Why outcomes-focused budgeting won’t work without adaptive leadership

Lessons from ANZSOG’s ‘Implementing the Early Intervention Investment Framework’ Report 

By Dr Honae Cuffe, ANZSOG Research Officer

A report prepared by ANZSOG for the Victorian Department of Treasury and Finance on implementing their Early Intervention and Investment Framework, looks at what is needed to support budgetary decision making on long-term social services investments. This article explains how outcomes-focused budgeting can improve services, the concept of adaptive leadership, and what lessons from the report can be applied to other budgeting initiatives, including the Commonwealth Treasury’s planned ‘wellbeing budget’.

Shifting budgeting process towards an outcomes-focus can help the government measure what matters against long-term priorities. This drives a performance-based culture that gives governments a better understanding of what is being achieved and how and help them prioritise funding to initiatives that have the greatest positive impact for citizens and reduced costs for the service system.

Doing so successfully requires major attitudinal and behavioural changes in the public sector, not just adopting new technical tools.

A recent report by ANZSOG found that outcomes-focused budgetary approaches cannot work without adaptive leadership. The report offers lessons for agencies who are working to implement outcomes-focused budgeting to take advantage of a process that should focus on measuring what matters to drive a more effective and efficient way of allocating resources, and of coordinating actions across different agencies.

Key lessons from the report:

• A feedback loop exists between the implementation of technical tools and individual and organisational behaviours and cultures. 
• Policymakers must consider the learning required – and by whom – to drive demand for and trust in new budgeting tools. 
• A sense of shared purpose, trust, and accountability are central to adaptive change and the successful implementation of outcomes-focussed budgeting: 
  • Increased communication and collaboration between the central financing agency and line agencies closes links and promotes shared purpose. 
  • Purposeful communication can help frame outcomes-focused budgeting as an investment in better decision-making, rather than a compliance activity. 
  • Cooperatively developed initiatives and outcome measures promote more sophisticated tools that have the trust of both central financing and line agencies.   
• Changes at the behavioural and cultural level inform technical aspects and implementation, as new standards and values are baked into practice. 

The Early Intervention Investment Framework and the challenges of outcomes-focused budgeting

The Victorian Department of Treasury and Finance is implementing the Early Intervention Investment Framework (EIIF), a new budgeting tool designed to guide investment in social policy early intervention initiatives through the quantification of outcomes and avoided costs to the service system. The Department engaged ANZSOG to develop a research and practice paper to aid in the refinement and implementation of the EIIF. 

A conventional view of budgeting processes usually focuses on the statement of accounts, department-specific measures, and the legislation needed to authorise expenditure. What is generally lacking is an assessment of the impact of these budget measures and the collection of the relevant information needed to make these assessments.  

This approach tends to focus on immediate problems at an agency-specific level, rather than a shared vision for government funding and measures with outcomes that span multiple agencies. This can contribute to budgeting silos and inefficiencies, with initiatives assessed on an agency basis, rather than their overall merit. 

The EIIF requires initiatives to demonstrate their expected impact towards improving life outcomes for citizens and reduced costs to the service system. This can be seen as an investment in the VPS’s evidence-informed decision-making capabilities. These capabilities are needed to assess the effectiveness of an initiative and allocate resources where there is a clear line of sight between investment and its impacts. 

The challenge is selecting indicators that are relevant, can be reasonably measured, and developed into a rigorous assessment tool. This is particularly important because social policy interventions do not typically fit within Treasury’s cost benefit analysis model, as their second and third order effects lack tangibility and generally take years of sustained effort and refinement to deliver impact. 

Accordingly, both central and line agencies must verify indicators and tools, or else risk the uptake and long-term feasibility of the EIIF.   

There are lessons to be learnt from other jurisdictions about the challenges and opportunities when implementing outcomes-focused budgeting. 

ANZSOG drew on interviews from senior finance and treasury officials from the Commonwealth, Victoria, New South Wales, and Aotearoa New Zealand who have direct experience of long-term, outcomes-focused budgeting. This includes the implementation of social impact bonds and Outcome Budgeting in NSW, and Aotearoa New Zealand’s own wellbeing budget initiative and Living Standards Framework. 

