, so forth and so on. And when one set of requirements does not mesh with the other, it requires a lot of coordination, negotiation, and compromises. Sometimes it works. Sometimes it doesn't. And then at the same time, the Chief Human Capital Officer a lot of time has similar if not overlapping responsibilities as prescribed to the CFO under the CFO Act, such as training, such as staffing, such as job requirements. So when you have all these chiefs and all these acts that create these positions that still has room for harmonization, what happens is it sometimes creates a lot of organizational tension; organizational issues that need to be resolved.

The way I see it is, if you've been to a circus, you see what I call the motorcycles in a steel ball. You have this huge empty steel ball that you have one motorcyclist go in and starts riding, and they'll introduce another motorcyclist, then introduce a third one. So at the end, you have many, many motorcyclists roaring at high speed inside the big ball, but because of fine coordination and synchronization, they don't hit each other.

Now in many ways, I think that is the vision of those who created all these positions, that they all should move along smoothly and create a spectacular show. But in a re-organization, sometimes that doesn't happen -- because of personalities, because of chemistry, because of organizational needs. So I think there is a lot of room for harmonization, and I think if we don't really focus on that, sometime in the future, there may be some fiery crashes because of these motorcycles spinning around. So that's the first challenge; the proliferation of CXOs.

The second one, I would say, is keeping financial management issues on the radar screen of the senior managers in any Cabinet-level agency. If you work very closely with a Cabinet Secretary and the sub-Cabinet officers, you will see that most of the days, not by their creation, fighting fires, so financial management gets lost in the translation, or gets squeezed out on the radar screen.

The CFO's biggest responsibility is making sure that financial management, sound internal control processes are firmly fixed on the radar screen of these folks so that they understand the consequence of not paying attention. They want to do this because they think it's good for them, it's good for the agency; it's good practice, not because they are required to. The second challenge; keeping financial management issues firmly in the radar screen of those top decision-makers.

And last but not least is what I call the Balloon paradigm. Somebody wanted to see the countryside, got into hot air balloon, floated around; had a good time, suddenly got hit by unexpected rainstorm. So when the storm died, this fellow found out that he was totally lost; no clue where he ended up. Then he saw a man walking on the ground below, so he lowers his balloon and says, "Sir, where am I? I am lost." So this fellow looked up for a moment, gazed at him and said, "Sir, you are about 300 feet in the air." So the guy in the balloon said, "My God, you must work for Labor Department CFO's office."

Well, this is a fungible joke; you can change anything you want. So the fellow on the ground said, "My God, how did you know?" The fellow in the balloon said, "Because the information you gave me is technically correct but totally useless."

Frequently, people in the financial management practices are guilty of that; providing technically correct information, but totally useless to the decisionmaker. I think the CFOs in the federal government had never gained the influence or the role in management as private sector CFOs. They failed to deliver a product that top, top managers find useful or compelled to say "Where is it? I need it." So those are the three challenges. That last one really has to do with systems and a product delivery.

Mr. Morales: Sam, that's a great metaphor. You paint a very vivid picture. You've had a fascinating career, both in the private sector and in the public sector, and you describe some of your activities, not only at Labor, but at the Department of Treasury. Could you describe for our listeners your career path? How did you get started in public service?

Mr. Mok: Most of you cannot see me because you are hearing me through the radio, but I am a follically, chronologically, and vertically challenged American. In everyday speak, I am a short, bald, old immigrant.

I was born in Shanghai, raised in Hong Kong, came to this country when I was a very young man, attended college in New York City, and then served five years in the military as an officer during the Vietnam conflict. And then I joined Time-Life and became the director of accounting for the Pope Publishing Group. And then I went to U.S. News and World Report and became their treasurer. And then I went into Foreign Service, and then I left and I went to the Treasury Department, became the first Comptroller of Treasury, and then later, CFO.

So if you look at my public sector service, I have been at Defense Department in the Uniformed Services. I've been in Foreign Service at State Department. I also have been a career CS at Treasury Department, and now I am a political appointee at Labor Department.

So I began my active public career -- in some way you can say because of the Vietnam conflict, by taking ROTC and got a 2nd Lieutenant commission after I graduated from college. But my civilian side of public service started actually with State Department. So I was commissioned as a Foreign Service Officer because the fact that I speak and write fluent Chinese, I become a Budget Officer. That's a joke.

So what happened is that got me into financial management of federal government, and had the pleasure of working with some very, very smart people, learned a lot of good stuff, and also brought a lot of private sector experience into my Treasury job. And I was permitted to do that by my superiors at Treasury who had very progressive outlook on life, so finally I was given a chance to basically experiment with different things over a period of time, and eventually, I think Labor Department gained a lot of benefit from my past experience.

Mr. Morales: Sam, that's great. I'm curious, and I only have a minute left. Over this range of experiences, how have they informed and shaped your current leadership style and approach?

Mr. Mok: Very good question. I think the most important part was my five years in the military as an officer during a draft army period in a war that nobody liked. So I was taught and gained from personal experience how to manage people from different segments of society, and motivating them to do things that they didn't want to do, and motivating them to stay in places that they didn't want to stay.

In Foreign Service, I went through the entire Foreign Service training. It taught me manners, I hope. Social grace, I hope, and most importantly, negotiation skills, and how to get things done diplomatically. And at Treasury Department as a career SES, I learned how to navigate a bureaucracy and how to build coalition to get things done, or sometimes how to take a stand without destroying a career. So all these came to bear when I got to Labor, and it really helped me a lot from a military, diplomatic training and as well as career civil servant.

Mr. Morales: That's fantastic.

How is the Department integrating Budget and Performance information?

We will ask Sam Mok, Chief Financial Officer at the U.S. Department of Labor, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Sam Mok, Chief Financial Officer at the U.S. Department of Labor. Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.

Sam, let's take a moment and talk about the President's Management Agenda, or the PMA. In the last OMB scorecard, unlike Labor, about half the federal agencies received a Red rating in Financial Performance Status. What has your organization done to continue to receive a Green rating in progress and status in this area? And second, if I may, could you tell us from your perspective why this is such a challenging area for many federal agencies?

Mr. Mok: First of all, we are extremely proud to be the agency, one of the two agencies -- we used to be the only agency that achieved all Green. It took a lot of work; a lot of teamwork, to be exact, and good leadership, and also commitment to excellence in management and fiscal integrity by our Department Secretary, Secretary Elaine L. Chao. As most of you know, Secretary Chao is a Harvard MBA. She really understands the importance of good financial management, because from her personal experience -- I don't know how many of you are aware she inherited the United Way after the big financial scandal, she has this unyielding support and commitment to sound financial and good financial management, and she holds us to very high standards; both ethics and also other performance.

As a result of the good teamwork, Labor Department probably has one of the most stable management teams in the entire federal government among all fifteen Cabinet-level agencies. Another big reason is we look at Green as a milestone, not as an endpoint. It's a continuous journey with no destination.

One of the persons I also need to give credit to is a gentleman by the name of Bill Reese. 20 years ago, way before the passage of the CFO Act, Bill was the comptroller of the U.S. Department of Labor. He had the foresight to work with his colleagues at that time and created an accounting system which we call DOLIS that really laid a foundation of financial reporting and fiscal integrity that allowed us to get ten consecutive years of clean audit opinions and six CEAR awards. So this is something we are very proud of, and also because of this foundation and this platform, we were able to win all the other awards that we have won in the last several years.

But we look at getting to Green in the PMA as a milestone, not as an endpoint, as I talked about. In our case, we got further ahead than most people because of Secretary Chao's commitment, Secretary Chao's support. And when the leader really believes in this, I think it makes a very big difference.

Mr. Morales: Sam, you referenced your tenth consecutive year of an unqualified opinion. First, what is the significance of a clean opinion, and what are the keys to successfully achieving a timely and a clean opinion?

Mr. Mok: I can say this and I don't want the listeners to get this the wrong way: I'm not really sure a clean opinion amounts to very much. Let me explain why, so don't quote me out of context.

As a former auditor myself; I don't do audits anymore, a clean opinion only means one thing: your numbers add up. That's all. Because basically all it says is you have performed your accounting process in accordance with certain predefined regulations and policies and your numbers added up. If you read history and follow the news, many organizations received a clean opinion and then went belly up. So therefore, getting a clean opinion is one of the many indicators, cannot be the only indicator.

To me, getting a clean audit opinion is kind of like a doctor telling you your body temperature is good, your heart rate is good, your pulse is normal. Does that mean you are healthy? Don't know, because you could have high blood cholesterol, you could be having cancer cells in your body. Those indicators don't tell you. But it's a good sign, and it's important -- I'm not saying it's not important. It is one of the many indicators. You have to look at an organization's financial state of affairs in a holistic way. So my point here is don't get carried away by a clean audit opinion. Obviously, if you don't have a clean audit opinion, job number one ought to be get a clean audit opinion, because that is the starting point.

Mr. Watson: Sam, moving on to job number two, budget and performance integration, this really lies at the heart of ensuring both the strategic allocation of funds and the efficient use of funds. Could you tell us about your Department's efforts in budget and performance integration, and how your organization has expanded the use of financial data to improve management decision-making?

Mr. Mok: In my opinion, we have had some spectacular successes in integrating budget and performance information, but having said that, we also have much room for improvement, and let me elaborate. At the Department of Labor, the Office of Chief Financial Officer has developed a managerial cost accounting system that we affectionately call CAM; it's the acronym for Cost Analysis Manager. CAM reports provide resource cost information; full costs of agency activities, and full costs of significant outputs of major programs, and unit costs of output by type, region and trend analysis reports. These are very important data and statistics for the operating managers to manage their programs.

Department of Labor's program managers are using a plan to use the CAM system for budget formulation and justification, resource allocation and determining best practices across similar programs or regions, costing a performance's goals, trend analysis and meeting external reporting requirements, and compliance with various laws and regulations.

We were not able to, at that time, accurately assess, to the best of our ability, the cost effectiveness of these operations, so we may have an office in one building and three blocks down the street, we have another office in another building belonging to another subordinate agency doing similar inspection work, and yet the cost per inspection can vary vastly. So through our CAM system, we started looking into that. We are still trying to bring CAM to full maturity, but some interesting statistics started coming back, and that's what I meant by using it for budget formulation.

We started looking into it. Some was due to lack of good management, others were because of the complexity of the cases. Still others were because of bad reporting of data. So through this kind of discovery, we were able to fine-tune the system so that at the end of the day, we want the program managers to have good information, and back in the home office, we can start looking at these trends to see if in Memphis, we have four offices doing similar organic work, why is one office more efficient than the others; then we can share best practices.

Mr. Watson: Sam, you've been talking about the CAM system, and it's certainly a robust system known across government. What were some of the challenges and lessons learned in implementing a cost management system within the Department?

Mr. Mok: Well, very good question, Steve, because when I first came to the Department, there was not a very robust CAM system, and I didn't really at that time look at it as a high priority; of course, the IG came in and gave us a big finding on the compliance issue. So as I am trying to implement this program, I ran into the same kind of resistance that I originally gave to this program: why are we doing this?

So it took us just a lot of blood, sweat and tears, and after some not-so-pleasant confrontation, to get the program rolling. Some of the folks who really actually got very mad at us because they felt we were jamming this down their throats within the Department of Labor are now the biggest supporters.

Mr. Watson: Sam, earlier, you mentioned your sixth straight Certificate of Excellence in Accountability Reporting, known as the CEAR award, issued by the AGA. Can you tell us a little bit about what is accountability reporting, and the benefits of it, and second, what is the process for achieving this award.

Mr. Mok: Well, this report is put together by a lot of people, not just by my office; it's a Departmental effort. First, we are very proud of the fact that we have been getting awards every year on this particular report, so that speaks well of the information we put out, and also speaks well to the fact that we are meeting the fiduciary responsibility as charged to us by the CFO Act and other requirements.

The report that we publish, like many of the federal reports, was actually instigated by a requirement, not because we thought, well, let's see how we can get the information to the people so that they can use it. So as a result of a federal requirement, the product tends to be weight -- almost like heavy, very very thick, and full of a lot of information that while useful, I'm not sure it is in a useful way; the information is meaningful, but I am not sure the product is useful.

That's why I call it a yet-to-be-success story. I really believe that one, this report ought to be relooked at to see if we can publish a Reader's Digest version of this report for the American public. Point 2 is, as I go through these reports, a lot of them got mailed out and now we are sending electronic versions, it is so long that sometimes it's hundreds of pages -- I question how many American taxpayers actually read these reports from page one to the end.

3 is, I also think that while it contains a lot of extremely useful information, I don't think it's packaged in a way that people can digest and translate into useful information easily. Now, my office has been trying to do that for a while, and we have run into all kinds of unexpected challenges, so I haven't given up that yet. I hope before I leave office, I can be in a position to publish a Reader's Digest or Cliff's Notes version of this report that many people will write and say, we want a copy.

Mr. Morales: Sam, transferring money between agencies can become a fairly tricky and difficult process. The GAO repeatedly identifies intra-governmental transactions as a material weakness when they perform their annual audit of the federal government's finances. Could you tell us about your efforts to promote a new standard for exchanging financial data called the Extensible Business Reporting Language, or XBRL, and how might this help?

Mr. Mok: Well, I'm a great believer in XBRL, and I really believe XBRL can help resolve many problems, including those that you talk about. But I also want to caution the listener that there is no silver bullet out there.

The intra-government transaction issue that you mentioned earlier is actually a multi-dimensional problem from where I sit. First, you got timing issues, you got definition issues; you also got posting errors and things like that, so it's not something that one product or one solution can resolve the problem.

Let me talk about XBRL. XBRL, as you said, stands for Extensible Business Reporting Language. When I first heard about it, I said I don't need this, I don't need another programming change, I don't need another programming product The second thing is, XBRL is not a computer program, it is not a product and it's not a software. What is it? It is a process, or it is a means for us to standardize financial information, in effect to try to create a better way to extract meaningful financial information without what I call invasive surgery.

If you look at it in another way, the Labor Department right now is in the process of implementing a new core accounting financial management system. We have a particular version of the ORACLE financial. The Transportation Department also has implemented ORACLE financial, and the version they use is fairly similar to ours. The Energy Department is also implementing ORACLE financial, and the version they are using is very similar to ours.

The nature of business among these three agencies is not really that different; while they are not the same, they are not really that different, and yet the three agencies' financial processes cannot talk to each other. So if you take that and extrapolate, can you imagine the difficulties of standardization? They're all probably different, so when you start going through consolidation, you are going to have a mishmash.

XBRL, if implemented correctly, can avoid all of that. If you think of it as a blanket that you can put on top of all these different systems, that you just, through data tagging, can feed into a process, so that way, as OMB, the Inspector General or those who have a need in the American public can get the information from different agencies through data mining or whatever a lot easier, and financial reports will become more meaningful, will become simpler, and yet there is no massive retrofit cost. So XBRL itself I think is a fantastic concept. XBRL itself is not going to be the silver bullet, but it is a very important tool, in my opinion, to achieve that ultimate goal.

Mr. Morales: Thank you.

What about the Labor Executive Accountability Program, or LEAP?

We will ask Sam Mok, Chief Financial Officer at the U.S. Department of Labor, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Sam Mok, Chief Financial Officer at the U.S. Department of Labor.

Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.

Sam, earlier, you alluded to new financial systems within your organization. Could you tell us more about Labor's efforts in replacing its core accounting system with a new state-of-the-art financial management solution called the Labor Executive Accountability Program, or LEAP? How key is this to your financial management modernization strategy and meeting the future needs of the business?

Mr. Mok: Thanks for asking the question, because that is probably the most important issue the CFO of the U.S. Department of Labor has to deal with or manage. When I first became the CFO, when I was sworn in or confirmed by the Senate in 2002, I took office and assembled my staff and all those people who were associated with the office, and I gave a talk, and in that talk, I drew two pyramids. On the left-hand side is what I call the today pyramid; on the right-hand side is what I call the pyramid that should be in place when this administration leaves office.

The left pyramid, which is the pyramid today, consists of a very thick base called transaction processing. That basically is what most of my staff was doing back then, processing paper in and out. And the next layer up is what I call financial report generation. It's a legacy system, it's still a batch-mode system, and it is a very outdated system. So by the time the requester receives the report, frequently they don't remember why they asked for the report.

And then we also have another base called analysis, which is not much thinner, because by the time we are done through transaction processing, through the report generation, and then the next thing is what we call analysis and reporting that we have to file required reports from OMB. At the end is a very small sliver or speck of what I call internal controls -- and basic functions of a CFO basically got squeezed out. That's where we were in 2001 and before.

What I wanted to achieve is a modern-day CFO-ship by the time we leave office, a very thin layer of transaction processing. How do I accomplish that? Because by using this ORACLE financial system, it's web-based, it's single data point entry, and once you put the data in, it just does borderless navigation. You can create your own report � la carte.

So a lot of time is being saved and created because of that so that we can devote more time to financial analysis and decision support and actual decision-rendering. That's the new pyramid. How do I go from one pyramid to the other is the Labor Executive Accountability Program. That is LEAP. There is a new core financial system that we're trying to implement.

When we first started with this program, I told my staff the previous paradigm doesn't work anymore. What we want to do is we want to create a new process. The motto we are trying to accomplish is "the right information to the right people at the right time."

In many ways, the CFO's office is like a policeman's. We have basically two responsibilities: we have law-enforcement responsibility, fiscal integrity, enforcing accounting policies and rules and regulations. But we also provide a service, so I always model my office on a community policing basis, that we're there to provide a service, because if we see something wrong, we need to help the citizens. But on the other hand, we also have to remember, we wear a badge and we have an enforcement responsibility. So how do you reconcile the two is provide better information to my constituents and to assist them with complying-assistance so that if we explain upfront what the requirements are, they can do the compliance themselves. So that way, we don't have to beat people over the head.

Mr. Morales: Now, that's a great analogy.

Now, the Department is the first federal agency to fully deploy an eGov travel system.

Mr. Mok: That's correct.

Mr. Morales: Could you tell us a little bit about this system, and how does it result in significant savings, enhance accountability, which we have been talking about, and operating efficiency?

Mr. Mok: We are very proud to be the first federal agency to deploy an end-to-end eGov travel system. Let me give you an example of some of these savings. Let us take a mine inspector, for example, who could be operating in Kentucky, Montana, someplace, in a field office. They travel because they go to inspect mines. In the old days, they'd fill out a paper form to document their travel and then they attach all their receipts, and it got mailed to the district office to get approved, and it got mailed to the processing center to get processed to be paid, and then a check comes back to them.

With eTravel, using that little example, the same inspector can file that through a computer, and as soon as he is done, he pushes a button and that thing gets electronically sent to his approver. His approver could be thousands of miles away, but he or she can receive it instantly. He or she can approve it electronically, and then it goes right into the processing system. And then once it is processed as electronic, the reimbursement is sent electronically through the person's bank or designated financial institution. You save many days now.

On top of that, we also build in front-end edit checks. We edit out a lot of human error upfront and it just expedites the whole processing in reimbursement.

Under our current system, which is split disbursement, anything that got charged to the travel card that has been approved for reimbursement, the money goes directly to the bank to get reimbursement, to reimburse the bank on the travel card. That's one of the reasons, if you look at the delinquency rate of the U.S. Department of Labor, we have an extremely low delinquency rate because we relieve our traveler of the burden of having to sit down and write a check to reimburse.

Mr. Watson: Sam, switching gears here for a minute, one of the administration's key emphases is on creating a federal government that is accountable, results-oriented, and appropriately aligned with strategic goals. In meeting these goals, can you tell us how federal managers can effectively manage an ever-increasing blended workforce comprised of contractors and federal workers? What are some of the key differences intrinsic in using contractors to get work done?

Mr. Mok: I have written articles about what I call the hybrid workforce. I don't know the statistics government-wide, but I think the U.S. government, federal government, is relying more and more on contractors. I see a lot of merit in doing that. I also see pitfalls in some cases. And let me talk about both.

For example, on the LEAP program itself right now, we are trying to implement this financial management core system. Not many if any federal government are staffed to do that because you do this once every 10, 15 years. Hopefully you don't do this every year. So therefore, the expertise does not necessarily reside within the federal government. You don't want to hire a whole office full of people to do this and put them on the federal payroll, because what do you do with them after you finish implementing the program? So this is an area where you can use good consulting help, and we are blessed with that in the Labor Department.

So therefore in this particular case, I see a need for federal employee leadership with extensive consulting support, because the consultants go from job to job implementing these systems, so hopefully as they go from job to job, they acquire more experience, then that knowledge passes through to us.

Another area of consulting help is when we need to create a new program, such as what I call the CAM Program, managerial cost accounting, Cost Analysis Management of the Labor Department --nobody in the Department had done that before, and we needed to do that. At the same time, we also require that they train our staff. So eventually this thing will be managed and run by the federal agencies. So that is what I call a transition workforce. The consultants coming in help us get it off the ground -- in the meantime, also, we federalized it. That's different from the first one: as basically we just hired outside consultants to help us build it and after, they leave, because the building process is a one-time deal every 10, 15 years, hopefully.

Mr. Watson: Sam, earlier you talked about the growth in the number of c-suite leaders within an organization. Let's see, I think you mentioned chief financial officer, chief information officer, chief acquisition officer, chief administrative officer. I think you even had a few in there I'd never heard of before there. How important is the coordination and collaboration among an organization's chiefs? And in your perspective, is there a single solution to this CXO conundrum?

Mr. Mok: I think the coordination is really important. Failure to coordinate will result in the fiery crashes that I alluded to before in the motorcyclist and the steel ball. I don't think there is, again, a silver bullet. But Comptroller General David Walker will be hosting a forum this month. And I think he might be on the right path on that, although I don't think a chief management officer is necessarily the solution to every Cabinet-level agency.

Having said all that, I don't think having a CMO or chief management officer will suddenly make all the problems go away, because the effectiveness of the CMO, if you have one, is still dependent on several things. One is the true ability of the CMO. Two is the relationship between the CMO and the Cabinet officer. Three is the mandate given to the CMO. So it's not a silver bullet, but I think it's something that's worth discussing and considering.

Mr. Morales: Sam, on a similar theme -- and I only have a minute left. We talk to many of our guests about collaboration. What kinds of partnerships are you developing now to improve the operations or the outcomes at Labor, and how might these partnerships change over time?

Mr. Mok: It depends on what you define as partnership. In politics, which political appointees practice, I think Lord Acton's statement a hundred years ago still applies today. Lord Acton wrote a hundred years ago that in politics, there's no permanent friends, there's no permanent enemies, only permanent interests.

So I think if a partnership is required and we can identify common interests, different people can become partners instantly. When their interests collide -- you may play golf every weekend, but professionally, you're going to have a problem. So I think that is a first important thing to remember, is where the interests lie. Two is: too often we forget, at the end of the day, we all work for the same boss. Especially those of us who are non-career, we can't take it with us when we leave. So it's very important that as we get sometimes emotionally involved with some of these turf issues, we need to take a deep breath and say, "one day this will end, too, so therefore, let's be realistic about how we work this out."

Mr. Morales: That's great.

What does the future hold for the U.S. Department of Labor? We will ask Sam Mok, Chief Financial Officer at the U.S. Department of Labor, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Sam Mok, Chief Financial Officer at the U.S. Department of Labor.

Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.

Sam, I'd like to transition now to the future. Could you give us a sense of some of the key issues that will affect the CFO and budget offices government-wide over the next few years?

Mr. Mok: Yes. I see going forward, the CFO will have to contend with a very serious issue: that is dwindling resources, expanding requirements. At the U.S. Department of Labor, that is going to be particularly acute for a couple of reasons. One is, the CFO set-up at U.S. Department of Labor is somewhat unique; we have a bifurcated CFO-ship. So therefore, I think we have an even greater need to look at the coordination, to look at the resource allocation.

Now, with the implementation of the requirement of OMB Circular A123, that is a requirement that all of us have to meet, and it is a good requirement, but at the same time, I am not sure there's a whole lot of funding that goes with it. So that is one big issue that we need to look at and figure out how to go forward, because as our resources are being constrained, the requirement -- growth -- has not. So that calls for greater efficiency in deploying what we are allowed to spend, and at the same time, a crying need for matrix measurements so that we know how to prioritize our requirements more correctly. So that's challenge No. 1.

Challenge No. 2 is that the CFO after me will have to look at how to retain and attract talented people. That is going to be a huge challenge, because according to OPM, more and more seasoned federal executives will be retiring, and we need to find good replacements. And I am not sure there is a very large pool, for many reasons. There are a lot of very capable people in the federal government, but are they given the training, the seasoning and the necessary tools so that they can step into leadership positions when this wave of retirements takes place? And at the same time, are they being brought along so that they are ready to step in? And I am not sure that this matter is totally under control at all federal agencies, including but not limited to the Labor Department.

Third, as we have about a year or two left in this administration, and there will be a new president in 2009, how do we transition some of these programs and initiatives to a new administration, and ensure that certain features that are important to the service of taxpayers are being kept and not being discarded for political reasons? So the deputy CFOs, in my opinion, at a federal level agency, and in particular, at Labor, will play an extremely important role, because the deputy CFO will be the transition figure, because he or she is the most-senior career civil servant.

I am the CFO appointed, nominated by the President and confirmed by the Senate, so if I'm lucky enough to be permitted to serve through this term, come 2009 January, I have to leave office. And I have reasons to believe the new President in the White House, whoever he or she may be, will not deem finding a CFO for the U.S. Department of Labor as the top priority as soon as he or she gets into the White House, so therefore, the sitting deputy CFO at U.S. Department of Labor will have to be that bridge to run the office until a new CFO is identified, gone through security check, nominated and confirmed. That can take some time. And in the meantime, run the ship, keep the new Secretary informed, keep a whole bunch of new Assistant Secretaries informed, and make sure that the needs are serviced properly. That's a big job.

