State government’s back office of the future: The digital transformation of HR, procurement, and finance

An important finding of the report: “While most participants rated their state between Active and Advanced, nearly every state representative said their digital maturity ranged significantly between individual functions, which are at various stages of maturity.”³ This wide variance indicates that while progress has been made, there may be a significant opportunity to further leverage digital technology.

Many states have introduced some level of digital processes to their back-office operations. Many states have made their job postings searchable online, routine commodity purchases often go through some form of e-purchasing system, and many financial organizations operate using some form of financial or enterprise resource planning (ERP) tool. But true digital transformation goes beyond the occasional automated system and encompasses an overall state vision for digital services.

It should be no surprise, then, that first on the NASCA’s list of top strategic priorities is “Digitization of State Operations, including “internal digital tools that simplify processes.”⁴

A vision for the state government’s back office of the future

The back office of the future will likely include the following core elements:

1. An integration of key back-office functions: Thanks to technologies such as AI, automation, SaaS, and cloud, governments can integrate functions such as HR, finance, and procurement as never before. For maximum impact, this integration should include digital systems that work together, data that flows seamlessly, and an organization that reflects the new integrated reality. The resulting integrated back office can reduce redundancies and deliver results in a more strategic manner.⁵ Integrated, these back-office functions can transform from a mere collection of transaction-processor divisions to an insight generator that leverages cross-functional data and talent to deliver mission outcomes.⁶
2. A coordinated whole-of-government approach: Is state government a single enterprise or a collection of semi-independent operating units? The answer usually is both. So, the back-office platform, in addition to being integrated, should be consistent. Instead of each department running their own siloed systems, centralized coordination can minimize redundancies, lower operation and maintenance costs, and, as technology advances, still deliver needed flexibility to various departments. The benefits of centralizing HR, procurement, and finance functions will likely grow with technological advances.
3. Close linkage with customer-facing offices: Back offices exist to help achieve the critical and diverse missions of state government, such as building roads, supporting public health, and helping families. Solutions for back-office and mission-facing organizations should be flexible enough to cover very different operational conditions, such as remote work, complex grant management, and challenging procurement needs.

HR: A critical function overdue for digital enhancement

Current state of play

Without question, HR functions in state government make use of digital processes more extensively than they did a decade ago. Many states have online job postings, and many have some degree of digital capabilities in other areas, such as benefit administration or online training. Generally, digital operations are limited to some areas, while in others, reliance on manual and semi-manual processes persists.

Moreover, many states currently have a proliferation of HR systems, as different departments employ legacy systems in areas such as time and attendance, payroll reporting, and tracking candidates through the hiring process.

Opportunity for transformation

The potential benefits of digital HR systems are substantial. That’s in part because the HR “life cycle” involves a large number of transactions and touches sizable constituents, including:

• Job postings: all job seekers;
• Application and interview process: all candidates;
• Onboarding: all new hires;
• Training and skills development: all employees; and
• Time and attendance, payroll, ongoing employee support (including benefit management), and separation: all employees.

Enhanced service is one benefit of digital transformation. Another benefit of a digital HR environment is seamless accessibility to information for management, which can help them oversee operations in a new way and make necessary improvements.

For example, Pennsylvania’s Department of Transportation previously managed the payroll of its highway maintenance workers using paper timecards. This paper-based process had an error rate of more than 80%. In addition, the process was tedious and time-consuming for staff. To streamline operations, in 2019, the department launched a new mobile app that allowed supervisors to log and manage work schedules. The app, which took just six months to develop, operates in real time, making it much easier for supervisors to manage work schedules. The department expects the new app to generate an annual saving of approximately US$7.5 million.⁷

The main purpose of an HR organization is to build and support a mission-ready workforce. Employers with strong HR capabilities anticipate talent needs, quickly hire mission-critical staff, build a diverse and inclusive workforce, and provide strong professional development opportunities. By treating workers like customers, a robust HR function can help government become an employer of choice—which is important in a highly competitive marketplace for talent.

Without question, government faces a highly competitive hiring environment. Inefficient systems that alienate job applicants and current employees can lead to the loss of skilled workers. As noted by Cheryl Schilling, human resources director, State of Louisiana, “First thing I would do is try to integrate the recruitment, hiring, and onboarding processes to improve the first year of the employee experience. We’ve got to get in front of the early career professional to sell working for the state as a real, valuable career option.”⁸

Challenges to digital transformation of HR

State HR agencies face several common obstacles on their path to fully digitize operations. One is tension between a centralized and a distributed HR function. A second challenge is related: a multitude of legacy systems and processes scattered throughout state government in various departments.

