Back to the future? Public services after the next election

The pundits are thinking about the election due in or before next summer – the above advert was commissioned by the Independent for an article about what the 2010 election advertising might look like. Boards and managers should be looking forward too. They need to think through what the aftermath may be for them. Now is the time to start adding some policy risks to risk registers and maps.

It does look like a Conservative government is a real prospect. Since the New Year the opposition has opened up a big lead over the government. While opinion polls are very volatile and a lot can happen, spread betting odds point to a Conservative majority.

What does that mean? Of course, since 1997 Labour has continued with some pre-1997 reforms and innovations. For instance, City Technology Colleges as Academies; PFI as PFI; the NHS “internal market” as choice, competition and contestability in the health sector and beyond. Likewise some Conservative policies like Michael Gove’s on school choice are to some extent pursuing Tony Blair’s own plans.

If the Conservatives are elected, they are likely to indulge in institution re-arranging. However, there has been plenty of merging of quangoes and the demerging of ministries under Labour so we should be used to that. (It’s probably time to invest in the letterhead and nameplate industries.)

Arguably the biggest change and uncertainty would be around spending plans. Public services have had year on year real increases in resources. According to the Institute of Fiscal Studies’ Green Budget (pdf available) total public spending has risen from just over 36% of national income in 1999/2000 to almost 42% in and after 2006/7. (The Labour government maintained the Conservative spending plans for their first two years in office.)

What now with public spending? It’s going to be tough whoever wins the 2010 election. But it would appear that the Conservatives are turning up the rhetoric on this issue.

Not all that glitters is a Golden Peacock: Satyam’s prize for corporate governance

As a film fan I am wary of judging a film by the number of Oscars that it scoops (or not). My scepticism has been confirmed today when I learned that the scandal hit Indian out-sourcing giant Sayam won a Golden Peacock award from the World Council on Corporate Governance.

I think this may devalue Golden Peacocks – not that they had a very high profile before. It’s not the first embarrassed accolade – Enron scooped a prize and praise for its risk management.

(Very) lean years for public services: it’s official

There has been lots of media coverage of the Times article by the Audit Commission chief executive Steve Bundred about public debt Armageddon. This sentence effectively summarises his warning to the public and third sectors

Any managers of a public service who are not planning now on the basis that they will have substantially less money to spend in two years time are living in cloud-cuckoo-land.

Interestingly Bundred gets his history wrong when he says Mrs Thatcher secured an opt-out from the Maastricht Treaty on public debt levels. (She had retired to he House of Lords by 1992 and indeed attacked the Treaty.) However, he is right to ring the alarm on the implications of public debt levels for public services – whoever wins the election. The inevitability of the forthcoming lean years were clear to those who looked but the implications of the credit crunch and recession upon public borrowing have been less foreseeable twists.

College websites: in the eye of the beholder

I’m spending my morning collating information off college websites. Its interesting to see that some colleges are doing new things such as welcome videos. I know it’s not revolutionary but it’s a start.

What I find less hopeful is the way that so many colleges do not have a welcome from the principal. (Some even have a “Principal’s statement” without either a name or a face.) I am no fan of the cult of the individual but a college principal should be the human face of a college – so why not show her or him?

Even more perplexing is the fact that some colleges do not seem to bother with search engine optimisation. It’s not hard to promote yourself through google and other search engines. Yet some colleges do not appear to be seeking make their website top of google rankings – even letting pretty bad publicity sit at the top of the list. It’s as if these colleges are oblivious to the reputational damage which may be ongoing.

Less than zero: housing association business plans, rents and deflation

Earlier this month I mentioned that the new social housing regulator was urging housing associations to check that their business plans were robust in the face of a negative RPI measure of inflation impacting on the rent-setting formula. This week there has been the example of the train operators who have their regulated prices set in relation to RPI too.

I do wonder if housing associations (and, indeed, other social landlords) have realised that things are pretty serious. While CPI inflation is now around 3%, the RPI measure is close to zero – tugged down by falling housing costs. IDS have calculated that the average expectation of seven leading forecasters is RPI inflation reaching as low as minus 2.7% in September 2009 – the month when rents for 2010/11 will be set.

