Local Management Accounting Team Review

1. Local Management Accounting Team Review Presentation of Findings DATE: July 07 Consultants: B.Brownlee, A.Duguid, J.Herman, C.Stone Ref: Final Draft DCLG-LMAT Rev-110707-1.3

2. Introduction Requirements & Objectives Scope and Principles for Change Project Approach Management Summary Baseline Findings Business Case for Change Future Ways of Working Gap Analysis Next Steps Baseline Analysis Background Local Management Accounting Team (LMATs) – Baseline Analysis Strengths & Issues Implications of Issues Conclusions Annex A – Current LMAT Organisation Structures LMAT Review - Contents MANAGEMENT SUMMARY SUPPORTING EVIDENCE

3. Introduction

4. LMAT Review - Requirements & Objectives The LMAT Review seeks to address the following: • Requirements • How are the LMATs currently structured and constituted, and what are the inefficiencies and issues? • How can the LMATs add the most value in the future, in the light of proposed changes? • Is there a sound business case that underpins the changes and what does this constitute? • Objectives • To identify and analyse the staff and activities that currently encompass the LMATs. • To evaluate potential future ways of working and • The potential savings arising from changes to roles, structures and ways of working

5. LMAT Review - Scope & Principles for Change • Scope – LMAT’s current activities - excludes Government Offices of the Regions (GOs) and the wider CLG family • The principles for change to consider: • Centralisation of transaction processing • Greater focus on added-value services • Group Management Accountants (GMAs) and their staff to come under the control of the Finance Directorate

6. LMAT Review - Project Approach • The LMAT Review was structured as a project over a five week elapsed period comprising the following phases: • Project Initiation to establish project communications and administration • Baseline analysis of current ways of working • Evaluation of potential futures ways of working • Gap analysis between current and future ways of working • Presentation and final reports

7. LMAT Review - Project Approach 2. Current Ways 3. Future Ways 1.Project Initiation 4. Report of Working of Working Wks 4 - 5 Wk 1 Wks 1 - 3 Wks 3 - 4 Establish Project Data Gathering LMAT Design Principles Develop and Test Presentation / Report • Initial communications • Headcount, grades, locations • Confirm & Agree Design • Project Plan • Organisation Structures Principles • Develop presentation • Deliverable format • Volumes, resource drivers • Organisational options and test with • Risk & Issue log • Actual & Required Outputs • Change management stakeholders • Take into account other change initiatives Confirm with Sponsors Issue Surfacing Evaluate Future Ways of • Terms of Reference Structured Interviews with Working • Design Principles Develop & present GMAs, LMATs, Central • Organisation structure • Roles & Responsibilities Draft Analysis & Finance, FSSD & other • High level Processes • Deliverables Evaluation stakeholders • Resources / FTEs • Business case evaluation Presentation / Communicate with Assess Current Ways of Working Report Stakeholders • Key activities and numbers of staff • Objectives Evaluation / Gap • Plan & Objectives • Structures, IT support • Analysis & Evaluation Analysis • Timescales & Approach • Resources & Outputs • Options • Organisation structure • Required involvement • Change / Next Steps • High level Processes • Risks • Resources / FTEs Current LMAT analysis Commence Baseline Analysis • Staffing and Structures • Schedule Meetings/Workshops • LMAT issues 5. Board Support Finalise • Obtain available base data • Scope for changes, added - value Evaluation with • Construct Interview agendas services, efficiencies Wks 6 - 8 Sponsors • Maintain Issue log Briefing & Support for CLG Project and Change Management July Board Key Deliverables

