Pillar 2: Improving Financial and Operational Effectiveness

This is the second blog in a series highlighting key insights from the IBM Center's Special Report, Five Pillars of Effective Government.

U.S. federal agencies face an increasingly complex operating environment characterized by fiscal constraints, technological disruption, evolving citizen expectations, and unprecedented global challenges. Improving financial and operational effectiveness represents a fundamental obligation to taxpayers and a prerequisite for maintaining public trust in democratic institutions.

The challenge is substantial and demands immediate attention. According to the Government Accountability Office's 2024 report, the federal government made $236 billion in improper payments in fiscal year 2023, with more than 80 percent concentrated in just five programs. Even more alarming, GAO estimates that $232-$521 billion is lost to fraud each year, making it equivalent to the "sixth largest agency in government" in budget terms.[1] These figures underscore the urgent need for systematic improvements in how government manages its finances and operations.

Yet within these challenges lie significant opportunities. Through rigorous research, evidence-based practices, and strategic adoption of proven innovations, federal agencies can transform operations to deliver better outcomes at lower costs.

Five critical dimensions define financial and operational effectiveness: operational efficiency, financial management, risk resilience, procurement reform, and regulatory reform—interconnected components of a broader imperative to optimize government performance.

Operational effectiveness requires rethinking how agencies design, execute, and improve core processes. Government workers seeking innovation "need new methods and tools that can help them make better decisions and deliver more effective results."[2] The transformation toolkit includes four complementary approaches: Lean Production, Agile, Design Thinking, and Lean Startup—methods that are "complementary and essential" because they address different improvement aspects while sharing a focus on user needs and continuous iteration.

Data analytics represents one of the most powerful tools for improving operations. Federal agencies handle "vast amounts of data and serve millions of people, from safeguarding identities and national security to managing benefits and citizens services."[3] By leveraging data on program performance, resource utilization, and service outcomes, agencies can identify bottlenecks, predict challenges, and allocate resources strategically.

Artificial intelligence and machine learning offer particularly promising opportunities. As the Congressional Budget Office has noted, "AI can help agencies identify patterns and relationships and respond to queries that arise in complex scenarios."[4] Moreover, "AI can also augment and improve decision-making across the federal workforce, freeing up time and energy for dedicated federal workers by automating data analysis, reducing manual tasks, integrating cross agency services, and minimizing errors in claims processing and system maintenance."[5]

However, technology alone cannot transform government operations. Successful transformation requires placing people at the center of all technology decisions. Understanding how employees receive, think about, and use technology, and connecting that understanding to business outcomes, ensures that technological investments yield actual improvements in mission delivery rather than merely creating sophisticated systems that employees struggle to use effectively.[6]

Shared services and cross-agency collaboration represent another critical strategy for improving operational efficiency. Empowering shared service providers can drive potential for significant cost savings.[7] When multiple agencies perform similar administrative functions—such as human resources management, financial processing, or IT infrastructure—consolidating these activities can reduce duplication, lower costs, and improve service quality through specialization and economies of scale. The challenge lies in overcoming institutional barriers and aligning incentives to encourage cooperation across organizational boundaries.

Robotic Process Automation (RPA) has emerged as a key solution to technology and human capital challenges. RPA enables agencies to automate repetitive, rule-based tasks, freeing employees to focus on higher-value work requiring human judgment. Government agencies have found RPA particularly valuable for bridging gaps between outdated legacy systems,[8] providing a practical intermediate solution while agencies work toward more comprehensive modernization efforts. A 2021 study on RPA usage in federal CFO organizations found that most organizations had five or more bots in production, with success depending on strong organizational change management and good working relationships with CIO offices.[9]

Adopting agile approaches can enhance organizational capacity by enabling iterative development, cross-functional collaboration, and rapid adaptation to changing requirements. State and local governments that have successfully implemented agile methods report improved project outcomes, reduced failure rates, and greater stakeholder satisfaction.[10] However, agile represents not just a set of techniques but a cultural shift toward experimentation, learning from failure, and continuous improvement, values that must be cultivated throughout the organization, not merely within isolated project teams.

Effective financial management extends beyond bookkeeping and compliance to encompass strategic budget formulation, performance measurement, cost analysis, and resource allocation. Budget processes should be transformed from purely fiscal exercises into strategic management tools.

The scale of the challenge is immense. Each year, the federal government spends more than $100 billion on IT and cyber-related investments, with agencies typically spending about 80 percent on operations and maintenance of existing IT, including legacy systems.[11] This creates a vicious cycle where outdated systems consume resources that could drive transformation.

