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This paper examines the financial control systems used by South Essex Partnership NHS Foundation Trust (SEPT), and the way in which these systems relate to Management Accounting theory. The document also reflects on the performance measures used by the organisation and the ways in which both the control and performance measurement systems have implications for the Facilities department. It concludes by recommending how the systems could be improved from a Facilities manager's perspective.
SEPT is a mental health NHS trust with both inpatient and outpatient sites in and around South East Essex.
Having Foundation Trust status means that SEPT enjoys greater financial freedoms than NHS organisations without this status. FT's are assessed and risk rated by Monitor, the organisation set up by Parliament, to ensure that they are financially stable and able to manage their own resources. As such, FT's are not required to use a resource accounting regime, which would require them to break even on an annual basis. However they must have a strategic business plan, robust systems to guarantee that public funds are managed responsibly and that there are governance arrangements in place to ensure that all aspects of their performance is managed and reported upon to both the external regulatory body, Monitor and other stakeholders. (Introductory Guide to NHS Finance in the UK, 2008).
Therefore, being part of a Foundation Trust has implications for the Facilities Department, as they provide the 'hotel' support services, such as cleaning, portering, transport, waste management etc to all areas of the Trust. The department has objectives and features in the Trust's strategic plan to improve the quality of the patient journey. It must also work within the constraints of the procurement and financial systems, market test the services it provides, and supply information and evidence to the Performance Department, who are responsible for reporting on the Trust's compliance with the National Standards.
THE FACILITIES DEPARTMENT
SEPT, the organisation, is the result of a merger between two Community Healthcare Trusts during the 1990's. The two Trusts had different approaches to Facilities Management, one provided the majority of their services in-house, and the other outsourcing all but the management of theirs. Subsequently, there are still different methods of service provision across the Trust. The Facilities department endeavours to manage the inequalities on the various sites, as clinical staff working on different sites have realised that more flexible SLA's and service provision exists in specific areas. These differences have brought the concept of value for money (Imperial College, 2010) to the fore as it is evident that this is not something that can be measured in purely financial terms.
It is also important to recognise that while clinical services can choose to deliver specific services on specific hospital sites, so that centres of excellence may be developed, this is not an option for a Facilities Departments. Hospitals have to be cleaned, irrespective of where they are, car parking has to be provided, and so the list goes on. As services are decentralised to smaller, more economic sites, Facilities Managers in SEPT have found the cost of the services they are tasked with providing has risen because they have lost the economies of scale they were able to utilise on large sites.
The media have highlighted problems in both clinical and the support services provided by Facilities Management over the past few years (BBC 2009). A number of white papers have been written to address problems and shortfalls in these services, and the government compiled the National Standards in 2004 which Trusts are required to comply with and are subsequently rated upon. These are referred to in both the Introductory Guide to NHS Finance in the UK (2008) and by Pollock and Talbot in the New NHS Explained (2006). The reality for Facilities Managers is that they face the ever increasingly more difficult task of delivering excellent quality services alongside Cost Improvement Programmes.
The primary objectives of the Facilities Department are as follows:
To support the clinical services by maintaining the patient environment to a high standard in order to enhance the Patient Experience
To provide services within budget
To ensure that value for money is achieved by market testing
To comply with the relative standards, guidance and legislation relating to the services provided, i.e. waste, cleanliness
Consider three of the primary objectives, i.e. to remain within an allotted budget, ensure value for money is achieved and compliance with various standards and guidance. Achieving these objectives, could actually compromise the achievement of the fourth objective mentioned - the maintenance of the Patient Environment. The Patient Environment includes, not just buildings, but furniture, linen, security, cleanliness, porters, waste disposal, car parking and so on.
Having achievable objectives and targets is a motivating factor for managers and staff alike. Various theories regarding motivation at work (Mullins, 2005 and Lyne, 1988) have been written by experts such as Hertsberg (Motivation - Hygiene Factors), McClelland (Achievement Theory) and Vroom (Expectancy Theory).
Achievement of the objectives is a challenge and a balancing act. Vroom, in particular, believes that in order for either an individual or team to achieve that effort, performance and motivation are inextricably linked.
