With public budgets being squeezed, local authorities need to be able to draw on not just the highest levels of financial expertise but also commercial acumen and understanding
Michael More, chief executive of Westminster City Council, makes a very interesting case for accountants and finance directors to play a greater role in public reform.
Theoretically, this has to be right.
After all, what serious business would not have a powerful finance director on its board?
Many public sector bodies including local authorities have budgets far larger and certainly much more complex than many quoted public companies. Yet it is only relatively recently that major Whitehall departments were expected to have a qualified finance director on their senior teams. It has been fascinating to note the trend to appoint executive corporate directors in local authorities, which has led to some senior management leadership teams not having a qualified finance director at the top table. In the private sector this would be regarded as madness.
Of course, whilst public sector bodies have to act in a business-like manner, they are not usually profit-driven entities. However, More is right to say that they require the skills and the authority of exemplar finance directors supported by teams of equally exemplar accountants. This is particularly the case as the public sector faces the most severe financial pressures for several generations.
Political leaders, chief executives and other decision makers require timely, accurate and comprehensive financial data. They need considered financial advice before making critical decisions. And they need to understand how their scarce financial resources are used and the impact of expenditure. The public sector has to cost all its activities and use of resources properly and accurately. Highly skilled financial modeling is essential as new ideas and change are contemplated. And, of course, fraud and the misuse of resources must be eliminated as far as is possible and prudent.
The traditional public sector ‘treasury’ (accountancy and finance) function has gradually been replaced over the last decade or so with a more dynamic strategic finance capacity – but not everywhere. Today the imperative is for a profession which is focused on enabling change, fostering innovation, allowing and supporting risk that is understood and well managed rather than being risk averse – and more focused on offering solutions instead of barriers to progress. The effective and economic use of resources is fundamental, especially at a time of cuts, so the finance function has to be about finding ways of ever enhancing effectiveness and efficiency. This requires a creative and strategic attitude and aptitude. Yes, it will sometimes require the authority and ability to say ‘no’ to politicians and chief executives. However, it’s also about being part of the team whilst ensuring there is sound advice and the fiduciary duty is secured.
The truth is that professional bodies such as CIPFA have a responsibility to ensure that the profession dramatically ups its game. The requirements today are not those of the past – the foundations are there to build on. CIPFA and others must look to the future not the past. Reform and change is inevitable and unavoidable. The forces of conservatism have to be swept aside.
That said, public sector organisations including local authorities require much more than excellent financial skills and thinking. Most critically, they require commercial acumen of the highest standard – and here rests the single biggest challenge for More and his colleagues.
Such commercial skill and expertise should also be at the top managerial table alongside chief executives, finance directors and professional directors. Commercial directors, as in the private sector, typically offer advice to contribute to the key decisions to be taken in response to budget and other challenges. Commercial directors or their equivalents should, of course, not override the professional judgment of specialists but enable them to make sustainable decisions that deliver their political objectives.
Their role is to ensure that decision makers understand and evaluate risks; and to take effective action plans to mitigate them. They also contribute to the evaluation of options for service delivery from in-house to outsourcing, to setting up employee co-operatives. Major investment and new forms of investment capital including social investment are going to be critical to the future of public service for which a combination of strategic, commercial, financial and operational skills will all be necessary.
The commercial team will also contribute to commissioning and to implementing any consequential procurement decisions, not least through an understanding of the mindset of corporate suppliers who themselves will be commercially driven. They therefore have to aim to match the commercial skills of suppliers, as well as ensure that they are best placed to understand, create, develop and shape supply markets. They have also to be able to ensure that contracting is more effective and aligned with both a public service ethos and the public sector’s objectives, and thus better ensuring that suppliers are fully held to account.
Having commercial directors in all public bodies – and certainly local authorities – will also enhance their entrepreneurial spirit and deliver the skills which will be critical over the next decade of austerity and rising demand. This has been recognised in some government departments and some local authorities but it is vital that the role is more than re-badging the procurement and/or client management function.
Let me be clear, the appointment of more commercial directors should not be regarded, as More might be suggesting, with a view to promoting the greater use of competition and outsourcing. In proposing more commercial directors and commercial teams for the public sector, I am not advocating more outsourcing or a greater use of competition in public service delivery. Indeed, good commercial judgment will often prevent the inappropriate pursuit of such approaches precisely because there are better means of understanding the risks, how these can be best managed and how the private sector (or any other potential supplier) may or may not be able to be contracted to deliver desired outcomes for given budgets. The skills and attributes of such professionals are required in public bodies whether they manage all their services in-house or secure them in a variety of other ways.
Just as financial professional capacity of the public sector has to be enhanced, so does the commercial capacity and competence. I hope that there will be wide agreement across the public sector that political and managerial leaders need to have access to sound commercial and financial skills, at the heart of their decision-making processes, and so do the citizens who pay for and who rely upon those services.