(Of course this will be good news for the tenants who have just been told that their rents in 2009/10 will be rising at an inflation-busting rate as a consequence of the RPI peaking in September 2008.)

How will housing associations cope with that squeeze on their rental revenues? They had better start thinking about it now.

Housing market: crash, bang, wallop, and more decline?

With a rush of house price statistics due over the next couple of days, its worth having a look at the latest issue of Roof with its depressing Housing market healthcheck. The article by Julian Birch includes a depressing graph from Nationwide which features on the housepricecrash.co.uk website. The graph shows the four cycles of boom and bust in the UK housing market since 1970. Basically the graph shows that house prices remain above their trend – for now…

House price falls are likely to be given a shove by the on-going credit drought. I was cheered up to hear one commentator refer to the end of the banking crisis. But then we had last weekend’s twitchiness in the USA about Bank of America and Citigroup.

Earlier this month The Economist made reference to Alt-A mortgages in the USA. After sub-prime this may trigger a sense of déjà vu. These mortgages have what might have once been called “innovative” features such as payments that are less than interest – so the debt grows for several years. Financial institutions have been digesting these rather toxic assets. As American borrowers come to the end of their not-even-interest-only periods, I suspect that even more misery will result. (House prices in the USA have fallen 25% already.)

Back to the latest issue of Roof … I would recommend you buy it if you want to read several articles on how the credit crunch is affecting the housing market and policy. However, it’s not an uplifting read when it looks like in 2009 the number of repossessions may be greater than the number of house-building starts.

Learning from the credit crunch: a series of unfortunate incidents (and examples of bad governance)

There’s lots of food for thought around risk, governance and regulation in the revelations from the former chief risk manager at HBOS, Paul Moore.

For people looking for some analysis about the lessons for governance arising from the credit crunch, I would particularly recommend a couple of documents.

There was an interesting article about Flaws at the top in the December issue of the Institute of Directors’ magazine The Director. The article quotes one observer as noting:

Corporate governance itself hasn't failed—the banks have failed corporate governance by not complying with it.

There certainly appears to have been a lack of challenge (and maybe understanding) of the risks that some of the banks were running.

A fuller survey of governance, regulation and the credit crunch was published by the Association of Chartered Certified Accountants (ACCA) in November. While a lot of the analysis was of an accounting technical nature and sometimes banking-specific, Corporate Governance and the Credit Crunch (pdf available) made points of wider relevance to boards in all sectors.

The ACCA made the general observation:

Many of the causal factors seem to be inextricably linked to a failure in corporate governance. Regulatory boxes may have been ticked but fundamental principles of good governance were breached. There should be more emphasis in the performance of corporate governance than with its regulatory compliance.

My personal view is there can be a sense that governance can become ritualistic as an unforeseen effect of rigid and poor regulation.

On the issue of risk management, the report noted:

Risk should have been more fully taken into account when making decisions about strategy or operations. Risk management tools have not always been fit for purpose.... More use should have been made of scenario planning as a risk tool. The risk management function needs to earn, and be accorded, higher status.

I would concur although it is worth remembering that the best sensitivity analysis and scenario modelling would not have necessarily factored in some of the arguably unforeseeable events that have come to pass.

The report links matters of risk to the ever-present fact of life whether we are talking about multi-national banks or community groups: the information imbalance between executives and non-executives. It usefully re-states the obvious:

There is a temptation for managers to make sure that information prepared for non-executive directors does not raise too many difficult questions. A partial explanation for boards not understanding their organisations’ risks is that information is sanitised by the time it reaches them.

It may not be much of a silver lining but hopefully board members will learn some lessons from what lay behind the current financial crisis.

