A brave new world? By John Thornton

18 Jun 08
What does the future hold for public sector finance teams in a globalised environment? More shared services, pared down back-office operations and beefed up finance functions are all possibilities, says John Thornton

19 June 2008

What does the future hold for public sector finance teams in a globalised environment? More shared services, pared down back-office operations and beefed up finance functions are all possibilities

The world of financial management and the role of the finance professional are changing fast. Globalisation, new organisational structures, the advent of shared services, and the increasing use of technology are all having a massive impact on finance professionals, how they do their jobs and often even the need for those jobs. And finance professionals in the public services are not immune from these changes.

In the private sector, the widespread adoption of a shared services approach has had a fundamental impact on the size, structure and operation of the finance function. Take, for example, software giant Oracle, which runs on a shared services model. Ten years ago its UK finance team consisted of 70 to 80 people. Now, with a much larger turnover, the finance team is made up of just six accountants working as 'business partners' to support the directors and managers who drive each of the company's key businesses with the planning, forecasting and analysis they need.

Large companies are also increasingly shifting their transactional services to 'silent running' systems, based on the principle of self-service by customers and staff. For example, customers who book flights online with airlines such as EasyJet will input all the transaction and financial information directly. The IT systems handle the booking processes and produce management information in real time.

These developments are leading to the emergence of two distinct professional streams within finance functions: business advisers who are embedded in a particular business area and focus on advising, supporting and challenging its managers; and financial controllers who focus on ensuring the integrity of financial systems and compliance with procedures.

But will public service finance departments follow the trend and move to the widespread adoption of shared services? A forthcoming report, The future of the finance function, published by Oracle, examines this and other options.

The report is based on detailed interviews with senior thinkers and practitioners from central government, the NHS, local authorities and the private sector; workshops attended by about 60 finance directors and other senior professionals; informal interviews and a high-level round table event hosted by Public Finance. It describes three possible scenarios for the future of the finance function, primarily in local authorities, which were developed on the basis of the interviews and other research, and then tested and refined during the workshops.

In the first scenario, pressure to reduce costs and increase efficiency will lead to widespread adoption of shared services for front- and back-office functions, as well as for the delivery of a range of frontline services.

Shared service operations might work across similar types of organisations, such as local authorities or NHS trusts, or they might extend more widely, to Local Area Agreement partners, for example. Shared services organisations could be based on geography or on other structural factors, such as bringing together all the organisations sharing a similar technology platform. They might be provided entirely by public sector organisations or – more likely – by a combination of public and private.

However the shared services are organised, standardisation of processes and procedures, coupled with greater use of technology, will provide much more responsive and efficient services at a considerably reduced overall cost.

In the shared services model, the finance directors of the individual organisations – the local councils, NHS trusts or other public authorities – will remain the strategic advisers on finance and resources and will focus on helping the organisations achieve their strategic aims. They will be supported by a very small team of qualified accountants and business advisers and will concentrate their efforts on forward planning, appraisal of options, risk analysis and performance management.

These new finance directors and their second-tier managers will have accounting qualifications and probably postgraduate business degrees. They will be astute in dealing with both the external political environment and the organisation's internal politics.

The shared services centre will be responsible for delivering the transaction processing and accounting information. It will be a centre of excellence for accounting standards, process improvement and transaction processing and might manage functions such as payroll, pensions or revenue collection.

Control and compliance functions will also be provided by the shared services centres, although local finance directors will continue to sign off their own organisations' accounts and financial statements.

The second scenario envisages a more diffuse finance function, where continuing pressure to reduce costs results in back-office services being pared down. The organisational agenda will be dominated by underfunding of major frontline service areas – such as adult social care, for example. This will increase the pressure to reduce the costs of support services, including finance. While there is talk about 'business transformation' and new ways of working, there will be little real investment in technology and the focus will be on reducing costs.

There will be an extension of some current trends in local government, with continuing moves towards generic directors and managers who can run any service or group of services. The finance director will effectively become a financial controller, reporting to a corporate services director, who in most cases will not be a qualified accountant. Managers with these qualifications will increasingly be seen as an expensive and over-specialised resource compared with generic managers.

The third scenario also assumes that cost pressures continue to bite and that there is an increased focus on efficiency and cost reduction. But in this scenario the finance function is strengthened. In the best performing organisations, the finance function is seen to actively embrace the efficiency agenda and to play a pivotal role in reducing costs, while maintaining services.

This is achieved through new ways of working, making better use of the available technology and providing clear advice on options, costs and financial consequences. The finance director plays a leadership role with the finance function becoming a model of efficient practice.

But this scenario also encompasses poorer performing organisations, where the finance function has been slow to react to increasing pressures. It is poorly resourced and has problems sustaining basic reporting, with little capacity to get involved in strategic decision-making. This could lead to poor decisions, large financial deficits and in some cases corporate failure. These struggling organisations will look towards their peers in organisations that have a strong and creative finance function and try to emulate their approaches.

In authorities where the finance function fails or under-performs, new finance teams will be recruited with stronger finance directors reporting directly to the chief executive. They will have a remit to rebuild and strengthen the finance function to ensure that the organisation will in future receive the strategic and operational financial advice it needs.

These three scenarios have been drawn up for discussion, to help shape the future development of public sector finance functions. The finance professionals who participated in the interviews and workshops felt that all three could operate in future – perhaps even in parallel. Although they were drawn up with local government in mind, it seems at present that local authorities are moving towards the second scenario, with its more diffuse finance function, while central government and the NHS look more likely to proceed slowly to the first scenario – the shared services model.

But increasing financial constraints and the possibility of high-profile budget overspends or even corporate failure could prompt a shift towards the third scenario, in which organisations seek to beef up their traditional finance functions.

Today, finance functions must both adapt to rapidly changing requirements and shape their own development. Surprisingly, it seems that very few finance teams have a clear strategy for their own development. But by planning their future in this way, finance directors can ensure their work is aligned with key corporate goals and demonstrate the value that it adds to the organisation – and win the crucial buy-in and support from colleagues and staff.

John Thornton is director of consultancy firm e-ssential Resources and is author of The future of the finance function, a discussion paper designed to stimulate debate and feedback


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