8. Management Summary

9. Management Summary - LMAT Baseline LMATs significantly resourced... Numbers: (source: LMAT Review – June 07) • The total LMAT establishment is 94 with current in post headcount of 89, 4.51% of 1,972 headcount within the Groups, £3.4m total LMAT payroll cost to Department • An EO and AO headcount of 56, primarily focused on transaction processing, costs £1.8m per annum • At least £1m+ per annum, 29% of LMAT payroll costs of £3.4m p.a., is involved in managing invoice processing arising from c34,000 orders p.a. of which 75% (25,000) are for less than £1,000 • The average LMAT process cost is, therefore, c£29 per order • The core Departmental spend is c£33bn of which only c£10bn is subject to LMAT oversight Capability: • Department has never achieved a stable population of qualified GMAs, the LMAT leaders • Resource flexibility is diluted given the prevalence of small teams in LMATs and the difficulty in managing LMAT resources across the Department. • Only 10 of the 28 HEO and SEOs are fully or partly qualified accountants (CCAB) limiting the practical delivery of value-added service • Quality of service delivery not consistent and effectiveness of professional oversight variable … but not effectively organised, focused and competent to deliver value

10. Management Summary - Findings LMATs well designed, planned, piloted... • LMATs undermined by: • insufficient resource of qualified accountants • diversion of resources to manage the payment of invoices that are not compliant with the procurement process • lack of consistent capability across the LMATs to participate in and to provide value-added services for decision support • Appropriate toolsets not provided to the LMATs and budget managers • Programme Management, payroll and personnel systems are not interfaced or integrated. There are no standard forecast, planning and programme management tools used across the Department. • Lack of clarity between the line and the LMATs with regard to accountabilities and responsibilities for financial reporting and outturn forecasting of programme spend • Non-compliance by the line with the prescribed procurement process. • Plan to centralise transaction processing in the shared service centre was abandoned in 2005 because of non-compliance. • The LMAT structure does not extend to all the Departments core Groups e.g. Thames Gateway, ERDF. … but roll out not resourced and poorly implemented

11. Management Summary - Business Case for Change Unsatisfactory and inefficient working arrangements… • LMATs have, therefore: • not achieved core objectives of: • more effective and accurate information • realisation of any significant efficiency and procurement savings • not been able to develop beyond exercising basic financial controls and record keeping to provide added-value management and decision support information • lack of discipline in the verification of balance sheet items • misuse of the accruals process • been required to support a non-compliant procurement process • for example, obtaining evidence of procurement authorisation after goods and services have been delivered and the invoice received. • become an unattractive working environment, lacking a clear career structure and difficult to attract high calibre civil service staff …resulting in not meeting the core objectives

12. LMAT Review – Business Case for Change • The cost of doing nothing is to continue: • not meeting the core objectives of the original LMAT strategy • wasting resources of at least £1m p.a. on the LMATs supporting a non-compliant procurement process • The business case for change constitutes the following elements: • Non-financial • Improving the effectiveness of the LMATs to support the Department in: • Ensuring financial control and the quality of financial and management information • Maintaining the integrity of the balance sheet • Providing decision support and value-added services to the Group DGs • Timeframe – targeting a completion date of 31/12/07 to provide the focus and urgency required to drive the programme of change and realise the benefits at the earliest opportunity • Financial • Gross headcount savings in the LMATs arising from centralisation of transaction processing of at least 29 FTEs costing £1m per annum • Potential efficiency savings in Central Finance arising from reductions in Quality Assurance and reworking of submissions from the LMATs • Potential additional cost of resources that may be required in the shared service centre

13. Management Summary - Centralisation Potential Savings • The Smarter Business Process outline business case sets out the options for centralising transaction processing for invoicing currently undertaken by the LMATs. • this business case concluded that the option with the largest saving is to “tackle compliance issues with centralising transactional processing” and • used as a baseline for calculating savings in transaction processing the assumption that 23 EOs and 17 AOs costing £1.1m per annum are doing transaction processing full time. • The LMAT review has identified that: • Of the LMAT headcount of 89, 56 (30 EOs, 20 AOs and 6 contractors) costing c£1.8m p.a. are made available primarily for transaction processing, • The LMAT resources absorbed by transaction processing amounts to 29 FTEs, costing £1m per annum, across all grades • Additional resources may be required within the shared service centre focused on placing purchase orders, scanning paper invoices and processing invoices for payments. The additional resource requirements are dependent upon the design of the re-engineered processes and supporting technology.