Vroom claims that the Expectancy Theory
"is not about self interest in rewards but about the associations people make towards expected outcomes and the contribution they feel they can make towards those outcomes."
This would appear to be correct in the case of the Facilities Department, however as theorised by Vroom, motivation can be affected by, having the right resources, e.g. time and raw materials, having the right skills and having the necessary support e.g. correct information.
It can therefore be deduced that if managers are to achieve their objectives and deliver the services required by the organisation, they need sufficient resources, i.e. staff and equipment, which have been budgeted for, and timely accurate information to assist them to manage and control the performance of those services.
CONTROL AND PERFORMANCE MANAGEMENT
The Facilities Department has a budget in excess of £3 million, which it must manage using the financial control systems. The department also gathers information about their various services to supply the Performance Department with the evidence they require to document compliance with the National Standards.
The Financial Control systems are known as Standing Financial Instructions, and are the policies and procedures which dictate how financial transactions must be handled. They include information on who may authorise expenditure, expenditure limits for authorised persons, and advice and documentation to use for specific instances.
Adherence to the SFI's can make a manager's job more difficult, especially when a specific task is required, or there is a necessary piece of equipment to be purchased that exceeds the manager's expenditure limit. The process then becomes protracted and the department can appear inefficient and may not meet its objectives or satisfy customer demand.
The 'authorised signatories' element of the control system, restricts who may sign off invoices, orders and other financial documentation, it can also impede the speed at which the staff in both the Facilities and the Financial Accounting departments can work. This in turn can affect the Trust's compliance with the Better Payment Practice Code, which requires NHS Trusts to pay their creditors within a specified number of days.
Atrill and McClaney (2006) state that accounting systems ensure that information is gathered and communicated to relevant parties both inside and outside the organisation. They also state that all accounting systems, whether in the private or public sector have common features which include:
The identification and capture of relevant financial information
Recording the information collected in a systematic manner
The analysis and interpretation of the collected information
The reporting of the information gathered in a way that meets the needs of the users.
Broadbent and Cullen (2007) also agree that financial accounting systems are recording systems, and ensure organisations comply with the Companies Act, and the NHS is no different from any other organisation in that they must produce audited accounts on a regular basis.
It is therefore necessary to have an efficient and effective accounting system in place for the organisation to operate in an efficient and effective manner, and for the Facilities Department this primarily translates into using the correct procedures for procuring goods and services, ensuring that invoices received are dealt with promptly and charged to the correct cost code and that income and recharges are similarly dealt with.
The information gathered and recorded by the Financial Accounting department is used by the Management Accountants to measure the performance of the organisation. However, the ratios and performance measures (other than budgets) that are used to measure performance are communicated only at Board level and to regulatory bodies rather than operational managers. All operational managers, including Facilities managers are given budget statements on a monthly basis. Any calculations such as the cleaning cost per square metre on different sites, would be determined by the operational manager.
The management accountants set the budgets, for both the organisation, and then for every directorate and department. For on-going services, for whom there are no major changes planned, incremental budgeting is used, i.e. planned expenditure is usually increased by a given percentage each year unless there are specific costs pressures that have been highlighted which will have a direct effect upon a manager's ability to meet a planned target. Budgets may also be decreased if circumstances change. Accuracy should be an important factor to consider because most theorists agree that budgets should be just right, rather than too easy or too hard to achieve (Hofstede 2001).
Where a new service is planned and implemented, zero based budgeting is used, i.e. each element of the service is costed to make up the budget.
Budgets may be considered as quite contentious. There are a number of opinions as to how useful, relevant and motivating they really are.
CIMA define a budget as follows:
"A quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows."
Cullen and Broadbent (2007, p115) believe this is a relatively restricted definition because budgets usually contain and make reference to both financial and non-financial information.
