Systems of Innovation and their Role in Public Financial Management Reform class=

Systems of Innovation and their Role in Public Financial Management Reform

Systems of innovation are information systems designed to support breakthrough governance improvements. They build upon other digital approaches, such as systems of record, engagement and intelligence, to deliver greatly enhanced processes and services through their facilitation of new, innovative ways of working.

According to MIT, creating these involves “the restructuring of social, economic, and technological systems… It is not just about a specific aspect or end product but the whole system which needs to be improved or replaced.” In essence, a system of innovation is more than just an IT solution; it’s an environment that encourages and supports innovation and experimentation through digital technologies.

In the context of digital public financial management (PFM), a system of innovation connects government stakeholders, organizations, and processes related to finance. It helps public officials to create, spread and implement new ideas and ways of working which improve how public money is managed.

Systems of Innovation Characteristics

Much like with  “digital transformation” where the key concept is transformation enabled by digital, implementing a system of innovation is about enabling innovation through use of digital tools. 

The key organizational characteristic to support innovation is agility. This is supported in a number of ways.

Use of proven agile techniques

Agility in government is enabled through process and product enhancements. Public servants leverage proven agile methodologies such as Design Thinking, Problem-Driven Iterative Adaptation (PDIA), Lean, Scrum, Kanban and DevOps to improve innovation. Agility facilitates user-centric design and continuous improvement by allowing for early pivoting or termination of initiatives that do not meet objectives, thereby saving costs. Collaborative software tools, integrated within government resource planning (GRP) systems, enable public servants to manage innovation processes. Performance tracking in core GRP systems is necessary to support agility.

Taking a bimodal approach

A bimodal approach is a further enabler. Gartner defines this as “the practice of managing two separate but coherent styles of work: one focused on predictability; the other on exploration. Mode 1 is optimized for areas that are more predictable and well-understood. It focuses on exploiting what is known, while renovating the legacy environment into a state that is fit for a digital world. Mode 2 is exploratory, experimenting to solve new problems and optimized for areas of uncertainty.” In other words, creating space for experimentation and innovation, without impacting day-to-day operations.


To be as successful as possible, governments need a leadership authorizing environment for experimentation. This can include innovation centres, centres of excellence, and digital services groups.

Emerging technology

Systems of innovation leverage emerging technologies like artificial intelligence (AI), augmented and virtual reality, blockchain, and the Internet of Things. The important characteristic is not the use of any specific emerging technology, rather the rethinking of government processes through experimentation. 

GRPs as Enablers of Innovation

Composed GRP

The shift away from monolithic proprietary systems is a fundamental trend in the enterprise software market. Market consolidation has enabled a few large software firms to own the legacy and monolithic space. Proprietary monolithic systems impede progress and governments are saddled with high operating costs. Any “progressive activation” to take advantage of innovative technologies is difficult in proprietary systems with limited openness. The market has seen a shift from monolithic to service-oriented systems.

However, many so-called “Service-Oriented Architectures” (SOAs) are really just monolithic systems with improved integration functionality. 

Governments need open systems that progressively activate. This is achieved when enterprise software supports service-orientation through components. Open components facilitate integration with functions from different systems. A “composed GRP” consists of assembled Commercial-Off-the-Shelf (COTS) technology components, extended by government configuration, integration and customization for comprehensive functionality. Composed GRP supports reform and agility. This means that core GRP functionality, such as financial systems used as systems of record, needs to leverage component-based SOAs.

Extended Relationship Management (XRM)

XRM is a concept that has yet to fulfill its promise. It extends back-office GRP functionality across networks of stakeholders, and government records, engagement and intelligence are deployed to external parties (citizens, businesses, civil society, academic institutions, etc). For example, businesses that sell to governments, and pay taxes, are provided with integrated IT services. These services can include integrated access to:

  • Relevant government statistical data for decision-making
  • Budget planning information to help forecast government opportunities
  • Integrated financial software for payroll, tax planning, cash management and budgeting
  • Central bank forecasts and foreign-exchange hedging mechanisms.