Centralized HR processes offer myriad benefits. Instead of maintaining a slew of systems on different platforms, a single tool can not only enhance efficiency, but deliver reliable, uniform data to decision-makers. In some states, HR officials lack access to basic information such as, “How long is it taking to go from application to job offer?” Why is it that way? Because that information is scattered in different departments across state government.

Individual departments will often make the case that their unique circumstances make a single centralized solution untenable. Take the time and attendance and payroll functions, for example, where differential pay for night shifts or hazardous duty, or customized overtime rules based on a variety of union contracts, require significant flexibility in the payroll solution.

Previously, sufficiently customizable, centralized solutions may have been out of reach. However, as digital maturity has advanced, and commercial HR solutions have evolved, commercial, off-the-shelf (COTS) solutions have become more sophisticated and represent a big opportunity moving forward. Similarly, enterprisewide learning management systems, performance reporting systems, and benefit self-service tools have significantly advanced in recent years. Large corporations with a wide variety of employees circumstances have figured out how to get the benefits of centralization without unduly sacrificing flexibility.

The road ahead

The digital journey isn’t easy, with three areas requiring special focus: committed leadership; in-house skills; and employee buy-in.

1. Get the governance right. Before starting any cross-functional/cross-agency transformation, it will be important to get governance right. State governments should decide who will lead the effort and who will be part of the transformation team. Successful back-office transformation usually requires sustained commitment.
2. In-house skills. These can be critical for a successful implementation of digital transformation; however, not every government will have sufficient employees with the necessary skills and experience. It may be necessary to augment government staff with partners outside the organization, either professional services firms or individual contract employees with relevant experience.
3. Focus on user adoption. Technology transformation involves changing systems, processes, and organizational structures, but ultimately true transformation is about changing human behavior.⁹ But to make sure it works for everyone, the transformation teams should consider taking a human-centered approach. Organizations can’t change without convincing their people to also change and adopt behaviors that can support the larger organizational transformational efforts. Keeping users at the heart of any transformation effort can help ensure that back-office functions deliver the services people need.

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Finance 

Current state of play

Many states are on a journey to upgrade their ERP systems, with the aim of integrating financial systems with HR. In some cases, this means migrating from legacy systems that might be decades old. In other cases, it means enhancing a relatively modern ERP system to seamlessly connect with HR and other processes or transitioning to a cloud-based system that enables greater functionality.

More than ever, chief financial and information officers are looking to build an integrated, digital foundation for the complex challenge of financial management in state government.

Opportunity for transformation

Different states have different structures for their financial operations—including authority distributed to various agencies and departments—to help fulfill a number of critical finance operations, including budgeting, accounting, financial reporting, and capital planning.

Two factors make modernization of financial operations especially pressing today. First, it has become extremely difficult to hire and retain skilled finance professionals.¹⁰ Second, as federal funds and grants flow to state governments as part of recent legislative programs—including the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and the Creating helpful Incentives to Produce Semiconductors (CHIPS) and Science Act¹¹—the demands on the state government finance function have increased.

The COVID-19 pandemic provided evidence of what can happen to financial processes that rely heavily on manual processes. When volumes spiked in service areas such as benefit programs, financial processes with significant manual components occasionally became overwhelmed. States are now exploring new technologies and automated solutions to help enhance customer service and reduce manual processes for caseworkers and staff.¹²

Many states have invested in ERP systems over the past two decades, improving operations significantly. But the continued need to boost efficiency will likely play out in many aspects of financial operations. Below, we take a closer look at two key areas: cost allocation and compliance and reporting.

Challenges to digital transformation of finance

Finance encompasses many functions, but two areas with significant potential and unique challenges are cost allocation and the reporting and compliance function.

Cost allocation

States have been moving toward greater use of cost allocation methods for years, if not decades—with mixed results. States with a clear cost-allocation model that captures the bulk of direct and indirect costs are often better-positioned to realize the full benefit of federal reimbursement. Moreover, states that can accurately report on their grant use and meet compliance audits can also avoid costly “clawbacks” from federal grants.