Mr. Watson: Sam, you've touched on a number of challenges here. How do you envision your office evolving over the next five years to meet these challenges, you and your successor?

Mr. Mok: Yes, I probably should talk about my successor, because my days at Labor are very limited as we travel towards the end of the term. I see my office in five years, if it continues to grow at the current progression, will become more of an oversight policy office instead of a transaction-oriented office. I also see my office staff evolving to become a more analytical staff rather than a transaction-driven staff. Now, I also see some challenges on the horizon. The reason is, as we migrate toward these things, the issue between who is really responsible for some of these system issues will continue to occupy discussion and burn up certain resources within the organization. At the same time, depending on who is going to be the CFO in terms of personality, background, and access and relationship to the Cabinet officer in question will largely determine which way this office is going to grow, migrate in the future.

One of the biggest questions my career staff has always been worried about or asked me continuously up to about a year ago is, will the CFO-ship at the U.S. Department of Labor implode after Sam Mok leaves office, because I am such a dominant person? I think at that time, they had reason to be concerned, but now I think if you go and ask all the senior managers underneath me, they would just laugh and say, Sam Mok can step off the train tomorrow and get killed and life will go on.

I think I have answered the question in a very professional way and I have done my job, because I believe that if I leave office tomorrow and the office starts to implode, I have failed as a leader, and I think I have created and recruited a very strong bunch of managers that can go on without me easily.

Mr. Watson: Sam, you've talked about the migration of the CFO's office over the next five years. What steps are you taking to attract and maintain a high quality technical and professional work force that will be able to make that migration?

Mr. Mok: That's an excellent question. A couple of things I've been doing, as I always have done: one is, as some of you may know, I am very active in many professional groups, including but not limited to the Association of Government Accountants, the Academy of Government Accountability, NAPA, the National Academy of Public Administration, and so forth and so on -- the reason why I am very active in those professional organizations is because I participate in those organizations and I go to their functions to listen to presentations. And through those forums, it helps me to identify really smart people who can articulate their views correctly and efficiently. I make friends with them and I recruit them. So that's the first thing.

The second thing is, within the Labor Department, I get very involved in different activities, and I spend quite a bit of time gathering information about hallway corridors, about some of the key managers, and I go recruit them if they're good.

Three is, I also believe that chemistry is very important. When I try to recruit a person, I always try to assess: "Does that person's personality fit with the team that I have?" Now, I'm not trying to get cookie-cutters; I don't want everybody to be alike. I always believed that if you have four people in a room and they all agree, you have three too many. What I'm trying to do is always have a very balanced team. I have thinkers, I have doers, I have conceptualizers. I also have people who want to bring everybody back down to reality. So if you come to our meetings, they are always very heated discussions, sometimes it looks like we may start a fight, but at the end of the day, everybody's extremely professional, because I think it is extremely important that we have diverse views, so that the sitting CFO and the deputy CFO have the benefit of these diverse views from people who are not afraid to speak up, and at the same time are professional enough to know that once the leader makes a decision, whether you like it or not, let's move forward. And by participating in many professional activities and volunteering to serve in these organizations, I get to know people like that and recruit them.

Mr. Morales: Sam, you've had a very highly successful career in the federal government. So I'm curious, what advice would you give to a person who perhaps is out there considering or thinking about a career in public service?

Mr. Mok: Very good question, thank you. First, you don't come into the federal government to get rich. If that's what you want, wrong place. You really have to understand the higher call of public service, because public service, especially at a senior level, tends to get very complicated, so you really have to have a very clear vision as to what you're trying to accomplish.

My goal in life is very simple: make some money, have some fun and leave some footprints. Leaving footprints is what public service is about. It's not about making money, and I'm not really sure you can have fun a lot of the time, so therefore it's about leaving footprints. Public service is about that, so that's the first thing I always tell potential applicants.

The second thing is, public service has its rewards, not in a monetary way, because if you do the right thing and have the right position, you can actually effect a change that can deliver benefits to a lot of people that owning a company or working at General Motors or working in General Electric and so forth cannot provide you that opportunity.

Last but not least, having an affiliation of a public organization such as the federal government provides you access to a lot of challenging opportunities, excitements not found -- I've been on both sides, private sector and public service. I'm doing this for the fourth time because every time I left the public service, I'll never do this again. But after a few years, I say, "Gee, it's doesn't look too bad." And that's why I keep coming back.

It's extremely consuming, it's very draining, but on the other hand, it's also extremely rewarding, but the stakes are also very high. In the private sector, if you screw up, probably the worst thing that can happen to you is getting fired. In public service, especially if you are in a very high senior position, horrible things can happen to you. So therefore, I always caution people, when you come into public service, make sure you know what you are getting into, because the consequences sometimes can be very unpleasant if you don't know what you're getting into and you mess up. But on the other hand, if you do the right thing and serve the right cause, the rewards could be extremely extremely satisfactory.

Mr. Morales: Sam, that's a wonderful perspective. Unfortunately, we have reached the end of our time.

I want to thank you for fitting us into your busy schedule, but more importantly, Steve and I would like to thank you for your dedicated service to our country across the many roles you've held over the past 30-plus years.

Mr. Mok: Thank you very much. If the listener wants to have more information about the U.S. Department of Labor or the Office of Chief Financial Officer, please visit our website, www.dol.gov, and click on the OCFO and you can find out more about us.

Thank you for sharing your time with us.

Mr. Morales: Thank you.

This has been The Business of Government Hour, featuring a conversation with Sam Mok, Chief Financial Officer at the U.S. Department of Labor.

As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who can't hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support.

For The Business of Government Hour, I'm Albert Morales. Thank you for listening.

This has been The Business of Government Hour. Be sure to join us every Saturday at 9:00 a.m., and visit us on the web at businessofgovernment.org. There, you can learn more about our programs and get a transcript of today's conversation.

Until next week, it's businessofgovernment.org.

Originally Broadcast Saturday, January 6, 2007

Arlington, Virginia

Mr. Morales: Good morning and welcome to The Business of Government Hour. I'm Albert Morales, your host, and managing partner of The IBM Center for The Business of Government. We created this center in 1998, to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about the center by visiting us on the web at www.businessofgovernment.org.

The Business of Government Radio Hour features a conversation about management with a government executive who is changing the way government does business. Our special guest this morning is Michael Ryan, vice president of the Administration and Finance with the Millennium Challenge Corporation.

Good morning, Michael.

Mr. Ryan: Good morning.

Mr. Morales: And joining us in our conversation is Pete Boyer, Director in IBM's federal consulting practice. Good morning, Pete.

Mr. Boyer: Good morning, Al.

Mr. Morales: Mike, perhaps you could start by giving us an overview of the Millennium Challenge Corporation. Tell us a little bit about the mission and give us an overview of the Millennium Challenge Act of 2003, and some of its key requirements.

Mr. Ryan: That would be my great pleasure.

The MCC mission is simply to reduce poverty by supporting sustainable economic growth in developing countries -- in those countries which create and maintain sound policy environments.

The Millennium Challenge Act established MCC to administer the Millennium Challenge account. This was established in January of 2004 as a result of President Bush's commitment at the Monterey summit. And that summit focused on financing for development, and the purpose, as stated, was to provide greater resources for developing countries, taking greater responsibility for their own development. It sometimes been referred to as assistance with accountability.

The act itself mandates that MCC provide assistance in a manner that promotes economic growth and the alleviation of extreme poverty and strengthens good governance, economic freedom, and of course, investments in people.

The MCC program, of course, is only one component of our overall foreign assistance strategy, but it is an important and an innovative one. It's something new, and our work draws on lessons learned from international development organizations over the past 50 years, and it focuses on the long-term mission of reducing poverty, as I mentioned, through economic growth.

In short, we work in partnership with some of the poorest countries to create country ownership instead of long-term dependence on assistance. We want to give assistance in order for countries to take over the job of their economic growth and alleviate poverty within their borders.

Mr. Morales: Mike, this is certainly a non-trivial challenge in mission. Could you tell us a little bit about how your organization is organized, the size of your budget, and how many people are employed in your organization?

Mr. Ryan: MCC was designed as a small and a federal corporation and is meant to ensure accountability for the aid we administer. As a federal corporation, it's managed by a chief executive officer, who's currently Ambassador John Danilovich, and he's appointed by the president and confirmed by the U.S. Senate.

What makes us a little bit different is we're overseen by a board of directors, who make the major decisions, what countries to give assistance to and the like. And that board of directors is chaired by the secretary of state. The vice chair is a secretary of the treasury. Other members include the -- the United States trade representative. The U.S. aid administrator. And it is has interestingly two public members currently, although, there may be more in the future.

Kenneth Hackett, who's the president of Catholic Relief Services, and Governor Christine Todd Whitman, who in addition to being the governor of New Jersey, was also a former EPA administrator and now is a president of the Whitman Strategy Group.

We have a number of departments. We have operations, we have a department of accountability, a department of policy and international relations. Of course, we have congressional public affairs and an office of the general counsel. And then we have the department that -- that I head up, administration and finance.

As far as our budget goes, the commitment had been to rise to $5 billion a year. The current request is for $3 billion. The House passed a bill, and now is at $2 billion. I don't know where that's going to end up. And clearly, one thing that gives us a good deal of flexibility is that all of our MCC funds are no-year funds, which means that we can obligate funds for a five-year compact at the beginning of the five years, and it's available until it's expended on that -- that compact. It saves us from year-to-year ups and downs and countries can rely on this -- this assistance.

As far as the -- the level of staff, as I said, we're small and we're -- we aim to be small. We want to arise to a staff of -- of 300 in Washington, D.C. Currently, we have 20 people stationed overseas that are above that 300 number, and that number overseas should rise as we established additional contacts in other countries. At the present time, we have approximately 280 people in Washington.

Mr. Morales: So, almost 300 people managing $3 billion in assets?

Mr. Ryan: That's right.

Mr. Boyer: Now, Mike, what are your specific responsibilities and duties as a vice president of administration and finance, and could you tell us about the areas under your purview?

Mr. Ryan: Sure, Pete. I -- I'm essentially a chief financial officer in the federal mold. I'm responsible for the same areas that many CFOs are responsible for, financial management and reporting, financial services, budget formulation execution, development of annual performance plans, oversight of financial systems, and producing the annual performance and accountability report and procurement.

I also have oversight of HR, Human Resources, recruiting in development. Facilities management, both in Washington and overseas. IT and personnel security. So, it's just a full range of administrative and financial duties that you'd expect to see in an organization with my title.

Mr. Boyer: Now, Mike, you clearly had a very interesting career. Could you describe your career path for our listeners? Specifically, how did you begin your career?

Mr. Ryan: Well, I should start off by saying that I -- I had been a civil servant until my current appointment with MCC for many, many years, but my first position actually was a mathematics teacher in Baltimore City schools. After I earned an undergraduate degree at St. John's College in Annapolis. But I left teaching math and went to -- to Harvard where I got a -- a PhD in near eastern languages and civilizations. I got that degree in 1981, after having joined the federal government in 1979.

During my studies on -- on that degree, I spent three years researching Egypt and traveling around the Middle East under a Fulbright at Smithsonian and the Center for Arabic Study Abroad fellowships.

I've had several positions in the Department of Defense and Department of State. And when I first joined in 1979, as I mentioned previously, I was a Middle East analyst for the Department of Defense. I've also had senior-level positions, including deputy director of a plans directorate under the Defense Security Assistance Agency. I've been the acting deputy assistant secretary for International Narcotics in Law Enforcement Affairs in the Department of State. I was also the executive director and comptroller of that same bureau in the Department of State.

I also worked at EPA, where I first met Governor Whitman, and I mentioned before, when she was the administrator. And I first started as a comptroller there in 1997, with responsibility for budget formulation and execution. As all -- as well as all aspects of financial management in operations.

I became the deputy CFO of EPA then in 2000, and I had that job until 2006. May, actually, when in joined MCC. At EPA, I also managed their strategic planning, budgeting, financial management, performance measurement analysis, and their accountability functions.

Mr. Boyer: Mike, that's a very broad set of experiences. I'm curious, how have these experiences prepared you for your current leadership role at MCC, and have formed your management approach and leadership style?

Mr. Ryan: I guess being deputy CFO at EPA and acting CFO during periods when EPA did not have a Senate-confirmed CFO in place was the best preparation for my technical duties at MCC. Having a practical experience in managing a CFO shop, including problem-solving in all areas normally reporting to a CFO, and also extremely useful contacts within the CFO counsel, helpful opportunities to share experiences across the federal CFO community.

Previously, I think overseas experiences in the Department of -- of State and Defense, where I was based in Washington, but did extensive travel, in addition to my -- my work, as I -- I -- on my degree that I -- I referred to previously, helped me understand other country's governments and -- and cultures, and how you deal with countries in their own terms and -- and not necessarily bring your own cultural assumptions to play.

So, it was a useful body of knowledge overseas and -- and in the CFO environment because I had to deal with a wide variety of people and -- and people who approached tasks from different angles, and it's tremendously useful in the federal workplace, which is, as you know, wonderfully diverse.

Another useful leadership lesson from defense was that you really have to build a team from the people that you inherit, and then you get to the task of recruiting others. And everybody brings skills to the task. It's a leader's responsibility really to find the best way to use each team member's skills to support the mission and target your recruiting to fill any areas where skills need reinforcement.

I think it's another example of why it's important to appreciate the diversity of abilities and backgrounds represented in the federal workforce based on all the talents that federal employees bring to work everyday, I think we're well equipped for problem-solving from a variety of perspectives, and we're especially well set up to deal with foreign governments, many of whose children, if you will, came to the United States either recently or in the distant past as immigrants and deal very well with those cultures.

Another lesson learned from my experience in defense, state, and EPA, and especially now at MCC, is the importance of public/private partnerships. The private sector has a depth of talent and knowledge that's always refreshed, and government can make good use of private sector expertise to augment its workforce to accomplish the civic tasks without institutionalizing that expertise when it might not be appropriate. To the next set of tasks that lie ahead. It helps to keep public sector organizations more nimble by allowing us to take on specialized talent as needed, while maintaining a basic core of skills in the career ranks.

For example, when EPA was assigned to a government center of excellence to host financial systems, my staff and I argued successfully for a public-private partnership along private sector centers of excellence to compete for technical services in the IT area and in accounting.

This competition, I understand, here at the beginning of December is still going on at EPA. OPM is -- is now, I understand, going to do something similar, and I think that's a good model for a small lien organization like MCC. That is reaching out to the private sector for help in those areas that the private sector does especially well, and can tailor its support for the needs of the day without institutionalizing that support and fixing it in place.

Mr. Morales: That's fantastic. I can -- I can see now why you are focusing on solving some of the world's greatest challenges. Thank you.

What kinds of innovations are being pursued by the Millennium Challenge Corporation? We will ask Michael Ryan, vice president of Administration and Finance with the Millennium Challenge Corporation to share with us when the conversation about management continues on the Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Mike Ryan, vice president of Administration and Finance with the Millennium Challenge Corporation. Also joining us in our conversation is Pete Boyer, director in IBM's federal consulting practice.

Mike, in pursuit of its mission to reduce poverty by supporting economic growth as you described in the first segment, the MCC has identified and defined three key principles to guide the efforts.

Can you elaborate on those guiding principles and what is new about the MCC approach to international development?

Mr. Ryan: Well, thank you. The three principles are first of all, to reward good policy. Countries are selected based on their performance, as shown on objective indicators. Not indicators that -- that MCC develops, but that NGOs of the private sector, someone outside, an objective measurement is done on governing justly, which means investing in their citizens and encouraging economic freedom.

The second thing, in addition to rewarding good policy, is that we operate as partners. Countries are responsible for identify the greatest barriers to their own development, ensuring civil society participation in planning and developing a Millennium Challenge account, or MCA program.

Then, to participate in -- in a MCA program requires a high level commitment from the host government. Now, when I say "MCA," of course, I mean the Millennium Challenge account, which is the appropriate that MCC uses.

Each country enters into a public compact with MCC. That includes a multi-year plan for achieving development objectives and identifies the responsibilities of each partner in achieving those objectives.

The third principle, the first being rewarding good policy, and the second, to operate as partners, is to focus on results. MCA assistance goes to countries that have well-designed programs with clear objectives, benchmarks to measure progress, procedures to ensure a fiscal accountability per the use of the Millennium Challenge account assistance, and a plan for effective monitoring and objective evaluation of results.

Because we focus on rewarding good policy, we are seeing something new, and this is where the innovation comes in. Something new in international development, which our CEO calls the MCC effect.

We are seeing examples of countries making important policy changes on their own in order to qualify for funding for the Millennium Challenge account. This is extremely encouraging because we are seeing positive change even before MCC investment begins. I could give one example of this that happened fairly recently in the last couple of months.

We had one country that had a policy. Actually, it was written into their constitution, that married women couldn't inherit property in their own name. And we determined early on that this would mean that only 50 percent of the population would get any benefit out of the --economic benefit out of -- out of our policies, and we told the government, no, this is just not acceptable. You know, we can't continue our conversations if this stays in place. Although it was a longstanding policy and it was rooted in -- in culture and -- and in -- in prior law, they went ahead and changed that law, and they did that without receiving a nickel from us. And one got the feeling at the end of the day that there was something in just getting the stamp of approval that they had passed the test.

That's one anecdotal account, but a very real one. Two Harvard economists studied the MCC effect in a report released earlier this year, and they concluded that countries are responding to MCC's clear and actionable incentives. This is -- was -- was done in the Kennedy School of Government; it was called "Can Foreign Aid create an Incentive for Good Governance: Evidence of the Millennium Challenge Corporation."

Then there was another one from the manager of the World's Bank's "Doing Business Project," And the quote there I think is a good one, in which they stated that we have seen a number of reforms around the world in both rich and poor countries, but in many of the developing countries, the reform has actually been primarily as a result of the inclusion in the Millennium Challenge account.

Now, I would note that we often see reforms, as I -- as I mentioned before, in anticipation of the funding of the Millennium Challenge account, and not just as a result of projects in those countries.

Mr. Morales: That's a powerful story. Now, you used the word "compact." Can you describe the MCC compact development and implementation process, and what are the criteria methodology for determining eligible countries and establishing these compacts? And can you tell us a little bit about the composition of the projects that make up the portfolio?

Mr. Ryan: Surely. I think around the compact development, you get a lot of the innovation that -- that you asked me about before. I mean, what is different? Well, for example, for the fiscal year 2007, the candidative countries, you know, were identified on the basis of a per-capita income, and they must be in the low-income, preferably, for a lower/middle-income categories established by the World Bank. By law, only 25 percent of our funding may be used for lower/middle-income countries, assuring that most of our support goes to the poorest nations in the world. And I might add that we make every effort that if a lower/middle-income country makes a -- a proposal for a compact, and it is for some of the poorest people in their country, we find that to be a very compelling argument for going to that lower/middle-income country.

We report to Congress on our selection methodology, and our board of directors that I mentioned before, base a selection on specific performance indicators developed by independent, third-party institutions. We also seek public comment on selection methodology.

Right now, we're using 16 indicators in three broad categories, and countries must score above the median to be eligible. These indicators come from organizations including the World Bank, the World Health Organization, Freedom House, and UNESCO. And again, the indicators are -- are in the three areas that I mentioned before, ruling justly, investing in people, and -- and I think I mentioned economic freedom.

And by "economic freedom," we -- we mean things like the costs of starting a business or the days to start a business, trade policy, those things that might be either barriers or spurs to economic development we want to see.

Investing in people, you could have public expenditure on immunization, public expenditure on primary education, and -- and interestingly, girls education completion rate, which we see -- think to be extremely important.

Ruling justly, I think we're more familiar with. I mean, civil liberties, political rites, voice and accountability, rule of law, and significantly control of corruption.

The MCC board selects eligible countries using the above methodology and submits a report to Congress, and the selective countries are then eligible to begin developing a compact proposal for MCC consideration. At this time, we have 11 signed compacts in place, representing a total of nearly $3 billion, supporting programs in agriculture, infrastructure, land tenure, healthcare, and other sectors. Most compacts extend over a five-year period.

Mr. Boyer: Mike, does the MCC dedicate any funds for those countries that do not specifically meet the compact criteria, but are moving in the right direction? And if so, how?

Mr. Ryan: We do, Pete. We offer a threshold program that provides financial assistance to help improve a score on one of our -- of the 16 indicators that I mentioned.

The board of directors selects the countries for the threshold program based on their overall performance on all 16 indicators and their demonstrated commitment to improving the scores and their ability to undertake reform. Countries selected for threshold consideration must create a plan that identifies miserable ways to improve a specific indicator score and they must submit that plan for MCC review and approval. We make threshold program agreements with countries whose plans demonstrate meaningful commitment to reform and a high likelihood of successful implementation. And, of course, the measurement of that success is, again, done outside of MCC. I'll just give you two examples.

In the first case is the government of the Philippines, which actually passed the corruption indicator, but both the government of the Philippines and MCC felt that we would like to work more on this. And so, we made $21 million in threshold funds available to the Philippines in 2006 for anticorruption efforts. And what was really exciting about this was that the government made a decision to match those funds fairly closely so that it doubled the amount that was available, and we view this as a real commitment to reform on behalf of the people of the Philippines.

Another example that's not corruption was in 2005, Burkina Faso in Africa became the first threshold country to be approved for a compact funding. Burkina Faso was awarded $12.9 million for its threshold country plan, which was designed specifically to improve girl's primary education completion rates.

Mr. Boyer: Those are powerful examples. What does it mean for compacts to enter into force, and how does it relate to the actual disbursement of committed MCC funds to recipient countries?

Mr. Ryan: Well, this is another term of art. A compact is a contract is between MCC and a foreign government. It sets out the terms of the programs to be funded along with the funding to be dedicate in each year -- in each compact year for specific project components.

For example, a compact might set out dollar amounts anticipated to be spanned in each five years on a component such as improvement of a particular set of rural roads to get products to market, for example. The compact also outlines the general terms of the road improvement work to be undertaken. The signing of the compact commits the full funding for the specified project in a given country. After the signing, we continue to work with the country, we do due diligence, and we make sure that all conditions are in place to support a proper disbursement of funds.

When those conditions are met, then we declare the compact ready to enter into force, we obligate the funding and technical terms and the disbursements begin thereafter.

Mr. Boyer: Mike, to supplement its organizational structure in assisting caring out its mission, MCC has several formalized interagency agreements, or IAAs, with other federal government agencies. Could you elaborate on these collaborative relationships?

Mr. Ryan: Well, I think that -- that with a small organization, it must be clear to everyone that we can't do everything that is necessary for us to succeed. So, we have a number of these kinds of agreements.

For example, the National Business Center of the Department of Interior pays the MCC employees and provides financial systems and some accounting support. We also work closely with USAID, and to some extent, with the Department of Justice for the threshold programs that we discussed earlier. Treasury also provides technical assistance, especially in the banking sector, and from time to time, no doubt will sign other IAAs with other federal entities as the need arises.

Mr. Morales: Excellent. How is the MCC managing its program development efforts? We will ask Michael Ryan, Vice President, Administration and Finance for the Millennium Challenge Corporation to share with us when the conversation about management continues on the Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to the Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Michael Ryan, Vice President, Administration and Finance with the Millennium Challenge Corporation. Also joining us in our conversation is Pete Boyer, director in IBM's federal consulting practice.

Mike, how does the MCC make sure that compacts with partnered countries are going to produce the results that will satisfy the U.S. taxpayers and meet the goals of the MCC?

Mr. Ryan: Well, I think that the U.S. taxpayer has shown the willingness to fund humanitarian assistance and assistance to poor people, as long as the overhead is not too high, and as long as the goals are worthy, and the people that really need the assistance receive it.

To ensure that we meet some of these expectations, MCC forms a transaction team whose members work closely with representatives from the country developing a compact proposal. Our teams include people with a range of a pertinent expertise in economics, law, and the appropriate technical areas, such as engineering or agriculture. We may also have someone who's an expert on gender issues, for example, or other social issues, or even the environment.

Partner country representatives are expected to engage in wide consultation with members of the public in a civil society in their own countries to ensure their compact proposals reflect needs identified by their own people and the poorest among them, and that the solutions are likely to work best for them.

MCC transaction team members evaluate all parts of a proposal and work with partner country representatives to develop practical, well-designed programs that incorporate steps to measure and evaluate results. MCC's investment committee, on which I have a vote, also plays an important role. It's chaired by the deputy CEO and is composed of MCC's senior officials.

The MCC committee considers all aspects of compact development and votes up or down any aspect along the way. MCC's board of directors, of course, has the final vote on a compact. The best designed compact programs are in the support of the investment committee first, and then the board of directors by incorporating meaningful evaluation of results and showing the promise of reducing measurably the number of people living in poverty. And, I might add, all of our discussions of the size of our staff and the amount of money that we put into overhead I think is an important one because we try to keep the overhead fairly low.

Mr. Morales: Now, Mike, as the -- as the CFO, many of our listeners may find it interesting that the MCC has identified that Chief Financial Officers Act of 1990 and the Federal Financial Management Improvement Act of 1996, and various other financial laws and regulations did not cover your operations.

What is MCC's basis for this position and does the MCC plan to follow at least the spirit, if not the letter, of those laws because they make good business sense?

Mr. Ryan: Actually, Al, we do manage our business according to the mandates of these laws and regulations. As we've said several times, we're small and organized as a federal corporation, rather than as a typical independent agency. And we were established after many of these laws were enacted. But we comply with them, however, and because we're part of the executive branch, and because they make good business sense.

For example, we issued our financial statements on November 15th with the rest of the federal government, and I might add, we got a clean opinion on that, and we intend to do similar things in the future.