14. Future Ways of Working - Design Principles • Centrally managed core of LMAT finance specialists working in partnership with Group Management Teams • Transactional activity from purchase ordering to invoice payment centralised within the Shared Service Centre • LMATs focused upon the delivery of value-added financial and risk management services, supporting effective decision-making and able to respond flexibly to emerging business needs, for example • Ensuring the accuracy, integrity and understanding of the balance sheet • Facilitating the identification of financial pressures that may impact the delivery of a programme’s outcomes • Engagement in the forecasting and management of programme resources beyond the current financial year • Providing management information and appraisal techniques to facilitate the value for money management of resources • Managing relationships in order to access and leverage knowledge expertise within the Group and Department.

15. Future Ways of Working - Design Principles • Supporting the Corporate New Ways of Working to enable prioritisation of resources and transparency of performance • One view of programme, accounting and HR data and information. No need to expend resources reconciling disparate systems, with consequent risk of misreporting. • GMAs adept at building relationships within Groups and considered a trusted financial expert, aware of the policy and programme challenges facing the Group • LMATs have oversight and accountability for all financial management activities with a Group • The Finance Director accountable for: • LMAT strategy • Recruitment and resource management across the LMATs • Professional & career development • LMAT processes and systems • Knowledge sharing and best practice • Resource Management across the LMATs

16. Future Ways of Working - Design Principles • Finance is an attractive place to work providing • A formalised career structure • Professional training and development opportunities • Valued experience for fast trackers • Exemplar for the new ways of working • Performance Management • Clear targets • Rewards for successful delivery and outcomes

17. Management Summary - Gap Analysis

18. Management Summary - Gap Analysis

19. Management Summary - Gap Analysis

20. Next Steps

21. Next Steps - Implementation Risks A restructuring and change programme for the LMATs must take account of: 1. Benefits not realised • Failure to obtain the commitment of senior managers will limit the realisation of financial and performance benefits • FSSD is unable to effectively interact with the line resulting in LMATs continuing to handle transaction processing enquiries 2. Reduction in performance while change is being effected • Change implementation will potentially reduce the initial perceived performance of the LMAT because of staff uncertainty and weaknesses in existing LMAT management 3. Implementation perceived to have failed because stakeholder expectations not managed • Expectations raised by the original roll-out have not been met. The upgrade of the LMATs further inflates expectations and undermines future LMAT credibility

22. Next Steps - Implementation Risks (contd) 4. Departments reputation impacted through mismanagement of employee relations • Consultation with staff and the Trade Union Side, concerning potential redeployment and recruitment are not well managed 5. Change Programme fails through lack of resource and ability to integrate all the change initiatives • Change Programme is not adequately and competently resourced • The scale of change throughout the Dept. is not managed and inter-dependencies between initiatives are not identified

23. Doing nothing is not an option because of the waste of resources within the LMATs and the requirement to improve basic financial controls. CLG Board support is sought to adopt the following LMAT restructuring proposals for change with a target completion date of 31 December 2007 for centralisation of transaction processing: Transfer the primary reporting line for the LMATs to the DG Finance & Corporate Service Delivery, Hunada Nouss Centralise invoice transaction processing in the shared service centre Agree to the initiation of an implementation programme to enable the LMATs to focus on added-value services and to deliver the change Investment It is proposed that the preparation of the detailed plan including resource requirements and the availability of investment funding will be completed by the end of August. This opportunity will need to be taken forward on an invest-to-save basis. However by delivering at pace the Department will realise financial benefit before the end of the current financial year. Management Summary - Next Steps Further detail regarding the above recommendations is provided within the ensuing slides…

24. LMAT Review - Next Steps • Transfer accountability for the LMATs to the Finance Directorate in order to speedily: • align the DG Finance reporting structures with the current responsibility for providing assurance to the Department’s Accounting Officer regarding the integrity of the Resource Accounts • develop the LMAT strategy in the context of the Department’s strategy for financial management • determine financial management objectives, disciplines and priorities • manage the skills and resources across the LMATs • manage professional & career development • establish LMAT processes and systems • promote knowledge sharing and best practice • create an attractive working environment

25. LMAT Review - Next Steps • Accelerate, as a matter of urgency, the current Smarter Business Process approach to centralising transaction processing • the current approach is to tackle compliance issues with centralising transactional processing • reframe the procurement process problem as • “what must we do to transfer processing to the shared service centre as a matter of urgency, efficiently and effectively in compliance with a revised set of rules for accounts payable?” • determine the financial risk exposures and how to mitigate and manage them, and • determine the necessary and sufficient conditions to enable centralisation.