Challenging boards: responding to the credit crisis with fresh thinking

I’ve spent most of my weekend at the National Housing Federation Board Members’ Conference hearing about the credit crunch and change (in the case of social housing, there is a transformed regulatory and investment landscape). Therefore, it was particularly timely to read in the McKinsey Quarterly an article by Andrew Campbell and Stuart Sinclair on Mobilising boards for change. (The article can be read and/or downloaded after registering.)

The article made the case for shaking up the natural rhythms of boards and challenging directors to re-examine their thinking. More than that it gave chairs some ideas about how to do it. For example, it argues:

Mobilizing the board to tackle the economic crisis requires a fundamental overhaul of how its members interact. The only solution is to force change. The chairman needs to underline the gravity and urgency of the situation by summoning the board to extraordinary “credit crunch” meetings, “survival” meetings, “does our plan still make sense” meetings, and “how can we turn this pain into an opportunity” meetings. Without disrupting the rhythm, anchored thinking will continue to dominate.

The housing association board that I sit on as vice chair had a credit crunch breakfast which was useful in terms of thinking afresh at the implications of events.

The article suggests the use of outsiders in challenging assumptions and facilitating a change in style. (I think this is a good idea and I charge very reasonable rates!) The authors refer to how one board was assisted by an outsider:

In one board, the work involved identifying the six to ten premises of the company’s plan for 2009. The outsider then interviewed each director and asked them to offer their opinions on each premise confidentially. When shown to the group, the results demonstrated that most of the board no longer believed the premises were valid.

Groupthink is unhelpful at any time. At exceptional and fast-changing times like this it is particularly dangerous.

Words of warning and wisdom from the TSA for housing association boards

I am attending the National Housing Federation's Board Members' Conference. Yesterday's opening speaker was Anthony Mayer, the Chair of the new housing regulator, the Tenant Services Authority (TSA).

Anthony Mayer repeated TSA themes about the importance of boards. He stated that the TSA would be relating to both execs and non-execs. The TSA see boards as directing strategy and scrutinising executives. (Of course this is the theory of good governance – but sometimes the practice of being a rubber-stamp is far too common.)

Mayer warned of up-coming issues arising from the recession and credit crunch:

1) Re-financing: housing associations need to check on how much finance they have as banks are expecting significant re-pricing of interest when re-financing is necessary.

2) Impairment: with declining asset values there may be some collateral damage (my pun – not his) on association balance sheets.

3) Negative inflation: as rents are set in relation to RPI, budgeting and financial forecasting could be complicated if/when inflation turns negative.

Mayer told board members to ask about these issues. They are potentially ticking bombs in need of defusing – or, as part of robust risk management, at least contingency arrangements if they explode.

Size doesn’t matter: evidence on college size and organisation performance

As someone interested in how size and mergers affect organisational performance in the public sector – particularly FE and housing – I was pleased to stumble across a study published by the Department for Innovation, Universities and Skills last year.

The study entitled The Evidence Base on College Size and Mergers in the Further Education Sector reviews the subject of college mergers including some economic theory. Laura Payne of DIUS observes:

Economic theory suggests that there may be potential for larger colleges to be more efficient.

The review certainly sets out the potential benefits of merger and the economies of scale. There is also some reference to diseconomies.

The most interesting aspect of the report is a statistical analysis of the performance of General FE colleges. It finds:

There is no evidence of a relationship between college size and success rates. There is some correlation between size and average OfSTED inspection grade, but the correlation coefficient is small and does not suggest a strong relationship.
...There is no relationship between college size and financial health.

The good news is that mergers do not on average do any harm:

There is no evidence to suggest that merged institutions perform any better or worse than institutions that have not been involved in a merger.

Ten (or eleven) things for audit committees to do in 2009

The KPMG-sponsored Audit Committee Institute has re-issued and up-dated its Ten To-Do’s for Audit Committees. Compared with the 2008 version, the 2009 edition reflects the issues of the credit crunch and recession weighing on corporates (and assumes the absence of the kind of finance committee seen in several sectors like FE and HE) so some of the content is less salient to not-for-profits. Nevertheless, the document is very useful in giving audit committee’s things to think and talk about.