There have been a number of government management reforms enacted in legislation in recent years. Most of them aimed at focusing agencies on managing for results and enhancing accountability for program outcomes. I'd like to think that MCC was designed to accomplish both of these ends, so it is not a stretch for us to follow the course outlined in legislation.

Mr. Boyer: Mike, on a similar topic, a key element of all compact development and execution is fiscal accountability. You know, the mechanisms and processes that assure that funds are managed properly and procurements are undertaken in a fair, open, and transparent manner. However, some of the compact countries do not perform accounting on a accrual basis by recording commitments and obligations.

Would you elaborate on the guidance provided to compact countries and requirements placed on those countries, and how has MCC handled this situation?

Mr. Ryan: Well, Pete, that's a question that's going to warm accountants' hearts all over the city this morning. MCC has a department of accountability which is responsible for these matters, and my department, of course, supports their work. Consistent with our model of country ownership of MCC-funded projects, compact countries must have internationally recognized system of accounting in place. It does not have to be identical to the U.S. model, but has to be recognized. We're constantly refining our approaches to this and expect to see continued improvements in the future.

For example, we require compact countries to have a fiscal agent and a procurement agent that we consider to be technically qualified. But while some countries might not use accrual accounting, the accountable entity, which is the organization set up in the country to carry out the compact by the government of that country, the accountable entity, often referred to as an MCA, set up by the government of a compact country must provide us with regular estimates of their cash needs. And these actually can serve as a surrogate for accruals, and indeed, we did an accrual in our financial statements just like every other federal entity on November 15th, as I mentioned before.

Mr. Boyer: Well, Mike we're -- we're glad we can get the -- the hearts of the accountants warmed up this morning.

Mr. Ryan: Let's not warm them too much.

Mr. Boyer: The USAID Office of Inspector General identified vulnerabilities affecting the MCC program in several criteria areas, including procurement, cash management, and disbursement that may adversely impact its financial operations. For example, the IG identified that the MCC Cape Verde compact had problems in the areas of cash management and procurement.

Could you elaborate on the MCC strategy for mitigating such risks and vulnerabilities? Specifically, has the MCC established policies and procedures for evaluating disbursement requests submitted by recipient countries to ensure that the amounts disbursed are only for immediate cash needs?

Mr. Ryan: Sure. First of all, I -- I have to point out that we have a very collaborative relationship with our IG. And I personally engage in conversation with IG staff on many issues, including the one you're -- you're asking me about. And while we do not always agree, we receive many useful recommendations that have caused us to improve our procedures. And we've been working on some exciting -- at least exciting to me, possibilities to enhance mechanism for getting funding out to compact countries.

Our current approach requires quarterly disbursement requests from a country. It comes into MCC, we consider it, and we say yes to the -- to the funding, its justified under the compact or -- or we ask questions. But we disburse on a monthly basis, asking the country to project their cash needs for the coming month, as I mentioned before.

However, we are in consultation with the Department of Treasury right now to see if we might use their Web-based online system for making payments worldwide. They call this system ITS. This would enable us to require that fiscal agents I mentioned previously overseas to request payments based on specific invoices and to justify disbursements in a systematic way in -- in real time. In addition, we're investigating to see if there might not be a private sector that would provide a -- a global payment solution, as well.

Treasury is interested in working with us on a solution in either case, and if we can't do this, I believe it would address the IG's concerns that you've -- that you've mentioned before. I'd also like to be able to try a pilot as early as January of 2007, so quite soon with -- with one or two countries to see how this actually might work in -- in reality.

Mr. Morales: Michael, we talked earlier about some of the interagency collaboration, and we know that the MCC has outsourced much of its administrative functions, including human resource and payroll management.

But does the MCC recognize the value of implementing an integrated human resource and payroll system, and can you elaborate on the status of this effort and the overall strategy to forge an integrated system that reduces the reliance on manual processes and enhances your interface with the NBC systems?

Mr. Ryan: Well, that's a great question. I mentioned before our -- our interest in keeping overhead down and of course manual processes are done by people, and people are overhead. So, we want to cut down on these things. They also introduce errors, as everyone knows, and -- and we'd like to do as much as possible automatically and with an -- with an integrated system.

We get great service from Interior's National Business Center, but it does not have an integrated system at this time. I understand they have long-term plans to make it integrate in the future, but at the current time, it's simply not.

The benefits of integration are especially important for a small organization like MCC. We do not have the personnel to make the multiple entries required by a non-integrated system, especially as we take on more compacts and more countries. We will be engaging consults soon to perform an analysis of how MCC might best achieve full integration of its financial management. And also, I hope a reasonable timeframe for achieving it.

You know, I am intrigued by efforts to engage private sector organization as -- as a center of excellence to supplement governmental centers of excellence. I am very familiar with the competition that's been going on at EPA, and I'm -- I'm looking forward to see the results of that competition for running their financial system. It's something that I saw at the beginning of when I was -- when I was at EPA. And now, I read recently that OPM is -- is also looking for a private public competition in this, and I think that's really healthy and something that might work very well for MCC.

Mr. Morales: What does the future hold for the Millennium Challenge Corporation? We will ask Michael Ryan, vice president, Administration and Finance with the Millennium Challenge Corporation to share with us when the conversation about management continues on the Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Michael Ryan, vice president, Administration and Finance with the Millennium Challenge Corporation. Also joining us in our conversation is Pete Boyer, Director in IBM's federal consulting practice

Mike, in its rather brief existence, the MCC has had some significant achievements, and we've certainly talked about many of those today.

What do you envision for the MCC over the next 5 to 10 years, and what are some of the key challenges and major opportunities facing the organization?

Mr. Ryan: Well, our overwhelming challenge is going to be compact implementation. We've been talking about performing the compacts, and that's what the corporation (off mike) spending its first two and a half, three years of existence doing. But making sure that results that we envision are achieved is our next challenge. Most of the work will be undertaken by partner countries, as they own the projects. So, it's really more of a challenge to them. And the real beneficiaries -- if -- if both us, that is to say MCC and the host governments are successful, the real beneficiaries are the poor people of our partner countries.

Mr. Morales: Mike, with such a small organization, I can only imagine that every single individual has a critical role and -- and is critical to the organization.

To that end, what steps are being taken to attract and maintain a high -- high-quality technical force, and can you elaborate on initiatives to ensure that you have the right skill and the right staff mix?

Mr. Ryan: First of all, let me say that I don't think any organization in my federal career can claim a higher quality workforce than MCC. And we owe that in part to the attractiveness, I think, of our mission, but also we've talked a lot today about public/private partnerships.

We have a partnership with Korn/Ferry International, in particular their Futurestep Division, which ahs been supporting our recruiting and hiring efforts. We've also been energizing our recruiting efforts through partnerships with targeted non-profit organizations who subscribe to our belief that, and this is a term we think has some power, that a diverse workforce can make a world of difference. And as far as training goes, I've been tasked by our CEO to create an overarching training plan for MCC. Everything from language skills to management skills. And we're beginning with training for all our transaction teams in partnership with the Federal Executive Institute.

Mr. Boyer: Mike, you mentioned MCC's focus on low overhead, and we've talked about it on a number of questions today, but how do you respond to people in a developing community that have expressed that MCC's proposed staffing level of 300 is very lean for an organization planning to disburse $2 billion or more per year?

Mr. Ryan: Well, you know, when the road is -- is twisting and turning and you're in a race, you'd rather have a sports car. So, we're -- we're -- MCC is based on a new organizational model. And we think our -- our leanness is an asset rather than a liability.

The key to our ultimate success has got to be related to our ability to identify the right countries with the right governance and respect their responsibility for their own development. We believe this approach is more likely to give arise to sustainable efforts and lasting reduction in poverty.

If we were to increase our own numbers, we might be -- just might be more tempted to give ourselves a larger role in other countries' efforts, and we really don't want to do this. Having said that, we are concerned with the growing workload, and we're constantly looking for ways to streamline our work and procedures.

In fact, it's interesting as far as this question goes that as I left MCC to come to this program this morning, we'd had a little meeting in which we talked about our model and whether we should change it, what aspects we should change to meet the challenge of the growing workload that's -- that's certainly coming. But I'm confident that this is a problem that we can meet square on, and we aren't going to go above 300 people in Washington.

Mr. Boyer: I like the race car analogy, Mike. MCC's compact pipeline seems to be robust and growing. Could you give us a sense of the current and future pipeline, and is there a point at which expansion becomes too much for a fairly new organization like the MCC?

Mr. Ryan: Well, obviously, I can't predict how much the pipeline will develop, and because so much of our future activities will depend on congressional funding, and that again will depend on what we do in our measurements of success. But we've been signing. This past year, we've signed six compacts, and I would think that this year, I would hope we'd sign three or four. But beyond that, it would be difficult to speculate.

We've learned a great deal about what works and doesn't work based on our experience with the 11 compact countries so far and recognizing that individual circumstances make each nation unique in its capabilities and the development issues that it seeks to address, we know that we found some approaches that are replicable, and we may identify some efficiencies as a result.

Finally, I really think being a new organization is a benefit because we can implement new ideas without being burdened by our past. Perhaps a real challenge is to remain, as the song goes, "every young," and avoid the bureaucratic impulse.

Mr. Morales: Michael, you've had a highly distinguished career in public service spanning some 25 years, as you indicate.

Is there any advice that you would give to an individual who is perhaps considering a career in public sector, or who may have a specific interest in the efforts at the MCC?

Mr. Ryan: I think the most important question might be why should someone want to work for the United States government? Because, after all, MCC, even though we're different and new, is part of the -- is a part of the federal community. The answer, I think, has to be, because it's the largest, most ambitious, and most diverse enterprise in history. Working for the federal government means upholding the principles on which the country was founded in the form of the Constitution, which is still the model for many countries, and many of the countries we deal with. The federal mission is also large enough to accommodate just about any interest or skill.

What's the best preparation for a federal job? I think everybody has their own concept, but I always recommend that people get the best general education available to them, especially in the liberal arts. But, to me, that means science, math, history, and language, before they specialize.

USA Jobs is a central Web site for all federal jobs openings, and it really does contain something for everything. Our MCC.gov Web site also provides the ability for individuals to go on and do online applications for our jobs, and actually anybody who comes to talk to us, no matter who they are or where they come from or what their background, ultimately, we ask them go back to our Web site, MCC.gov, and fill out an online application.

With respect to jobs at MCC, we find a variety of technical skills useful, much like the other federal agencies in the development community. But I would encourage people to focus on foreign language skills, with French, Spanish, and Portuguese, the most useful to MCC at this time.

To work with representative other countries, there is an obvious benefit to being able to speak and understand their languages. Of course, it's not just language; we can never have too many employees with skills that include communicating across cultural lines, regardless of what their technical expertise may be.

Mr. Morales: That's fantastic. Mike, we have reached the end of our time, and that'll have to be our last question.

I do want to thank you for fitting us into your busy schedule this morning, but more importantly, Pete and I would like to thank you for your dedicated service to our country.

Mr. Ryan: Well, thank you. It's a great honor for me to be here. It's a great pleasure.

I'd like to invite everybody who would like to learn more about MCC, certainly more than -- than I was able to give this morning, to go to our Web site, MCC.gov, and there you can see information about countries, about our programs, and also apply for a job if you want, as I mentioned before.

Thanks a lot; I appreciate being here this morning.

Mr. Morales: Fantastic. Thank you.

This has been the Business of Government Hour featuring a conversation with Michael Ryan, vice president, Administration and Finance with the Millennium Challenge Corporation.

Be sure to visit us on the Web at businessofgovt.org. There you can learn more about our programs and you get a transcript of today's conversation. Once again, that's businessofgovt.org.

As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who can't hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support.

For The Business of Government Radio Hour, I'm Albert Morales. Thank you for listening.

Originally Broadcast Saturday, August 19, 2006

Arlington, Virginia

Mr. Morales: Good morning, and welcome to The Business of Government Hour. I'm Albert Morales, your host and managing partner of The IBM Center for The Business of Government. We created the center in 1998 to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about the center by visiting us on the web at businessofgovernment.org.

The Business of Government Radio Hour features a conversation about management with a government executive who is changing the way government does business. Our special guest this morning is Jennifer Main, Chief Financial Officer at the Small Business Administration. Good morning, Jennifer.

Ms. Main: Good Morning.

Mr. Morales: And joining us in our conversation is Steve Watson, partner in IBM's financial management practice. Good morning, Steve.

Mr. Watson: Good morning, Al, and good morning, Jenny. Thanks for joining us.

Ms. Main: It is good to be here. Thanks for having me.

Mr. Morales: Jenny, let's start at the beginning. Could you tell us a little bit about the mission and the history of the Small Business Administration?

Ms. Main: Sure. The Small Business Administration was founded in the 1950s -- 1953 to be exact. So we just had our 50th birthday. And the mission has really been the same since the agency began, which is to serve the needs of small businesses, particularly in the United States. We do a little bit of outreach across the world, but the United States small businesses are our focus.

And the programs that we provide have also essentially been the same since the beginning of the agency, which is to provide credit opportunities. We used to do direct loans. Now we usually are partnering with the banking community to provide guarantees on loans that they are doing for small businesses around the country. We provide a lot of entrepreneurial development assistance, technical assistance you might call it, through partners across the country, the biggest program in that area, the small business development corporation program. There are over a 1,000 SBDCs -- they're called small business development corporations -- across the country, tend to be in colleges and universities that support entrepreneurs in their areas of local resources

And also procurement -- obviously the SBA's 8(a) program, which was named for the section of the act, but it's to assist small businesses, and particularly economically disadvantaged small businesses to get procurement opportunities, particularly with the federal government. We have a goal of ensuring that 23 percent of the federal contracts go to small businesses across the country.

So those are the main programs, particularly for small business assistance. We also advocate on behalf of small businesses within the federal government, for example, regulatory issues that come up that could have a particularly burdensome impact on small businesses.

And we also have a major role in disaster recovery across the country. And that one is not just small businesses, but homeowners as well. And that's the long-term economic rebuilding in an area after a disaster has struck. We provide long-term loans at very reduced rates. They tend to be -- right now, probably around 3 percent, which is a nice rate to get. For homeowners and businesses that have suffered physical damage or for businesses that have suffered economic injury, losses of -- there are no customers for the business and it shuts down, for example, so they can get recovery for those type of things.

So those are the main programs and the main areas that we've been working in. And really, although the programs have, you know, sort of, modernized over the years, they've really stayed the same in terms of their core purposes, and who they're -- they intended to serve.

Mr. Morales: That's great. That's certainly a very broad mission. Can you give our listeners a sense of the scale of the operations over at SBA? How many businesses are supported by your organization?

Ms. Main: Well, currently we're doing about over a 100,000 guaranteed loans through our main business programs each year. That totals a portfolio of about $60 billion right now in our primary lending program, again named for the section of the act that it was made under, 7(a), as the loan program that most people are -- the most familiar with. Between that and our Section 504 real estate development program, we have over a $60 billion loan portfolio. And of course we actually have a venture capital program as well, which some people are familiar with.

And then separately, our entrepreneurial development programs -- we reach, we believe, over a million businesses every year, and of course some of them are existing businesses, some of them are startups -- people who are considering going into business and trying to make that decision. And on the procurement front, I don't -- I'm not sure we have a good measure of how many we've assisted.

We have a lot of different things we try to do. We do business matchmaking opportunities, for example, where we've reached thousands of small businesses that are meeting up with either large contractors or potential government agencies or other entities that could be looking for small businesses to help them. So it's in the -- well over millions range that we've helped; certainly, you know, aggregate, you know, it's over 20 million over the years.

Mr. Morales: Can you tell us about the mission scope of your office specifically within SBA? Give us a sense of the number of employees, the size of the budget that you manage.

Ms. Main: I'll tell you, the whole agency is about 2,100 people -- our regular staff. We have disaster staff that can range -- 400 or so is our typical baseline. In the Katrina situation over the last year, the disaster employee base actually grew to about 4,000, which is, you know, twice the agency's size. So you have to, you know, kind of -- the core regular agency is 2,100. So it's a fairly small agency. The CFO's office is about 107 of those. And our budget in the CFO's office is, you know, $1-1/2 to 2 million range. It's pretty small. For my discretionary, you know, things that we need to get done. With the staff included, it's over 10 million in terms of their salaries.

The overall agency budget is just over maybe $650 million on average. Of course, the big factor's disaster. This past year we're going to spend a couple of billion dollars at least lending to victims in the disaster in the Gulf area. So our budget, if you looked at it at any one time it really is dependant on disaster.

Mr. Morales: It's just a variable component too.

Ms. Main: Right. If you exclude disaster, we are in the $600 million range.

Mr. Watson: Jenny, can you tell us a little bit about your responsibilities as the CFO, and how you support the mission of the SBA?

Ms. Main: Sure. I kind of think of what we do on two different fronts. On the one hand we're the financial operations, which means we have to work through the budget process, ensure that we get the funds, and just properly track them and account for them, make sure that everyone knows how much they get, what they are authorized to spend, that we don't spend a dime that we don't have all the paperwork properly in place for, and track that all the way through and do the financial reporting that's required.

We're one of the 24 CFO Act agencies -- we're one of the smallest -- but that means we're required to do anything that a CFO Act agency is required to do. So we have audited financial statements and quarterly reporting, et cetera. So the CFO's office covers all of those basic operations. And we certainly I think are typical in that sense in terms of what our role is.

The other side, in my mind of what we do is performance management, performance measurement, really trying to help support the agency in achieving its goals, ensuring that the funds that we spend are accomplishing what we intended them to accomplish.

In that regard I think of us a bit -- the program offices I think are very focused on serving their customer, identifying with their customer's need and making sure that they are doing everything they can to create creative products and interesting tools to help support their customer. And in the CFO's office, I feel a bit responsible, sort of, for the shareholder if you will. The taxpayer. Is the taxpayer getting, for the funds that are going into our agency, the best that it can get?

And ideally we have strong alignment between what we're trying to do for the customer and what we're trying to do for the taxpayer. That's the best scenario and usually it's the case and we're all in alignment. But sometimes you have a conflict there. You might have to look at them, and obviously, there are a lot of people who would have been very pleased if we could have just given out grants in the Gulf coast to people who had such disastrous events impact their lives. But from a taxpayer perspective, we don't have a program that budgets to give grants to everyone; we have a long-term loan program, and that means we can only make loans to people who meet our standards for the likelihood that they will pay those back. So in the CFO's office, I tend to think of myself as the one who's trying in our office. It's our job to make sure that the taxpayer's voice is at the table when the agency is making some of these kinds of decisions.

Mr. Watson: You know, responsibilities for CFOs differ across the 24 agencies. What responsibilities do you have as the CFO of SBA? Do you budget, for example?

Ms. Main: Yes. Yes, I have. Specifically, I have budget, accounting, financial reporting; I have internal controls. We also have performance management. And that's something new that we created in office about two or three years ago within the CFO's office that's called the Office of Accountability, Planning, and Analysis, with an emphasis on ensuring that we are measuring the results that we're getting from the funds that we're spending, that we're tracking outcomes, that we're tracking outputs and using that feedback to influence the business decisions we're making in terms of the funds that we request and how we spend the money that we get.

Mr. Watson: That's a broad scope of responsibilities. I know in reading your background before the show started that you had some private sector experience as well. How has that private sector experience prepared you for this role as CFO of SBA?

Ms. Main: Well, it's interesting. I actually -- and my private sector experience kind of spans a wide range. I worked at a very large consulting firm, multinational, huge place. And I actually worked in several small businesses, one of which I started with two other people, so from the very biggest to the very smallest. And I would say that I got some good experience in both of those places to work in an organization like the one I'm in.

From working -- having started my own business, the thing you have to do if you start a small business is be prepared to wear any hat. You could do every job in the business during one day. So you have to be ready to roll up your sleeves, no job is too big or too small to tackle. And the CFO's office that I came into almost four years ago now at SBA was really struggling. We were in a disclaimed audit opinion and we had a lot of challenges in front of us. And I think one of the things that helped me a lot personally, and helped me create a good rapport with our staff, was that I was willing to roll up my sleeves, get out my pencil and my calculator, and sit down and go through all the issues and really understand what was happening, why it was happening, and what was going on, and I think that earned me respect from my staff, which was -- is very important for a lot of reasons. And it just gave me an understanding of what was going on and helped me come up with better solutions, and provided opportunities for leadership.

So that's on the one hand. On the other hand, working at a very big firm I got an opportunity there to see that people have different skill sets, different styles, different roles. And that's what a team is made up of, that you're going to have different things coming to the table, and as the leader of the team, my goal is to leverage, bring out the best in all those skills in people that we have. And frankly, in some cases, try to minimize some of the weaknesses, you know, find a way to not have them impact the team while you work on making improvements, for example.

So between the two of them I really do feel like I used some of the skills that I got from those two different kinds of experiences in my regular work at SBA.

Mr. Morales: Jenny, we only have about a minute left, but I do also want to get to some other public sector experience that you've had outside of SBA. I understand that you spent a portion of your career as an expert in credit programs at OMB. How has this experience at OMB affected your perspective now at SBA?

Ms. Main: I think a couple of things on that front. The main one is certainly having been at OMB I really have an -- obviously an inside understanding of what they're looking for. So when we get into issues that OMB is going to be concerned about, and it happens very regularly, I have a pretty good sense of anticipating what their concerns will be, and that helps us be more prepared.

The other thing is, I really feel like I recognize that OMB is the policy entity for budget and financial management. We are the operations, so it helps me sort of frame issues with them sometimes that they may have a goal of what they want, but on the operational side it may just not really work that way. And so it's a nice opportunity. I have a lot of colleagues who still work at OMB that I have good relationships with, and I think it's been helpful on both sides to be able to engage in a sort of a knowledgeable dialogue about the issues.

Mr. Morales: Great. What are the Small Business Administration financial priorities? We will ask Chief Financial Officer Jenny Main to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Small Business Administration Chief Financial Officer Jennifer Main. Also joining our conversation is Steve Watson, partner in IBM's financial management practice.

Jenny, can you describe for us what are the goals for your office in 2006?

Ms. Main: Sure. Probably the primary goal is the maintaining our unqualified audit opinion that we were able to achieve in 2005. I'm very optimistic about that, but I also have a new auditor this year, so that just by its nature brings a new set of folks looking at the issues and having different perspectives. So certainly we are anticipating that we'll get feedback that, you know, of a different nature than we've gotten in the past. So maintaining the unqualified opinion is our top priority.

We also have had a repeat material weakness for several years now. And that is really our target to get rid of that material weakness. We've taken a lot of action over the last few years, and I'm hoping that the cumulative effect of those is going to pay off this year in terms of eliminating that.

And the other big item that's on my radar screen is the implementation of the Sarbanes-Oxley type work for the federal government, the OMB Circular A-123. We started that last year like everyone else did, and I really want to get something valuable for the agency out of that. I don't want it to be a paperwork exercise. I want it to be something meaningful. And I think we're on track to do that. But that's been a real goal this year, is to make that add value at the agency, and not be something that people are just feeling they have to do.

Mr. Morales: I wanted to go into this audit opinion, because I think there's a wonderful story here. We understand that -- I believe it was in 2002, in your audit, you did have a disclaimer, but by 2005, you went back to an unqualified audit status. Can you describe some of the steps that SBA had to take to improve controls to get to unqualified?

Ms. Main: Sure. The cornerstone kind of the problem of the disclaimed audit opinion was that SBA had done a series of asset sales where we sold loans, primarily defaulted, but in some cases performing loans. And over time -- the sales were between '99, and 2002 -- and over time it became clear that the books that we were keeping, the accounting books, were not reflecting that we were making money on the sales. And yet the budget tools that we were using, the budget models, were showing that we were making money on the sales.

And I have to add that we were following the guidance that OMB has in its circular for how you do this type of thing. But it was complicated. It was a difficult problem and it was complicated and we were not -- by late 2002 when I got there it was clear that our accounting situation was very out of whack. I mean in effect the loans that were left on the books had to be valued at more than a 100 percent of the return. In other words, borrowers were going to pay us $120 for every $100 they owed us, which simply couldn't be true.

So that was kind of the cornerstone of the issue that got the disclaimer. And we had to resolve that issue itself, which we did through a team effort. We brought in experts from consulting firms. I obviously from my experience at OMB and credit accounting had a lot of expertise to add, and we worked with OMB. We actually asked them to be a partner with us in resolving that issue. So we worked through that and got those things resolved.

And then separately I really felt like we also had to look at what was it that allowed this to happen. And really we needed to address the culture in the CFO's office. So we did it primarily by creating teams. We created two teams, one for all loan programs credit issues in the CFO's office, and really anyone who works on credit issues within the CFO's office is a member of the credit team. And then we met biweekly. And I could give you a lot of details about exactly how we did it and what we did, but our goal was to expand communication and accountability.

Collectively we identified what the key issues were, and then we divided ourselves up into sub teams, and held ourselves responsible for getting those issues resolved. And that meant that everyone who was there had a role in finding solutions. And I think it really worked well just at a lot of levels in terms of getting folks involved in a constructive way to solve problems, empowering ourselves that we could solve problems and address the issues, and communication. If something was going on and someone knows about it in a pocket of our organization and two or three months later -- and they don't say anything -- and two or three months later it comes back as an issue, the whole group was willing to hold that person accountable for not having communicated and participated and worked through the issues.

So we really -- we broke down the silos. The budget, you know, team, the accounting team, the financial reporting team would -- you know, when I got there were sort of pointing fingers at each other. We broke those silos down and we said we're all on the CFO's team. Collectively we have to figure out how to solve these issues. So that was really to me the way that we moved from, over a three-year period from 2002, with a disclaimed opinion all the way up to the 2005.

