Modernizing federal financial systems: A call for step change transformation

The U.S. federal government operates on outdated financial systems that hinder efficiency, transparency, and accountability. Despite incremental improvements, these systems remain fragmented, costly, and lack compatibility with modern hardware and software, leading to increased complexity and higher costs for updates and repairs. Additionally, finding skilled personnel familiar with outdated technologies can be challenging.   

Federal agencies need a bold, step change transformation—leveraging modern technologies such as cloud computing, AI, blockchain, and advanced data analytics—to drive radical improvements in cost reduction, service quality, interoperability and financial integrity.  

The problem: Outdated and disconnected federal financial systems  

Many agencies are burdened by legacy infrastructure and technical debt, relying on decades-old financial platforms that are both costly to maintain and difficult to integrate with modern technologies. This reliance on outdated systems leads to inefficiencies, as overlapping systems across various agencies create data silos and can lead to inconsistent reporting. Furthermore, the technological obsolescence and manual processes in these systems enable fraudulent transactions and wasteful spending, exacerbated by the lack of real-time monitoring.  

The slow and costly nature of upgrades further compounds these issues. Incremental improvements often fall short due to organizational inertia, lack of interoperability, and the high costs associated with patching outdated systems. Additionally, legacy operations and processes, including annual and multi-year budgeting cycles, tools, and training, do not support the delivery and operational needs of modern systems.   

Why evolutionary change won’t work 

Historically, federal modernization efforts have adhered to an evolutionary approach, focusing on incrementally upgrading components of financial systems rather than undertaking a comprehensive redesign from the ground up. This method has resulted in costly, piecemeal upgrades that fail to address the underlying inefficiencies within the system.   

As agencies continue to layer new technology on top of outdated infrastructure, technical debt has increased, further complicating the modernization process. This layering approach has further maintained the status quo in fraud detection and waste prevention, failing to eliminate vulnerabilities and leaving the system susceptible to ongoing issues.  

Bold, holistic transformation through a step change approach  

To achieve rapid, transformative impact, the government must embrace a step change approach that includes the following:

Replace legacy systems with cloud-native, AI-driven platforms

• Real-time processing and automation: AI-powered financial systems can analyze transactions instantly, identify anomalies, and prevent fraud before payments are made
• Eliminating redundant systems: A unified, cloud-based financial platform can replace multiple outdated systems and reduce costs  

Universal blockchain implementation for transaction transparency  

• Immutable ledgers: Every financial transaction can be recorded on a blockchain, ensuring full traceability and accountability  
• Smart contracts: Automated compliance and fraud prevention through self-executing financial rules  

Data-driven decision making with advanced analytics  

• AI-powered anomaly detection: Identifies fraudulent activities, improper payments, and budget inefficiencies in real time
• Predictive analytics: Enables proactive financial management to prevent waste before it occurs  

Interagency financial data integration for full transparency  

• Centralized financial reporting: A unified, government-wide financial data platform would provide a better set of foundational capabilities for each agency to utilize, eliminate redundancies, and ensure consistency 
• Machine learning insights: Enhanced budgeting, forecasting, and risk management via actionable insights  

Modern system delivery and operations  

• Consumption-based budgeting models: as demand for government services fluctuates, so do the costs of providing those services. While technologies like cloud are ready-made to charge costs dynamically, budgeting needs to also adapt to this reality
• AI IT Ops: AI can be better leveraged to provide advanced DevSecOps capabilities to rapidly produce code, provide customer support, monitor operations and protect against security vulnerabilities and attacks.  
• Quantum: it is now imperative that federal organizations transform their systems to be quantum safe. 

FinOps and technology business management (TBM)

Federal civilian agencies spend over $100B annually. With the Department of Government Efficiency’s intent to modernize federal technology and software to maximize efficiency and productivity, there is a deeper focus on cost transparency and optimization opportunities.  

FinOps and TBM are two management practices that focus on transparency of IT costs. FinOps takes advantage of the extremely granular cost detail made available by public cloud service providers to enable conversations between engineering, finance and business in near real time. It can be used to identify and drive short term spend reductions within the portfolio or to inform longer term optimization initiatives.   

 TBM provides a framework for conversations on IT spend by the business, finance, and technology department by connecting general ledger entries to IT services and business capabilities. Both FinOps and TBM align IT spend to business capabilities and set the stage for realizing savings through the portfolio management process without disrupting essential functions. Using established processes and frameworks like IT Portfolio Management, FinOps, and TBM is crucial for providing transparency, identifying high-risk areas, eliminating duplication and inefficiencies, and appropriately rebalancing the portfolio.  