26. LMAT Review - Next Steps 3. Implementation Programme a. Review and update the original LMAT strategy with respect to: • The vision and objectives for the LMAT in the context of the Department’s financial management strategy • Challenge the requirement for the LMAT structure • “What should the LMAT be doing and why?” • Manage the Step-up through the Financial Management Capability Maturity Model • The challenge of resourcing the LMATs with appropriately qualified finance staff b. Provide appropriate toolsets for programme and budget management, management reporting and forecasting. • identify the needs of the Department for programme, financial and management reporting • design the ICT and process architecture to support the Department’s business and financial needs • map the current standard application set to the ICT and process architecture identifying the need for any additional systems and facilities

27. LMAT Review - Next Steps 3c LMAT Capabilities - resource the LMATs with the required level of professionally qualified personnel • In the context of the LMAT strategy, establish the financial management objectives and the associated performance management systems • Assess the skills and capabilities required to deliver the LMAT strategy • Re-define the LMAT structures, roles and role descriptions • Develop appropriate grading structures and job titles that match the scope of responsibilities and provide opportunities for career development both within finance and the wider civil service, for example: • Group Management Accountants to be accorded titles that better describe their status and responsibilities (Group Finance Manager/Director/Group Finance and Planning Director). • Manage the exit and recruitment of personnel to fit the roles

28. LMAT Review - Next Steps 3d LMATStructures • Redesign the LMAT structures to incorporate financial management oversight and accountability for all financial management activities within the Department including Local Government Finance, European Regional Development Fund, Thames Gateway and any other financial management resources within the Groups. 4 Change Management, Communications and Culture • Sponsorship – ensure strong sponsorship and buy-in of Director Generals • Staff Considerations • Consultation with staff and unions, preference exercise design and implementation • Change management – provides glue for both LMATs and centralisation • Unfreeze the current, implement new design and refreeze so it sticks • Identify and deploy levers to overcome passive resistance • Gather feedback from staff and adjust the plan

29. Next Steps – Programme Management Plan 5. Programme Management Plan for completion by end of December 2007 to include: • determining the source of funding for the change as part of the business case • governance framework and creation of Project Initiation Documents • confirmation of work streams and requirement for internal and external resources • programme, project managers • change and stakeholder management expertise • expertise on finance transformation • expertise in the complex preference exercise process and consultation with the Trade Union Side • process and implementation expertise • business case and benefits realisation manager • initial consultation with the Trade Union Side and staff • integration with other Department initiatives • development and management of the business case process

30. Immediate Action / Mobilisation Change Implementation Project Staff changes Review LMAT Strategy & Transfer control of LMATs Consultation and Preference exercises Staff changes Workstream Completion be end of December 2007 Centralise Transaction Processing Decision to centralise Transaction processing Transfer responsibility to FSSD, performance management system, data and process changes Risk assessment, end to end process agreement. FSSD Readiness LMAT Capability & Structure Plan to Close the LMAT capability gap Design roles, responsibilities, Secure required GMAs Deploy new roles, structures, performance targets in all core parts of the Department Implementation planning - Project plan, resourcing - Integration with other projects - Update LMAT Vision & Strategy Change Management, Communications and Culture Performance feedback including staff perceptions Vision, Objectives & Strategy Staff, department and stakeholder continuing communications & feedback, ways of working & Change Management Project Management / Business case management 1 2 4 3 Management Summary - Implementation Plan Overview July Decision / Sign-off Next Phase Establish Project Steering Group