Numerous guidelines detail how to implement cost-allocation models.¹³ The real challenge, however, isn’t in knowing what to do. The challenge lies in having access to certain financial information needed to populate a cost-allocation model in an automated or at least partially automated manner. Costs may not be centrally accessible, meaning that states—and local governments as well—can fail to capture all the indirect costs of services.

To help improve cost allocations, states first and foremost should have data in a consistent format. Automated tools allow governments to capture data with precision and allocate them to the appropriate cost buckets.

States can choose to do cost allocation as part of existing ERP systems or can set up stand-alone cost-allocation systems. No matter which route agencies take, without a proper cost-allocation system in place, agencies will not be able to articulate their costs and in turn will not be able to bring in the revenue needed to cover those costs. Without real-time cost data, states may take longer to recognize anomalies, identify risks, and react to changing circumstances.

Compliance and reporting

The federal government has recently enacted three pieces of legislation—the IIJA, CHIPS, and IRA—that together represent more than US$2 trillion in authorized federal funding and incentives for up to 10 years.¹⁴

State governments will play a critical role in administering the multiple streams of funds flowing to local governments, businesses, nonprofits, and academia. Tracking spending can be more complicated when funding flows to a variety of partners.

Common reporting systems can help states track funds on an ongoing basis. While reporting and compliance is the primary driver of modernization efforts in this area, many aspects of operations can benefit. Transparent data dashboards can help agencies publicly share outcomes and expenses, creating more transparency into the use of funds.

States often face the challenge of merging two or more agencies or departments, with each using their own legacy financial tools. Creating unified financial processes and systems for functions such as benefit distribution, fine collection, vendor payments, and reporting can be challenging due to legacy process and system disparities existing in each function. Integration often requires assessing the current processes within the various departments and formulating a new design for both systems and processes of the future state.

In some cases, a newly integrated approach can yield efficiencies while enabling mission fulfilment, resulting in a migration and implementation of multiple departments to a single instance of an ERP system. States have been on this path for some time, and while progress has been made, there is more work to be done, especially in terms of integration with HR.

States should also consider building a reporting platform where financial, management, and regulatory reporting can all be done simultaneously from a single source of data. This can help prevent inconsistencies in the reporting data.

The road ahead

1. Establishing a clear strategy will be important for the digital transformation of the finance function. This should involve a future reporting vision, a governance model, and the selection of technology architecture that enables seamless integration with HR and between departments.
2. Connecting reforms in finance to the business mission can help finance groups in establishing closer connections with various agencies and the people they serve. This may entail transcending organizational boundaries and strengthening a “business partnership” mentality where the finance function helps enhance the way agencies operate.
3. Being agile can mean being ready to respond to agencies seeking changes to systems and processes. To do this, finance officials will often need to work in close collaboration with CIOs to enact technical changes to react to changing business needs—static processes can be the enemy of service excellence.

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Procurement

Current state of play

Many state governments have made progress in digitally transforming their procurement function. Many states in our survey rated themselves between active and advanced. While states have long employed e-procurement of commodities (with a mix of home-grown solutions and ERP systems), opportunities exist in other areas of procurement, including improving the way vendors are identified, contract documentation, tracking key performance indicators electronically (such as procurement cycle times), pricing accuracy, and shortages. Additional opportunities exist in more complex procurements, not just during the initial onboarding but also in using digital tools to monitor delivery.

Opportunity for transformation

Like HR, the procurement function usually hasn’t had the funds to digitize to the same degree as many other client-facing areas. And like HR, government procurement can also benefit significantly from going digital. Consider this:

• State and local governments spend an average of US$1 out of every US$4 on procurement.¹⁵
• A Gartner report found that the average buying time for technology in government is 22 months compared to six to seven months in the private sector.¹⁶

Procurement activities often involve a large volume of transactional processes, including soliciting bids, managing payments, tracking delivery, and supplier management. Introducing digital procurement tools in these areas has the potential to save money, speed up cycle times, and strengthen fraud prevention.

Easy-to-use digital systems can encourage more bids, which means more options for government. Furthermore, when done right, digitizing procurement can help small businesses—including businesses owned by women and disadvantaged groups—increase participation. For example, the Department of Defense leverages its small business program website, business.defense.gov, as a single point of entry for small businesses to enter the defense marketplace.¹⁷  

Having multiple state procurement systems can complicate the process of applying for bids as contractors must learn how to navigate each of these systems separately. A centralized system can also make it easier for vendors to engage with several different agencies without having to learn multiple different systems.

