Scottish Government

Chapter Seven Strategy, Risk and Financial Issues

Strategic Planning, Corporate Values and Behaviours

7.1 All colleges consulted adopted some form of strategy away day as a means of drawing value from the expertise of Board Members. Inevitably, the development of a strategic plan is iterative and involves staff, senior managers and Board Members. However, the format for engagement of Board Members in developing the strategic plan and operating plan falls into one of two formats with the timing of staff engagement being the only key difference:

• Up-front staff engagement: Following development of a draft strategic plan by the SMT, staff workshops are held and staff review strategic priorities and implications for the strategic development plan. Thereafter the SMT revise and further develop the draft plan, which is submitted for Board review at a residential strategy session or away day(s). Inputs from the Board are used to finalise the Strategic Plan which is then considered / adopted by the Board; or
• Top-down model: Alternatively, and our impression is that this is the norm among case study colleges, following reflection upon performance against the previous corporate plan, and identification of key changes and drivers of performance going forward, the SMT will draft a revised plan and present their draft ideas at a strategy day or days (again these often involve a residential format) to the Board. The Board then ratifies or amends the strategic goals for the year ahead. These strategic objectives and themes for the year ahead are then passed to SMT who revise the Draft Plan and circulate to departmental heads and other senior teaching and support staff who then lead development of the operational plan complementing the strategic plan.

7.2 A key aspect of these strategy sessions is that, regardless of whether they are on-campus or off-campus, and regardless of whether they are of one or two days duration, they allow an opportunity for the Board to interact with senior managers and departmental managers, hear presentations on market outcomes / performance and departmental objectives and plans. Moreover, the events allow Board Members to interrogate senior managers on performance against the outgoing strategic and operational plans in order to enhance and/or validate their understanding and inform their strategic thinking.

7.3 This event can also be used to inform staff of the Board's view of values and behaviours expected of staff and to ensure staff understand the strategic direction the Board wish the college to pursue. In parallel, the away day can also help new Board Members to get a feel for the strategic context and key personnel within the college.

7.4 Aside from this, the away day(s) can help the Board to review the self-evaluation undertaken at Board level, with outputs (remediation) feeding into the operational plan and corporate plan.

7.5 While it is not always the case that Boards have viewed the strategic planning process as ideal, with one commenting that their previous college strategic plan was not strategic at all, but rather " ad hoc operational" (subsequently being addressed in the 2006/08 plan), our impression is that the colleges in general have made effective use of their Board's time and expertise in strategic planning, recognising that Board Members are volunteers who have competing time commitments.

7.6 Ideas from the sector to improve the Board's effectiveness in strategic planning include use of the strategic planning process to incorporate portfolio planning.

7.7 What is also clear is that Boards are acutely aware that once the strategic planning cycle is completed their role in monitoring performance becomes critical to the delivery of those goals and values. Hence, audit and risk management are examined below.

Risk Management in the College Sector

Developing and Monitoring of Risk Registers

7.8 A critical function of Boards of Management is to oversee development of a central risk register for the college in consultation with the SMT and sub-committees of the Board. In a number of cases, we have also been made aware of the development of a separate risk register for major capital projects, which we would regard as good practice.

7.9 The Audit Committee, as described elsewhere in this report, is critical to developing an effective risk management process, and compliance with relevant policies and procedures. Where there is a strong audit culture, this can play a pivotal role in development of the college, as one respondent stated:

"A strong Audit Committee and an effective audit ethos are important. Audit must not be seen as part of a blame culture, as it too often is in the public sector. Rather it should be seen as constructive, setting out how to do things better."

7.10 The relationship between the Audit Committee, the Internal Auditor, the sub-committees and the full Board is critical in identifying and assessing emerging risks to the college, be they financial or in terms of its wider performance. Our impression based upon the case studies is that Audit Committees, in practice, are providing such a role. ASC training and the recently published guidance for College Board Members has helped cement the audit culture.

