Why wouldn’t a bright, energetic, ambitious accountant with their eyes on a financial directorship join the public sector? The usual answer is because they are bright, energetic, ambitious.

In other words, the public sector has a real challenge on its hands in trying to embed strong financial management skills into key positions. There are a number of reasons why the public sector should wish to do this. As the excellent HM Treasury publication, which takes this theme for its title, Embedding Financial Management Skills in Government, points out: “Good financial management is like fresh air, exercise and a healthy diet. Organisations need it every day to stay fit and to live a full and active life.” Who can argue with this?

The problem is that the public sector has woken up rather late in the day to the realisation that, while a generalist civil servant is an excellent beast, it is perhaps not a good idea to give billion-pound budgets to people who lack even a nodding acquaintance with double-entry bookkeeping, however splendid they might otherwise be.

The civil service was founded on the idea that a gentleman amateur who can parse his Greek and Latin can turn his hand to anything. In general, this may be true, but it is also doubtless true that they can turn their hand to financial management rather more easily, and with a better chance of success, if their seniors steer them towards some basic courses in accountancy as part of their career progression.

A better idea, though, would be to forego the training of amateurs and hire full-on professionals. But that takes us full circle to our opening remarks: who would join?

Stop-gap solution
In practice, however, HMG has managed to devise a stop-gap solution while it girds its loins to produce a more elegant longer-term solution. The short-term fix is to hire interim financial managers and to swallow the costs associated with paying these temporary members of staff three or four times the salary that would have been paid to a public sector employee in the same position.

As Andrew Simmonds, senior account manager at Hudson, a global recruitment consultancy providing finance professionals for the public sector, observes, the whole economy, public and private alike, suffers from a skills shortage. Skilled people are hard to find in finance, IT, HR and half a dozen other specialist areas. With both the public and the private sector chasing skilled accountants, there are no prizes for guessing who wins in the war for talent.

One card up HMG’s sleeve, however, is that while pay grades for civil servants are cast in stone and have virtually zero flexibility, it is possible to pay bonuses of up to 60% of pay for key categories of staff, including finance directors. “The civil service can do this because even with the bonus, the cost of a permanent finance director in the public sector will be significantly less than the cost of paying for interim staff to fill that position if the incumbent leaves,” says Simmonds.

The problem that HMG has, however, is that finance directors are streetwise. Someone from industry or commerce might get a finance director position in this or that government department but then, having worked there for a few years, they know that they can earn significantly more – while still undertaking a ‘public service’ role – by leaving the service and returning as an interim finance director. This secondary ‘bleed’ of skilled talent is very hard to stop.

Another source of ‘bleed’ driven by the market, ironically, has its roots in the civil service’s drive to push through strong financial disciplines. This leads it to hire interim specialists, often seconded from management consultancies. This gives the consultancies a motive to headhunt skilled finance directors with public sector experience, so the wheel goes round and round.

Tired or fired
There is, apparently, another category of finance director, rather more valuable, perhaps, to the public sector, that the civil service may well be able to attract and retain. This is what we might term, “the tired finance director or the fired finance director”, the man or woman who has become a little jaded by the hire ’em, fire ’em mentality of the private sector.

Many finance directors find four years with a plc an unusually long tenure in a world where disasters happen. To the tired finance director, a comfortable and relatively safe berth in the public sector, with a wonderful final salary pension, may well look like an attractive opt-out from the hazards of commercial life. Caught rather late in life, the tired finance director is also less likely to be tempted to play the interim game simply to maximise their cash reward.

Of course, there is much to be said for growing your own, and the civil service bit the bullet two years ago. In conjunction with the Chartered Institute of Public Finance and Accountancy (CIPFA) and Warwick Business School and HM Treasury, the civil service introduced a two-year finance diploma for senior civil servants (specifically, the Postgraduate Diploma in Public Finance & Leadership, which leads to membership of CIPFA).

The inspiration was a declaration by the then-prime minister, Tony Blair, in 2004, that all government IT, finance and human resources departments should be “…filled by people with a demonstrable professional track record in tackling major organisational change, whether inside or outside the service.”

What this meant was that managers in key governance functions in the civil service could henceforth expect to require professional qualifications, in addition to their doubtless glittering academic qualifications, if they wanted to advance their careers.

Tony Blair’s comments led to the Professional Skills for Government (PSG) agenda and the finance transformation programme led by HM Treasury. In fact, they were one of a number of changes sweeping through the public sector, all of which are generating what the Treasury calls “a timely opportunity to capture hearts and minds and to secure powerful corporate commitment to embed financial management skills more widely within departments”.

Two other drivers for this are the 2007 Comprehensive Spending Review, and the Gershon efficiency agenda. Both make it plain that the significant increase in public sector spending that has characterised the past decade is going to end for all departments, and that many will find themselves having to operate with reduced resources.

“Ministers and civil servants are having to look for new ways to improve how government bodies operate to deliver what is asked of them,” the Treasury says in a second publication, Doing the Business: Managing performance in the public sector – an external perspective. Published in February this year, this publication focuses on achieving management efficiency through the better management of performance. This clearly goes beyond the finance function, though it implicitly relies heavily on the finance function’s ability to deliver strong financial discipline.

As the Treasury puts it, “Performance must not be just a centrally-driven exercise or seen as the sole preserve of finance or some other corporate function.” The Treasury’s vision is to create a culture of performance management, embedded organisation-wide. This, the Treasury says, would create a public sector whose departments automatically demanded high quality financial and non-financial performance information, and which are more confident of their abilities to achieve outcomes cost effectively, and that are more innovative and better able to prioritise and deliver broader strategic options.

Peter Morley, technical director at Insight Management and Systems Consultants Ltd, was on the Treasury committee that formulated the Performance Management publication. In his view, despite the difficulties, HMG is managing to attract some very good finance directors, indeed. He cites Huanada Nouss, a former Diageo finance director who joined the Department of Communities and Local Government, two years ago following a reorganisation at the FTSE-100 drinks company.

“Nouss joined at grade six and is now grade three or maybe even grade two, which is a very senior position in the civil service, and one that she has reached in a very short space of time. So it is not impossible for the civil service to attract people who can clearly demonstrate their worth,” he says. Another finance director who proves the point is Richard Calvert, now finance director of the Food Standards Agency, whom Morley calls “a very bright and able individual and another excellent example of a high calibre individual with strong financial skills joining the civil service”.

High rewards
Morley argues that there remain some very good reasons why people join the public sector, including work-life balance and being able to make a very significant change through a very important department. “Delivering a real change in outcomes for departments by leadership in financial management can often reward high-flyers just as powerfully as more cash in their pockets,” he says.

So are these initiatives working? Morley argues that they undoubtedly are. “When you see how far the government has moved from cash accounting to resource accounting, which was the application of UK GAAP, and how it is now preparing to adopt IFRS over the next few years, we are in an unimaginably different position to the one government was in 10 years ago. There is much better visibility of assets and liabilities,” he says.

Since Morley made these comments the government has announced that the introduction of IFRS in the public sector will be delayed by at least a year to 2009/10. But, though later than planned, the end result should be that the whole of the government’s accounts, as prepared by the Treasury, will give a UK balance sheet that is much more readable and that will enable people to see what outcomes are being delivered by departments in return for the resources they spend.