Sustainable Development

Government performance planning is transforming thanks to the introduction of the 17 Sustainable Development Goals (SDGs). The SDGs help governments focus on policy and regulatory interventions for equitable and environmentally sustainable growth. The challenge for governments is program planning, implementation and results planning coordinated across ministries, departments, and agencies. Many SDGs require extending coordination to sub-national governments, other national governments and international organizations. GRP systems, therefore, need advanced program and performance classification structures. External data used in Intelligent GRP is necessary for governments to adjust program planning and execution to what works.

Innovative Thinking Using the FreeBalance Accountability SuiteTM 

FreeBalance has leveraged almost 40 years of experience in PFM to develop the Accountability SuiteTM, a GRP solution which covers the full range of the budget cycle.

Utilizing technology, it offers innovative approaches to managing public funds. For example:

Benefits of Systems of Innovation in Public Financial Management

Implementing a system of innovation approach in public financial management offers several benefits, including:

  • Improved efficiency and value: By leveraging innovative practices and technologies, governments can streamline financial processes, reduce manual interventions, and enhance operational efficiency. This leads to cost savings and enables governments to allocate resources more effectively.
  • More informed decision-making: Systems of intelligence mean that government leaders have access to real-time data and advanced analytics at their fingertips. This results in more informed choices, optimized resource allocation, and improved financial management strategies. Systems of innovation extend this, equipping innovators with accurate and up-to-date information on which to base new practices.
  • Enhanced transparency and accountability: By digitally transforming financial processes, governments can track and monitor financial transactions more effectively, reducing the likelihood of fraud and corruption. Additionally, the use of technology enables better reporting and disclosure, ensuring stakeholders have access to accurate and timely financial information. In tandem, these help to build citizen trust.
  • Citizen engagement and satisfaction: Increased trust boosts citizen satisfaction. Additionally, systems of innovation enhance citizen engagement through user-friendly digital platforms for accessing and providing feedback on public financial services.
  • Economic value add: Reducing citizen and business costs to work with government while providing intuitive access to important information supporting the “government as platform” objective

Innovation versus Compliance: The Challenge of Implementing Systems of Innovation in the Public Sector

Implementing a system of innovation includes the same challenges as other large scale government IT projects . However there is a greater challenge with innovation: confronting resistance to only using “proven solutions”.

By definition, innovative approaches are new. They tend to be untested (at least at scale) and, in the public sector this can be troublesome. Panelists at a 2022 Harvard Kennedy School session entitled “Learning, Failure, and Blame in the Public Sector” noted that the public sector’s strong compliance culture advocates for rigorously following specific processes, and this in itself discourages innovation and experimentation. Yet frustratingly, focusing on compliance doesn’t guarantee success, and we know from numerous examples over recent years that it doesn’t protect projects from failure. But this approach is still entrenched because it does to some extent protect leaders from “blame for failure”. And it is this resistance to trying anything new, and to implementing any system which isn’t ‘proven’ successful in other organizations, which holds many governments back from transformative improvements. 

The route out of this for many is to implement a system, such as an ERP tool, which is ‘proven’ in a commercial environment. Even though this is not the best for governments, it ticks some of the compliance boxes, protecting leaders and the organization from blame. Risk is minimized, but unfortunately so also is the level of transformation.

Trying to put a system of innovation into place within a wider risk-averse, compliance-heavy culture is likely to be painful, and will often fail. A wider organizational culture of innovation, complete with dedicated innovation units, innovation champions, internal and external partnerships, and clear policies and governance mechanisms to support innovation initiatives, is needed as a foundation for success. This, coupled with leaders who are willing to balance risk with potential benefits, opens up the potential for genuine transformation.


Systems of innovation have a pivotal role in public financial management, enabling governments to address complex challenges, enhance efficiency, and achieve better outcomes. 

Investing in the key components of systems of innovation enables government leaders to ensure that their organization’s public financial management is agile, transparent, aligned with sustainable development goals, and capable of embracing progressive technologies.

Find out more about how the FreeBalance Accountability SuiteTM can meet your PFM digital transformation needs, set up a call with our PFM experts.