Mr. Morales: A specific question. We understand that you also had to -- aside from the asset sales valuation method, which I think you needed to work on, was that you improved the cash and tracking of loan performance. Can you describe that a little bit?

Ms. Main: Sure. When I got there, we really didn't have adequate reports on what was happening. Particularly, as I mentioned, we had the $60 billion loan portfolio. And what that means is we have cash coming in every month, fees and repayments of loans, all sorts of different potential sources of funds that are coming in to our account there, as well as funds that are going out. Payment of defaults, payment for care and preservation of collateral, for example. And the fund that these loans are in, it's called a financing account in budget terms, and it's technically a non-budgetary account, because you've accounted for the cost on the budget front in the -- what's called the program account.

So these financing accounts don't have all the same controls on them that a traditional budget account would have. And the problem was that they were -- the team that was there at the time didn't have adequate knowledge of what was coming in and what was going out. In fact, when I got there that summer -- I'm happy to say it happened a month or two before I got there -- we overdrew the account by $50 million that they paid out. And so they clearly did not have enough knowledge about that.

And so we instituted a really tight monthly report -- I would say it took us literally a year and a half to get the report to where it should have been, you know, honing and improving it. But we have a really tight monthly report now that everyone takes a look at and understands exactly what's coming in each month, what's going out. And if you do that and you break it down by your loan programs, you can really understand, are we on track for the defaults that we expected to occur this year? Are we on track for the fees that we expected to get? How are we doing on recoveries? And you can do that by every program that you have. And that's really helped us in our long-term modeling that we have to do to understand what the costs of these programs are.

Obviously, loan programs by their nature -- you make a loan today, you expect to get paid back, but you don't know until year three, four, five, whether the borrower was really going to do that. So we're constantly modeling these long-term liabilities. And having much better data, much more accessible, has really improved the models that we have. And I think that's also been a big part of eliminating our disclaimed audit opinion. And we also had a mature weakness in that area, and that was eliminated in 2005 as well.

Mr. Watson: Jenny, I read your auditor's report before coming here. And they had strong praise for the corrective actions that you've implemented and the financial improvements you've made. Yet SBA's still not at the green status on the PMA. What additional improvements are needed to get to green?

Ms. Main: Well, the last remaining item is this repeat material weakness in financial reporting. And there were a number of items in our audit recommendation list particularly setting up, for example, change control process around accounting -- that's an example. I feel like we should have had some miscellaneous weaknesses last year, certain items that the auditors found that they weren't comfortable with. My hope is that we've addressed all of those. And we really feel like we have a solid quality assurance process in place.

They recommended that we continue to improve our quality assurance. We did hire an additional credit accountant this year. And with the A-123 internal control initiative, we've also done more of our own testing and our own analysis in the financial reporting front.

Another thing we've been doing is -- most agencies have been doing this, to meet the accelerated financial statement deadlines -- is quarterly -- the level of quality assurance and analysis that you're doing quarterly has really increased. Things we used to just do at the end of the year, now we're doing quarterly, you catch a problem much easier earlier in the year than you had before.

I don't think we have a pervasive weakness that I can see. So I think we have some smaller issues that last year our auditor felt like we had enough small ones that they added up to enough of a big thing that they didn't want to say okay, the material weakness is gone. I've been of the view that we're there. And we'll see. We have a new auditor coming in, and I'm actually very much looking forward to getting their views on how we're doing, and in comparison to the other agencies they worked with.

Mr. Watson: Well, good luck with moving to green this year. Moving away now from the audit and the financial reporting to your additional responsibilities to work with program managers better support the business. What steps are you taking there to help the program managers better operate at SBA?

Ms. Main: Best way I can answer that is to sort of tell you my philosophy about that role, which is, I feel very strongly that the CFO's office is a support office, and I'm excited -- you read articles today about CFOs getting a seat at the table. And I'm excited about being, you know, perceived as having a strong role in an agency. But I really want us to use that to empower the program offices to be responsible for their programs, and to ensure that they are getting results that they have established.

I don't want to be the one setting up goals, then telling them that they have to meet them, and then hearing from them that they don't believe in the goals. I want them to establish the goals, and then we'll help hold them accountable. We'll give them tools, try to give them resources. The whole point is to have -- they're the program managers, they know the programs best, and I want to support and help them in achieving what they've identified as the best way to achieve the agency's mission.

So that's really my philosophy about it. Again, the best example I have is this year with the A-123, the internal control situation. We did a sit down kind of qualitative assessment with each of the managers in the main program areas and said, what's keeping you up at night? What's happening in your area that makes you worried? And we identified a couple critical ones. And we've used the contractor that the CFO's office had hired to do this implementation, to go in and do extra testing and create recommendations for them about what they could do to address some of those issues.

So really to make it practical and valuable for them, that they'd have something additional to say when the IG or someone else comes in and says, "What have you done about this?" And we've helped them solve a real tangible problem that they identified that they were worried about. It's a big thing for me. I want them to have ownership of those types of things, the goals and the issues.

Mr. Watson: Following up on that, did ownership of data change, or processes, or the way the CFO interacts with the program offices?

Ms. Main: Well, it's interesting. The data ownership -- we were actually -- the last couple of years the CFO's office has expanded the amount of data that we kind of are tracking for our performance and accountability report, to the annual report that the agency has to do like all federal agencies. And one of my big goals this year is to trim back that data that we all say we're going to track. And if the program officers want to use the data that we've been collecting for their own management purposes, then great. But if they don't, then we shouldn't be tracking it. I think we've accumulated some data in the last few years that we've taken on ownership of, and I'm trying to push it back out. I want them to be the owners of it, because that's where the quality's going to come from. If they use it, the data quality will be good, because they care about it, and they'll notice when something is askew. If they don't use it, it could take a long time for someone to notice that there's a problem with the data, if no one's using it, keeping an eye on it.

Mr. Watson: Moving beyond basic scorekeeping, do you work with the organization to actually help them achieve their goals?

Ms. Main: Definitely. SBA's a very small agency. And literally, the headquarters, the whole management team is in one building on four floors -- five floors. So I see the folks that I work with, I see them at the management meetings, and I see them down at the lunch counter. And I've developed, I think, pretty good relationships with them as I'm working through them -- with them, and trying to keep my eye on what tools do they need, what things do they need that I can help them with.

Mr. Morales: Jenny, we talk with many of our guests about this topic of ownership, of about working together in collaboration. What kinds of partnerships are you developing now to improve the operations or the outcomes at SBA? And how will partnerships with other federal agencies, or the private sector for that matter, change over time?

Ms. Main: I guess I have two different answers for that question. In the first answer, SBA is very much about delivering its products through its partners. Almost all of our programs are delivered through the lending community, and as I mentioned, the small business development companies around the country. Partnership with the private sector is really what we're about. We can't afford to be having a lot of one-on-one relationships with small businesses. So the entire model of the agency's delivery mechanisms has changed to this partnership notion. And we actually engaged in some discussions internally about, is the customer the lending community, or is the customer the small business? And obviously the small business is the ultimate customer, but we recognize that those partners in the private sector are the ones really delivering the services. So we're focused on both. So it's been -- that's a big area for SBA.

In the CFO's office in particular, I would also add -- and I think this is also happening across other federal agencies -- we are recognizing that there are areas of expertise that we can just leverage private sector expertise. We don't to have to do it ourselves.

This notion of outsourcing, hosting -- SBA moved to -- shifted its administrative accounting system to -- we outsourced it to a -- through a competitive bidding process. And that has worked out very well for us. And I think we'll continue to do that, and we're looking for more opportunities to outsource the hosting of our major systems. And potentially, even some of the core functions that repeat commercial operations that could be done anywhere in this budget environment, which is just extremely tight, and anyone who pays attention to what's happening to the budget can see that 10 years from now it's going to be -- it's only going to get worse. We have to be finding ways to lower our costs. And the outsourcing, working with the private sector, is absolutely a top priority for us.

Mr. Morales: How is SBA integrating budget and performance information? We will ask CFO Jenny Main to share the details with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host Albert Morales, and this morning's conversation is with Small Business Administration CFO Jenny Main. Also joining us in our conversation is IBM's partner in financial management, Steve Watson. Jenny, many agencies are working to implement the budget and performance integration aspect of the PMA. And we've talked a little bit about the PMA in our last segment. What is the status of SBA's plan for this effort?

Ms. Main: I'm really pleased to be able to say that SBA has been green on the budget and performance integration in President's management agenda item since a quarter or two after they started the PMA. We were one of the first agencies to be green. And I think the reason for this is that the agency has had a lot of experience that probably since 1998, we've had an activity-based cost model that we used to identify the cost across the agency of the activities that we do. And we've been pretty successful at linking our whole budget environment to -- you know, having a strategic plan that's the baseline that identifies the key outcomes we're trying to achieve.

Our budget itself is mapped to those, and then includes the activity-based cost results in terms of what things cost us, and then our performance and accountability report reports against those same things with the costs identified all the way through.

So that framework has really helped us demonstrate that we're focused on budget and performance integration. And actually, if you went to the culture within the agency, we have what we call -- it makes me laugh -- it's called the execution scorecard.

I always wanted to call it the executive scorecard, but it's the execution scorecard that the chief operating officer uses to manage the program managers and all the managers throughout the agency. And the items that are in there are the same things that are in our budget, on our performance accountability report. He meets monthly with the major office heads to go over the results and how they're doing to date, against those things. So you can really kind of show that we have an integrated performance culture. And I think those different components all put together have helped us achieve green in the first place, and then sustain it going forward.

One thing that concerns me though in this march towards budget and performance integration, which I wholly support, is that there are really two sides to what you have here. You have the cost side, and we're getting better and better. The tools, the data, are more readily available. It's cheaper to track data and keep it and look at it. So we're getting really good at identifying what it costs us to do things. The other side though was the benefits. Unfortunately, particularly in a lot of the programs that the federal government is involved in -- we're involved in them because for some reason the private sector isn't doing them, but collectively our government and our country have decided that they're important activities for us to do.

So there's a benefit there. And it's very hard though for us sometimes to figure out what the benefit is. We have a range, as I mentioned, of different loan programs at SBA. What's the benefit of a small business getting a loan on the terms and conditions that a private sector bank wouldn't provide them? That's the criteria for our primary loan program that the lender wouldn't provide that loan on the same terms and conditions. So figuring out exactly what benefit -- how much revenue we add to the economy.

Well, did, you know, the business retained a person or two, a job or two, or maybe even the whole company that they wouldn't have otherwise. Figuring out how to measure the incremental effect of that is really challenging. We've been working on it a lot, and it's not new to folks who follow this type of issue in the social services world. Because we're so focused on costs and benefits, and because our benefit data isn't so great, we're driving to the lowest cost products.

And I think maybe, especially since I'm in the -- I'm the CFO, I'm the one who's supposed to keep my eye on the budget, I worry that if we keep doing our jobs so well, we're just going to have all the low-cost programs funded, and anything that's higher cost, because we haven't shown what the -- that the benefit is commensurate with the higher cost, you know, we're not going to be able to do those things. So that scenario I've been struggling with. Our office has been leading a large multiyear program evaluation trying to quantify the benefits of some of our loan programs.

But it's challenging. I know when we're done there'll be, you know, a potential for people that, well, you didn't have a prefect comparison sample, because you can't.

Mr. Watson: Jenny, shifting gears here a little bit, the internal control requirements of Sarbanes-Oxley have moved into the public sector in the form of an expanded circular A-123. How is SBA implementing the new A-123 requirements?

Ms. Main: Well, we've really done what I would call, sort of, a traditional A-123 implementation, and I'll confess in the government you're allowed to do this. We just took OMB's guidance that they provided us last summer and used it as the basis of our plan. We just went section by section and said, "Okay, OMB wants us to do these things, let's put them in our plan." So we're kind of trying to do the baseline traditional version of it. And it's actually worked well for us in the sense that I think everyone's clear about the goals, there's a lot of documentation for exactly what we're doing and why we're doing it.

But as I mentioned earlier, from my perspective, the number one thing is to bring this back to the actual issues the agency is facing, and allow it to give us a few solutions to problems that we know we have. SBA has literally a couple hundred open IG audit recommendations, and we are not alone in that. Any agency you go to is going to have a lot of open audit recommendations. We have unresolved issues. If there are issues around that the resources we're using under A-123 can help solve some of these problems then my view is let's do that.

Rather than going finding more new things, let's make it really hands-on and practical and solve a few of those problems. So we picked to go deep, if you will, in a couple of key places. Rather than 10 miles wide and an inch deep, we said we'll go five miles wide and pick two or three and really drill down. And that's how we've done it. And I feel like I've gotten some really good feedback from our program managers, because they're going to have something tangible that they can use in a response to the IG, for example, on a problem they've been working on.

Mr. Morales: As a result of your efforts, are there any lessons learned you will apply for next year, or could provide to other government agencies that are going through the A-123 process?

Ms. Main: Well, certainly the most practical one that we're learning right now is because we spent the whole year planning, and this is the first year of it, we're testing the exact same time that the auditors are testing. It's frustrating on a number of fronts. We certainly wish that we would -- could and hopefully next year will test -- you know, February-March range. It'll separate the sampling process. Right now, we have program offices getting request for samples of loans from our internal management's auditor, and which is -- because we hired a firm to help us -- and from the IG's external auditor.

And they don't know the difference. You know, we can try to tell them, and I've tried, believe me. But when all is said and done, you know, they're auditors, whatever, you know. So hopefully if we push our testing back a few months, maybe February-March, and then I would say we'll have the results earlier. And if there are issues that you can address and get them solved, that's the ideal situation. At least by September 30th you might be able to show that you've cleaned up whatever the problem was, and that you have a practice in place that the auditor, then when they test it in June or July they'd see something that they're comfortable with.

Mr. Watson: Do you envision being able to integrate that testing going forward so that there's not the A-123 auditors and then the traditional financial statement auditors both testing and looking at data?

Ms. Main: Well, from everything I can tell, the intention is that they want us to test for ourselves, and have the auditors test on top of it. That's my understanding of where they're headed. I think they're willing to let us document -- you know, the first year they want us to test every -- a baseline of the key processes, and then going forward it seems like there's some opportunity to show, hey, we have a really strong track record that we don't have any issues. We have these processes in place that would tell us if there's an issue, and therefore we're only going to -- we're going to sample a smaller number, we're going to sample less frequently in a sort of a multiyear kind of thing. But I think the notion that management has to have something of its own to stand behind the assertion where we have to assert as to the quality of our controls that are in place -- in the past you could make that assertion based on whatever your --- process would let you get away with in a sense.

You know, you had to write a letter, and it said, "Yeah I've looked things over. I've checked it out. Based on my management judgment, I think we're fine." And my understanding is now you have to say, "Hey, I feel good about the internal controls, and I tested them. And we didn't have any exceptions." Or, "The exception I had I could understand and explain it away," you know, whatever the case may be. But you have to have that testing, I think, to make the assertion that you have things under control.

Mr. Morales: Jenny, how has SBA handled the accelerated financial reporting requirements implemented in '05 and '06, and what steps is your office taking to ensure the deadlines will be met?

Ms. Main: This one I -- near and dear to my heart. We actually had a disclaimed audit opinion the first year that they -- that was actually in '04, the first year that they were -- we had to meet the November 15th. The number one that was one word, "planning." And we literally planned down to the day who was doing what, when. We had plans and sub-plans because our auditor -- and of course our auditor was nervous about making November 15th too, it's a lot of work for us, it's a lot of work for them.

Our IG and OMB, we had so many planning meetings and discussions, we had literally almost 100 pages of planning documents of exactly what was going to happen when we tracked every component of the financial reporting process down. And then the audit process, I think they did the same thing on top of it. And that's how we made it. And it served us very well because we could just update those plans in subsequent years.

Mr. Morales: What does the future hold for SBA? We will ask CFO Jenny Main to discuss this with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with SBA's chief financial officer, Jenny Main. Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.

Mr. Watson: Jenny, in the last segment we were talking about various OMB initiatives for internal controls and accelerated reporting. I want to talk to you a little bit about the line of business initiatives. Where is SBA with respect to implementing lines of business?

Ms. Main: We're very supportive of the lines of business initiative. I can tell you as again, one of the smallest of the CFO Act agencies, we are constantly looking for opportunities to team up with a bigger agency who has gone the path of getting all of the standards and requirements in place for some sort of technology that we can just piggyback on. But we're just too small to be developing our own things. That said, we had just outsourced our administrative accounting system in 2003, right when the line of business initiative was kicking off for the financial management side.

And so we're anticipating when that contract is up -- we have a very, very good contract that has been very cost effective for the agency. So we don't want to move away from that in the short run. But when that contract is up in a couple more years we'll be anticipating transitioning to one of the existing centers of excellence or, you know, our service provider is actually I think becoming a center of excellence. So that will be a competitive opportunity that we'll look at. We are a small entity that benefits from others who want to do this. I don't anticipate us becoming a center of excellence because we're a small fry in the mix.

Mr. Morales: Jenny, I want to transition, now, to the future. What trends will have the largest impact on SBA, say, in the next five to ten years?

Ms. Main: I think it continues to be technology. We're primarily a wholesale provider of services to the small business community. We're working through our partners as I mentioned. And technology -- you know, the number of people who have computers and Internet and access to things -- we really want to move to 100 percent electronic transactions with everyone that we deal with. Obviously, aside from training and counseling type of activities where although you can do a lot of that through the Internet, and we've been expanding our presence on that front, you know, person-to-person is still I believe an important part of like a training or a counseling program.

But lending and those types of things -- the lenders are going to be the ones that interface directly with the small businesses, and we really will just interact electronically with our lenders. And we're using technology now to monitor our lenders much more effectively. We can get data. We have over 4,000 lenders. We need to know very quickly which ones are high risk, and you can use data to do that today. And we'll just become more efficient and proficient at that in the future.

The other area that, unfortunately, I'm not so optimistic about -- I know it's going to impact us, but it's not in a good way, is the budget. As a small domestic agency, very small, we have already shrunk almost, well, over 30 percent as our -- what our budget has declined over the last five years. Our staff has gone down 20 percent. We haven't given up any programs or any major programs at least, and our loan portfolio only grows. When you make loans, it creates a liability that can be 5 to 10 to 15 years down the road that you're still working on it.

So we have to maintain sufficient infrastructure. As a steward of the taxpayer's dollars, it is penny wise and pound foolish not to be maintaining an adequate infrastructure to manage that portfolio. In this current budget environment we're looking at cuts, you know, across all the agencies. I'm not the only one, you know, singing this problem. But I -- when I look at the impact of that on our agency it makes me very nervous, and we've been working hard for the last few years to try to figure out strategies. But you get to a point where you can't tighten the belt anymore, there's bone there, and just need a different approach.

Mr. Morales: Certainly a challenge. I want to transition back to some comments you made earlier in the show around disaster and disaster planning. And we've talked to many of our guests about what their organization's role is in this area. What role does SBA play in national efforts to support businesses and the economy during a disaster response?

Ms. Main: Well, SBA has one major disaster program. It's a loan program. We provide long-term recovery loans for rebuilding either homes or businesses after a disaster. And that's -- it's been a bit of a challenge. And over the past year with the extreme nature of the disaster in the Gulf, I think folks really wanted, for example, a bridge loan type of thing. Something that could keep them going for a few months while they were trying to figure out how they were going to salvage their business, or whether they were going to be able to return to the area.

And unfortunately, SBA doesn't have a statutory program that provides a short-term bridge loan product. And that was a source of, I think, a lot of frustration. But what we really have is the long-term recovery program. And in fact, most of the loans are 30 years. We will extend the payment term out as long as it takes for the borrower to be able to make the payments on their forecasted, you know, income that's available. So that's our primary program. It's been around for more than 30 years.

And overall, I would call it a very successful program. Folks who have used it -- Northridge earthquakes, for example, we did about $4 billion there in Southern California. We've gotten, over the years, a lot of positive feedback about it. But in such a dire circumstance like the Gulf, I think we found that that program alone was challenging. It caused a lot of frustration that there weren't more things. And, you know, today you can find that Mississippi and Louisiana are actually giving out grants to homeowners who have gotten SBA loans, and we're going to use -- and we're coordinating with them to coordinate that benefit.

But the devastation has been so bad that the federal government responses said, you know, we want to go a step further. So we've been working with them to make that happen.

Mr. Morales: Great. Jenny, you've enjoyed successes both in the private and now in the public sector as well as starting up your own business. What advice could you give to a person who's interested in a career in public service?

Ms. Main: Well, certainly, I've always loved being a public servant. I actually have a master's degree in public policy. So I really enjoy the challenges, the issues that you face. I mean, I kind of define the issues that the government frequently is looking at, or the things that didn't get taken care of in the private sector. There are issues that people care about, but the for-profit bottom-line isn't making them happen. So that by its nature I think makes it interesting. And I would certainly offer encouragement.

And we're looking at a huge demographic shift in the federal workforce in the next 15 years -- 40 -- 45 percent of SBA staff are eligible to retire in the next 5 years. So we need good people. So I would very much encourage anyone who's interested in public service. I would say that it's a -- it can be very challenging. There's a lot of tough things about it. But I personally feel like I make a difference every day. Personally being there, helping to make a decision or change something that otherwise would have gone a different way, I feel like I make a difference everyday, and that's very rewarding.

Mr. Morales: Great. Excellent. Jenny, unfortunately that -- we've run out of time here, and that'll have to be my last question. I do want to thank you for fitting us into your busy schedule today. But more importantly, Steve and I would like to thank you for your dedicated service to the public in our country in the various roles you've held at OMB and now at SBA.

Ms. Main: Thank you very much. I really appreciated the opportunity to be here. And I just want to make sure that all of your listeners know that if they're interested in the Small Business Administration and the products and services that we offer, particularly if they're considering starting up a small business, you can go to our website, which is www.sba.gov, and take a look at all the many great programs that we have.

Mr. Morales: Great. Thank you. This has been The Business of Government Hour featuring a conversation with Chief Financial Officer of the Small Business Administration, Ms. Jennifer Main. Be sure to visit us on the web at businessofgovernment.org. There you can learn more about our programs, and get a transcript of today's conversation. Once again, that's businessofgovernment.org.

As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who can't hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support. For The Business of Government Hour, I am Albert Morales. Thank you for listening.

Friday, October 29, 2004

Arlington, Virginia

Mr. Lawrence: Good morning and welcome to The Business of Government Hour. I'm Paul Lawrence, partner in charge of The IBM Center for The Business of Government. We created The Center in 1998 to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about our programs and publications by visiting us on the web at www.businessofgovernment.org.

The Business of Government Radio Hour features a conversation about management with a government executive who is changing the way government does business. Our conversation this morning is with Andy Maner, Chief Financial Officer of the Department of Homeland Security.

Good morning, Andy.

Mr. Maner: Good morning.

Mr. Lawrence: And joining us in our conversation, also from IBM, is Dave Abel.

Good morning, Dave.

Mr. Abel: Good morning, Paul.

Mr. Lawrence: Well, Andy, let's start by talking about the Department of Homeland Security and the Office of Budget and Finance. Could you give us some background and describe the size and composition?

Mr. Maner: Well, the CFO's office at Homeland Security really encompasses about five different functions: that includes budget, finance and accounting or financial management, strategic planning, financial systems, and GAO and IG audit liaison. So those are the primary functions that make up the office of the CFO at DHS.

Mr. Lawrence: What type of skills do you have on your team? What are the skills that people have on your team?

Mr. Maner: Well, it certainly varies, of course, by office. You would normally have quite a bit of budget expertise, both execution and formulation experience, in your budget office. In the finance office, you typically might have, of course, CPAs, accounting types. And then in strategic planning, as you move into financial systems, these are people with a broad background of either accounting, budget, or possibly systems experience. So it is a bit of a blend, but you do tend to find people who do focus on numbers or systems, per se.

Mr. Lawrence: And are they a tenured team? As you were describing the offices, I thought about level of complexity and imagined somewhat older, more experienced.

Mr. Maner: It's a range. Again, when you look at Homeland, really in any of our offices, where people came from, their age, their experience, it's a variety, because when we set up the Department, we inherited a lot of people from other departments. That was part of the transformation and how Homeland was created, and then we've hired a lot since then. So you would definitely find a blend of people. And as you know, I think good financial management personnel don't grow on trees, and so you have to work pretty hard to find good people, especially in a major metropolitan area like this, which you have to compete for resources quite a bit with private sector firms, et cetera.

Mr. Abel: Let's focus a little bit on you. What are your specific roles and responsibilities as the Chief Financial Officer for DHS?

Mr. Maner: Well, in a sentence or two, it's, of course, to be the steward of the financial resources that exist in the Department of Homeland Security. So it is certainly my job to obtain the financial resources that drive our department, but it's also to be the steward of those resources, to make sure they're spent in the right way and we execute according to regulations and laws that govern our department and others. So it's being the primary financial conscience, if you will, of the organization. That's how I describe it.

Mr. Abel: Let's talk a little bit about your background. What experiences did you have before being appointed to CFO?

Mr. Maner: My background is really about a 50-50 blend of private sector and public sector experience, and some of it revolved around financial management and some of it didn't. My career began in government. I was in the first Bush administration for a few years. And after we lost the election, I guess we say, I continued to stay with President Bush for about six months, six to nine months after that.

I stayed in government after that and went over to Somalia for a time to help set up the -- what is now called the Coalition Provisional Authority over there. It was really the civilian-military mix in Somalia. So I stayed there for a while doing just a little bit of everything in terms of running that organization. That was a U.N.-sponsored organization.

After coming back from Somalia, in fact, being evacuated from Somalia, I really focused on the private sector portion of my career. I was at the Chicago Board of Trade for a time. I got my MBA in finance and then really moved into more of an entrepreneurial phase of starting companies and managing those, growing them, merging them, et cetera.