Using the Adaptive Leadership Framework to manage change 

Across the jurisdictions, there was a consensus that a technical platform was an essential basis for success, providing well-designed tools that make clear what an initiative is seeking to achieve, what is being measured, and how. For instance, Aotearoa New Zealand Treasury’s Living Standards Framework and NSW Treasury’s Outcome Budgeting have been useful for helping agencies shift their thinking to a technical mindset where evaluation is central to the work of government.

However, interviewees identified a feedback loop between the technical aspects of new budgeting processes and cultural and behavioural forces. A central financing agency may very well create new tools, but the right behavioural and attitudinal changes are also required to create a culture that drives demand for these tools.

The Adaptive Leadership Framework is a helpful way to think about managing this feedback loop. Adaptive Leadership is particularly useful when challenges lack clear problem definitions and solutions require learning to challenge beliefs and behaviours, develop new competencies, and work collectively. As these changes at the behavioural and cultural level are baked into practice, they will inform the implementation of technical solutions.

Overwhelmingly, interviewees agreed that a sense of shared purpose, trust, and accountability were central to ensuring the successful implementation of new tools.

Communication and collaboration between Treasury and line agencies is key.

Increased communication and collaboration allows Treasury to frame and clarify the role of outcomes-focused budgeting. NSW, for instance, described a concerted effort to frame outcome measurement as contributing to the evidence-led decision making capabilities of government, ensuring funding is allocated based on merit and what will deliver the greatest public good. Outcomes-based funding is, one interviewee observed, “an alliance with the public service to drive good decision making.” This purposeful messaging helps protect against fears among line agencies that outcomes-focused budgeting is a compliance activity with the potential for punitive cuts.

Collaboration between Treasury and line agencies is also important in terms of closing links and promoting a sense of shared purpose. These interactions provide opportunities to understand the different contexts and interests at play. The incorporation of agencies’ specialist knowledge – what is needed to address complex problems, what is being measured and if it is the correct and most useful information – promotes the design of a more sophisticated tools with better outcome measures.

Collaboration can also extend to the development of initiatives, as is the case with the EIIF, where Treasury and Finance work with agencies to identify outcome measures, estimate savings to the service system, and set targets for budget bids. These activities have the second order effect of risk management, alleviating some of the vertical pressures that central financing agencies face when activities fall beyond the traditional remit of cost benefit analysis. A robust outcomes framework ultimately provides central financing agencies with confidence that interventions will result in positive outcomes and value for money.

The higher levels of trust and clarity that these activities promote made line agencies more likely to engage fully and in good faith in the agreed cycle of designing an outcomes-focused initiative, providing regular reporting, and making reforms in response to outcome measures.

Designing and implementing Australia’s first wellbeing budget 

On the day he was sworn in, Treasurer Jim Chalmers announced Australia’s first wellbeing budget would be delivered in October.

“…we should also judge our policies, including our economic policies, against agreed markers of progress. That begins with measuring what matters, not instead of traditional economic indicators but in addition to.”

Borrowing from countries such as Aotearoa New Zealand, Australia’s wellbeing budget will include measurements such as mental health, environment, and poverty reduction, alongside GDP and public debt projections. Budget measures will be required to demonstrate their expected impact towards meeting wellbeing goals.

As with the EIIF and other outcomes-focused budgeting processes, a wellbeing budget can help the government measure and monitor the efficiency and effectiveness of an intervention, informing decisions about where allocations will have the greatest impact.

So too will the design and implementation of the wellbeing budget require the selection of indicators that have the trust of both Treasury and line agencies.

As the Commonwealth Treasury develops the technical aspects of the wellbeing budget, it must also consider the cultural and behavioural learning that remains to be done to ensure a wellbeing budget that delivers the greatest results for the service system and Australians.

To read the report in full visit ANZSOG’s Research Insights collection.