They also state that:
"it is important that planning and budgeting is not a mechanistic process, but a dynamic and interactive one involving every manager within the organisation. The involvement of all managers will allow their expertise to be properly used and will provide a strong motivational force." Cullen and Broadbent, (2007 p117)
Gowthorpe (2005) agrees with this view and states that the budget setting process forms part of a broader planning process and takes into account the strategic direction the organisation is taking, in that both short and long term objectives are taken into account, along with alternative courses of action that can be taken should circumstances change.
Atrill and McLaney (2006, p282) are of the opinion:
"the budget is essentially a business plan for the short term. It is likely to be expressed mainly in financial terms, and is designed to convert the long term plan into an actionable blueprint for the future."
They are of the opinion that budgets benefit any organisation and are useful and have explained this as detailed in the diagram in appendix 1.
Within SEPT, budgets are generally accurate in terms of the information they contain, and on the whole, achievable.
There are two main problems that the Facilities managers face with their budgets, firstly, for historical reasons, there are account codes on some of the Facilities budgets, that the managers responsible for those budgets have no control over whatsoever, and which, in some cases, account for the whole of the overspend on that budget every year.
And secondly, that budget statements are not available until the middle of the month.
Johnson and Kaplan (1991) suggest that corporate management accounting systems are inadequate for today's environment because they do not provide useful, timely information for performance evaluation of managers. Other theorists agree with this point of view, but highlight the fact that accuracy can be sacrificed for timeliness. (Gowthorpe 2005)
Whilst the general view is that an achievable budget will be a motivator for managers, it is also accepted that an unachievable budget, with elements that are uncontrollable will be a de-motivating influence. Gowthorpe in Management Accounting for non-specialists (2005, p153) states:
"Although the budgeting process is intended, ideally, to encourage participation and 'ownership', the practical effect may not be as intended. If the budget process is essentially authoritarian with little or no effective participation, middle managers and staff may feel resentful and disinclined to work to budget."
The Facilities Department is part of the People Management and Business Development Directorate. Managers are asked prior to the budget planning process if they are aware of any cost pressures that could affect budgetary requirements, but this is usually the extent of their involvement in the process, as budgets are agreed upon at Director and Assistant Director level.
As previously discussed, some theorists would argue that this lack of involvement in the budget setting process is not conducive to good management practices and will lead to lack of perceived ownership, and be a de-motivating factor. Others, (Atrill & McLaney, 2006) disagree and believe that budgets imposed on managers generally improve performance, but qualify this by adding that only achievable budgets are a motivating factor. However, they believe that where managers are involved in the budget setting process, their sense of participation and motivation is heightened because they are committed and feel they have a moral obligation to achieve the budgets they have signed up to.
It can therefore possible to see that budgets and the SFI's are two important elements of the control system, and that the financial performance of the department can be measured using these systems. However it is also apparent with regards to these control systems that they are not necessarily conducive to achieving goal congruence, as the Finance Department's objectives require rigid systems in place to control financial transactions, whereas the objectives of the Facilities Department place emphasis on flexibility of service provision.
Maximising Sales and income, whilst keeping costs and expenditure to a minimum, is the philosophy, which in the private sector should lead to profit. In the public sector, making a profit is not a requirement, but ensuring that services provided are giving value for money is extremely important, and as previously mentioned this is one of the prime objectives of the Facilities Department. When Butt & Palmer (1985) wrote about VFM in the public sector, they described how public services need to be accountable, by having strategic plans that considered how and when an organisation was to develop. These had to be fully costed, have operational objectives and targets linked to performance measures.
SEPT uses market testing and benchmarking to achieve VFM. The Cabinet Office (1997) suggests that the best outcome for a public organisation when looking to deliver services that represent value for money is to go through a competitive bidding process.
All Facilities services that will cost the organisation in excess of £50,000 for a three year period, go through a market testing process. Unfortunately Market Testing does not necessarily result in achieving value for money over the whole term of a contract because circumstances can change, or because there are insufficient monitoring arrangements and a lack of penalty clauses.
Adherence to a budget and proof that the organisation has tested the market to achieve VFM are two financial PI's. However these are PI's, which according to Johnson and Kaplin (1991) are of little use to operational managers because they need PI's which will consider the operational efficiency of their departments.