Cybersecurity protections: Securing the future of federal finances  

Modernizing federal financial systems introduces new cybersecurity risks. A comprehensive cybersecurity strategy that also anticipates the challenges posed by advancements in quantum computing is crucial for safeguarding sensitive financial data.   

 This strategy must effectively counter cyber threats, insider threats, and the sophisticated tactics employed by nation-state adversaries and includes:  

 Zero trust architecture for maximum security 

• Continuous authentication: Every transaction and user action is verified in real-time, reducing insider threats
• Least privilege access: Users and systems are granted only the minimum necessary access to reduce exposure
• Micro-segmentation: Financial data is compartmentalized to prevent lateral movement in case of a breach  

End-to-end encryption and secure data handling

• Encryption at rest and in transit protects financial transactions from interception and tampering
• Homomorphic encryption enables secure data processing without exposing raw financial records
• Multi-factor authentication reduces the risk of unauthorized access     

AI-driven threat detection and response  

• Machine learning for anomaly detection to identify unusual transaction patterns and potential fraud in real time
• Automated incident response and AI-driven security systems can isolate and neutralize threats without human intervention
• Threat intelligence integration that continuously updates security measures based on the latest cyber threat data  

Blockchain for immutable transaction security  

• Tamper-proof financial records like those provided by blockchain technology ensure that once a transaction is recorded, it cannot be altered or erased 
• Decentralized authentication reduces the risk of single points of failure or insider manipulation
• Smart contract enforcement prevents unauthorized financial transactions and automates compliance  

Continuous compliance and regulatory adaptation  

• Real-time compliance monitoring using AI-driven tools can instantly flag transactions that violate financial regulations 
• Automated audit trails using blockchain and AI technology provide transparent and verifiable records for financial oversight
• Regular penetration testing with simulated cyberattacks ensure federal financial systems remain resilient against evolving threats  

The benefits of a step change transformation  

A step change transformation in federal financial systems promises significant benefits across multiple areas. First, cost savings can be achieved by eliminating outdated systems and redundant infrastructure, potentially saving billions annually. AI-driven automation further reduces manual processing costs, while blockchain technology helps minimize fraud-related losses. Second, quality of service improvements can be realized with faster and more accurate financial transactions, enhanced system delivery and support, and improved citizen services due to streamlined government spending.   

 In terms of fraud, waste, and abuse, AI-driven fraud detection can significantly reduce improper payments, while real-time transaction monitoring helps to proactively prevent fraud. Blockchain technology provides a tamper-proof record of financial transactions, ensuring integrity. Additionally, adopting a Zero Trust security model can prevent unauthorized access and improve cybersecurity resilience.   

Key implementation considerations  

Adopting a collaborative approach to modernization, as opposed to the traditional siloed method where individual projects are conceived and executed in isolation, helps bring down communication barriers and fosters a shared vision across organizations. Agencies should also look beyond their walls and work with Congress in support of policies and laws that support modern financial technologies. Another important consideration is the input from the commercial sector where public-private partnerships can play a significant role in accelerating transformations. Agencies will benefit from the examples and learnings of organizations facing similar technology modernization challenges.   

Equally important, and often overlooked, is the workforce’s readiness to adopt new technology and the process of change management. This involves preparing the workforce through upskilling and reskilling programs, identifying internal change champions to promote adoption and reduce resistance, establishing communication frameworks, and implementing adoption metrics to track progress and ensure effective implementation.  

The urgent need for action  

With billions of dollars at stake, the federal government cannot afford to continue its path of incremental change. Step change transformation is essential to reducing costs, improving service quality, and eliminating waste, fraud, and abuse. By embracing cloud computing, AI, blockchain, and data analytics, the government can build a modern financial system that ensures efficiency, accountability, and long-term sustainability.  

Call to action:   

• Policymakers must support legislative initiatives that prioritize financial system modernization
• Private sector leaders should partner with the government to implement cutting-edge financial technologies
• Federal agencies ready for meaningful change must commit to bold, technology-driven financial transformation

5 steps for federal agencies:  

• Develop a system portfolio modernization strategy to key impact areas where modernization will provide the greatest benefits and mitigate risks
• Establish trusted partnerships with strategic technology vendors
• Budget for targeted investments across the enterprise and technology layers
• Address legacy budgeting and process constraints
• Avoid risks by implementing system and operations modernization in tandem to avoid risks and maintain efficiencies  

The ability to navigate the balance between adopting advanced technologies, maintaining resilience, and addressing the essential compliance and security considerations is critical. A future-proof, efficient, and fraud-resistant federal financial system is within reach—but only by taking decisive action now.