Foreign and Commonwealth Office Annual Report 2007-08 - Foreign Affairs Committee Contents


'Five Star Finance' programme

196. The FCO has a programme in place to improve its financial management, the Five Star Finance project. This is based on a National Audit Office (NAO) assessment of organisations which ranks them from one, indicating that an organisation is just able to manage their cash, to five, signifying that it is able to rely on good, accurate financial information produced in a timely fashion. The FCO's performance will be reviewed by the National Audit Office early in financial year 2009-10.

197. As part of its Five Star Finance project, the FCO: has introduced a new structure for its central finance function, with a 'Finance Direct' service to handle queries from staff; is working to improve the quality and speed of management reports for the Board and operational units; is making use of new, proprietary budgeting and reporting tools for management information requirements; has created a new scheme for accountancy trainees, taking on nine such trainees, and was the first Whitehall department to lay its 2007-08 accounts (laid on 30 June 2008).[266]

198. The FCO is using the Chartered Institute of Public Finance and Accountancy (CIPFA) financial management model to benchmark its performance. In January 2008 it told us that its aim was to reach five stars by April 2009.[267] The FCO achieved a 3.5 star rating in August 2008, but in September the FCO informed us that it might see a delay in achieving four stars (the level at which accruals-based information is fully integrated for internal and external reporting):

    We have reviewed our programme of milestones for 4 to 5 stars and identified additional requirements for the four star definition. In particular, we have reviewed the purchasing and payment processes and identified opportunities to share the UK best practice across the network. This may delay the achievement of 4 stars until February 2009.[268]

199. In October 2008, Sir Peter Ricketts acknowledged in his quarterly management letter to us that "significant work [had] to be done to reach the 4 stars level".[269]

200. On 20 November Sir Peter wrote to tell us that:

    We believe that we should achieve 5 Star during 2009-10. A key element of 5 Stars is the delivery of management information in 7 days after the month end. This milestone is dependent upon the implementation of a new management information tool, which is scheduled to be implemented in early 2009-10. […]The programme is making tangible improvements to the FCO. […]Through consultation with other government departments and external advisers, we have raised the "bar" for 5 Stars i.e. made it more difficult to achieve. This reflects the reality that financial management is improving across many Government departments and to be "Best in Whitehall" is becoming tougher. Additional initiatives have been brought into our 5 Star Programme.[270]

201. In our last Report, we commented on the FCO's attempts to professionalise its top financial management.[271] The FCO has supplied us with updated information on how this process has continued during 2007-08. They stated that IPF Consultancy, the consulting arm of CIPFA, had conducted an independent review of the FCO's financial management. The review concluded that there had been a strong improvement over the last two years from a low base, that the FCO's performance relative to other Departments was commendable and that it was well-placed to improve its skills and professionalism.[272] The FCO also highlighted a range of developments in this area which have occurred since our last Report was published:

  • A qualified Management Accountant was appointed as the FCO's new Finance Director.
  • Senior Management Staff (SMS) and Band D staff are now required to undertake the Professional Skills for Government (PSG) finance e-learning and two-day Financial Management course. To date 70% of SMS and Band D staff have attended the course.
  • In-house financial training is being increased including the introduction in 2009 of tailored individual finance training for directors and a 'Finance in the FCO course' aimed at the generalist level. A budgeting course, which will be mandatory for all FCO budget holders will also be rolled out.
  • The first intake of eight graduate entrant accountancy trainees recruited through the Government Finance Profession (GFP) scheme joined the FCO on 1 September 2008. Plans are in place to recruit at least five more GFP trainees in 2009 with a view to the FCO "grow[ing] its own" accountants who will be equipped to occupy senior management positions in the future, and
  • the FCO has participated in two Whitehall-wide programmes designed to increase the financial acumen of current and future senior civil servants.[273]

202. We conclude that the changes that the FCO has introduced with a view to improving its financial management are to be welcomed. We commend the FCO for resisting the temptation to gild the lily when self-assessing its financial performance under the Five Star Finance programme.

203. We look forward to considering the findings of the forthcoming independent National Audit Office appraisal of the FCO's performance with a view to assessing how much progress the FCO is making in this area.