Although Financial PI's are of importance, particularly to external stakeholders such as Monitor and the Trust's commissioners, from an operational perspective, it is often the Non-financial Performance Indicators (NFPI) that give an alternative, but equally important measure of success, and are significantly more useful to operational managers and their directors.
"Some of the drawbacks of financial performance measures such as ROI can be addressed by assessing performance using a set of non-financial measurement. These do not have to be an absolute alternative" Gowthorpe (2008, p260 )
She goes on to say:
"The best way of assessing the performance of an organisation or division is likely to be via a combination of financial and non-financial measures." Gowthorpe (2008, p263)
In the Facilities department some of the NFPI's used affect the organisation as a whole, i.e. those that consider the cleanliness of our wards and buildings, the quality and quantity of the linen provided for patients, and whether patients, staff and visitors are protected by adequate security systems. These are audited and reported on via PEAT. The results are published by the relevant regulatory body, and although they are not a measure of financial success, they contribute to the success of the organisation, and without them, the value of the healthcare service provided, could be dramatically reduced.
Kaplan and Norton identified four perspectives that required key performance measures. To each of these, goals and critical success factors were allocated, and it was intended that the Balanced Scorecard was to be linked to overall business strategy. (Gowthorpe 2008).
Broadbent and Cullen (2007, p310) noted that:
"An important feature of this approach is that it is looking at both internal and external matters concerning the organisation" .
In summary, a number of Management Accounting theorists believe that The Balanced Scorecard (Kaplin and Norton 1992) is a useful and comprehensive method of measuring performance.
"In theory there's no difference between theory and practice. In practice there is."
Management Accounting theorists agree that organisations need accounting systems in place to produce information which they should pass on to operational managers to help them make decisions and work more effectively.
"Management Accounting describes the process of collecting, collating and reporting information that is of use to the managers of a business for making decisions, for monitoring past performance and for making the most efficient use of resources." Gowthorpe, Management Accounting for non-specialists, 2005 p96.
Johnson and Kaplan (1991), considered that management accountants no longer produce relevant information that could be easily used by operational managers for decision making and evaluating performance and stated:
"Today's management accounting information, driven by the procedure and cycle of the organisation's financial reporting system, is too late, too aggregated, and too distorted to be relevant for managers planning and control decisions." (Johnson and Kaplan, 1991, P1)
The financial control and performance measurement systems in place in SEPT are not perfect, and it would be fair to say this is to be expected, given that SEPT has been through a period of extensive change as it has moved to Foundation Trust status.
The author considers that the following recommendations would assist the Facilities Department to manage more effectively and lead to a more productive relationship with the Trust's Management Accountants:
Budget statements available throughout the month on the intranet. To be Available in draft format, in PDF format for budget holders.
Greater participation and input with regards to budget setting. This would include both the transfer off the budget of expenditure codes for which managers had no control, and the transfer onto the budget of expenditure codes that are relevant to the Facilities Department and performance managed by them.
Adopt a useful performance measures that relates to Facilities, i.e. The Balanced Scorecard. Using a management tool such as the Balanced Scorecard would take into account and balance the financial and non-financial performance indicators (see appendix 2)
CIMA Chartered Institute of Management Accountants
FT Foundation Trust
KPI Key Performance Indicators
NFPI Non-Financial Performance Indicators
NHS National Health Service
PEAT Patients Environment Action Team
PI Performance Indicator
ROI Return on Investment
SEPT South Essex Partnership Trust
VFM Value for Money
Glossary of Terms
National Standards A document published in 2004 compromising of 24 core standards and 10 developmental standards, and arranged within seven domains based upon existing requirements and describing acceptable levels of service which must be achieved within all NHS Trusts. (Pollock and Talbot 2006)
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BENEFITS OF A BUDGET
Provide a basis for a system of controls
Provide a system of authorisation
Promote forward thinking and identify short-term problems
Help co-ordinate the various sections of the business
Motivate managers to better performance
(Re-produced from diagram in Accounting and Finance for Non-Specialists (2005), ATRILL, Peter, and McCLANEY, Eddie.)