31. Resources Tools Next Steps - Change Implementation Core Components Implement the LMAT Strategy in the context of developing CLGs financial management competencies Strategy People Stakeholder & Customer Needs • Put the right people in place • Recruit • Upskill • Manage out poor performers • Provide career structure • Control from the Centre • Understand how to deliver value • To the business for financial information & decision support • Central finance for financial information & control • Other stakeholder needs Objectives Programme & Change Management Systems & Infrastructure Service Delivery Provide the right tools IT Applications: -Budgeting, Programme management & planning -Integration of programme tools with SAP -Decision support tools Management Techniques: -Performance measurement and management Ways of Working Integrate the processes -LMAT, business, procurement, & accounting -Centralisation of transaction processing -Reinforce accountabilities & responsibilities Deployment

32. Local Management Accounting Team Review Baseline Analysis

33. Background to the Assignment • The Department is changing: • Moving towards a strategic and policy focus with delivery through partners, supported by a slimmer, professional core able to deliver with reduced resources • The LMATS were introduced in 2005/06, following a successful pilot. The current business perception is that although improvements have been made in terms of data integrity, the quality of the service being delivered by LMATs is not consistent and the primary focus remains on transaction processing rather than on the value-added services envisaged in the LMAT business case • The Central Procurement Division Smarter Business Process outline business case for the centralisation of invoice processing assumes a baseline of LMAT transaction processing costs of £1.1m that requires validation • The professionalisation of the Department’s financial capability continues to gather pace and is essential if it is to meet the future financial management challenges that will arise as a result of tight constraints on public expenditure

34. Local Management Accounting Team Review Original LMAT Strategy

35. LMAT Original Strategy To contribute to the improvement of financial planning and control processes… • Proposed changes included: • Centralisation of invoice processing to FSSD • A CPD procurement specialist within the LMAT • Transfer SAP processing from the line to the LMAT • GMA to report to the local Group Director General • Financial Qualifications • GMAs to be qualified accountants • Local Management accountants to be at least part qualified accountants • LMAT to provide a finance support role to programme budget managers • Accountability for strategic planning and performance reporting to be transferred to the GMA or a BDA • Maintain the responsibility of a PBM to manage the Programme • GMA to provide financial management and policy advice to Group senior management Implemented? X X X X X X X X • …and the realisation of significant efficiency and procurement savings

36. Only two of the proposed changes have been successfully implemented! LMAT Original Strategy Implementation

37. Local Management Accounting Team Review Current Analysis Headcount

38. Current LMAT Analysis - Headcount No correlation between the size of the Group and the LMAT headcount • The total LMAT in post headcount is 89, 4.51% of 1,972 headcount within the Groups • The range of LMAT size ranges from the smallest (PPI) at 2.92% to the largest (Gov & Comms) at 6.25% as a % of Group total headcount • There is no obvious correlation between LMAT and Group size • There is an unclear differentiation between the roles and responsibilities of the EO and AO grades

39. Current LMAT Analysis - LMAT Scope • The LMATs have oversight and responsibility for only 31% £10bn of the core Departments total expenditure of £33bn • The remaining £23bn is managed outside of the LMAT structure with limited direct oversight and input from the LMATs

40. Local Management Accounting Team Review Current Analysis Organisational Structure

41. Current LMAT Analysis - Typical Organisational Structure Traditional hierarchical structure… • LMAT organisation structure has narrow spans of control (1 to 1 relationships) with limited sharing of EO/AO resources across an LMAT • EO/AO Headcount of 56 costing £1.8m per annum will be directly impacted by Centralisation of transaction processing Deputy Director Finance Directorate Current Headcount & average direct annual salary costs Support to the DG 4 = £0.3m GMA (Qualified Accountant) (Qualified or finalist) 7= £0.4m SEO Support to BMs & Central Finance (Qualified /studying) 22 = £0.9m HEO HEO Studying CIMA/ACCA 30 = £1.0m EO EO Transaction Processing May or may not be AAT 26 = £0.8 AO AO AO …but not consistent with new ways of working TOTAL 89 staff = £3.4m per annum