State procurement officials often express an interest in obtaining better data to improve future procurements. This data includes things such as time to procure, market-pricing analysis, and various process measures such as price and volume data, which can aid in identifying frequently used goods and services. Digital procurement systems can provide officials with this data to improve their processes. Incorporating generative AI into these systems could help procurement officials process this large volume of data with precision, helping them become more efficient. Procurement officials can also use generative AI to generate market research reports and purchase requests. Lastly, generative AI could be used to create several different requests for proposals using different buying strategies, allowing procurement officials to experiment and choose the approach that works best for them.¹⁸

Challenges to digital transformation of procurement

A challenge in digitizing procurement is the diversity of procurement activities. Government procurement ranges from buying basic commodities, to purchasing big-ticket items such as computers and vehicles, to multimillion-dollar contracts for specialized IT implementations and strategic design services. Unlike a high-volume, one-size-fits-all process, some procurements require extensive human involvement.

But in many cases, digital processes can enable a more self-service approach to purchasing. Moreover, when it comes time to dispose of assets that have outlived their usefulness, automated auction sites can efficiently bring buyers and sellers together and help governments maximize revenue.

Another challenge to digitizing procurement is culture. As noted by Windy Aphayrath, chief procurement officer, State of Utah, “It’s not about the money part that drives the change, it’s the people part that drive the change.”¹⁹ Procurement officers who are familiar with current processes may be resistant to adopting new digital systems.²⁰ “A challenge that everybody faces is the change management piece. It’s very difficult ... We need to articulate a clear statement as to why change is going to enable us to better serve our constituents,” stated Ms. Aphayrath.²¹

The road ahead

1. Consider using AI to augment procurement staff. Agencies can start exploring AI use cases that would free workers of low-value work or assist them in higher-order work.
2. Focus on change management. Resistance to change can stem from a risk-averse organizational culture. In the private sector, many organizations set “innovation goals” to encourage their teams to look beyond current processes and find better ways of doing the same work. Such approaches can make change management and adoption of new technologies easier.
3. Build a diverse ecosystem of collaborators. Almost no organization has the experience to make such transformations alone. Tapping into academia, industry, and other government organizations can help bring in new technology and skills.

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Future state

In the short term, states will likely continue to advance the use of digital technologies, moving up the maturity curve. Back-office functions are increasingly in the spotlight, because public officials recognize that these internal support activities can have a big impact on how well departments and agencies can fulfill their external missions. However, what lies ahead a little further down the road?

The advent of AI and generative AI are poised to reshape the operational landscape of many large organizations, including state government. AI and generative AI have the potential to revolutionize state governments’ back-office tasks. “I believe that generative AI is going to be completely transformative for government as well as for society," said Utah CIO Alan Fuller.²² Its capabilities could serve not only to improve productivity but can play a key role in creating an environment where data-driven decision-making becomes a powerful tool. Both frontline workers and senior officials can benefit from these intelligent tools, and one can envision a future in which AI tools help in detecting fraud, deterring cyberattacks, and delivering previously unavailable insights.

However, for AI, generative AI, and machine learning to be effective tools for the back office, they should operate on a digital platform that can reliably provide the access to data that fuels these technologies. Thus, state governments will likely need robust public digital infrastructure to provide these emerging technologies with the necessary data.

Some state governments are already experimenting with these new technologies. For example, Massachusetts is starting to introduce these smart tools, working toward what state CIO Jason Snyder refers to as “ChatGPT with controls.” Current applications include translation of services into 20 different languages and the use of basic chatbots to locate responses on some web sites. While noting that generative AI is not fully deployed yet, Snyder sees potential value in this technology, “Especially for some of the more routine processes—if you think about HR-related processes or financial-type processes, I think there is real value there,” as he said to GovTech in May 2023.²³

While AI and generative AI have many possible benefits, attempting to layer these tools onto existing processes built for humans may not capture their full potential benefit. A recent Deloitte survey found that agencies that significantly change their workflows are 36% more likely to achieve desired outcomes from their AI projects.²⁴ AI and generative AI are still quite new and should be introduced within a governance structure that allows for human oversight.

The benefits of digital transformation are well-established, and yet there remain significant opportunities to enhance key back-office functions such as HR, procurement, and finance. The ultimate goal is effective and efficient fulfillment.