I would recommend that all audit committee members download the document and regularly look at the Audit Committee Institute website.

Some issues raised in the document are worth reiterating here. The Ten Do’s urges audit committees to thoroughly review risk management processes:

With the benefit of hindsight and possible “lessons” from the financial crisis, consider the adequacy and effectiveness of the company’s processes for managing risk (management’s processes and the board’s.)

The document also reminds audit committees to do things that they often forget such a rigorously appraising their own performance and monitoring organisational culture and “tone from leadership”.

One thing that I would add as an eleventh thing to do is for audit committees to meet their auditors at least once a year without executive management being present. This may only take five minutes of a meeting but it is a vital way to get assurance.

Not-for-profits, strategy and finance: what they do teach you in Harvard Business Review

Almost anyone who has done a course related to business will have come across some fancy matrix for distinguishing different products in terms of market share, growth and/or profitability. Sadly many of those boxes don’t appear that helpful for the chief execs and boards of charities and others whose business is not-for-profit.

Last month’s Harvard Business Review had an article on Delivering on the Promise of Nonprofits by Jeffrey L Bradach, Thomas J Tierney and Nan Stone. It included the matrix above for developing financial and strategic clarity. It’s not rocket science but it does conceptualise the issues for organisations thinking about new developments as well as existing portfolios.

Three million homes – or not?

On this blog I encouraged people to sign up to the epetition on the Downing Street website urging a re-statement of the three million homes by 2020 target. Does the response do this? I don’t think so. Look at it here.

It’s a pity that the epetition only clocked up just over 2000 signatures. Building affordable homes in sustainable communities and sustaining the flagging construction industry (with new home starts halving last year) are now more important than ever.

Welcome to short notice inspection?

This year lots of providers of social housing (as we will soon be calling housing associations, ALMOs and council housing departments) will be getting a call from the inspectors. With the completion of the Short Notice Inspection pilots, its time for the real thing.

As SNI involve only a couple of inspectors on site for about three days, inspectors go a lot further. However, the good news from those that have been inspected is that SNI appear to be a step forward. For a start, there isn’t the months of inspection preparation (and distraction). The short, sharp shock of SNI would certainly appear to reduce compliance costs.

Perhaps there might be some more good examples of regulatory reform in 2009. I certainly hope so.

Decisions, risks and Chief Executives

McKinsey have just published the results of a survey of over 2000 executives into decision-making - and what practices are associated with good results.

The survey conformed the value of:

1) Performing sensitivity analysis and creating financial-risk models
2) Including comparable situations from one’s own or the firm’s experience
3) Examining the risks of a project combined with the risks of other projects in the firm’s portfolio
4) Creating a detailed financial model of the decision

This accords with my experience. Far too often I have seen risk analyses that look at each risk in isolation or are hurriedly undertaken as little more than a ritual. (I also think that exit strategies and other contingency planning is even more neglected.)

Interestingly it appears that Chief Executives play a large role in instigating both the most and the least successful decisions. The report suggests that Chief Execs may be more likely than others to gamble on bets with big upsides and downsides - or may be better able to secure approval for such bets. It certainly demonstrates the need for boards to act as an effective challenge to Chief Execs.

Public libraries as “recession sanctuaries”

As someone with pessimistic tendencies, I do try to look for a bright side. In the case of the credit crunch and recession, it is more challenging. One interesting possibility may be public libraries.

I read on the Freakonomics website that there are signs of a startling revival in the fortunes of libraries in America. Libraries are becoming “recession sanctuaries”. Will we see the same here?

My understanding is that libraries in the UK have been showing a declining trend (in books at least) in recent times. (And tightening public finances will pose a threat to their survival in the near future.)

As public space promoting knowledge and understanding as well as building civil society, any revival of public libraries would be welcome good news.

Roof on the financial health of on housing associations

It seems only yesterday there was all the Housing Corporation talk of housing associations "sweating their assets". Now the Tenant Services Authority has a watch list of half dozen or so housing associations in worryingly poor financial health.