After 9/11, I came back into government, was pulled back into public service, and I was at Customs, where I was the Chief of Staff there. But, you know, primarily, one of the great experiences of the Customs, couple years I spent there, was that after Homeland was created, I was in charge of the merger of Customs, which was the merging of Customs and many parts of the old INS and parts of the Department of Agriculture.

So, in a sentence or two, it's really a blend of private and public sector experience, which I just find fascinating, that mix.

Mr. Lawrence: What drew you back to public service?

Mr. Maner: Well, public service, there's just nothing like it in my mind. In fact, I hope my career continues to be that blend. The stakes that exist in public service, I think for people who have been in it for a long time, they often forget about the dollar amounts they're dealing with and the high-level stakes that they're dealing with, but I just find that public service is the most noble cause that exists. And it's hard, and a lot of times, there's not a handbook. You're constantly under scrutiny and you just -- there's not a lot of room for error. So I think it's the noblest calling, and I personally enjoy it very, very much.

Mr. Abel: With this balance between public and private sector work, what are the major differences in working in each of those sectors?

Mr. Maner: Well, I think there are a lot of differences. I think it's interesting in financial management, I actually kind of view the public and private sector as kind of coming a little bit closer together with Sarbanes-Oxley and some of the new requirements put on the private sector. The private sector's getting a feel for somewhat greater oversight, which certainly exists in the government. So there's a similarity there, or at least a growing similarity.

But in the private sector, accountability of people is a very important thing. You get issued a task and you have to do that task, and oftentimes your compensation rides on it or, in some cases, your job rides on it. That's one difference. I think you have to spend more time in the government cultivating and training your people, because that's going to be your team. And so I have found in the public sector, I spend more time on people issues, and that can be a positive and a negative, but I think you have to work hard to develop your own people.

I would say, I would have said three years ago, that the public sector moved at a slower pace than the private sector. But from my experience here at Homeland Security, I wouldn't say that anymore. We're moving at a very, very fast pace. So maybe I'm saying that some of the differences are narrowing between the two.

Mr. Abel: Has the experience in the Department of Homeland Security and the pace, with which it's moving, has that changed some of the challenges that the public sector faces in performing its mission?

Mr. Maner: Well, I think that there isn't room for error. I think we all come to work at DHS knowing that -- I mean, there's a lot of clich�s about Homeland Security, about, you know, you have to be right 100 percent of the time, you can't ever be wrong. But yeah, I think it's changed the complexity of government for sure, because my given day and that of my employees is we have a mission to carry out, and that is to support the Department and to make sure our frontline people have what they need to get the job done. But almost a secondary job, but takes just as much time, we have to build a department. Those are almost two full-time jobs right there. So the people that work for me and I think work in the Department, they have stepped up to that and it's not easy. And so it's not -- when they talk to their friends at other departments, it's not always the same lifestyle, for sure.

Mr. Lawrence: Andy, as you were describing your career, I couldn't help but think that you've had some pretty profound moments in your career, and thinking about those lessons learned. So let me take you through what I heard: part of an administration that was not selected to come back; being in Somalia, a very difficult situation; getting an MBA and a specialized career; and then sort of 9/11. I'm curious about, you know, the lessons you learned in a couple of those situations and how you're applying them now in your job.

Mr. Maner: Well, I think that it's interesting that my first job out of college was working for the President of the United States, and so what is something that you learn there? You learn a very high stakes existence pretty quickly. I think you learn to deal with adversity. I think you learn to deal with a look around you that is not complete; it's up to you to fill in the blanks. And that's what I think management and leadership is, is filling in the spectrum for your employees. And I think at an early age being in the White House taught that.

In Somalia, again, I actually did think that being in Somalia would be the hardest job I ever had in my life, but maybe Homeland might surpass that. But Somalia was -- there was no handbook. There was no handbook for how to achieve peace. There was no handbook for how to contain starvation. There was no handbook for how to do nation-building, as it was -- that was a new term back then. And you just had to figure it out. You had to get the resources and figure it out.

And so those experiences at a young age, for me, really taught me that it's really about initiative and about leadership. And people often ask me, well, you were the CFO, but you were in the press office in the White House. How are those similar? Well, to me, these are management jobs. What I'm in now, it's not important if I'm a CPA or an MBA, it's important that I manage, and that's really what I've been trying to build in my life is that capability.

Mr. Lawrence: Interesting, especially the part about filling in the blanks.

How is the budget for the Department of Homeland Security formulated and how is the money allocated? We'll ask Andy Maner, CFO of the Department, to take us through this when The Business of Government Hour continues.

(Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, and today's conversation is with Andy Maner, Chief Financial Officer at the Department of Homeland Security.

And joining us in our conversation is Dave Abel.

Mr. Abel: Andy, beginning with the budget for 2005, a performance budget is going to substitute for the annual performance plan required by the Government Performance and Results Act. Can you give us some details about this?

Mr. Maner: Well, the overall budget process is really quite intricate in government, and it's about getting the resources. But as you suggested, it's about providing the results for those dollars. And so we spend a lot of time in the Department formulating the budget and looking at what initiatives should the Department be doing. You know, of course, resources are not unlimited, and so we are trying very, very hard to put together a package that reflects the current threat picture against the United States, and that's really what we try and do.

And then, of course, once we move into where we have signed a bill, we move very hard into tracking that money and trying to make sure it's doing what it's designed to do. And there are many, many avenues in government to do that from when you send your 300 submissions over to OMB to Homeland actually has one more assignment, and it has to provide a future years budget, a five-year look at our budget.

So there are many acronyms and many papers that fly around, but what it all culminates with is on February -- the first Tuesday of every February, we will hand a budget to the Congress. The President will hand a budget to Congress. And by that point, it's obviously our goal to have it very tight, have there be no doubt what those resources are to be used for.

Mr. Abel: This whole process is very interesting, so maybe we can dive into some of those components. You mentioned that there's a strategic plan and a future years Homeland Security program. There's also the planning program and budgeting system. How do these components work together? What's the vision or view of how these components should relate with each other?

Mr. Maner: Well, again, as you suggested, there are lots of acronyms and lots of things. What we are trying to do, and we're not done, is to create a year-long calendar that everybody knows and everybody understands. And by everyone I mean the agencies, the agency heads, Congress, OMB. And so every department does it slightly different.

And so we've had to build ours, and so you begin really in the spring formulating for a budget two years from now. And so you would go through, and we will build our budgets off of a strategic plan. We want our budgets to reflect the strategic plans that we've put forth to the Congress so that people know, hey, we are trying to fund these types of initiatives.

And so you don't want to -- having to do a five-year budget allows you to not start from scratch each year. You know really, you have the base of your programs, but the threat picture may change. And so each budget cycle, you want to make sure you engage the agencies, you want to make sure they have a chance to make their pitch to not only me and our staff, but to the Secretary or to the Deputy Secretary.

So all of those things, and you mentioned, you know, PBBS, again another acronym for programming, planning, budgeting, and execution, which is really -- that's really important. That's a system, and we haven't perfected it, but we're trying to get to a calendar that everyone understands.

Mr. Abel: Yeah. How far along are you in the implementation of this method? How's it being received within the organizations at DHS?

Mr. Maner: I think it's being received okay. I think that everyone at DHS, you know, is used to new things coming at them, and we try and not tip people over with a lot of new requirements. We are really asking for the same thing we've asked for the last two years, but we're doing it in a more concise and a more transparent format. And, you know, as I say, it's all driven by the calendar. You have to submit your budget in the summer for two years from now, then you get your pass back, and then you submit on the first Tuesday in February.

So I think it's being received well. Again, most people have been in government. So as it relates to budget, they kind of know the drill.

Mr. Abel: So if we shift from the budgeting/planning side to the execution side, for 2005, DHS requested $40.2 billion, which is a 10 percent increase over last year. Can you tell us a little bit about how that money gets allocated on the bill side, and the operations then come after the planning phase?

Mr. Maner: Sure. Again, we allow -- you want people to begin to think about the budget in an unconstrained way first, which is if you had all the money in the world, what would you do to secure America? Then you hone it down. And then, of course, our '05 budget gets submitted by the President, and then the Congress really passes that. And of course, our '05 bill was just passed in October, so we're very pleased to have a 2005 appropriation.

But for us, we have many, many operating agencies and only a small amount of money. And so we allow people to pitch their budgets as to how they affect and better the strategic plan of the Department. And so for us, it's not any different than any other department. We want the people who have the most innovative programs, who do the most to secure and have the most performance metrics for those dollars to get the money.

In Homeland, we have such great agencies that we inherited, and some new very important startup agencies, such as IAIP, which an intelligence analysis unit; we have science and technology, which is an R&D component. So again, our funding is pretty well spread to all of our components, and again, the success for any budget is to work with the administration and then to work with Congress, and you spend most of your summer doing that and having hearings.

Mr. Lawrence: Andy, you talk about the fact that you would have many demands for the scarce resources you have. How is conflict resolved in that situation, conflict in the sense that, you know, everybody wants the little that's left?

Mr. Maner: We've had a very great -- we had a very -- and again, I've only been here for this budget cycle, the '05 and into the '06, so I can -- but we've had a great experience in that the Secretary and the Deputy Secretary have believed very strongly in bringing together the senior management team at every turn so that they are hearing the programs of all of the agencies. Instead of just coming in, and let's say I'm the commandant of the Coast Guard, and pitching my budget, I will actually hear at a forum everyone's budget. And I have found that everyone realizes that while they're not the only one doing great work, there's a lot of great work going on in the Department. So as it relates to budget, I think we've been able to really reduce that conflict that could exist.

And frankly, though, Homeland Security's been very well funded by the administration and Congress. So, you know, we don't have maybe as much conflict as we would if we weren't getting upticks in our budget.

Mr. Lawrence: You talked about execution at the end of the planning and allocating the budget, so I'd like to talk about one of the management initiatives that's going on, e-MERGE2, or the Electronically Managing Enterprise Resources for Government Efficiency and Effectiveness. Can you give us some background on this project that I believe just recently started?

Mr. Maner: E-MERGE2 is really a financial systems effort, but you could call it a financial transformation effort. It is Homeland Security's attempt to really cajole the financial systems, the many, many that we had inherited, into a more usable format. And I'm careful not to say that you want just one system, but e-MERGE is an effort to make sure that we have a way to very quickly have visibility into our finances and the billions of dollars of grants we give out very quickly, and to integrate that with our procurement asset management systems. So e MERGE2 is really our backbone for creating one DHS.

As a financial manager or as a secretary, if you don't have good visibility into how dollars are spent and you can't get a dashboard of what these things look like and how you're doing, you really don't have full control over your department. And so that's what e-MERGE is designed to do.

It's worth saying, though, that the government in general has struggled with these types of efforts. Some people have been very successful at rolling out and some people have not. We're trying, as in a lot of areas of Homeland, to not repeat mistakes of the past. We've spent a lot of time on due diligence and looking at what other departments have done, what's worked, what hasn't worked. And so we are trying to do this in a 21st century way.

Mr. Lawrence: Well, I'd be curious to learn about what you learned in the due diligence and also tie that into -- I thought your wording was interesting, that this is a transformation project. I'm sort of wondering what the vision here around those things are.

Mr. Maner: Well, we've learned that you can't just take systems, throw them out, and replace them with the perfect system, because it doesn't really work. Every -- anything you do in financial management revolves around the system and the process with which you use the system. So we're about the work of trying to, you know, create and market those processes in a way that says -- and how you bring the system in; the system is really just the -- that's the tool that allows you to do it, but you need to create a common set of practices and processes to do that, and that's what we're trying to do.

Mr. Lawrence: And the transformation comes from the new processes?

Mr. Maner: Yeah, the transformation is remembering that the financial management staff that we inherited at Homeland and my own staff and that in the Bureau's, they are from virtually five different departments, possibly even more, so they all have different processes. They think about things totally different. So transformation is to transform that thinking into one line of thinking. And that doesn't necessarily mean everyone needs to be on the same system at the same time, but it does mean that everyone needs to follow a common set of processes, and that's transformation.

Mr. Lawrence: How about a timeframe, where we are and how long this will take? Because I know everything at the Department of Homeland Security has to happen fast, but this doesn't sound fast the way you described it.

Mr. Maner: Well, again, I think this will take, you know, at least three years to get the roots deeply engrained, and this isn't going to happen overnight, as you suggest. However, I've often said that financial management is a journey and you have to make progress every year, but you don't need to make one great leap. This year, we're focused on visibility and making sure we have a common set of financials that I can review and see how everyone's doing against their execution; and we want to see -- have visibility into our grants. Again, one of the -- the Secretary says this all the time, one of the primary drivers of Homeland Security is our interaction with state and locals. We produce and provide a lot of money out there, and we want to make sure we have the right visibility into how that's being spent.

Mr. Lawrence: That's interesting, especially the point about visibility.

Management guidance for this administration comes from the President's Management Agenda. How is the Department of Homeland Security implementing the PMA? We'll ask Andy Maner, CFO of the Department, to explain this to us when The Business of Government Hour returns.

(Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, and this morning's conversation is with Andy Maner. Andy's the Chief Financial Officer at the Department of Homeland Security.

And joining us in our conversation is Dave Abel.

Mr. Abel: Andy, in the last segment, we talked a little bit about the due diligence that you did looking at other agencies' implementation of financial management systems. What are some of the things that you learned in looking at other organizations, and how did it change how you will move forward with e MERGE2?

Mr. Maner: Well, it's a good question, Dave. And first of all, I'd make the broader point that the words "due diligence" are often not well understood. Due diligence is something that the private sector takes very, very seriously, and earlier in the show, we talked about differences between the private sector and public sector. When you're taking on a task or a project this big, I think it behooves you to do lots of due diligence, as much as you can do. If you think about the private sector, before they acquire a company, before they do a system, they do lots of due diligence. It's where that word came from. The government I think doesn't take enough time to do it. I think there are lots of examples, and there's lots of data out there that you can learn from. And one of the things we've tried to infuse into e-MERGE and other places within Homeland is do due diligence, look around the federal government and find the best practice and find the things that didn't work.

While we were doing the e-MERGE procurement, there were some pretty high-profile stories out there about some systems that hadn't worked and some agencies that had failed. And what we did was just take a timeout and make sure we understood what was driving that. Again, I don't think that the press always reports these things; that they don't take the care to really dig into why a system's failed, because most people don't understand it. But we took a couple months to do that, and that really pushed our procurement back, but I'd much rather do that up front than somewhere in the middle or at the end of the program. So we've tried to infuse that into e MERGE.

Mr. Abel: Did that make changes to what you'll do going forward as well? Did it make changes to milestones or the direction of the program, what you learned in that research?

Mr. Maner: Most of what we learned, believe it or not, was about project management. It wasn't about technology. It was about how you manage a project of this size. And it gets back to some fundamental things, which is about project buy-in. And sure, there's a lot of data conversion issues, but, to me, what I learned, and this was both from the private sector and the public sector, I spent personally a lot of time talking to companies, all of their things revolved around management.

Mr. Abel: Speaking of management, Steve Cooper, the CIO from DHS, has a great quote on e MERGE2, that it's "changing the wheels on a moving car." What are some of the biggest management challenges dealing with the merging of 22 different agencies' financial systems?

Mr. Maner: You could actually take Steve's quote and blow it up to reflect the whole department. I mean, it's changing engines in mid-flight, changing the wheels on a moving car. Homeland Security doesn't have time to sit, make it perfect, and then relaunch. We have to move.

The biggest management challenges are about getting people to see and accept a one DHS vision, and that revolves around people, processes, systems, and locations. Those are the four ways that I look at our management challenges. And I'm careful not to try and attack all four at once. You know, you say where are the financial management people in the Department? Well, that one's really not important now.

What's important now is that we set up standard operating processes and we work the systems angle. There will be time to work on the people. Do we have the right skills sets? Are they in the right cities? Do we have too many of this, too many of that? One example I'd give you is when we created Homeland Security, we had 19 different financial management providers. We've consolidated that in one year down to 10, and this year we will be down to 8. So we're doing some consolidation, and that does remain to be one of the goals that I have.

Mr. Lawrence: The management agenda for this administration is in the President's Management Agenda. How's DHS doing implementing the PMA?

Mr. Maner: Well, there's really two parts of the PMA that I look at very closely, and, of course, that's budget and performance integration and financial management. And we talked a little bit earlier in the show about how you link budget and performance, and that's both a top-down and a bottom-up approach. And the second is financial management and making sure we have clean financials and we are stewarding the money properly.

DHS, in 2003, did a financial audit, as an example, when it wasn't required to. We did that to start getting people in the habit of financial management and accountability. We did another of course, we did an audit this year and, again, we were more ready for it this year. So the PMA drives a lot of what we do. We still have a long way to go on it. I think Homeland being a remember, I think one of the most compelling parts about Homeland is it is a collection of mergers; it's a collection of acquisitions, startups. It's really a conglomerate of a lot of different things. And we can't treat any of our agencies the same. We might have a startup over here or we might have the Coast Guard that is over 200 years old. So you have to treat them very, very differently.

Mr. Lawrence: I'm curious about your perspective on the linkage between budget and performance, especially around management. I mean, some argue that it's being done. But until we can link, you know, budget to sort of accountability at an individual level and begin to make some hard choices, and by that I mean not necessarily giving more money to programs that are in trouble, but maybe taking money and giving it to the programs that are really doing well so that we can be more effective, I'm curious about where you think budget and performance integration is relative to where it has to go.

Mr. Maner: Well, any CFO anywhere in the government, and I'm sure in the private sector, will tell you that there is no mountaintop, there is no peak, it is something that evolves, it is something that continues. One of the things we are trying to do at Homeland is get away from the belief that if it was in my budget last year, it's in my budget for the next year, and then I'll add some new initiatives on top of it. I call that mining the base. I don't think the government does that well enough. And that's one of the things we're trying to do at Homeland, to say we have, as you suggested earlier, almost a $40 billion budget, what was working in '05? What didn't work? What didn't secure the homeland? So that we can move those resources, and that's accountability. That's taking resources from a program that's not working and giving it to someone that has a program and a way to measure the program.

So again, I'll go back to my "it's a journey." You have to get better every day. We have a ways to go here, but we're pretty committed to it.

Mr. Lawrence: Well, let me drill more on this mining the base, because it sounds very -- tell us about some of the management challenges and what works doing that.

Mr. Maner: Well, again, mining the base, or whatever you want to call it, is all about visibility, and we talked about it. Now I'm linking e-MERGE into this discussion, because if you don't have visibility into the dollars, you are forever in an information-gathering mode, and I would rather be in an information analysis mode. We have, of course, a great staff who is constantly on the hunt for information, but it takes a lot of time in government to get the information, and I'd rather spend more time analyzing the data so that I can look at a secretary of my department and say let me tell you, I know this program, it's working and here's how I know it's working and I would recommend this to it the next year. So it's really, really about visibility.

Mr. Abel: Andy, technology is a leverage in most of the things that are done in the Department, and when we think of technology, we tend to think of the technology in fulfilling the mission in the field. But technology has to be a big lever for you, an advantage for you to getting visibility, to getting to analyze information in the way that you need to be able to make decisions. What are some of the ways that you're using information technology and e-government initiatives to enhance financial performance at the Department?

Mr. Maner: Well, technology is, as you suggest, the great lever for really moving successful programs forward. My reliance on technology will come down to systems, to the financial systems or to e-MERGE. Certainly you can have tactical pieces of technology that allow you to do budget formulation better or allow you to do a certain thing in finance better, produce your financial statements, that sort of thing. But really, for us, it comes down to having an integrated system that will provide us better visibility. So there's tactical things using technology you can, but you really -- for us, we are going to have to do a broader step, which is e-MERGE.

Mr. Lawrence: That's an interesting point, especially about the visibility and technology.

What are the implications and management challenges of being the CFO for a young or relatively new cabinet agency? We'll ask Andy Maner of the Department of Homeland Security for his perspective when The Business of Government Hour returns.

(Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, and this morning's conversation is with Andy Maner, the Chief Financial Officer at the Department of Homeland Security.

And joining us in our conversation is Dave Abel.

Mr. Abel: Andy, previously, we talked a little bit about in the development of the budget, developing the budgets for the mission without resource constraints. But in the real world, in the Department, there are resource constraints. How do you work collaboratively to be able to fulfill the mission of the Department with those resource constraints in place?

Mr. Maner: Well, the best thing you can do -- again, we're about the business of supporting the mission, and so the best thing you can do is run -- is you have to start a process that allows people to think uninhibited. You have great policy minds. There's a lot of great people in Homeland who have come from the intel community or DoD or other places. You've got to let them be thinking about how best to do this. Then -- and then you can put the box around it that says, well, we can only afford this much this year, but, hey, let's think about putting some of this in '07, let's build on this and start to show a vision that we're serious about this program.

And so Homeland and the way we do budgeting allows us to do that and allows us to show a commitment to a certain program. And I think that's good for the mission, because I think it allows people to come to Homeland and say, wow, I can get a program done here, funded and done here. So that's how we do it, and it really does start with, as any problem is ever solved in the private sector, you brainstorm first, unconstrained by things, and then you hone in on what you can do.

Mr. Abel: I would imagine one of the most difficult decisions that you have to make is to prioritize how you apply the resources of the Department. How do you make the determination and the tradeoffs of what to do now versus what to do tomorrow?

Mr. Maner: It is; it's very tough. It's very tough because we have some very compelling missions in Department of Homeland Security. We have the Coast Guard, which is fulfilling a very important port security role and really maritime security role. You have Customs and Border Protection, which is making great leaps on the border and really creating a border that's much more efficient and much more tighter against terrorism and other forms of illegal immigration.

So you have some great agencies, and so it is tough. But that's why, as we talked in the middle or earlier, that you have your whole management team involved. And the Secretary makes a decision based on his input from his senior management team, his or her senior management team, and that's what we've done and that's really worked for us. And because we're still growing and because homeland security as a term, it didn't even really exist before 9/11, we're still evolving. We still have TSA in a growth mode. We still have CBP securing the borders. We're going to need to be doing this prioritization for a long time.

Mr. Abel: When you turn on the television or when you read the newspaper and you read about the Department of Homeland Security, you often read about new technology, you read about new whiz-bang devices to be able to achieve parts of the mission. But when you really get down to it, the Department of Homeland Security is about people. It's about the right people in the right place to be able to protect our country. What is the Department doing to be able to invest in its human resources?

Mr. Maner: Well, as you suggest, the way we approach technology is technology is the enabler. We know we're not going to grow to millions of people in the Department. We have to make the people that we have more efficient, and there's a few ways to do that. The first and probably the foremost way to do that is give them technology that works. Give the Customs and Border Protection inspector the right radiation equipment. Give him or her the right entry system with US-VISIT. So the best way you can do it, in my opinion, is to give them the tools to do their job better.

When you take it off of mission and you take it into something, a mission support role, like our office, it's about investing in people. I don't want to be hiring 15, 20 people new every year. I want people to stay. I want people to want to work at Homeland Security because of the mission, and then I want to develop them. I want them to be able to say I was in budget last year; maybe I'm going to go take a tour and work in accounting or financial management. So I'm going to rotate people. I'm going to do all the things that I've learned in the private sector about job enrichment to make people want to stay with me or, at a minimum, in Homeland Security.

Mr. Abel: Now, the Department has unique flexibilities in the employment of civil servants. How does that program, the HR program, relate to you and the Chief Financial Officer's office?

Mr. Maner: Homeland Security has done a structure where a lot of our offices are under an Under Secretary for Management, and I think that allows us to really gather together with the CIO, human capital, CFO, chief procurement officer to make sure we're leaning forward on practices in government. And you mentioned the HR one specifically, but there's -- we do have some unique flexibilities, and I want to make sure we're taking advantage of those because, again, we say it all the time, we don't want to be another department of government, we want to be the leading department. We want to be a 21st century department that people want to work for. We're not there yet. People are still thinking, oh, Homeland, it's really hard, should I go there? But we think with our mission and the funding we've received, this is a really good place to work.

Mr. Abel: So shifting gears a little bit, in order to be able to effectively use the budget that you've been given and to work in a resource-constrained environment, you need to focus on efficiency and effectiveness of your programs. Currently, DHS is working to achieve that 100 percent of the programs will have at least one efficiency measure. What other steps do you think needs to be taken to be able to accomplish this goal?

Mr. Maner: Well, again, I think we're still in an education mode. We need to understand these programs, and you and I talked earlier about looking at past programs. And I think the one thing that we're going to make sure we're doing is looking at the past performance of programs, maybe they're even 10 years old or 20 years old, and make sure they're fulfilling their mission. I don't want to see us just looking at the new things and saying, well, how are we doing on baggage screening or on port security? I want to look at all of the functions, trade enforcement, all of the things we do, figure out if they are doing their mission. If not, close them down and do new things.

Mr. Lawrence: You're the CFO of a relatively young department. When you meet at the CFO Council and talk to the CFOs of more mature departments, how do your conversations reconcile? What are the management issues, and are they different or similar?

Mr. Maner: Well, those conversations usually begin with them, my counterparts, patting me on the back and wishing me luck. But again, I think we mentioned the idea of two full-time jobs, and right now, we do have two full-time jobs. We have to support the mission of homeland security, but we have to build a department, one that will stay if administrations change. This department's here to stay.

And so for me, that's about building and developing people; it's about providing visibility of financials and budget information; it's about integrating the financial management people within Homeland to make sure we're doing things one way; and dare I say this in the financial management community, it's actually about having some fun, too, while you're doing that, and certainly we try and do that at work. It's something that I've always done. I've had -- I've worked for some people who have had some serious jobs in their life. I've worked for two presidents, and I've always noticed that they have fun. And we deal with some pretty serious subjects, but if you provide a fun place to work, I believe that you can get a lot done. And if people -- if they dread coming to work and they don't understand their mission and they don't understand how they fit into the mission, you're not going to get good work out of them.