Performance-based budgeting represents a promising innovation. Traditional line-item budgeting focuses on controlling inputs—salaries, supplies, equipment—rather than outcomes. Performance-based approaches link funding to measurable results, creating incentives for efficiency. However, implementing these approaches requires robust performance measurement systems, clear articulation of program goals, and willingness to make difficult trade-offs between competing priorities.[12]

Predictive analytics offers powerful capabilities for improving financial management and resource allocation. By analyzing historical spending patterns, program utilization trends, and external factors affecting demand, agencies can forecast future resource needs more accurately and identify potential problems before they become crises. The Department of Labor's early use of analytics enabled agency officials to anticipate and prevent operational bottlenecks, demonstrating how forward-looking analysis can prevent problems rather than merely responding to them after they occur.[13]

Zero-based budgeting approaches can surface hidden inefficiencies and encourage fundamental reconsideration of program design and delivery. Rather than assuming that current funding levels represent appropriate baselines and focusing debate on proposed increases or decreases, zero-based approaches require agencies to justify their entire budget from the ground up. While resource-intensive to implement, these approaches can reveal opportunities for significant cost savings and program improvements that incremental budget processes might miss.

Transparency in financial management serves dual purposes: enabling better internal decision-making and strengthening public accountability. When budget information is presented clearly and accessibly to citizens, it invites informed public engagement and builds trust. However, presenting complex financial information in meaningful ways to non-expert audiences while maintaining technical rigor remains an ongoing challenge. Agencies must balance the need for comprehensive disclosure with the reality that overwhelming citizens with technical details can reduce rather than enhance understanding.

Traditional risk management has focused on prevention and recovery—protecting against threats and returning to normal operations. However, contemporary challenges demand building resilience that enables agencies to 'bounce forward' by adapting and improving in response to challenges rather than merely recovering to their prior state.[14]

The COVID-19 pandemic exposed critical vulnerabilities in government systems for rapidly distributing emergency assistance while preventing fraud. It is estimated that with most of the $5 trillion appropriated, over $600 billion was taken fraudulently and/or subject to improper payments.[15] This unprecedented loss occurred because: “Relative to the rapid promulgation of legislation, developing program management rules and capacity, distributing funds, training staff, developing data systems, measuring the impact, and providing for proper oversight, the government was trailing with proper and effective tools and practices to prevent significant fraud or improper payments.”[16]

The analysis of root causes provides crucial insights for future preparedness. Fraud involves paying entities not entitled to payment based on misrepresentation, while improper payments result from failures to access needed data, lack of documentation, or absence of necessary information. "The bottom line is regardless of what the number is, it emanates overwhelmingly from three programs that were designed and originated in 2020 with too many large holes that opened the door to criminal fraud."[17] This candid assessment highlights how emergency circumstances can create vulnerabilities that persist long after the immediate crisis passes.

Integrated risk assessment models enable agencies to prioritize resources across multiple threat categories. Rather than treating economic, cybersecurity, and operational risks as separate domains, sophisticated risk management recognizes the interdependencies among different types of threats. For example, a cybersecurity breach can create operational disruptions that generate financial losses and undermine public confidence.

Cybersecurity represents a critical dimension of resilience in an increasingly digital government. "The 2024 Ponemon Cost of Data Breach study found the average total cost of a data breach has risen to $4.88 million, a 10 percent increase over 2023 and the highest total ever."[18] More broadly, data breaches by local, state and federal agencies have cost over $26 billion over eight years. These figures demonstrate that inadequate cybersecurity represents a massive drain on public resources that could be invested in mission delivery.[19]

Strategic foresight and scenario planning represent proactive approaches to risk resilience. Rather than waiting for crises to occur and then responding, agencies can "prepare an emergency funding execution playbook to ensure readiness for the next crisis, so that Standard Operating Procedures (SOPs), authorities, fraud risk inventory, and protocols are in place and ready for execution."[20] This preparation enables rapid, controlled response when emergencies arise, reducing both the immediate damage and the long-term costs of crisis management.

Building resilience also requires attention to organizational culture and human capital. “Resilient organizations cultivate employees who can adapt to changing circumstances, solve novel problems, and collaborate across functional boundaries."[21] Technical systems matter, but ultimately resilience depends on people who can exercise judgment, improvise, and work together under pressure.