The latest issue of the re-vamped Roof magazine brings more festive cheer (not). In its article on housing associations “On the edge” it sets out how 24 of the largest associations fared in 2007/8: 13 of them had interest payable greater than their operating surplus.

In the financial year 2008/9, things will be even harder. If associations breach loan covenants, lenders will play hard ball in negotiating new terms that reflect the new post-crunch world.

Merry Christmas.

How to survive the credit crunch

While the newspapers are full of advice on cutting household bills and more generally responding to the recession. There have been fewer handy hints for managers delivering public services. However, Public Finance recently carried a useful article by Roger Latham on How to survive the credit crunch. Here are some extracts:

1) prepare for the long haul.

2) watch out for the secondary effects … Existing contractual arrangements around the Private Finance Initiative are already showing signs of pressure. In the long term, the implications on the pension fund will show up in increased employer contributions. Will these still stand, or would there be further changes?

3) efficiency is more than a priority, it’s a necessity.

4) look out for displacement of policy objectives. Existing policy priorities at central and local level are going to change and with them the existing funding arrangements…

5) place shaping on hold? Some of the proposals currently being considered by planners and proposed by developers are going to come to a grinding halt. The value of assets and the cost of borrowing might suspend some long treasured plans. The community facilities promised through Section 106 agreements and the like might not come to fruition…

6) a collapsing capital programme? Valuable parts of your capital programme might be underpinned by capital receipts based on assumptions of land and property values that are now unachievable…

7) check the pattern and flexibility of service demand … You need to think now where your budget flexibility lies.

8) tax base losses.

9) propping up the local economy … Establish immediately what you will and won’t do in discussion with the business community to avoid raising unrealistic expectations.

10) don’t forget the people. The morale of your organisation might take a real hammering…

While some of these are issues specific to local government, other parts of the public and third sectors will often have similar issues – or be affected by how local government responds to the credit crunch and recession.

It’s definitely a good time for revisiting risk registers.

House prices bears, bulls and the National Housing Federation

A good place to read about the property crash is the website Housepricecrash.co.uk. An addition to that site is the inclusion of house price predictions. They vary from housing market bears suggesting falls of 50% from the market peak to bulls like the National Housing Federation who predict a 25% rise over the next five years.

I must say that I lean towards the bears. Capital Economics – who now forecast a fall of up to 35% over the next three years – had long warned that a house price crash was on the way. (Their voices should not have been so lonely. Ultimately house prices and incomes had to be brought back into line. Buy-to-let investors and permissive lending could only stretch the elastic so long.)

It is good to see that the NHF have moderated their predictions – last year the NHF was suggesting that house prices would continue to spiral with a 40% rise from 2007 to 2012. While the NHF was right to draw attention to the need for new homes and the problem of affordability, I still feel a bit uncomfortable. I have seen the suggestion on the blogosphere that the NHF was inadvertently helping to ramp up house prices.

It is worth noting some of the NHF’s members are painfully learning the reality of a market correction hitting property sales and land values.

Change and strategy – the perils of success

For some thought provoking blog posts on strategy and change I would recommend the Random Rantings of Freek Vermeulen of the London Business School. This week he flags up some research coming out of the States that indicates that Chief Executives from high-performing firms were significantly more likely to interpret changes in their business environment as a threat than the their peers at poor-performers, who tend to interpret change as a positive thing.

Vermeulen suggests that this may be the cause of the “success trap” about which he writes:

ample research and statistics show, for a variety of industries, that especially very successful firms have trouble staying successful, and adapt to fundamental changes in their business environments (such as new competitors, different customer demand, radical new technologies or business models, etc.). Over the years, they focused on the thing that made them successful (a particular product, service, production method, etc.) and as a result became even better at it.

The times are certainly a-changing. We live in manic macro-economic environment. For the public and thirds sectors a bracing funding regime looks set to be even tighter. On top of that there is major institutional change in many areas such as the end of the LSC in further education and the de-merger of the Housing Corporation in social housing. It all makes an interesting laboratory for success, change and strategy.