Efficiencies and the FCO's financial position

204. In our last report we recommended that, given the scale of the FCO's efficiency programme, it should devote more space in its annual report to reporting progress on meeting its efficiency target.[274] We were pleased to see that the FCO has acted on our recommendation in its 2007-08 annual report.[275]

205. In the Spending Review 2004 (SR04) period, the FCO was set a target of finding £120 million in efficiencies. In July 2008 it sent its final report to the Treasury on its SR04 Efficiencies Programme. This showed that the FCO had achieved savings of £132 million, the biggest savings being achieved by the Corporate Procurement Group which realised savings of £23.4 million.[276]

206. In its Comprehensive Spending Review 2007 (CSR 07) settlement, the FCO was allocated a 5% real terms cut in administration. It has an efficiency target of £144 million (or at least 3% annual cash-releasing efficiency savings on its 2007-08 near-cash Departmental Expenditure Limit (DEL) baseline by 2010-11, of which £130 million must be resource and £14 million capital). The FCO sent us the summary table below, showing its provisional targets by project:Summary Table of FCO VfM Project Efficiency Targets[277]

Efficiency Target
Europe Zero Based Review (ZBR)
£ 9,000,000
Roll out of Europe ZBR to other regions
£ 2,900,000
£ 9,500,000
Finance Function Review
£ 1,700,000
Improved procurement
£ 11,000,000
Increased FCOS efficiency
£ 6,000,000
Reducing the overhead costs of overseas Representation
£ 3,000,000
Increased UKTI Efficiency
£ 4,400,000
Rolling back grade-creep in London
£ 3,200,000
Future Funding of VIP Suites
£ 2,000,000
Gratis Visa
£ 2,000,000
Reduction on time spent by Defence Attaches on non-defence activities
£ 10,500,000
Language Training
£ 1,500,000
BBC World Service efficiencies
£ 23,270,000
British council efficiencies
£ 18,240,000
Allocative Efficiencies*
£ 41,500,000
Capital Efficiencies
£ 9,000,000
£ 158,710,000
Restructuring Cost
£ 8,400,000
Net Total
£ 150,310,000

207. The FCO pointed out that this table did not include predicted benefits of the shared services programme as these were under review (see paragraphs 215 to 218 below). It also emphasised that it had allowed for a contingency in case certain projects under-delivered.[278]

208. We asked the FCO for further information about allocative efficiencies. The FCO replied:

    Allocative efficiencies in CSR 07 are generated from moving resources from lower priority areas allowing savings to be released and invested in higher priority areas. During 2007 Resources Allocation Round (RAR) budget were adjusted accordingly to release 'cash' from these areas to be used in priority areas as outlined in the Strategic Framework.[279]

209. The FCO's current budgetary position is set out in the table below.


Resource DEL
Capital DEL
Less Depreciation*
Total DEL

*Depreciation, which forms part of Resource DEL, is excluded from total DEL since capital DEL includes capital spending and to include depreciation of those assets would lead to double counting.

210. The FCO told us that its senior management were seeing "better monthly reports, enabling us to be more confident about reallocating resources and achieving a smaller underspend in 2008-09".[280] We were also told:

    At the same time, we are pushing ahead with a set of projects to make our PRISM system easier to use and take advantage of new Oracle tools for planning, budgeting and measuring the use of staff time. We aim to introduce those new features in 2009-10.

    We have established that there is a performance gap between our overseas posts and UK departments in terms of complying with our Purchase to Pay (P2P) processes. The UK position has improved significantly in the last year and we are concentrating on raising overseas performance. We are implementing a series of improvements to our internal financial controls. These are designed to place more reliance on in-built software, reduce the level of year end audit testing and speed up the implementation of recommendations in our audit programme.[281]

211. The FCO's Board minutes for 30 May 2008 suggested that the FCO is facing a number of "emerging budgetary pressures" this financial year, including how to manage the Treasury's withdrawal of its support for the Overseas Pricing Mechanism (OPM), which used to protect departments from weakening of sterling.

212. The FCO subsequently wrote to us in November 2008 outlining what action it had taken to mitigate the effect of the Treasury's withdrawal of support for the OPM. We were told that, upon ascertaining the Treasury's position, the FCO immediately began to consider options for managing its foreign exchange exposure, including the forward purchase of certain currencies. The FCO also took advice from commercial banks and the Bank of England, explored what government partners were doing and consulted independent financial experts. We were told that proposals were then made to the FCO's Finance Committee and HM Treasury and in May 2008 "approval was given to hedge using simple 'outright forward' contracts."[282] These contracts have no premium and guarantee an agreed exchange rate for a given volume of currency on a given date in the future, thereby providing absolute budget certainty. The FCO noted:

    To date we have contracted with the Bank of England to buy 80% of our net US Dollar and euro exposure up to October 2009. The principles we have applied to managing our foreign exchange exposure are to (a) maximise budget certainty, (b) be low risk and non-speculative, (c) hedge a maximum of 80% of net foreign exchange exposure, and (d) recognise that the 'do nothing' option is itself speculative and potentially high risk. […] As a result of the hedging, we know that we will have the foreign currency funds to finance our activities in this FY; but we will face a tougher challenge in 2009-10.[283]

213. The Board minutes for September 2008 stated that the FCO's financial position was "likely to be very tight in forthcoming years" and would "need to be kept under review".[284] In correspondence with us the FCO has stated that although the Treasury's increased contribution to expenditure on international subscriptions should enable the FCO to meet commitments this financial year, there is less certainty over the position for 2009-10 and 2010-11. It told us that:

    We are currently forecasting additional pressures of around £3 million in each of these financial years, and a likely increase in the UN Regular Budget and other international subscriptions will push this figure higher. That being the case, we will have to curtail activities in other programmes in order to meet these non-discretionary costs.[285]

214. We are deeply concerned that as a result of the Treasury's decision to withdraw its support for the Overseas Price Mechanism, the FCO may not be able to meet higher international subscriptions over the next two financial years unless it cuts its activities. We conclude that it is deplorable that the FCO should have to shoulder the financial burden from within its already tight budget to pay for subscriptions which also benefit other Government departments, and we recommend that additional non-discretionary costs should properly be met by the Treasury.

Shared services programme

215. Last year we were told that the FCO would have a Shared Services Programme to "simplify, standardise and streamline corporate services" within its network of Posts in the CSR 2007 period and that this had the potential to produce £22million in efficiencies.[286] In early April 2008 the FCO informed us that it was working on the design of its first Shared Service Centre, which would be in the UK, and would cover the UK and 14 northwest Europe Posts. We were was told that the Centre would initially focus on finance and procurement, but would later extend its activities to cover human resourcing also.[287] The first step in this programme was to set up a UK processing centre. This is sited at Hanslope Park near Milton Keynes; we visited it in July 2008.

216. We were subsequently told that the programme had received a red (take immediate action) rating at its Gateway 0 review.[288] Three out of ten of the review's recommendations were rated red. These related to the shape of the programme, its governance and the need to establish an "Intelligent Client" Function for the North West Europe Facilities Management contract.[289] The FCO said it welcomed the recommendations and was taking action on them, including strengthening the leadership of the programme by appointing a more senior programme director (Andrew Lloyd).[290]

217. The FCO Board held a detailed discussion on Shared Services at its September 2008 meeting.[291] On 3 October, Sir Peter Ricketts wrote to tell us that the Board had taken a decision to end its shared services programme and replace it with a new "corporate services programme", with Andrew Lloyd taking on the post of Director of Corporate Services. He stated that experience had shown that in order to realise benefits from the shared services programme, the FCO first had to "spend more time modernising individual corporate services, before moving to larger scale sharing of services overseas". The new programme is intended to:

  • Simplify, standardise and streamline the FCO's corporate services, particularly in the areas of finance and human resources;
  • Develop the UK Processing Centre into a UK Shared Services Centre, with initial further consolidation of financial transaction processing, with a focus on driving service levels up. Over time the Centre will be expanded to provide further support across corporate services functions;
  • Set the corporate framework and provide support to deliver more joint working on corporate services among groups of Embassies in particular regions, where it makes good business sense to do so, and building on good practice already developed, for example among the FCO's Posts in North America.[292]

218. We recommend that in its response to this Report the Government should set out what lessons it has learnt from the failure to implement a shared services programme, and what progress it has made on setting up its new corporate services programme.

266   Ev 135 Back

267   Ev 58 Back

268   Ev 167 Back

269   Ev 155 Back

270   Ev 174 Back

271   Foreign Affairs Committee, Foreign and Commonwealth Office Annual Report 2006-07, paragraph 102 Back

272   Ev 195 Back

273   Ev 196 Back

274   Foreign Affairs Committee, Foreign and Commonwealth Office Annual Report 2006-07, para 8 Back

275   Foreign and Commonwealth Office, Foreign and Commonwealth Office Departmental Report 1 April 2007-31 March 2008, pp 114-117 Back

276   Ev 135 Back

277   Ev 79 Back

278   Ev 79 Back

279   Ev 170 Back

280   Ev 155 Back

281   Ev 155 Back

282   Ev 174 Back

283   Ev 174 Back

284   Summary of Minutes of FCO Board, 26 September 2008 Back

285   Ev 166 Back

286   Foreign Affairs Committee, Foreign and Commonwealth Office Annual Report 2006-07, para 86 Back

287   Ev 70 Back

288   This is a programme-only review by the Office of Government Commerce that investigates the direction and planned outcomes of the programme, together with the progress of its constituent projects. It is repeated over the life of the programme at key decision points. Back

289   This project was looking at outsourcing the cleaning, upkeep and maintenance of FCO buildings in the UK and North-West Europe. In September the FCO informed the Committee that Interserve (Facilities Management) Ltd had been awarded the seven-year contract. It anticipates savings of around £9 million over this period and also expects the contract to "deliver significant benefits in terms of standardisation of services for staff, better value for money, a reduction in the management burden at Posts, and innovation from the facilities management industry." (Ev 153)  Back

290   Ev 128 Back

291   Ev 165 Back

292   Ev 153 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 8 February 2009