Feature / A measured performance

As PCTs face challenging targets to cut management costs, KPMG’s David Reeson and CIPFA’s Richard Ludlow describe the background to their finance function indicators.

While there arE specific and challenging management reduction targets facing primary care trusts, in reality the whole NHS and public sector face similar pressure to reduce back-office and support costs.

It is more important than ever for organisations to ensure their corporate support services – finance, human resources (HR), estates, information and communications technology (ICT) and procurement – operate as efficiently and effectively as possible. Perhaps as important, they need to be able to show stakeholders internally and externally that these functions represent good value for money for the taxpayer.

Until recently there was no common set of indicators to allow public sector organisations to have an informed discussion about maximising value for money. This gap was identified by the UK’s five audit agencies – the Audit Commission, the National Audit Office, the Northern Ireland Audit Office, the Wales Audit Office and Audit Scotland – and they set up a programme to address it.

In 2006 the audit agencies commissioned KPMG, which worked with more than 100 public sector organisations to develop value-for-money indicators covering the five areas of corporate services. The aim was to develop a suite of indicators that could be used by managers across the sector.

KPMG consulted across the public sector to develop the indicators. Practitioners were involved from the outset in developing and ‘stress testing’ the indicators. The audit bodies suggested we consider four key aspects:

• Efficiency – how much does each service cost? How productive is it? What does it deliver in terms of outputs?
• Impact – how does the service influence corporate performance? How do the outputs from the service contribute to the success of the organisation as a whole?
• Modernisation – to what extent has the service adopted management practices regarded as innovative and forward looking?
• User satisfaction – how well does the service respond to the needs of internal and external customers?

Following our work the audit agencies continued to consult and published a joint report incorporating our results in 2007.

Subsequently, the back office and IT strand of the Treasury’s operational efficiency programme recommended: ‘All public sector organisations employing more than 250 people must collect and publish data using the audit agencies’ approved value-for-money indicators for back-office operations.’ The report was approved in the 2009 Budget.

Performance sharing

We can all learn from our peers. The key is to do so in a structured way that considers all aspects of value for money and focuses on improving the contribution corporate services makes to the success of the organisation.

This requires an appropriate – and shared – set of performance indicators, a robust process of data collection and analysis, and a broad range of organisations against which to compare one’s performance.

This model provides that opportunity and allows bodies to compare across the whole of the public sector and regions of the country.

KPMG and CIPFA have worked on benchmarking and collected data for the audit agencies’ indicators for the past three years. More than 230 public sector organisations took part in 2009, including 29 trusts, 12 foundation trusts and 16 primary care trusts.

Organisations can use the indicators to compare themselves with others. If they depart significantly from benchmark, this may indicate a need for further analysis, which could identify opportunities for performance improvement.

As well as using the benchmarks to compare themselves with others, organisations can track their own performance and measure the impact of improvement initiatives.

There are also wider ranging benefits from this approach. Feedback from organisations in the NHS has shown that it has been used to redefine coding structures, identify duplication across support functions and clarify interdependencies.

It has also been used to redefine service expectations and model different levels of service provision, particularly with the push towards further shared service arrangements.

Michael Brodie, assistant director of finance at the NHS Business Services Authority, gives an insight into how one organisation has used the indicators.

‘It has helped shape our thoughts on the structure of our chart of accounts and how we report the cost of back-office services,’ he says. ‘Additionally, the focus on efficiency and effectiveness has led to us reviewing our cost base in certain areas and making savings.’

Interesting trends have emerged in the NHS over the past three years. One is the correlation between strong financial performance and the ability to release resources from transactional processing into support for decision making. This analysis and a review of wider processing costs have proved a key aspect of some NHS reviews of finance.

NHS statistics

Evidence from the past three years’ benchmarking suggests the cost per full-time equivalent (FTE) in providing reporting, controls and decision-making support to PCTs is about 40% less than NHS trusts and about 30% less than foundation trusts. The analysis also reveals that FTs’ costs per FTE in providing strategic and policy support are more than twice that of PCTs.

These differences could signify greater investment by some organisations in these functions, with a bias towards senior staff, or it could say something about relative efficiency.

Other analysis shows that the cost of NHS accounts payable compares well with the wider public sector. Costs in foundation trusts are typically 30% lower than the public sector average (not including the NHS), with PCTs and trusts about average for those subscribing.

However, and perhaps not unsurprisingly, the NHS costs of invoice processing are higher than the wider public sector – typically 60% higher in FTs and more than three times the cost in PCTs.

Management costs in the NHS include the full cost of the finance department, which means the cost of this function is under particular scrutiny. Figures for the past three years suggest average costs are not dissimilar to the wider public sector at around 1.1%.

The CIPFA/KPMG definitions for finance costs bear some correlation with the NHS definition of management costs. Staff costs should be broadly similar and typically represent 70%-80% of the cost of the finance function. But the CIPFA/KPMG definitions include broader costs to cover the use of IT, property and other attributable supplies and services (see box).

Identifying relative costs of different activities is only the first step in improving value for money. Knowing where you score on the indicators compared with your peers is of little value unless you take the next step of asking questions about why you diverge from the peer benchmark. The next thing is to do something about it – if it reveals opportunities.

We are seeing many NHS bodies taking steps to improve value for money, including process reviews, shared services and outsourcing. There are also many examples of organisations that do not take action to improve value. They are missing an opportunity to improve corporate services and reduce costs at a time when budgets will become even tighter.

This indicator set continues to be refined and developed, and more services have now been added to cover corporate communications and legal provision.

At least now we have a common language of indicators with which to discuss relative performance in corporate services. But, of course, discussion for its own sake is pointless. Action must follow if value for money is to be achieved.