Federal procurement represents one of the largest aspects of government operations. The Government Accountability Office reports that federal agencies purchase approximately $759 billion worth of contracts annually. The procurement system profoundly influences government effectiveness, determining not only costs but also how quickly agencies can access capabilities and leverage private sector innovation.[22]

The new Revolutionary FAR Overhaul (RFO) initiative provides a significant opportunity for procurement reform.[23] As the RFO website indicates, “this initiative will return the FAR to its statutory roots, rewrite it in plain language, and remove most non-statutory rules. In addition, non-regulatory buying guides will provide practical strategies grounded in common sense while remaining outside the FAR. The goal is clear: faster acquisitions, greater competition, and better results.” The RFO provides a lynchpin to advance significant procurement reform activity.  

Digital contracting and electronic procurement systems can dramatically reduce transaction costs and accelerate acquisition processes. Some encouraging news was reported in December 2024, when the Office of Management and Budget announced the use of Category Management to deliver over $100 billion in savings and cost avoidance.[24] This enterprisewide approach to federal contracting demonstrates how organizing as a better-informed buyer can yield substantial savings. Category management treats procurement as a strategic function where agencies coordinate their purchases, share information about supplier performance, and leverage their collective buying power rather than making independent decisions that fragment demand and reduce bargaining power.

Increasing vendor competition is essential for better taxpayer value. However, significant barriers persist, including overly restrictive requirements, complex proposal processes that favor large incumbents, and limited outreach to potential vendors, particularly small businesses and non-traditional contractors. Balancing innovation from new vendors with reliability from established providers creates ongoing tension: Established vendors often bring proven expertise, reliability, and familiarity with government processes, making them a safer choice for projects requiring stability and predictable outcomes.[25]

Agile procurement models offer promising alternatives to traditional waterfall approaches that require detailed specifications upfront and provide limited flexibility during execution. 18F developed an innovative approach to agile contracting that "slims down the solicitation document to around a dozen pages but still follows all of the applicable procurement rules and keeps it under the contracting officer's control."[26] Key elements include using a Statement of Objectives rather than a Statement of Work, employing labor-hour contracts versus firm fixed price, and maintaining short periods of performance. This approach recognizes that for many technology and service contracts, detailed requirements cannot be fully specified in advance and rigid contracts can lock agencies into approaches that prove suboptimal as circumstances evolve.

Share-in-savings approaches, where contractors are compensated based on cost reductions or performance improvements, align vendor incentives with government interests. These models can be particularly effective where savings are measurable. However, structuring agreements that fairly allocate risk and reward while maintaining oversight remains challenging, requiring agencies to balance performance incentives with taxpayer protection.

The importance of vendor relationships extends beyond contractual terms. Government agencies sometimes create unrealistic expectations for contractors while failing to provide clear requirements or adequate support, effectively setting service providers up for failure. A more effective approach involves removing unnecessary burdens from contractors, strengthening the government's own capacity to articulate needs and evaluate performance, and fostering mutual accountability. When government agencies and contractors treat each other as peers working toward shared mission objectives rather than adversaries, both parties can focus on delivering results efficiently.

Regulations shape behavior throughout society and the economy, yet regulatory processes struggle to balance competing imperatives: ensuring compliance, providing flexibility, maintaining accountability, and adapting to changing conditions. Modernizing regulatory frameworks offers critical opportunities to improve government effectiveness while reducing unnecessary burdens.

The challenge centers on translating broad policy intentions into implementable rules. Overly prescriptive regulations create rigidity that prevents adaptation to unforeseen circumstances; overly vague rules generate uncertainty and inconsistent enforcement. Finding balance requires analyzing regulated activities, engaging stakeholders, and learning from implementation experience.

Building flexibility enables agencies to address unanticipated events without time-consuming rule changes. Performance-based standards that specify outcomes rather than methods, or safe harbor provisions that provide clear compliance paths while allowing alternatives, can achieve this balance while maintaining accountability.

Technology offers multiple pathways for improvement. Automated systems streamline routine compliance, reducing burden on agencies and regulated entities. Data analytics identify compliance patterns, target enforcement effectively, and detect emerging problems earlier. However, regulatory technology must be user-friendly and well-integrated with business processes. Given that most modern code relies on open-source components with security vulnerabilities, technology solutions require ongoing maintenance and updates to remain secure and effective.

Retrospective review can identify outdated rules, requirements with costs exceeding benefits, or conflicting mandates. Building regular review processes into regulatory management, supported by data on effectiveness and compliance costs, ensures the regulatory framework evolves appropriately over time.

Improving financial and operational effectiveness requires sustained commitment across multiple dimensions. The five areas explored—operational efficiency, financial management, risk resilience, procurement reform, and regulatory reform—are interconnected elements of a comprehensive approach to government excellence.