Mr. Lawrence: As you indicated in the first segment when we talked about your career, you've moved through both the sectors, public and private, about half the time. So I'd like to ask you to be reflective and what advice would you give to someone perhaps interested in or just starting out in a career in public service?

Mr. Maner: Well, again, I talk to my friends from business school all the time who are off making lots and lots of money and excelling in the corporate ladder. And I think we have equal respect for each other, because I believe that what's happening here in public service, here in Washington right now, is a redefining of government. And certainly this -- these last four years, we have a new focus in this country. Everyone, every American, is focused on security, somehow, some way. The financial viability of our companies all revolves around security. And so the government, the public sector, is leading the way in how we are going to do business and how these things are going to happen.

So at Homeland, I believe -- my advice to people is come, try out government. The money is good. It's not -- you know, as you move through your career, it might not stay, but in an entry-level position, you can make good money, you will get a higher level of responsibility, you will be dealing with bigger budget numbers, and you will just have a lot more interaction with I think policymakers than you would in the private sector. So I just think it's a wonderful place to start a career and to really, you know, immerse yourself.

Mr. Lawrence: Andy, that'll have to be our last question. Dave and I want to thank you for fitting us in your very busy schedule and being with us this morning.

Mr. Maner: Great. Well, I appreciate both of your time. And I would also mention that if people are interested in working in the government at all or, of course, working at Homeland Security, you could learn more about Homeland Security at www.dhs.gov and, of course, www.usa.jobs.gov, which is a great place to learn about opportunities at Homeland and in the government.

Mr. Lawrence: Thank you, Andy.

Mr. Maner: Thanks.

Mr. Lawrence: This has been The Business of Government Hour, featuring a conversation with Andy Maner, Chief Financial Officer at the Department of Homeland Security.

Be sure and visit us on the web at businessofgovernment.org. There, you can learn more about our programs and research and get a transcript of today's fascinating conversation. Once again, that's businessofgovernment.org .

This is Paul Lawrence. Thank you for listening.

Arlington, Virginia

Wednesday June 12, 2002

Mr. Lawrence: Welcome to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers, and the co-chair of The Endowment for The Business of Government. We created The Endowment in 1998 to encourage discussion and research into new approaches to improving government effectiveness. Find out more about The Endowment by visiting us on the web at endowment.pwcglobal.com.

The Business of Government Hour features a conversation about management with a government executive who is changing the way government does business. Our conversation this morning is with Sam Mok, the chief financial officer at the U.S. Department of Labor.

Good morning, Sam.

Mr. Mok: Good morning.

Mr. Lawrence: And joining us in our conversation is another PwC partner, Morgan Kinghorn. Good morning, Morgan.

Mr. Kinghorn: Good morning, Paul.

Mr. Lawrence: Well, Sam, let's start by finding out about the Department of Labor. Could you describe its mission and its organization to us?

Mr. Mok: Well, the Department of Labor is one of the Cabinet agencies headed by a Secretary, Elaine Chao. She was appointed and confirmed January 9, 2001. And within Department of Labor, we are not one of the biggest organizations. We have about 17,000 employees. To give you a comparison, Treasury has 170,000 employees, so

150,000-170, depending on, you know, who is counting.

So we are not really that big. But we do have an almost $60 billion budget. So it's pretty big. Within the Department, it's organized into major components, and each of the components is headed by an assistant secretary or commissioner. And they administer different programs within DoL -- that's the Department of Labor. And these programs are carried out through a network of regional offices, or small field offices. And sometimes, they are actually carried out by representatives or contractors.

The largest program of the agency, I'll just briefly explain is, for example, the Employment Training Administration -- we call it ETA within the Department of

Labor -- contributes to the efficient functioning of the U.S. labor market by providing high-quality job training, labor market information and income maintenance, such as unemployment insurance and employment services.

And they provide these services primarily through the state and local government. And another major component within the Department of Labor is the Pension Welfare Benefit Administration. Its acronym is PWBA. They protect the integrity of pensions, health plans and other employee benefits for the nation's workforce.

Another major component within the Department of Labor is the Pension Benefit Guaranty Corporation. Most people know it as PBGC. It protects the retirement income of about 44 million Americans, and more than 35,000 private, defined benefit plans, pension plans.

Another one that a lot of American citizens have come into contact with is called the Employment Standards Administration. This is an enforcement arm and benefits delivery agency of our department. Primarily, this agency is responsible for enhancing the welfare and protects the rights of the nation's workers through wage and hour enforcement, for example.

It increases the equal employment opportunity for employees of federal contractors. And it provides wage replacement, cash benefits and medical treatment for certain workers due to work-related injuries, disease or death, such as workmen's comp, black lung, so forth and so on. It also promotes internal union democracies and financial integrity and right of union members.

One that a lot of people hear about frequently is called OSHA, Occupational Safety and Health Administration, that establishes and protects standards, enforces those standards, and reaches out to employers and employees through technical assistance and consultation programs with the goal of protecting the health of the American workforce.

Another one is Mine Safety and Health Administration. Probably a lot of Americans have no contact with that agency unless you are from the mining states. It enforces compliance with mandatory safety and health standards in order to eliminate fatal accidents, reduce non-fatal accidents and promote safety and health in the nation's mines.

And we have other agencies, such as the Bureau of Labor Statistics, which is a very important organization, because they publish the Consumer Price Index, Producer Price Index and unemployment rate that has impact on economy and nation's policies.

So these are a sample of some of our internal components. And we'll work together as a team. Secretary Chao, Secretary of Labor, is very committed to the following goal, that Labor Department represent everybody in the workforce, not just a small group. We also represent the employers as well as the employees. So this is not about just unions, or about employees. We are committed to provide full access to everybody that we serve.

So that, in a nutshell, is what Labor Department is about.

Mr. Lawrence: Even though you said it wasn't a large group, it seemed like a large group in terms of its mission and its organization, and a lot of diverse activities. What types of employees are in the Department of Labor? I first thought they were all accountants when you began describe it.

Mr. Mok: If I had my way, they would all be accountants. But I'm just joking. But we have, actually, a workplace that very much looks like America. We have economists, we have clerks, we have computer programmers, we have accountants, of course. A lot of lawyers. We have MBAs; we have high school graduates. We have a full representation of the workforce in America; that we have people of very different ethnic backgrounds. So it's really an exciting place.

Mr. Kinghorn: Can you sort of give us your view of what are the responsibilities you see as most critical as it relates to the mission of the department?

Mr. Mok: As to the mission of the department, or the mission of the CFO within the department?

Mr. Kinghorn: How you see the CFO supporting that mission, the broader mission of what you do.

Mr. Mok: Secretary Chao, Elaine Chao's main top priorities, for example, there are four priorities. The first one is prepare the workforce for the 21^st Century. The second one is a secure workforce. And at the same time, a quality workplace for the workforce. And at the same time, we also put a lot of emphasis on upfront compliance assistance, so that we can minimize the enforcement on the back end. Because if you help people understand the rules and regulations, and help them comply with it, then you don't have to come back and find out why they violated it.

So, these are the things that we work very hard towards. So, from my vantage point as a CFO, I have to do the same thing within my own organization. So, I am doing my best in whatever way that we know how to do it in a most intelligent way to have a prepared workforce, a competitive workforce, and a secure workplace.

And since, as a CFO, we also have compliance work, but within the department, compliance with various federal regulations so that we help our clients -- in this case, the other agencies we talked about earlier -- comply with the various financial regulations, the laws, and other rules governing the operations.

Mr. Kinghorn: Can you share with us a little bit about your career or how you got to where you are? It's been quite an interesting career.

Mr. Mok: Well, I have a fairly diversified background. And when I started out in college, being the CFO of the Labor Department was not on my radar screen. As a matter of fact, back then, I had no idea what the Labor Department was about. I'm a professional accountant by training. I received my undergraduate degree from Fordham University in accounting, one of the few fellows who got a bachelor of science degree in accounting. It's a very unusual program.

And I have a master's degree in auditing and accounting. I am a certified internal auditor as well as a certified financial government manager. I had worked from the private sector, you know. So I had worked as an auditor for a company that's now part of KPMG. I actually started out as a hospital auditor, and eventually became, you know, more involved in other things.

I was also at one time director of accounting for Time-Life Books. And later I became treasurer at U.S. News & World Report. So, from the private sector side, I started -- actually, my first real job in college was accounting clerk for a company back then called Continental Can. I worked in the accounts receivable department.

So I started -- one can say I started as a bookkeeper and worked all my up. From the public sector side, I was a budget officer at State Department as a Foreign Service Officer. And later, I became a comptroller, U.S. Department of Treasury, and became the first career CFO, chief financial officer, at the U.S. Department of Treasury.

So I had a lot of public experience background. Insofar as leadership is concerned, also in the public sector, during the Vietnam conflict, I served 5 years as a commissioned officer, as what is known as an AG officer, which stands for Adjutant General's branch, which are the administrative officers and personnel officers of the Army.

So, I had good training in terms of government bureaucracy, so to speak. And then I joined Foreign Service later. So, if I look back in my career, I have done a lot of different things. But they all have one common thread, administration and management and dealing with people.

I didn't, you know, grow up and say I want to be the CFO of Labor. I became CFO of Treasury quite by accident, because I was in Foreign Service at that time, I was on orders to go overseas and to -- I believe to China. And I found out I couldn't bring my children, or it was not practical to bring my children. And I didn't want to leave them behind. So I said, "No, I don't want to go."

In Foreign Service, if you turn down an assignment, you have automatically resigned. So, I came and told my wife. I said, "You know, this is what happened." She said, "You have another job?" I said, "No." She said, "How are we going to pay rent?" I hadn't thought about it.

But to make a long story short, one thing led to another. I was in a job search. And I

had -- I came across an opportunity that I was recommended to. And I was invited to join the Jim Baker team, who was coming into Treasury. And I was named Comptroller of the U.S. Treasury. And the next year, I was named CFO.

So that got me into the government financial management and senior executive rank. And I left in 1992 and started my own consulting practice. Done fairly well representing American companies in Asia.

So, with the election of George Bush as president, Bush 43, Secretary Elaine Chao was nominated to be Labor Secretary. And basically, I knew her for quite a while before she became the Secretary of Labor. So, she went around her circle of friends and asked if anybody would want to come in and help. And at the same time, since I was involved in the Bush campaign, you know, presidential personnel and the White House also asked, you know, all those who were willing to serve to provide their names.

So, my name came up in different circles. And I was actually offered opportunities -- not job offers, but possibilities in different agencies. And I find Labor to be most interesting, for two reasons. One is it's one of the few agencies that actually has clean opinions 5 years in a row, the audit opinion. It's the first agency that has a clean audit opinion. Two, it is a self-contained CFO shop, because they have a centralized core accounting system, and so forth and so on. So it's like a CFO-ship of a $60 billion corporation. So, that's why I said yes, please give me a chance.

Mr. Lawrence: That's a good stopping point, because it's time for a break.  Rejoin us in a few minutes as we continue our conversation with Sam Mok of the Department of Labor.

Do you know why clean opinions matter? You'll find out when The Business of Government Hour continues. (Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers. And this morning's conversation is with Sam Mok, the chief financial officer of the U.S. Department of Labor.

Joining us in our conversation is another PwC partner, Morgan Kinghorn.

Well, Sam, in the last segment, you described your career. And I'm curious. You've worked in both the public and private sector. How do you compare the two?

Mr. Mok: Let's talk about money first. Obviously, there's a tremendous pay gap between, you know, positions in the public sector versus the private sector. The compensation and the perks are also different. But that's a real cash payment. But you have to look at the total compensation package.

There is something, what I call "psychic income," that cannot be measured in dollars. I'll give you an example. When I was working at Treasury, at the main Treasury Building, walking down the hallway, there are some of the, you know, very historic persons that you read about: Alexander Hamilton and all those people. And working in the same building, the sense of history, you cannot measure it in dollars.

When I come out of the building at night, walking out through a back door, you see the Washington Monument, the White House on your right side. And you know you're part of the history. You cannot measure it in dollars.

Now, working at Labor Department, and I always tell people that when I walk out of the front door, I look at the U.S. Congress on my left-hand side and remember my responsibility. And every day, being part of the action, to see how national policies is being shaped and carried out. The satisfaction, you know, just cannot be measured in dollars. So that more than adequately made up the shortfall in cash. So that's one big difference.

The second big difference is, within the government, there are a lot of rules and regulations. Sometimes, those can be extremely frustrating, like hiring people. When I was running my own consulting firm, if I have a need for a particular person, I just go. And if I meet somebody in a bar and I like the person, I think they qualify, I can offer a job right there and then.

Well, within the federal government, I have to post the job. There has to be a panel and there has to be a cert. So, you have to go through all this. So it takes a lot longer to hire somebody. And also, there's a structure. I don't really have the latitude to negotiate salary, because you either come in as a GS-15 or GS-14. All these are predefined.

So that in itself is an extra step you have to carry. But I also think that the hiring process in the federal government is quite efficient. It takes time. But by the time you go through all of these steps, hopefully the chance of making mistakes are minimized, whereas, in my consulting days, you go and hire somebody you think is dynamite, turns out to be a total dud. And then you've got to deal with the aftermath.

So, that's the other big difference. Also, in the government, at least where I sit right now, I spend more time on administrative matters than on substantive matters when compared to the private sector. Because in the private sector, I contract everything out. I don't want to deal with administrative matters. I'm only there to make money, and that's the only reason why I'm there. And everybody works who for me and with me shares the same goal.

Whereas, within the government sector, you have a lot of rules you have to follow. So you want to make sure the T's are crossed, all the I's are dotted. So those are the major differences that come to mind.

Mr. Kinghorn: Let's get back to the clean opinion. I think you're right, Labor was the first to get a clean opinion, and you've certainly sustained that. Why is it important, in a federal perspective, to get clean opinions?

Mr. Mok: Well, because when we put a financial statement together, it's kind of like we're telling the world how we look like. To have that opinion reviewed by an independent, outside entity, you know, be it the Office of the Inspector General, or an accounting firm, it validates the data integrity. And I think that's important, because as more and more government executives learn to use financial statement as a basis for decisions, it gives you the extra layer of quality assurance, if you will.

Mr. Kinghorn: Interesting. As you know, the President's management agenda has a component called the -- sort of the "Report Card. " And Labor, even with a clean opinion, got sort of a red mark on financial management. Of course, you weren't alone. There were 26 grades in that area, and only one agency got a green. Can you give us a sense of why that happened, and what you're going to be doing to get to the green, as the OMB says?

Mr. Mok: Well, I have good news to report. Yes, we started with a red mark, like most federal agencies. We are now practically a green, except two components. One is the integration of budget and performance. Another one is competitive sourcing. All the other components are either already a green in an interim assessment, or a yellow, with great confidence that we'll go to green.

And I believe that the competitive sourcing, you know, getting the green is not a humongous challenge. It's doable.

The integration of budget and performance is a challenge, because you need the proper system. To arrive at that state, you need to have the technology. For example, if the Secretary wants to know how much does an inspection of mine shaft costs, I'm not really sure if one can right now provide the correct data on a timely basis for the Secretary. The data's there. We can get it. But it requires a tremendous amount of effort.

So, by the time we got the information, the need might have passed. We are right now focusing on investing in technology, and also a shift in paradigm for the staff, so that that way, that type of need can be satisfied in a very effective and efficient manner.

Mr. Kinghorn: You are the CFO that sort of looks at information from a broad variety of fairly large, complex bureaus. What are the challenges in trying to coordinate that data, and the financial information of those various agencies?

Mr. Mok: The good news is, as I said, one reason why I chose Labor over the other Cabinet agencies is that Labor has a central core accounting system. And Labor is fairly centralized in that respect. If I compared it to my previous government job at Department of Treasury, the CFO at Department of Treasury is more of a traffic policeman, because each bureau is fairly autonomous. And they have their own system, they have their own CFO.

That situation does not exist in Labor. So, it's easier for us to do. But the challenge is, our technology is quite old. My central core accounting system was quite old. It is not on demand web-based. That's a challenge for us to get to, so that users, clients and executives, can design their own report by point and click any time they wish, in the form that they like, and with good data and reliable data. We are not there yet.

And that is to me a big personal challenge. The technology is out there in the business world. We just need to figure out a way how to bring that into the Department of Labor and the federal government, and Mark Everson at the OMB is doing a great job in, you know, giving guidance and also assistance to help us get there.

Mr. Lawrence: What will the management challenges be of implementing and using the new technology?

Mr. Mok: What are the challenges?

Mr. Lawrence: Yes.

Mr. Mok: Obviously, the first thing is funding. That's the biggest problem for everybody. The second is also know-how, because when you bring in technology like that and implement it, it requires a lot of one-time know-how that I'm not sure any agency or any private sector business would like to invest in their own staff. So, finding the right partner to work with to select the right software, select the right implementation strategy, and manage to change management correctly afterwards.

Those are the real big challenges. I mean, in theory, you know, there's textbooks for that. But carrying it out is not the same thing.

Mr. Lawrence: How about the challenges of time? My sense is that there is an increased pressure on doing management right and very fast. The scorecard is pretty clear, and everybody wants to do it quickly. But sticking in the kind of technology I think we're envisioning generally takes time.

Mr. Mok: Yes, that's true. But I kind of look at this differently. We talked about getting a green at Treasury, and sharing experiences. And my view towards getting the green is getting the green is really a process. A lot of people look at it as an endgame. To me, it's not an endgame. I place more emphasis on why are we getting the green versus getting to green.

If we understand the philosophy about the green benchmark, and how to embed those practices into the infrastructure, so that one day, for those who are non-career and move on, these things will continue. And I think that is our biggest contribution, if I can make that happen.

Mr. Lawrence: How will you do that, because I believe there is a lot of perception that because people will move on shortly and these are long things, we can ignore them or it will all pass.

Mr. Mok: Right. This getting to green, in my mind, is really change agents. They cause paradigm shifts, hopefully. And then the next challenge is lock those changes in.

For example, e-government. Once you start that process, I think it's hard to put the genie back in the bottle. So, for example, I invite all your listeners to visit our website, www.govbenefits.gov. That is our major e-government initiative, spearheaded by Assistant Secretary Pat Pizzella to deliver information for American citizens in the way they're familiar with, by going through and asking yes-no questions and answers.

But once you have that thing going, I am not sure, and the citizens like it, I'm not sure if you can roll that back, and that's an example.

Mr. Lawrence: That's a good stopping point. It's time for a break. Come back with us as we continue our discussion about management with Sam Mok of the Department of Labor.

What's the link between performance and costs and why is that so important? We'll ask Sam for his thoughts when The Business of Government Hourcontinues. (Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers. And this morning's conversation is with Sam Mok, the chief financial officer of the U.S. Department of Labor.

Joining us in our conversation is another PwC partner, Morgan Kinghorn.

Well, Sam, can you tell us about the department's three strategic goals?

Mr. Mok: We have three strategic goals right now and we're soon to have a fourth one. The first three are a prepared workforce, a secure workforce, and a quality workplace. Soon we're going to have a fourth goal called a competitive workforce.

Mr. Lawrence: And how does the office of the CFO assist the Department in working with these goals?

Mr. Mok: First of all, I have to make sure my own area of operation complies with and strives towards achieving those goals. So, for example, a prepared workforce. We are doing a series of training, both formal and informal, to prepare our workforce for the 21^st Century.

A secure workforce, we contribute to making sure we have safety in the workplace, so that it is a friendly workplace and a positive workplace. And there's talk about quality workplace, too. The building itself, because of 9/11, has been very secure. But at the same time, you know, we also exercised extra measures within our own area, because we do have a lot of information that we don't want to float people's pay records, for example.

The competitive workforce. Departmentally, they talk about global competition. From my own area, you know, we need to compete with the private sector, compete with other agencies so that I can get the very best to come to work for us, and to keep them. So these are the things we're trying to do.

Mr. Lawrence: Strengthening the link between program costs and performance is something we hear a lot about. How do you this at the Department of Labor?

Mr. Mok: That is an interesting challenge that we are working on right now. I mentioned earlier that we have all these components. And their missions are quite diverse. And the way they go about doing their business is quite different.

What we're trying to accomplish is, there is some common denominator. We have continuous discussion, and different meetings that go on to try to accomplish building a database, a pool of information for the senior executives of the Department, so that on demand, user-friendly method, they can extract information in format they would like to.

For example, if, just for argument's sake, if Secretary Elaine Chao, sitting in her office one night, decides she wants to know how much a mine inspection costs in Montana, under the current scenario, she has to look somebody up, call somebody up, and make that request. And somebody will probably have to write a program, go to the database, do a test, and then deliver the report much later than she would probably like.

By having the financial system -- which we have a core accounting system and what we call the financial data store -- hooked up with parameters that we predefine, and hopefully using a web-based technology, point and click, we can produce all this information on any parameters that the manager would like, because we cannot anticipate what managers want.

And I think the best way to do that is create a situation where they can point and click, and extract the information and build their own report. In the private sector, the technology is there. I have not seen a whole lot of that in the government. The melding together of the performance goals and the budget, I think that's a very good goal and a very important function. Because how do you know the programs are effective? How do we make sure cost allocation is done correctly? We are not there yet and we are striving to get there.

 Mr. Lawrence: That was actually going to be my next question. While you're waiting for someone to write the program, while the Secretary's waiting for someone to write the program in your example, how do you make management decisions?

Mr. Mok: Well, we do right now. The information is there. The ability to deliver it is there. But it is not done in a timely or useful manner, useful in the sense that the user, or sometimes the client has to adjust their needs because of restrictions on format and things like that, which I think is ridiculous.

It's kind of like going to a restaurant. You look at the menu, you want this. They say, well, you want a chicken dish, but you can't have this and that. And so, it's a compromise. What we would like to do is to be -- the CFO office is a service delivery organization. So, we would like to have a very flexible menu, so that you can come in, you want this particular dish without salt? It can be done. Or you want the other dish to be more salty? That's fine, too.

So, that basically is the goal here. We are not there yet, because that requires an investment in technology, which we're doing. Also, a shift in paradigm from the employee's level. And also, data collection, which is also important.

Mr. Kinghorn: The financial management, as you know -- you've been in this business a long time -- the bar keeps getting raised on us. And OMB now is requiring agencies to prepare semi-annual consolidated financial statements this year. And they're going to go to quarterly next year. We know some departments are trying to do closings in 3 days. And two or three large departments still can't even get clean opinions, aren't even close. You've done it. But is this going to be a challenge for you to do, leaning toward a more consistent and earlier and earlier set of consolidated financials?

Mr. Mok: The answer is yes and no. Yes, it's going to be a challenge. No, it's not such an impossible dream. Okay? And I'll tell you why. In the �70s, I was head of the accounting operations for Time-Life Books in Alexandria, Virginia. And Time-Life Books are a division of Time, Incorporated, which now is part of Time Warner-AOL.

Time-Life Books itself at that time was headquarters. We were headquarters of 36 companies around the world. And we had Italian liras, you know, Chinese dollars, so forth and so on. And we were able to close our worldwide books in 5 days. And this is like 20 years ago. Corporate-wide, Time, Inc., when I was working for Time-Life Books, which is part of Time, Inc., they closed the whole worldwide Time, Inc., I think in 7 days. This is 20 years ago.

So, I think to close our books in a few days, the technology is there. The question is, we have to change the methodology within the federal government. Secretary Paul O'Neill has committed to close the books, Treasury's books, if I remember, in 3 or 4 days. I was talking to Steve App this morning, and Ed Kamen. They think they can do it -- and Steve App being the deputy CFO, and Ed Kamen being CFO of Treasury.  

I also think that this goal is very doable. But a lot of agencies, including that of my own, have to make some changes in methodology. And we are making those changes now.

And I think it's important to provide that information. Because for the first time in history, or at least for us anyway, we have an MBA president, and an MBA secretary at the Department of Labor. And they are very focused on financial information, because they know how important it is. They know that having sound financial information helps make better decisions.

Mr. Kinghorn: You also have a lot more MBAs on the Hill, too.

Mr. Mok: That is correct. I'm a member of Treasury executive -- a Labor

executive -- see, you talk about Treasury, I just came from Treasury -- a Labor Department Executive Committee called MRB, Management Review Board. And we meet, you know, every week to discuss, you know, department-wide management issues. And yesterday, actually, the head of our human resource department, Tali Stepp, came in and talked to us about her efforts in recruiting more MBAs into the Labor Department.

And she was very optimistic. And she actually shared some statistics with us. And I'm quite impressed by her efforts. We actually have recruited quite a few MBAs, and we will continue to recruit more. So I think the demographics of the federal government employees are changing, too. Because I think the economy obviously also helped us. Five years ago, every MBA got 20 job offers upon graduation. Now they find government work a lot more attractive, because it's more secure.

Mr. Kinghorn: The issue of people is critical. So you can do a lot with both technology and people. But people are pretty essential. As you know, you can have a financial system. And if you don't have the right people and processes, it's probably not going to get you to where you want to go.

But you, like other agencies, are facing what GAO and others call the crisis of human capital. How is this impacting the Department of Labor as a whole, and what kind of strategies are you developing to find solutions to those issues?

Mr. Mok: Succession planning is the key to solving this problem. The baby boomers are all retiring, so everybody says. But I think what happened is I don't think a whole bunch of people are going to walk out on the same day. Number one. Number two, for example, we had a buyout recently at Labor. And, you know, a bunch of people took it. But not as many as I personally thought might have taken it. Part of the reason, I think, the economy, it's a recovery, so people want to wait and see.