42. Local Management Accounting Team Review Current Analysis Process Costs

43. Current LMAT Analysis - Process Costs £1m + per annum consumed by processing invoices… • £1m+ per annum, 29% of LMAT payroll costs, absorbing 1/3rd of the FTEs across all the grades is involved in managing the procurement and invoice process. • This is likely to be an understatement as the LMATs are not structured for efficient workload management and productivity is considered to be low. • The Smarter Business Process Business case assumed an annual cost for transaction processing of £1.1m in respect of 40 EO/AOs, which is consistent with the results obtained from the activity analysis. • Under utilisation is likely to be analysed to processes such as “other activities” and “training and personal development”. • Average process cost per order = £29 (£1m/34,000) Source: Activity Analysis returns completed by the GMAs …of which 75% (c25k) of purchase orders are for less than £1,000.

44. Local Management Accounting Team Review Current Analysis Skills and Competencies

45. Current LMAT Analysis - Financial Management Capability Model CLG stuck at level 2… Level 5 • Level 3 provides the base from which LMATs can provide the desired value-added capability OPTIMISINGFocus on continuousimprovement and learning Level 4 MANAGEDFocus on balancing efficient and economical use of resources with quality / effectiveness of results achieved • LMATs level of maturity is variable • Focus remains on Level 2 and attaining effective control and compliance Level 3 INFORMATIONFocus on measuring how resources are used and managing for the efficient and economical use of resources Level 2 • Level 3 OBJECTIVES • Risk Management • VFM CONTROLFocus on compliance and control • Level 2 OBJECTIVES • Internal Control • Financial & Outcome information • Stewardship • Regulatory compliance Level 1 START UP …but LMATs need to step-up to at least level 3

46. Current LMAT Analysis - Skills and Competences Low level of accounting qualifications… • As part of the Department’s Keegan action plan objective to develop “quality financial management in the line” there is a specific action to identify and mandate the required grades and qualifications for GMAs and LMAT staff and to restructure the LMATs and improve skills to provide stronger support to the line. • Although all GMAs are now qualified accountants, those holding or studying for a recognised accounting qualification at the SEO/HEO grades is currently only 35% (10 out of 28) and are not universally pursuing an accounting qualification. • However, the competence, i.e. the ability to deploy technical accounting skills and experience, even amongst the qualified accountants, is considered by the line to be insufficient to meet their needs for “value-added” services such as financial risk management, technical advice and guidance, investment appraisal, forecasting and other types of decision support. …impairs the capability to provide added-value services to the line

47. Current LMAT Analysis - Professional Qualifications LMATs are reliant upon a limited pool… • Only 10 of the 28 HEO/SEOs are fully or partly qualified accountants (CIMA, ACCA, ICAEW) • 51% of LMAT staff do not hold or are studying for a financial qualification • There is evidence of renewed interest in finance qualifications especially amongst the EO and HEO grades …of fully qualified and experienced staff

48. Local Management Accounting Team Review Current Analysis Ways of Working

49. LMAT Original Strategy - Roles & Responsibilities The responsibilities for the LMAT roles… …were clear but remain largely unfulfilled

50. Current LMAT Analysis - Ways of Working Inefficiencies are inherent … • People and Structure • small team approach does not support resource flexibility and capability development and is inconsistent with the New Ways of Working being developed by the Department. • time allocated to core activities is spread across the grades • lack of a clear definition of roles and priorities • AOs and EOs priority is completing the procurement and invoice paper-chase • Process • Delivery approach focused upon compliance with process rules and the LMAT Operations Manual rather than business requirement • for example the management of the procurement process • No consistent, shared timetable for the completion of key financial tasks and controlling the quality of the content • For example the production of monthly reports and balance sheet reconciliations • Systems • The systems (SAP, spreadsheets, programme management, payroll and HR) do not provide a common and consistent view of data and need to be manually reconciled with each other. …in all aspects of current ways of working