7.11 As an example, one Chair of Audit consulted, following attendance at a training session held by ASC, had initiated a restricted session in Audit Committee for which the SMT, Principal and minutes secretary (in this case, the Principal's PA) were excluded. The session observed was a useful opportunity for the Audit Chair and lay members to interact with the internal auditor and receive guidance and serves as a useful approach for other colleges to adopt.

7.12 However, responsibility for risk management does not fall solely upon the Audit committee and its Chair, as a comment from one college highlighting the relationship and interdependence is typical of practice in the sector between Audit and the board and sub-committees shows:

"The Audit committee prepares an annual audit needs assessment which takes full account of the college's value-for-money agenda, perceptions of financial (and other risk) and governance. Audit reports by internal auditors are also reviewed routinely by appropriate standing committees to utilise the specialist skills and knowledge of members."

7.13 The key role played by the sub-committee structure underpinning the Board was highlighted by one college that stated:

"A great deal of Board business is undertaken via the Board's standing committees. This is reported to the board, including issues that relate to the management and monitoring of risk."

7.14 In general, based upon our case study consultations, it does appear that sub-committees will look after or oversee variance against risks in their respective areas of influence, e.g. health and safety, WSUM count against target, recruitment and retention against target, financial outturn against budget, compliance with procedures (e.g. in relation to HR, and the overall staff complement), among other measures. The members participating with sub-committees have access to specialist expertise and also develop their own knowledge within the area and act as the first line of defence for the full Board.

7.15 Utilisation and understanding of the risk register, where it involves or implies specialist understanding, is limited by the somewhat dense nature of these sometimes very detailed documents. It has been indicated by a number of consultees that moving to a system incorporating a "traffic light warning system" with green for "healthy", "amber for warning" and red for "high risk / significant variance" has been hugely beneficial in allowing all Board Members to have an at-a-glance view of the level of risk to the college at any one time, while still allowing the Audit Committee and Sub-committees to oversee in more detail their area of influence.

7.16 Moreover, evidence suggests that at least two of the eight case study colleges do not regularly visit their risk register and indeed in one case a new Board Member had at no point prior to being interviewed seen the college risk register or been introduced to it during induction. Clearly, while possibly an isolated case, this is an unsatisfactory state of affairs and suggests improved accessibility and greater rigour in scrutiny at Board level may be required in some colleges.

Survey Findings - Risk management and decision making

7.17 The College survey indicates that colleges are generally satisfied with the effectiveness of their monitoring procedures, identification of risk, risk management, understanding and utilisation of management information and the quality of decision making.

7.18 The aspect of risk management that was considered to have the greatest scope for improvement was in respect of the effectiveness of risk management processes. For that measure, one-in-five colleges responding found their arrangements in this area to be less than effective. Also, one-in-seven did not give a strong endorsement of the quality of the management information received.

Figure 7.1 Perceived Effectiveness of Aspects of Risk management and Decision Making

Source:DTZ College Survey, Question 4.1

7.19 Qualitative feedback from the survey of Chairs highlights the seriousness with which Boards engage with the risk assessment process:

Financial Management in the College Sector

7.20 As Figure 7.1 above indicates, the overwhelming majority (33 of 36) of respondents indicated that they have effective monitoring and control of their college finances. Based upon the evidence provided by the colleges consulted and the interviews with Board Members, Principals, staff and students we are satisfied that college Boards in general do take considerable effort and attach a high degree of importance to a detailed scrutiny of their finances. In fact, as well as most colleges citing financial management as a strength, a number of college staff and students indicated that perhaps the financial stability of the college was such an over-riding concern of their board that the quality of the learning experience and / or the range of programmes available were neglected.

7.21 Feedback from consultees throughout the study has highlighted the significant financial progress that has been made in recent years, driven by a period of relative consolidation in WSUMs growth, declining access to European Structural Funds and colleges' actively seeking to diversify their income base away from SFC dependency.