I can use my own area of operations as an example. We did a demographic study in my department, in my office. Thirty percent of my staff are eligible for retirement. I mean, they can literally say tomorrow, "I'm retiring." And they can walk out the door after they file the papers. Okay?

So, it is very critical. That's one of the first issues I identified, that for me to plan succession correctly. So, for the first time in the CFO's office that recent

history -- because I inquired, you know, I have a chain of command. Not in the military style. But we start grooming the second- and third-generation leaders. I have an SES who's a deputy. But now I'm grooming several 15s to step in, that we actually do a rotation of duty assignments so that they have a chance to experiment what is a deputy CFO like? One day in the life of.

And I also groom 14s to step into 15 positions, so that they, too have a chance. As a matter of fact, some very interesting results came out. We had one individual who always wanted a promotion. So we happen to have an opportunity. He was a 14. And we said, okay, here is your opportunity. Would you like to be acting for a while, so that we get to know you better, and you get to know what it takes to be a leader? After two days, he came to me and said, I don't want to do this any more. He said, I didn't realize it was such a hassle, he said. I'm going to be very happy where I am. And that's fine. And that's the beautiful thing about the federal government system, that if you want to stay where you are and do a good job, there's a place for you.

But through these kinds of processes, we hope we can identify what are called voluntary leaders, and so there's always succession. At the same time, we also try to recruit more people at the entry level. That is, that would be ready and wanting to move up.

Mr. Lawrence: That's a good stopping point. Come back with us in a few minutes as we continue our conversation about management with Sam Mok at the Department of Labor.

What does the future hold for those in financial management? We'll ask Sam for his thoughts when The Business of Government Hour continues. (Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers. And today's conversation is with Sam Mok, the chief financial officer at the U.S. Department of Labor.

Joining us in our conversation is Morgan Kinghorn, another PwC partner.

Well, Sam, how do you measure success in improving financial management?

Mr. Mok: The way I would measure it is, from the CFO's office, Sam Mok and his staff can provide timely and useful information to our clients, including executives and other users. That's the first criteria. The second criteria is that everybody working in the CFO's office at Department of Labor will become a better and more informed employee after I'm done there. What does that mean? Given their career in the government, as I observe, I call it the flock in the well syndrome in a very positive way.

If you sit at the bottom of a well, after a while, the sky is as big as the mouth of the well. So my goal is get the flock out of the well to see that there's a whole new world out there, so that they know how they fit into the bigger picture, so that when requests for information comes from the top, they can relate to the bigger picture, and make this information more useful.

I'll tell you a less than one-minute story about a balloon. A man was riding in a balloon to see the countryside. And he got caught in a windstorm. So when the wind died, he finally felt a sigh of relief that he's going to live. But he needs to figure out where he is. He's totally lost.

Suddenly he saw a man walking in a field down there, and he lowered the balloon and started yelling. He said, "Hey, man, I'm lost. Can you tell me where I am?" So the man stepped back, looked up, thought for a while, and said, "Sir, you're about 300 feet in the air." So the guy said, "You must work for the government as an accountant." The man said, "My God, how do you know?" He said, "Because the information you gave me is technically correct, but totally useless."

What I'm trying to do is, you come to the CFO's office, and Department of Labor, our staff gets a balloon that I give them, remind them that when a client, a user comes to us with information, not only is it important to give technically correct information, but think of how they're going to use that, and make it useful for them. That, I call success.

Mr. Kinghorn: We talked about how you were a presidentially appointed official. So now we all need to call you "Honorable" for the rest of your life. Not that you --

Mr. Mok: That and $1.25 will get you a cup of coffee.

Mr. Kinghorn: Right. But you also once, just like the rest of us, were sort of a career official. What do you find the differences there in terms of what you're facing now and what you faced when you were career, in terms of making things happen?

Mr. Mok: It's a very interesting change. Because when I was a career senior executive, I think very long-term, because I have 20 years to retirement. So when I think of projects, when I think of goals, time wasn't very critical to me.

Now, because I'm a political appointee or non-career officer, others would say I come and go with the President. So, the longest I'm allowed to serve is 3 more years,

2-1/2 more years.

So constantly, I feel there's a sword over my head that I'm running out of time. I need to do it now. I don't have 20 years to wait. So I've become more time-sensitive. And at the same time, because of level, I get to see a much bigger picture, because, as a

non-career senior executive, I get involved in many different things. My job definition, my job requirement is not defined by some PDs that say you've got to do this and that's it.

So, I see a much bigger picture. I also am invited to a lot more senior management meetings. So I see the interrelationship much better. So I think, as a result of that, my outlook and my goals are different.

Mr. Kinghorn: In looking back at that time when you were a career official, now you're looking at a staff and an organization with a lot of career officials in them, how do you sense you can maybe change their motivations and how they think about now that you've seen it both ways maybe differently?

Mr. Mok: I think the key to a successful relationship, including that between employer and employee, is there has to be a win-win situation for everybody. So, the programs I try and initiate within the Department of Labor, I always try to explain to my staff, and to those whose support I need, what is in it for them? Why is it good for them?

And one example I always use is, when I leave office, I hope I can look back and say, hey, we have established the most best practice within the federal government of any CFO offices. That's my personal goal. Why would my staff care? The way I explain it to them is, if we all work together towards this, it's glory for you folks, too. So one day, if you want a promotion, one day you want to move on to another position, you can say you came from that operation that has the most best practice.

Nobody wants to come from an organization that failed, or that's mediocre. So that's one or the ways I try to motivate my staff that there is a lot in it for them. And usually, if I want to initiate a program, I'll try and talk to them and find out, you know, how can we make sure everybody's wishes are accommodated now. This is not a democracy. I don't take it to a vote. But, on the other hand, I think it's important to respect institutional knowledge, because a lot of times, they've been there before, and they've done that.

Why reinvent the wheel? How do we leverage what they know into a new initiative?

Mr. Lawrence: Let me ask you Morgan's question a little different way. You were involved in financial management during the first Bush's presidency, took a break, and came back and are now involved in financial management, 8-ish years later. How do the two compare? What were your observations when you came back?

Mr. Mok: A lot of initiatives during the first Bush administration were actually carried out in different ways in the 8 years of Clinton and Gore. And for example, the reinvention of the government is really, in my personal opinion, an extension of some of the things we did in the first Bush administration.

But the current Bush administration I think is more specific. For example, there

Are -- getting the green. Very specific goals, and a very clear path to get there. The other major difference I find is that there is a tremendous amount of teamwork within this administration. And I'm just totally awed by the teamwork.

I think the President, the current President Bush, is extremely focused. He showed a tremendous interest in financial management, and also management in the government. And my boss, Secretary Chao, also showed a tremendous personal interest. My other experience is, I've been in government three times prior to that. The top bosses are more interested in the core mission of the agency they head. The Secretary of State is more interested in foreign affairs, for example. Defense, more interested in, you know, readiness. That kind of stuff.

Management has always taken a back seat. Under this administration, I think our president being an MBA, our secretary being an MBA, places a lot of emphasis on management.  And they know that that's a core to good government, and they actually spend time on it. They actually, you know, call people on the carpet about it. And so, people are taking this very, very seriously, not because they are afraid, but because they understand it's important. And they want to.

Mr. Kinghorn: Where do you see the CFO office of the future going, in terms of whether it's Department of Labor, or Education? What do you think 5 years, 6 years from now, your functional areas will look like? What do you think you'll be really focused in on?

Mr. Mok: My office in Labor is a fairly typical office within the federal government at the Cabinet agency level. I have -- my paradigm is I have two pyramids. And I show my staff, from time to time, kind of remind them. And I think Morgan Kinghorn also understands that theory. Because actually, I stole an idea from him way back 20 years ago or 15 years ago.

On the left-hand side, if you look at that pyramid, my current operation anyway, I think at least 60 percent of that pyramid is this transaction, after I do a time analysis of my staff, a transaction with no real value -- and the paper come in, the paper gets processed, paper go out -- maybe 15 percent are reporting, 20 percent are reporting. And very little decision support, and some control, because preoccupied with the transaction.

The pyramid on the right-hand side is 20 percent transaction, maybe 10 percent reporting. And the rest is decision support and decision and control. How does one get from one to another? Well, through technology. Because if you have a single point data entry, then you don't have to re-key, re-verify and so forth. So you'd reduce your transaction time.

E-government is a wonderful example of that. So, if you implement e-government to the fullest, it's all electronic, and reduced error, reduced reconciliation and reduced transaction processing time.

Well, it's because of e-government you also reduce report production, report programming. People will get report on demand at will in the form that you want. So, you free up all this time to provide decision support. Obviously, that will require a different workforce, because then we're going to more analysis, more advisory role.

That's what CFO is all about. And their staff. Provide advice and leadership. We right now have the tail wagging the dog. We spend most of the time trying not to make mistakes. And I think the future is more advisory and more leadership.

Mr. Lawrence: Speaking of the future, what advice would you give to a young person who's interested in a career in government, or perhaps even in the Department of Labor?

Mr. Mok: I think first of all, a young person ought to get an internship. Young meaning in this case, still in school for me. Get an internship in the summer, or part-time work. I went to a work-study program.

See what the government is like up front, up close, because on the outside, it looks different. For example, my daughter wanted to be a doctor. So we arranged for her to work in a hospital in the summer. And after one summer, she said, "I don't want to be a doctor." And then she said, "I want to be a lawyer." So we arranged for her another summer to work in a law firm. She said, "I really like that." So, another summer we arranged for her to work in another law firm, different size, different type of transactions. Three summers in a row, three different law firms.

She loved it. She's now a very successful lawyer. And we did the same thing for our son. So the point is, if you want to pursue a career in the government, get some real experience through an internship or part-time work. Point one. Point two is you've really got to ask yourself, why do I want to do this? Government work, government career, is really a calling. Other than a political appointee, if you want to be a career civil servant, which is a very honorable profession, you need �

Mr. Lawrence: Thank you very much.

This has been The Business of Government Hour, featuring a conversation with Samuel Mok, the chief financial officer of the Department of Labor.

To learn more about The Endowment, our research into improving government effectiveness, visit us on the web at endowment@pwcglobal.com.

Originally Broadcast January 26, 2008

Washington, D.C.

Announcer: Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business. The Business of Government Hour is produced by The IBM Center for The Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about The Center by visiting us on the web at businessofgovernment.org.

And now, The Business of Government Hour.

Mr. Morales: Good morning. I'm Albert Morales, your host, and managing partner of The IBM Center for The Business of Government.

Over four years ago, Congress and the President created a new department whose central mission would be to secure the homeland, integrating and aligning 22 separate government agencies into a single, cohesive, efficient, and effective department. During this rather short interval, DHS has faced many challenges while continuing to make progress securing our country from threats.

With us this morning to discuss his office and its role is our special guest, David Norquist, chief financial officer at the U.S. Department of Homeland Security.

Good morning, David.

Mr. Norquist: Good morning.

Mr. Morales: And joining us in our conversation, also from IBM, is Steve Watson, partner in IBM's financial management practice.

Good morning, Steve.

Mr. Watson: Good morning, Al. And David, thanks for joining us this morning.

Mr. Morales: David, let's start with some perspective. Many may not realize that the creation of DHS has represented one of the largest reorganizations in government since the Second World War. Could you set some more context by providing us a sense of its mission and its continued evolution?

Mr. Norquist: Sure. The Department was formed out of 22 different agencies, and so we went from something that was not existent to becoming the third largest federal agency, which is a pretty dramatic transformation. Some organizations came intact, such as Transportation and Security Administration, United States Coast Guard. Some organizations, like Immigration and Naturalization Service and the Customs Service, were reorganized during their time with DHS. But the overall idea was that the Department would benefit, the country would benefit by having a department that had one common face at the border, one overarching mission: to secure the homeland, to facilitate lawful trade, travel, and immigration, and to help protect our freedoms. And by bringing all those different groups together with that common mission, that we'd be much stronger for it.

Mr. Morales: So you gave us a sense of some of the components within the Department, but can you give us a little bit more of the sense of the scale in terms of size of budget, number of employees, the geographic reach and footprint of the Department?

Mr. Norquist: The Department has 209,000 employees and a budget of $35 billion for Fiscal Year 2008, and we show up all across the country. If you're getting on at an airline, you'll run into Transportation Security Administration. Customs and Border Protection is the one that greets you at the ports of entry when you're coming across the border or going through Customs security. The Coast Guard is there at sea if you're in trouble, or to help protect the navigable waterways. We have ICE, Immigrations and Customs Enforcement, enforcing our nation's laws throughout the interior. And of course, FEMA during a disaster is there to help and to respond. And so we have a footprint not only throughout the United States, but as well as attaches at embassies overseas.

Mr. Morales: So lots of moving parts.

Mr. Norquist: Yes, indeed.

Mr. Watson: Dave, thanks for that overview of the Department. Could you focus in a bit on your roles and responsibilities as the chief financial officer? What are your responsibilities?

Mr. Norquist: My two jobs boil down to building the budget and being a good steward of taxpayers' money. We just finished the audit on the 2000 budget. We've got the 2008 budget we're executing. We're going to present the 2009 budget to Congress in the beginning of February. And so you have all of those different moving parts at the same time, and we have to make sure that the Sceretary has the ability to reflect in the budget the relative priorities, to be able to address different risks to the nation by investing resources against those higher priority areas.

And so as the chief financial officer, as the different components submit their budgets, I help present them to him as options. What's the relative risk of this threat versus that? What's the relative effectiveness of different solutions? And then he can make the choices about where to invest the resources and the President can submit that recommendation for the budget to Congress.

At the same time, I worry about those funds as they're being executed. Do we have the proper internal controls? Do we have the policies and the procedures to protect the American taxpayers' money? And so we go through review processes of how we execute money. One of the most basic controls you look for is you want to make sure that the person who orders the item and the person who pays for the item and the person who receives the item are three different people. And that is a strong internal control that if you reflect it throughout your organization, it greatly enhances your protection of the taxpayers' money.

Mr. Watson: David, that's a broad set of responsibilities you've defined there, both in budget and as the chief accounting officer in effect. What are the top challenges you're facing right now in executing those responsibilities, and how are you going about addressing those challenges?

Mr. Norquist: Well, Steve, I think the key is we need to move beyond an agency in transition. When I came into the Department, people said, you know, DHS is new, it needs some time. And certainly when you've had a large reorganization, it takes some time to make all the changes you want, but we basically are tackling three areas.

The first is the staff. Do you have the right number of staff with the right skill sets to accomplish the mission? All internal controls begin with people who know how to do their job and do it well.

The second is we've had audits and others that have identified known weaknesses, and so we have a job to go out and address those, to eliminate those weaknesses and fix their problems.

And the third is we have to go beyond that. We have to look at those core things that many other agencies have and take for granted, and ensure that we have them so that we don't have this in the future. One simple example is, most organizations have basic financial management manuals to tell you how to do the processes and the procedures. Our components, some of them brought them with them, but as a department, you don't have that, so you don't know that you've got the best business practice in every organization. And it's our job to establish that, to elevate it, and thereby prevent new problems from occurring. And of course, you have to do all this at the same time you're producing and delivering a budget to Congress and doing the regular day activities.

Mr. Morales: Now, David, you've spent most of your career in the financial community. Can you provide our listeners with a sense of your career path? How did you get started in this field?

Mr. Norquist: Sure. I came out as a graduate of the University of Michigan, with both an undergraduate from there and a master's in public policy. I then went to work for the Department of the Army as a GS-9 program budget analyst through what was then called the Presidential Management Intern Program.

I spent several years with the Department of the Army, and over the course of my 18 years doing federal financial management, I have worked at a U.S. military field site overseas as the director of resource management, I've worked at Army Headquarters, I've worked at a major command, I worked for several years with the House Appropriations Committee, and I've worked at both the DoD comptroller shop, which is their CFO organization, and here at DHS. So one of the advantages of that is I have worked at basically every level at which the federal government spends money.

Mr. Morales: So tell me a little bit about some of these experiences, and how do you think that they have prepared you for your current leadership role and informed your management approach?

Mr. Norquist: I think one of the things that's essential for a leader is to be able to have the perspective of the individuals in the organizations they're dealing with. When you're at headquarters writing a policy, you need to imagine you're the person out in the field site attempting to implement it. Does this make sense to that person trying to implement it? Likewise, you have to take into account the perspective of the Congress. What are their concerns and issues going to be? And so if you've walked a mile in their shoes, if you've had to deal with those day-to-day decisions that are dramatically different between those levels of an organization, it makes it much easier to manage. You understand why something is a particular concern to an organization, or why a certain policy would create a problem rather than be a solution for somebody who's out at the field site.

Mr. Morales: So perhaps more so than any other role, there are many constituents to consider when you're working in this field.

Mr. Norquist: Absolutely. And it's best if you've had the chance to be in their shoes in order to really understand how what you're going to do is going to affect them, and be able to look at how to have an effective control from their perspective as well.

Mr. Morales: Great.

What is Homeland Security's financial management modernization strategy? We will ask David Norquist, chief financial officer at the U.S. Department of Homeland Security, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with David Norquist, chief financial officer at the U.S. Department of Homeland Security.

Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.

David, can we talk for a moment about your recent department audit? Now, your department has been working very hard to make headway in a variety of different areas, so would you assess for us your progress on this audit?

Mr. Norquist: Sure, Al, and thank you for the question. The audit for DHS has been in the past a significant challenge, and I think some background here might be very useful. Two years ago, when I came into the Department, we had not just 10 material weaknesses, but they pretty much ran across the Department. For every material weakness, several organizations contributed to the reason we had that. Most of them came to the Department that way. They were not weaknesses necessarily from the reorganization, but ones the Department had inherited, and so this wasn't a problem you were going to be able to solve in a day. But we systematically set out to develop corrective action plans for each and every one of those material weaknesses, and then we began to execute it and track it over the course of the year. And so what's been very gratifying for me is, given all the hours and energy put into that, the results.

We have, for example, had the number of material weaknesses for the Department go from 10 to 7. The number of component conditions that contribute to that went from 25 to 16. Getting a little technical here, but the audit's disclaimer conditions dropped by 40 percent. So no matter how you measure progress in a financial audit, there was significant improvement across the board. The auditors were very favorable about their comments about how we had done. Their guidance to us next year was to keep it up, that that was exactly the type of progress that you should be doing, and the approach was the right way to go ahead.

What we now have done is got it to the point that the vast majority of our organization does not contribute to a material weakness, and we're down to only a few players left, and we hope to be able to reduce that again over the course of the next year as well. And so I've been very pleased to see that those resulted in very tangible results, and results not just of our saying so, but others coming in and saying, yes in fact you have addressed those concerns.

Mr. Morales: Well, that's great progress, and you should be congratulated for that. But as you look to the future, what are some of the steps that you're taking now to improve upon the results in the next audit?

Mr. Norquist: The first thing we're doing is we're producing the second edition of what we call our playbook. And that one is a collection of our internal controls over financial reporting corrective action plans. And so it lays out the steps each component is responsible for. It has milestones by which they're going to meet each of those steps. It has the responsible individual, so I know who I can hold accountable for that. I also then have regular meetings with each of them. One of the important things about a corrective action plan is, like any other program, you have to stay on top of it, you have to monitor it. And so one of the things we did is we created a program management office that effectively treats these plans like you would a program acquisition. Are they on schedule? Are they meeting their milestones? How are they doing, and how much is it they're spending in order to reach those goals?

We're going to do a couple of things different this year building on that success. The first is, many organization either began with a clean opinion and still have them, or the federal agencies have material weaknesses and they haven't eliminated them. We are blessed with several components, like Immigration and Customs Enforcement, which used to have virtually every material weakness the Department had. And in the last two audits, they've gotten to the point that this year they contribute to none.

And that's a reflection on the strong leadership from Julie Myers, their Assistant Secretary. They had a very strong CFO and they had very good corrective action plans. But what that means for me is there are people in that organization who know how to eliminate these problems, who've done it and who've been successful. So now when I sit down with a component who hasn't been able to solve these, I can bring in people from two or three other organizations in DHS who fixed exactly that problem, and now I can have them as sort of an advisory board, helping me review these corrective action plans and helping the components navigate their way through these problems.

Mr. Watson: David, could we talk a little bit more about this internal controls over financial reporting playbook? How are you using it to strengthen internal controls? How are you balancing short- and long-term fixes in the playbook?

Mr. Norquist: The playbook has two tracks. The first track is directly addressing anything that an auditor identified as a material weakness. But our goal with those corrective action plans is not to make the material weakness go away. The goal is to go beyond that, to get to the point that the head of that organization can say not only did the auditor not find a problem, but I have carefully reviewed this process and I believe that the information is correct and the process is sound. And so much like you shoot at a target by aiming slightly above it, we are going to go beyond the point of eliminating the weakness to having confidence in what they call going after the root cause, and making sure we've solidly addressed it.

But we've also got a second track that goes beyond that. We're looking at areas where the auditors have not identified a material weakness, and going through a process of looking at what are the steps we go through. And as I mentioned before about segregation of duties, are those strong internal controls? Do they give us a process that is both sound in design and sound in operation? And when we can validate those, then we can turn to the Secretary and say you can give affirmative assurance that this process is good, not just that the auditors didn't find it, but we've examined it, it represents best practices, you have good assurance about this process. And so we are doing that because I want to get ahead of the audits. I don't want to simply be responding to each weakness and say, okay, I'll play Whack-A-Mole, go after that one next. I want to be looking at where there aren't weaknesses, and knowing that if there is a problem there, we found it and we fixed it.

Mr. Watson: David, I know one of the other things you're looking at is your financial management system and your modernization strategy there. Can you talk to us a little bit about your transformation and systems consolidation plan? What are the next steps regarding this plan?

Mr. Norquist: Sure, Steve. What we have done, when I came in, the Department had inherited numerous financial management systems, and many of them were contributing to some of our material weaknesses. And looking at them, we said do we have any that work well? And we discovered we do.

We have, for example, a system used by Customs and Border Protection, who has a clean audit opinion on their entire financial statement. And their system works very well for them, contributes to no material weaknesses. We also have a system being used by Transportation and Security Administration, and their system works very well for them. And the system isn't the driver between the problems they've had, and they've been very successful in improving their audit position.

So the question becomes, well, do we need to design our own or can we consolidate on either or both of these systems? And from a risk management point of view, asking someone to develop new software for you and tell them these are my thousands of requirements, please meet them, that's a pretty high-risk approach. It's a big challenge. But if you say I've got these two that work and I've got a component that's on a different system, I'd like to move them onto this system, now there are people at DHS who are familiar with it, they know what it does, they know how it operates, and that strategy of migration is much more manageable. You don't have to move the entire department at once, you can move it in pieces, and every step results in a clear demonstrated benefit.

A simple example is in my immediate area, in one of our offices, they process purchase transactions, and their paperwork goes to the accounting shop to enter the data. Under the new system, what they enter would be automatically logged into the accounting system, so there's no risk of somebody mistyping a dollar amount or delay in the paperwork moving. Now the accounting folks can just validate that those in fact are correct, but they're not reentering, and you dramatically reduce your risk of a material weakness, your risk of error, and you most importantly remove the timeliness and accuracy of your financial data.

So we're going through the acquisition and contracting process for that right now, and we'll begin the consolidation and moves over the course of the next several years.

Mr. Watson: David, thanks. We've covered controls. We've covered a new system. Could we talk next about the Improper Payments Information Act? Agencies are required to annually review programs to identify those susceptible to significant problems. As I'm sure you know, but for our listeners, improper payments can include the wrong amount, the wrong recipient, or monies going to the right recipient, but being spent improperly.

What is the Department doing about improper payments?

Mr. Norquist: We regularly test for improper payments. When the Department was first started, we tested based on the size of the activity and the transaction to determine it. Since then, we've been shifting over to doing risk assessment, where are we most vulnerable, and concentrating our test work in that area.

As we have gone through, we've been very pleased to see that across the board, folks have had very good results in their improper payment testing, that the incidents are very low. The most significant exception, of course, is FEMA and the payments that happened during the Katrina disaster. I think people are maybe familiar with some of those challenges. But there, FEMA's done a number of things to strengthen those internal controls. They've increased their capacity to handle the volume of traffic, and that is one item, the simple volume of transactions, that can drive up errors. They've also put in additional automated checks. So for example, to ensure that the person applying for the benefit is in fact who they say they are and entitled to that benefit reduces your chance of error.

We've looked at and done some follow-up testing, and seen that in the hurricanes and events since then, that the error rate is in fact quite low. And so part of that is the volume and part of that is the improvement in internal controls. But we're very interested in staying on top of this issue of continuing our risk assessment and validating that the controls work or, in places where we see a weakness, strengthening those controls to prevent improper payments.

Mr. Morales: Great. Now, David, along similar lines, I understand that transferring money between agencies can be quite cumbersome, and that GAO has repeatedly identified intragovernmental transactions as an issue when they perform their annual audits. Can you tell us more about the government-wide effort to improve its ability to properly count, report, and reconcile these intragovernmental activities?

Mr. Norquist: One of the challenges you have when you go to close out an audit is you have to record how many obligations and how many -- or what exchange of data and finances do I have with, say, the Department of Defense or the Corps of Engineers, and what do they have with our organization. Now, it is quite possible that the individuals and very likely that the individuals within the organization all know about each of those individual agreements. But now the finance and accounting staff at the aggregate has to be able to resolve those. And so if the Department of Defense has one number and we have a different one, you have to figure out, well, what's the difference? Which record am I not having or do you not have from within our organization?