Success requires leadership that articulates clear visions, builds cultures valuing evidence and innovation, and maintains focus through obstacles. It requires investment in technology and data systems, employee development, and stakeholder engagement to identify opportunities and build support for change.

Genuine transformation cannot be achieved through isolated initiatives or purely technical solutions. It requires integrated efforts that simultaneously address how people do their work, how processes are designed to support faster service delivery, and how technologies leverage commercial best practices, all focused on improving mission results for businesses and citizens.

The path forward is challenging but essential. Taxpayers deserve government that operates efficiently and spends wisely. Federal employees deserve organizations that provide tools and support to excel. Citizens deserve public institutions that earn trust through demonstrated competence and accountability.

As government leaders navigate digital transformation, they must balance short-term wins with long-term strategies for creating public value. The maturation of next-generation technologies will only amplify the importance of this balanced approach. By documenting successful practices and offering practical frameworks, research equips government leaders with tools for enhancing performance.

Footnotes 

[1] Steve Goodrich and Bob Westbrooks, A Prepared Federal Government: Preventing Fraud and Improper Payments in Emergency Funding (Washington, DC: IBM Center for The Business of Government, 2024), 11, https://www.businessofgovernment.org/sites/default/files/Preventing%20Fraud%20and%20Improper%20Payments%20in%20Emergency%20Funding.pdf.

[2] Andrew B. Whitford, Transforming How Government Operates: Four Methods of Change (Washington, DC: IBM Center for The Business of Government, 2020), 6, https://www.businessofgovernment.org/sites/default/files/Transforming%20How%20Government%20Operates.pdf.

[3] How Technology Can Drive Government Efficiency (Washington, DC: IBM Center for The Business of Government, 2025), 11, https://www.businessofgovernment.org/sites/default/files/How%20TECHNOLOGY%20Can%20Drive%20GOVERNMENT%20EFFICIENCY_0.pdf. which is a companion piece to the more detailed TCC report, How Productivity, Innovation, and Efficiency Can Transform American Government.

[4] Congressional Budget Office, Artificial Intelligence and Its Potential Effects on the Economy and the Federal Budget (Washington, DC: Congressional Budget Office, December 2024, https://www.cbo.gov/publication/61147#_idTextAnchor000.

[5] How Technology Can Drive Government Efficiency, 11.

[6] Gregory S. Dawson, James S. Denford, Kevin C. Desouza, and Marc E. B. Picavet, Digital Modernization for Government: An Implementation Framework (Washington, DC: IBM Center for The Business of Government, December 2024), 26.

[7] How Technology Can Drive Government Efficiency, 6.

[8] Dawson et al., Digital Modernization for Government, 7.

[9] Dawson et al., Digital Modernization for Government, 30.

[10] Sukumar Ganapati, Adopting Agile in State and Local Governments (Washington, DC: IBM Center for The Business of Government, 2021), 10.

[11] How Technology Can Drive Government Efficiency, 12.

[12] Dawson et al., Digital Modernization for Government, 7.

[13] U.S. Department of Labor, “Artificial Intelligence Use Case Inventory,” Office of the Assistant Secretary for Administration and Management, accessed; U.S. Department of Labor, Office of Inspector General, Fiscal Year 2026 Congressional Budget Justification, section “Leveraging Data & Predictive Analytics to Strengthen Programmatic Oversight”.

[14] Michael J. Keegan, “Navigating Crisis: Insightful Lessons in Resilience,” The Business of Government Magazine, 2022 Edition (Washington, DC: IBM Center for The Business of Government, 2022), https://www.businessofgovernment.org/sites/default/files/From%20the%20Editor%27s%20Desk_1.pdf.

[15] Goodrich and Westbrooks, A Prepared Federal Government, 8.

[16] Goodrich and Westbrooks, A Prepared Federal Government, 8.

[17] Goodrich and Westbrooks, A Prepared Federal Government, 11.

[18] How Technology Can Drive Government Efficiency, 14.

[19] How Technology Can Drive Government Efficiency, 14.

[20] Goodrich and Westbrooks, A Prepared Federal Government, 27.

[21] Dawson et al., Digital Modernization for Government, 7.

[22] How Technology Can Drive Government Efficiency, 16.

[23] “Revolutionary FAR Overhaul,” Acquisition.gov, General Services Administration, accessed December 18, 2025, https://www.acquisition.gov/far-overhaul. (Acquisition.gov).

[24] How Technology Can Drive Government Efficiency, 16.

[25] Dawson et al., Digital Modernization for Government, 41.

[26] Whitford, Transforming How Government Operates: Four Methods of Change, 35.