The coalition government is not merely cutting public spending: it is radically and speedily reshaping the public sector. By the end of the process, public bodies are intended to be leaner and fitter. They will also be expected to be better at generating commercial income.
For the transformation to be implemented effectively it requires active engagement from high quality finance professionals in public bodies. Yet fears have repeatedly been voiced that the finance function in the public sector does not have the same influence as it does in commerce and industry.
John Berriman is a PwC partner, head of its Government and Public Sector finance practice and lead author of the firm’s report ‘A Place at the Top Table?’. He says that the firm’s research – based on many interviews with senior finance personnel in the public sector – revealed worrying findings. “The first thing is just how much time the finance function in the public sector spends on compliance and control,” he says. “The public sector is hugely risk averse, so the focus becomes more on compliance.”
While private sector finance officers spend only 20% of their time on compliance and control, the figure is a startling 50% in the public sector. This means there is accordingly much less time for public sector finance workers to deal with other finance issues. This puts pressure not only on their ability to focus on transactions, but most specifically on their time to engage in the oversight and management roles. Senior finance officers may be marginalised from business analysis and operational planning.
“When you are moving into a period of austerity, you want finance engaged in making informed analysis,” argues Berriman. “My concern – what I think the research says – is that often so much time is spent doing control and compliance work, it’s difficult for finance to spend much time doing the analysis type work.”
Gillian Russell, a Deloitte public sector finance partner, also believes that public sector finance professionals risk being sidelined from decision-making. “A key challenge for finance directors and other senior finance professionals in the current environment is that while they need to focus their efforts on strategic input into the development and implementation of efficiency plans, in parallel, they are having to deal with restructuring and potentially reducing the size of their own functions and that will bring with it its own set of unique challenges,” she explains.
“A key difference between the current scenario and the previous experience of many finance professionals is the need for them to work with colleagues to deliver cashable efficiency savings very, very quickly. So we’re seeing a lot more evidence of public sector finance leaders engaging directly with private sector counterparts, who have experience of delivering real savings over a very short time period, to understand exactly how they delivered on it.”
But Gillian Fawcett, head of public sector at ACCA, believes that the UK’s public sector finance professionals are uniquely equipped to take on the challenge of ‘interesting times’. “My view is that compared to anywhere else in the world, we have strong financial management skills in the public sector,” she says. “You can probably argue that it is stronger in some areas than in others – government departments are moving exactly in the right direction.”
But with less funding, the public sector as a whole will find itself operating in a difficult operating environment. “They have been working in areas of plenty, but now that has been turned on its head and they have to pull rabbits out of their hats,” Fawcett suggests. “They have to understand their cost base. They need good quality, evidence based, financial information.” There are serious risks, though, from the Government seeking simultaneously higher quality financial management, while spending less money on achieving this.
There is the further challenge that the task of financial management is changing very quickly in much of the public sector. This is particularly true in the NHS, where all trusts that survive will become foundation trusts, and all those will become trading social enterprises. Finance directors will now have to focus on maximising commercial income.
“Income generation has traditionally not been something they have had to think about,” stresses Fawcett. “That would be a challenge and there is probably lots to learn from the charitable sector. Understanding the cost base still tends to be a weakness across [public sector] organizations. They don’t think about what it costs to deliver a certain number of outcomes.”
Another increased focus will be on the sharing of back office services across public bodies, or outsourced. If finance directors are overseeing the transfer of these tasks to another organisation and ensuring that service quality and information flows are maintained, how engaged will they be in service planning and strategic management?
Fawcett warns that while the emphasis on cost savings and efficiencies is correct, this must always be balanced by an awareness of cost-benefits. In particular, she says, public bodies need to ensure existing services operate efficiently before they are outsourced or devolved. “You don’t want to start from a position of weakness and then devolve,” warns Fawcett.
Changes in the administration of back office services could lead to a major cut in the number of finance jobs in the public sector. Recruitment advisors Ambition puts the total number of public sector accountancy job losses at a potential 140,000, if employment reductions are spread pro rata across the public sector. There are also fears by some working with the public sector that the pay freeze will exacerbate existing difficulties in recruiting top quality finance directors into government departments, in particular.
Yet there are positive signs, suggests PwC’s John Berriman. Incoming ministers and senior finance staff have indicated their keenness to have the finance function operate differently in the future. This could lead, he hopes, to senior finance staff becoming more engaged in the decision-making process.
“I would imagine it’s a journey from where we are now to where we want to be,” says Berriman. “They will want to review their skill sets, downplaying some existing skills and playing up others.”
But the objective will be for the finance function to evolve, rather than to replace existing financial managers with a new generation brought in from elsewhere. Yet continuity of staff will mean neither continuity of existing practices, nor a sign of patience by minister. “It’s not a signal that things should be done slowly,” warns Berriman.
Those public sector cuts
Cuts are widespread and deep. Ministers are examining options of cuts to government departmental spending of between 25% and 40% – but with NHS budgets protected and cuts limited to education and defence spending. Budgets for prisons, policing, regeneration and local government are likely to suffer substantially. Welfare benefits become subject to greater conditionality and rates will be cut in real terms – but reforms intended to move more people into work could lead to short-term spending increases. Public sector pay is frozen for all but the lowest paid, while public sector pensions will become less generous. Many public bodies will be abolished, including the Regional Development Agencies, arts bodies, the social care council and environmental agencies. The Sustainable Development Commission loses its public funding. Capital spending on schools is substantially reduced. Expenditure on public sector auditing and regulation will also be cut.