The challenge becomes that the data that's required to be on those documents is pretty high-level. And so you can easily run into a point where I know it's a transaction with DHS and the Department of the Army, but which organization within them? Those are absolutely enormous organizations. And so if we can move to the point of having more detailed data in those records, and I realize it's a specific office within my organization, a specific office within yours, and immediately we can reconcile which one of us is missing a piece of information and get our two numbers to match. So part of this is a standardizing the data. And OMB has been leading the effort in this area, and we're very supportive of the pilots that they are doing to try and examine ways to elevate this, and to be able to have that additional level of data so we know the right way to reconcile these. Otherwise, it becomes manpower-intensive.

And one of the responsibilities you have as a CFO is to say if I were to dedicate, you know, hundreds of thousands of dollars paying multiple federal employees to research this, is there a risk or a problem that I'm avoiding or solving by doing this? In some cases, there might be -- in this case, it may be mostly recordkeeping, and so you'd much rather switch to an automated way than to be spending resources hunting it down in a one-time, one-solution manual process.

Mr. Morales: So do you see a solution for this issue in the near term or is this going to take some more time to resolve?

Mr. Norquist: It's going to take some time, but I think they've been making progress in identifying the types of things that are going to work. And of course, all of us who are affected by this, and that's all of the agencies, are very supportive of OMB and supporting their efforts to find a common solution.

Mr. Morales: It's certainly a vested interest for everyone to see a solution to this problem.

Mr. Norquist: Absolutely.

Mr. Morales: Great, great.

What is the Department doing to integrate budget and performance information? We will ask David Norquist, chief financial officer at the U.S. Department of Homeland Security, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with David Norquist, chief financial officer at the U.S. Department of Homeland Security.

Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.

David, we've talked a lot about financial management and accountability, and certainly this is essential to the achievement of DHS's mission, but it continues to be a challenge for the Department since its creation. So focusing on financial management, can you tell us about the challenges inherent to bringing 22 diverse agencies together? And how have these challenges led to the passage of the Department's Financial Accountability Act?

Mr. Norquist: When you look at any sort of self-assessment, are you at risk for problems with internal controls or your finances, one of the first questions they ask you is have you either had significant staff turnover or been through a reorganization? Well, the Department was created, as you mentioned earlier, in the largest reorganization since World War II, and since then, we've been reorganized several more times. And so all of that means that from an independent perspective you're at a high risk for problems and you have to approach it. You will have a lack of standardization in policies, because people came from different organizations, and they bring with them the different policies and practices.

They likewise bring with them the different systems, so they won't necessarily talk to each other or, in some cases, they don't represent best practices. You'll have staff turnover that will kick in because of the change and the reorganization. And you started with a very small headquarters because that was the part that didn't exist when the Department was created. And so their ability to enforce standardization and develop a common culture is a start-up activity.

Recognizing that, Chairman Platz from the Congress and then-ranking member, now Chairman Townes looked at these types of issues and said for DHS, it isn't just about integrating your operations. It isn't about having Customs and Border Protection as part of the Department along with Coast Guard because we want a seamless control of the border. It's as much about the management of the Department and getting those to integrate as well. And I think that's what drove the Financial Accountability Act, is how do we help DHS put an emphasis on that part of the Department's challenge and help them through what clearly to them would be recognized at the very beginning as a hurdle that any new organization would have to get over.

So when I came in, I looked at the Financial Accountability Act, I looked at the types of challenges we faced, and you recognize that it really isn't a single problem. People would say, when I came in, oh, it's the system. Once you fix the system, everything's going to be okay. Well, that's not the only part that was reorganized. That's not the only part that's affected by change. And so I started to map out with my staff and with the CFOs of the components how do we tackle this in a broad range?

And you'd like to do it sequentially. You'd like to say, well, first, we're going to establish department-wide policy. And once we have all of that nicely done and the ribbon on it, we'll move to staffing, and we'll have enough people to implement that. And then you'll lay out the controls and you'll walk through it, but you're up and running. You've got to make payments tomorrow. You've got to support a mission today. You've got to disrupt a terrorist attack right now. And you can't wait on the back office to pull those together sequentially, and so we've attacked them and dealt with those challenges across the board.

We have initiatives in the people area. How do we make sure of the right people with the right training? We've got initiatives to establish the right policies. We have an initiative to put together a financial management manual. Most other departments, you would take that for granted. You'd come in -- in the Department of Defense -- or when I was at the Army, these big, green tomes that sat on the shelf and weighed hundreds of pounds that told you how to do absolutely every step. And here the ones we have are the ones the components brought with them. And so we've been looking at those of different departments, putting together workshops to review what are the best practices that a new department should use, and we've got about half of them done. By this summer coming up, we hope to have the 90 percent solution and be able to publish our set of standards that we can hold folks to.

We talked a little bit earlier about reviewing all our processes. How do we make sure that our processes are right and our controls are right? That, you have to do at the same time. That's what the OMB calls the A-123 reviews. Again, we talked about the systems as well. That's an inherent part of any solution going forward: getting to fewer systems, getting to common systems, getting to those that reinforce your controls.

Another simple example: You can have a rule that says that you can't engage in a certain transaction unless you have an authority or warrant to do that. It's really helpful if your financial system blocks somebody from doing that as well. So it isn't something that you only maintain through external checks, but your system reinforces good behavior by preventing people whose logon does not link to that warrant from being able to engage in those transactions.

And the last part that we focused on was assurance, which is how do you know that over time, these won't decay? How do you know that the controls won't get weak and that people you know, you have turnover. The new person comes in a month or two after the old person left, never quite got the hand-off briefing. How do you make sure that they know what they're supposed to do? And so we have a number of different things to train new people, as well as I have an assurance team that I send out to spot-check these and identify these types of issues before they become problems, before they contribute to a material weakness or before they become a vulnerability that somebody could later exploit.

And so we believe that that intent behind that language, and I really appreciate the strong support we have had from the Congress in this area, is helping to drive us forward in addressing not just one aspect of the financial management challenge, but the full range of challenges that go into strong internal controls.

Mr. Morales: So let me switch gears for a moment here and talk a little bit about the President's Management Agenda, or the PMA. In the last OMB scorecard, nearly half of the federal agencies, including Homeland, received a red rating in financial performance. Could you tell us from your perspective why this is such a challenging area for many agencies across the government? And can you further expand on how has your organization done to progress and improve over the last year?

Mr. Norquist: Delighted to. The President's Management Agenda has ratings on -- sort of red, yellow, green as you progress in solving problems. Many of the earliest ones, such as to get out of red, you have to have an unqualified opinion on your financial statement, well, that alone involves innumerous amounts of work and effort to fix that challenge. And so the standard was designed for the entire federal government and then many organizations who are working their way up that, addressing greater and greater challenges. But for some of us who inherited material weaknesses that prevent an unqualified opinion, you have to be tackling that at the same time you're trying to address the types of challenges that will show up at the higher levels of the standard to make sure you're in compliance with all the laws and regulations that relate to that standard. But it gets back to not focusing on a single problem at a time or thinking that you can just pick a single area, but recognizing you've got to make progress across the board. And what we have found, both here and elsewhere, is that when you make progress in key areas, it really opens it up for everyone else.

To go back to an example, Immigration and Customs Enforcement began two years ago by saying we'll address something called Fund Balance with Treasury. The sample version is, does what we have in our multiple checkbooks match the Treasury's? One of their material weaknesses was that they didn't do it. As they addressed that material weakness, as they eliminated it, all of a sudden, all sorts of other material weaknesses were getting solved. Because in order to get to the root cause of that problem, they were attacking the underlying.

Likewise, in this area, as you begin to address those, you're also addressing the very same problems that would come up as you got to yellow, as you got to green. And so you have to be tackling the full range.

I'm very excited about the progress we've made on the audit. I'm very excited about where it'll put someone who comes after me in terms of their ability to continue to improve both their score on the President's Management Agenda as well as their performance in terms of supporting the taxpayer and supporting the Department's mission.

Mr. Watson: David, sticking with the President's Management Agenda, budget and performance integration is another key component of that agenda. Could you tell us about DHS's efforts to get to green on the budget and performance integration score on the President's Management Agenda? And then more generally, how are you using finance information to inform management decision-making at the Department?

Mr. Norquist: Sure, Steve. The issue here is that you want to make sure that when you're looking at a budget and you're trying to decide what to fund next, you recognize how the funds in the past have been used. Did they in fact accomplish what you intended them to? Are you getting the results that you hoped for? What are the performance standards that you want to set out for the future? And you want that information directly integrated into your budget decision-making. You want that presented to your leadership at the same time, so they're making a decision off the full range of information. This is what's driven OMB's emphasis behind this, is to link the performance results and that what you're getting for your money with how we use additional taxpayers' money.

One of the nice advantages we have in our organization is as the Department was stood up, we created within the Comptroller's Office something called Program Analysis and Evaluation. That office has several responsibilities. One is they work on the President's Management Agenda and the PART scores, the reviews of the different components on how they meet those standards. They also work on the annual performance report. How have we done on the milestones? What were the goals of each organization, and did they in fact accomplish those goals, or how are they doing in accomplishing those goals?

They also have responsibility to review and look at major programs within the Department, not just from a performance, but also from an internal, executing their money, how are they doing on meeting their internal production milestones for new systems coming on board. That office is an essential part of our program build. When we meet with the Secretary or the Deputy, that office is essential to managing that process. They're there at the meetings. They ensure that when a project is up for approval or review or is being considered for additional funding, the leadership knows how it's done in the past. Did it in fact meet its objectives? Is it on schedule? How are they doing on spending their money and staying within budget? And by tying those all into the same organization and by having that with the comptroller -- with the CFO as part of our financial duties, we can ensure that performance is consistently put in front of the leadership to inform them, and consistently linked with our budget and our obligation of funds.

Mr. Watson: David, we talk with many of our guests about collaboration. What kinds of partnerships are you developing now to improve operations or outcomes at the Department? How might these partnerships change over time?

Mr. Norquist: Partnering with other organizations is absolutely essential, absolutely essential to your success as a CFO. Take, for example, other departments. In order to resolve the intergovernmental liabilities issues or any of those challenges, you have to have strong working relationships with the other CFOs of the other departments. In fact, I came to this meeting from meeting with the CFO at the Department of Defense. We have many issues in common, including, for example, the Coast Guard, which performs operations in Iraq, but also through OMB with our council -- the CFO Council there. That close relationship allows you to tackle many of these issues across organizations.

But it also works within an organization. Inside of my organization, we have regular meetings with the CFOs of each of the components. And in fact, I strongly encourage in the hiring process that we have CFOs who have worked in other components or at the headquarters in order to ensure that they have a broader understanding of their mission other than the office and the organization they're in. They've worked in another place. They understand how the two offices work together. Because so many of the issues that we work on, whether it's immigration and border enforcements, whether it's preventing terrorists from entering the country, require extensive collaboration between the organizations. And the financial world reflects that as well.

Perhaps the most important one that I would flag, particularly for the audit, is the close working relationship we have with our inspector general and our independent auditors. And this is a place where it is absolutely critical for us to have them involved in everything. We bring them into our regular meetings. My view is, I know that they're trying to identify weaknesses for the audit, but I'm trying to find them as well and fix them as well, and if they find them, I want to hear about it. I'm not interested in trying to hide the information from them. I want them to see the transparency. That also helps them, because they know going through the audit that they're seeing everything that you're seeing. They're seeing what's going on, and have a much better understanding of the solutions you're taking, what approaches you're using.

One of the ways we have used that strong solid relationship to improve our process is when we initially developed the corrective action plans that we talked about earlier, we asked the IG to take a look at them while they were still in draft. And we asked a few set of questions: do these in fact represent appropriate responses to the challenges that you've identified? Is it clear that the people who developed the corrective action plan understood your findings? The last thing you want to do is be solving a problem that's different than the one they found. You want to make sure you captured theirs, so you get that feedback. Do you think that these corrective action plans are in fact likely to be effective? Are they the right approach? Are they going after the root cause?

Some people will sit back and wait until you're done, and then they'll come back in and say it didn't work, you didn't succeed, and you should have sent something different. That's not particularly helpful. I've already spent a lot of time and resources. I would have preferred that up front. Our inspector general, our auditors, and others have given us a lot of that feedback early, so if they don't think an approach is going to work, they give us that feedback, we can fix it. That's why our corrective action plans last year were so effective. They had been reviewed by a number of people who knew the problems in detail, could provide that good feedback, and so when we executed them, we really saw success, we really saw them pay off.

We're going to do the same thing this year, sit down with them again. They're independent. They're not going to promise you it's going to make your weakness go away. They're still going to look for things. But they're going to let you know if you're off on the right track. They're going to give you that additional feedback from having another player who understands the process. And likewise, again, the close relationship that we have with committees on the Hill, both those on the appropriations side, on the budget, and those on the authorization and oversight side, you know, on the Financial Accountability Act and so forth, all of those are strong and essential to our progress. Because much of our work has been successful because of the support we have had from them.

Mr. Morales: So it's feedback in real time then.

Mr. Norquist: That is very helpful and it's absolutely essential.

Mr. Morales: Great.

Now, at the start of the show, you talked about the 209,000 employees at DHS, but we know that more and more government work is being carried out through the use of contractors. So could you tell us how federal managers can effectively manage this ever-increasing blended workforce? And what are some of the key differences intrinsic to these two core groups?

Mr. Norquist: Well, I think a manager has to recognize that whatever organization they're going to be in, they're going to have both. And they need to recognize their strengths and weaknesses, just as you would with the employees on your staff. What are their strengths and weaknesses? How can I team people up to get the best results?

For example, if you're looking at a challenge or a mission that is stable, it's enduring, it's perhaps a core government mission, that's a place where you're really looking for your federal workforce to be your strength and your backbone. This is a place where you want to develop depth of experience, where you don't want to be potentially changing over the support on a regular basis, because it's essential to your success. You did it last year, you're going to do it next year, and you can manage the work that way.

But there are other places you run into where there's a real surge requirement. And in the audit, for example, this comes up in some areas where while at the same time you're producing the audit, you're trying to solve certain problems. You will not require that intensity and that level of work in perpetuity. You will not need it, so there's no reason to bring on board a large number of federal employees who then after a year or two, you will not have a requirement for that. So you strike a balance.

You identify what are the challenges that are best suited to an organization in the private sector where they can provide that search. In some cases, you're looking for something where they can make a rapid trade-off between technology and staff. In the government, we have a very hard time doing that. You know, we're developing right now the guidance for our 2010 budget. We're about to go to print on the 2009 budget. We're in the midst of executing 2008. So our planning is several years ahead, and our ability to make trade-offs are affected by that. Whereas with other organizations, if you're contracting for a service, they can make those trade-offs very quickly, and the private sector does a very good job at that.

And so as a manager, you really have to recognize both their performance boundaries as well, of course, there are certain legal ones or there are certain ones where by law and by the interest of the government, you want to keep in-house. But it's an important balance to maintain, and I think any manager should recognize that they're going to need both and they're going to end up using both.

Mr. Morales: So along these same lines, you know, given the critical role that financial management plays in the mission and program delivery, could you give us your view on how the role of the CFO will need to evolve in the future?

Mr. Norquist: Well, I think if you look at how the CFO has changed over time, everyone's always been focused on the budget. Ever since the appropriation committees were created over 100 years ago, you had that emphasis on the budget, and everyone understands that process. It's well-established, it will drive itself. But CFOs have had greater and greater responsibility on the internal control and the accountability side. And you've seen this in various levels of legislation that have been passed over the last set of years. And that's helped strengthen and improve the focus of the CFOs on the full range of the financial transactions, following them right out the door and making sure that the strong controls are in place.

Different offices have been tackling this in different ways in the past. And so what you've seen here is ability to get more standardization and more control and a repeated emphasis -- and the resources that come with that, the ability to put the staff on it to ensure that you're doing those checks. And a lot of benefit comes from random sampling and random checks to ensure that the controls are working properly.

Mr. Morales: Great.

So what does the future hold for the Department of Homeland Security? We will ask David Norquist, chief financial officer at the U.S. Department of Homeland Security, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with David Norquist, chief financial officer at the U.S. Department of Homeland Security.

Also joining us in our conversation is Steve Watson, partner in IBM's financial management practice.

David, I'd like to continue transitioning to the future. Could you give us a sense of some of the key issues that will affect the CFOs and budget offices government-wide over the next couple of years?

Mr. Norquist: I think the central issue that will be affecting CFOs government-wide over the next several years, particularly the next year, is recruiting and retention. As you look at the agencies like Homeland Security and then the Defense Department, who is continuing to expand its ability on the audits, there's an increasing demand for people with accounting skills or people with CPAs. And as the size of the Defense Department begins to take its effect, you'll see that marketplace become very competitive, which means for the rest of the organizations who have been doing well, we'll be actively hiring their staff away and bringing them onto our organizations, creating challenges for them. And Defense Department, of course, will be by far the largest player in that area as they move forward on the process. So it creates an incentive for us to focus on training our staff and expanding the pool of people with that skill set, as well as the retention to keep the people who've got the longevity to understand the issues and how to solve those challenges.

Mr. Watson: David, on a broader basis, what are some of the major opportunities and challenges your organization will encounter in the future? How do you envision your office will evolve over the next five years to meet these challenges?

Mr. Norquist: Well, we're going to go through a transition over the next several years. We are going to shift from being focused on putting together those building blocks. Do you have a financial management manual? Do you have the right number of staff? Do you have the basic training courses? Can you establish a program for bringing people into your organization? Can you consolidate your systems? Those will either be done or well under way within the next year or two, next couple years, which means that what we're setting up for is, in my case for my successor, that he or she can look at an entirely new set of choices. They won't be talking about the Department is in transition or new. They'll be walking into a department that's well-established with as many of the features that we've expected somewhereelse. In fact, hopefully, they'll see it as better because we'll have been able to have adopted the best practices of those other organizations as we went through it.

But that will really create a whole new playing field. They will -- my hope for my successor is that they are not worried about the same issues that I am, that they're able to look at a whole range of new areas, efficiency of operations in some of our financial areas, things that move beyond the internal controls and the policy manuals and things that we've wanted to do to put that basic building block of a new agency in place.

Mr. Watson: David, having staff with the appropriate skills is obviously going to be key to achieving those objectives you've set out there. Would you elaborate on some of your human capital strategies? How are these programs helping you prepare future financial leaders for the Department?

Mr. Norquist: Well, there's one of the things that we started doing early on when I realized that weaknesses can come as much from people as from systems or policies, was if you are a new hire in the Department of Homeland Security, in the financial management field, whether you work for the Coast Guard, Customs and Border Protection, Immigration and Customs Enforcement, we bring you to Washington, D.C. for a central training class, welcome on board. I don't want them to feel that they've been hired into the accounting office on the second floor of the Indianapolis office. I want them to recognize they've joined the Department. And so they need to understand the mission of all the different components of the Department.

They also need to understand fiscal law. In my view, if you're in a financial management profession, you are the residential expert in that room, on that meeting, on fiscal law and internal controls. And you should feel both that you have the knowledge and the obligation to speak up if somebody is suggesting a policy or procedure that would create a problem. And in many cases, some of the government controls are not inherently obvious to someone who's not in our profession why you have that segregation of duties, why you have some of those other controls.

So they need to be able to stand up and say, wait a second, we need to check the fiscal lawyers here to make sure that's an appropriate way. Maybe if we did it this way, with the right notification, that would be the appropriate solution. So we go through that training with them, fiscal law, the budget, the audit, the overview of DHS, and all the other components, to ensure that everyone being hired into the financial management community inside DHS has that core skill set, that strong understanding of internal controls.

It also helps because they get to meet the different CFOs. We have a panel. They get to see who the heads are of each of these organizations. Both times we've done it, the Deputy has come and spoke, so it also is very effective for the morale of the folks to understand that what they do is important to the leadership of the Department.

We're also going to be promoting certifications. There's a number of organizations that provide certifications to the people in the financial management field. My office has put out an announcement to the components saying that we will sponsor those, we will pay for those. We will encourage people to apply for those certifications. I want them to be a professionalized workforce. And if they are willing to spend time and energy to study to pass these exams, we're happy to pay the cost of them to take the sitting fee and the other associated costs with that. And I recognize that they may take that skill set and go work for some other component inside DHS, but that's great. Because if they move from Coast Guard to ICE or from ICE to Secret Service, that's better for us as a department, and so we're also focused on building that skill set.

We'll have an award ceremony to recognize success. I think it's important for people who have been able to have as much success as we have had in the last few years to be able to be recognized for that. I think that's a positive reinforcement that's worth promoting.

In addition to which we have the CFO Mentorship Program, and this is really about preparing the financial leaders of tomorrow. I think you asked that as sort of the ending to your question, but I'll bring -- come to it here, Steve. When I looked across the Department, I asked the question where are the next set of CFOs coming from?

If you look at Department of Defense or anywhere else, they have an entire pipeline. You go to colleges, you recruit, you bring them in, you promote them up, they move up. Our staff came from other agencies. They came from Treasury, they came from Justice, they came from the Drug Enforcement Agency, they came from the Department of the Navy. They weren't developed and promoted from within. And so I realized that we were going to have to establish training opportunities and developmental opportunities so we can build that next group of career civil servant CFOs.

Our mentorship program is four years -- four months long. And they come in, and we've got five people in this year's class and we had five in last year's. And they spend time with the different CFOs. They spend some time getting residential training and leadership training. And the idea is to expose them to the many challenges a CFO has.

In the financial management field, most people are either from the budgeting side or the accounting side. A CFO has to manage both. And so if the mentor candidate has a budget background, we send him to work on the accounting side to understand the audit and how it relates, and vice versa. And I think this really helps lay the groundwork for a future group of people who everyone can turn to and say that's the next generation. That's the group of 15s and 14s that we look to promote over the next several years.

Again, it's no guarantee; have to compete just like anyone else. You don't have to go through the program to be selected. But by participating in it and by supporting it, I am trying to promote, and I think we've been very successful, in building that future cadre of managers.

Mr. Morales: So, David, we talked about maintaining this high-quality technical workforce, but what about at the front end in terms of attracting new employees to DHS or to the financial management ranks? What are you doing in this area?

Mr. Norquist: We have a number of initiatives underway. We've done a lot of basic outreach, going out and setting up booths at jobs fairs and conferences and things to try and attract. We've reached out to other organizations to promote the opportunities.

I think one of the things about DHS that is particularly appealing is it's really a place where you can make a difference. You can come in here and if you work in the area of financial management policy, we are writing new policy. We are putting in for places that didn't have it. You can come make a difference. If you are in any of these other areas, this is a place where you can wake up in the morning and recognize that what you did that week has really made a difference in making the world better, whether you work in the Financial Management Office or whether you're patrolling the border or whether you're doing checks on people boarding airplanes or whether you're looking for terrorists or you're protecting -- rescuing people at sea. People at DHS consistently are able to wake up and point to the successes and the accomplishments that they have had, and have that job satisfaction of knowing that the mission is really what made it successful.

We're also in the financial management area setting up an internship program to bring in folks from universities. Most departments have those, but our staff, as I mentioned, came from other departments. And so with Congress' support, we'll be reaching out to universities looking for those people with CPAs or financial management interest to drive them and draw them into the Department, give them the training and the rotational opportunities they need, and begin building that pipeline so we have a place to draw our GS-7s and GS-9s into our organization as opposed to simply always taking from other departments.

Mr. Morales: David, you're obviously very passionate about your work, and your success is unquestioned. So what advice could you give to a person who perhaps is out there, whether, you know, they're coming out of college or perhaps, you know, have several years in the workforce? What do you tell them if they're thinking about a career in public service?

Mr. Norquist: What I would tell them is to go where their passion is, to go where their heart takes them. This is not a job you do because it's going to make you large sums of money or it's going to make you famous. This is a job you do because you believe that you can make a difference. And so if you're really interested in boating and safety at sea and the Coast Guard is a place for you, go there, because you need to have a job where you're going to really understand and feel that sense of accomplishment. If you're interested in uniformed military service and protecting the country that way, there are great opportunities there. If you're interested in securing the border, there's a lot of hiring going on on the border protection. But these are places where people can bring safety and security to their friends and family, wake up every day knowing they made a difference interdicting a drug shipment, preventing a terrorist attack. Those are the types of things that you should look for.

In the financial management field, I've always passionately cared about two things, and I've been able to do it throughout my entire career. The first is protecting the country, and the other is protecting the taxpayers' money. And there are very few jobs where you get to do both at the same time, and so I've been blessed by having that opportunity. And I would encourage folks who are interested in a career in government service look for where that -- where your passion takes you. Look for the type of job where you can be satisfied with what you've accomplished and be able to look back on it with pride.

Mr. Morales: That's great, David. It sounds like there's something for everyone and you guarantee a high level of satisfaction.

Unfortunately, we have reached the end of our time this morning, David. I want to thank you for fitting us into your busy schedule. But more importantly, Steve and I would like to thank you for your dedicated service to our government and protecting our homeland.

Mr. Norquist: Thank you, Al, thank you, Steve, for having me on the show. I appreciate the opportunity to talk about the success that we've had at the Department of Homeland Security, our improvement both in the audit and in internal control. I particularly thank all those hard-working folks in the Department who day-in and day-out make all of this possible. If anyone is interested in the financial management career field at DHS, just e-mail us your resume at cfojobs@dhs.gov. We'll let you know where the applications are, help you navigate your way through some of the job application process.

Mr. Morales: That's great, thank you.

This has been The Business of Government Hour, featuring a conversation with David Norquist, chief financial officer at the U.S. Department of Homeland Security. My co-host has been Steve Watson, partner in IBM's financial management practice. As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who may not be able to hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support.

For The Business of Government Hour, I'm Albert Morales. Thank you for listening.

Announcer: This has been The Business of Government Hour. Be sure to join us every Saturday at 9:00 a.m., and visit us on the web at businessofgovernment.org.

There, you can learn more about our programs and get a transcript of today's conversation.

Until next week, it's businessofgovernment.org.