Local government – the big squeeze

It is budget-setting time again for finance directors across local
government, with many a late night meeting being held, all with a single
objective ­ to bridge the gap between an increasing demand for services and
declining resources. Many authorities are finding this year’s budget process a
challenging one. With public sector debt soaring and all political parties
united in forecasting a decline in public spending over the medium term, they
can expect more of the same in the future.

Driving efficiency through the delivery of local services is nothing new for
local government. What is different is the scale of the financial problem being
faced. Councils are anticipating real cuts in government funding for the first
time in a decade of unprecedented growth in public spending. With a general
election a matter of months away, the lack of certainty in terms of policy
direction adds a further complexity to the mix. What is certain however, is that
authorities across the country will be challenging the way they currently do
business to seek new ways of working to ensure that they are able to sustain
essential public services within reduced resources.

In stark contrast, Deloitte’s 2009 Q3 CFO Survey, which covered 27% of the
quoted market, indicated an increasing optimism amongst FDs in the private
sector that their continued focus on steadying the ship and keeping tight
control on cash, working capital and funding is starting to make an impact. This
is reflected in responses which highlight corporate strategies geared towards
the emerging recovery, and with 40% of respondents being more optimistic for the
financial prospects of their business now than three months ago.

It is not unusual for the public sector to feel the impact of recession later
than other parts of the economy. Is there a way in which local government can
benefit from this phenomenon? Can real advantage be gained by applying the
lessons learned in the private sector and sharing skills and experience to help
local government in such challenging times?

Key focus areas right now for finance directors in private sector
organisations include:

* Providing information to support decision making;
* Delivering sustainable cost reduction; and
* Business partnering.

These areas are firmly at the top of the agenda in local government too.
Councillors across the country will be making difficult decisions to scale back,
reconfigure or cease local services. Such decisions will have significant
consequences, not least to the recipients of these services and in many
instances will involve job losses. These decisions will not be taken lightly and
will need to be founded on evidence to support the recommendations made.

Many authorities will be considering new ways to deliver local services, in
partnership with other public sector organisations, the third sector, or indeed
through outsourced arrangements with the private sector. Although on the agenda
for some time, outsourcing and shared services have failed to make much of an
impact in local government. Views on the potential benefits of such arrangements
may be tainted by early deals which did not meet expectations, and partnership
discussions in the main have failed to progress beyond the initial flirtation as
the “burning platform” necessary to drive change failed to materialise. We
expect this picture to change significantly as financial pressures start to

Leading private sector businesses have been adopting partnering strategies to
gain competitive advantage and drive sustainable cost reduction for decades.
They focus on their core business and outsource the rest, with the belief that
those best placed to deliver should do so.

Business process outsourcers have developed highly successful business models
which focus on delivering standardised low cost transactional business services
efficiently and effectively. While it would be naïve to suggest that such an
approach should be applied across the board in local government, there is much
to be gained from sharing strategic insight and leading practice from these
successful private sector business models.

The role of the FD is multi-faceted. The effective management of public funds
is a statutory responsibility in local government and the focus of finance
activity has been to support this stewardship role ­ much of the resources
deployed by the FD centre around operational practices to support this function.
In times of financial hardship, the FD in successful businesses has a key role
to play in driving the strategic direction of the business and in being a
catalyst for change. But they will not be trusted to advise on strategy or to
drive change unless the processes underpinning the steward and operator roles
are mature and high performing.

In those organisations with leading finance functions, the function has been
transformed, with investment in technology supporting automated end-to-end
processes with management information to support decision making being available
to operational managers in real time. Finance resources are deployed to
interpret financial information and to provide financial insight to support
operational decision making and strategy development, not in the transactional
activity of payment processing, data recording and reporting.

Finance is traditionally the Cinderella service in local government ­ with
investment being focused on front line services rather in back office functions,
and as a result, it is the personal gravitas of the FD rather than the
performance of the finance function as a whole which ensures their place as
catalyst and strategist at the top table. As financial pressures begin to hit
front line services hard, it is questionable whether gravitas alone will be
enough. Opportunities will abound for those who have delivered sustainable cost
reduction, outsourced key services or successfully transformed the finance
function to bring their skills and expertise to bear within local government.

These are challenging times, but for those seeking an exciting, rewarding
challenge, local government is the place to be.

Carolyn Low is a senior manager in Deloitte’s local and regional
government consulting practice

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