7.22 Feedback from the case studies has highlighted the problems colleges face in the annuality of funding. Unlike business in the private sector, colleges have an annual funding allocation that restricts the scope to plan over a three or five year time horizon, and a methodology and financial monitoring agreement that presents significant difficulties and uncertainties for all colleges, particularly those with 'lumpy' student / WSUM numbers due to market conditions. Funding is supply-led rather than following the learner and hence current arrangements restrict a college's ability to carry over WSUMs, as well as stifling the ability of the college to be entrepreneurial, as the annual claw back arrangements produce risk aversion / responsiveness to demand. There was a very strong view from colleges to change the current annual financial cycle to one based on three years.

7.23 Another considerable area of concern is the uncertainty of the impact of treatment of pension liabilities arising from participation within local government pension schemes prior to Incorporation. These now appear to be under-funded given investment market performance. A considerable degree of nervousness exists as the treatment of this issue will be settled by the External Auditor appointed by Audit Scotland and it has the scope, if interpreted too pessimistically, to put all colleges into an on-paper deficit position, due to the adjustment / allowance that may be required to the income and expenditure account for the college. In theory this will be treated uniformly, but colleges are concerned as to how this will be applied across a diverse sector with the risk that they face being pilloried in the press for what is largely an accounting adjustment.

7.24 However, their concerns notwithstanding, the colleges visited seemed to be taking adequate and effective steps to examine the financial impact of this change and to ensure that appropriate action was taken. Across the piece, the research team was impressed by the level of financial diligence of Boards and their willingness to challenge negative budgets or question the business rationale underpinning investment proposed by senior managers.

Monitoring Financial Performance

7.25 College financial monitoring appears to be rigorously pursued by Board Members and the strength of the audit culture, the external pressure on funding and the business background of many members has helped significantly in this regard, in keeping it at the forefront of thinking.

7.26 If there is a concern, it is in the ability of new members to get to grips with the financial jargon and peculiar nature of college sector funding, while a number of colleges cited the financial management accounting information as being an area where improvements in terms of clarity and real-time accuracy of information can be enhanced.

7.27 A number of colleges cited keeping on top of the SFC circulars on funding as one of the key challenges they face.

7.28 However, a number of good practice examples are evident, many of which are also integral to effective conduct of risk management:

Summary & Recommendations

7.29 Strategic Planning & Monitoring - we have found effective strategic planning systems and a good level of engagement of Board Members with the Strategic Planning of the college. These processes are supported by away days which help to inform/revise draft strategic plans, but also allow interaction between academic and support staff and the college Board of Management. Board Members also appear to be very aware of the need to focus on monitoring of strategy and operational plans to ensure the college remains on-track. DTZ has no specific recommendations in this area.

7.30 Risk Management - in general, the majority of Chairs believe that they have 'effective' or 'very effective' risk management processes (80%). Furthermore, their effectiveness in addressing highlighted risks is assessed to be even stronger at nearly 90%. The case studies supported these findings, with Boards treating the risk management process very seriously. This was evidenced by the range of good practice that was identified. The objective is to encapsulate and share this good practice.

Recommendations

7.31 - it is recommended that good practice in risk management be disseminated throughout the college sector. This should draw upon the following good practice findings:

• The role of Audit Committees and the specialist sub-committees in delivering risk management is absolutely critical;
• The use of separate risk registers where significant capital projects introduce a new area of risk;
• Risk registers need to be regularly reviewed, calling upon the sub-committees and executive/senior management team expertise, produced in a format that is simple for non-specialists to understand, perhaps using "traffic light" colour coding;
• Communication of Performance Indicators - either in real time (say via a college intranet) or regular distribution, a short list of the key PIs that are of critical importance to the college, such as recruitment, retention, WSUMs against target and key financial PIs against budget (e.g. cashflow position, as treasury issues are critical), should be communicated.

7.32 Financial Management - in DTZ's view college financial management appears to be rigorously pursued by Board Members and the strength of the audit culture, the external pressure on funding and the business background of many members has helped significantly in this regard, in keeping it at the forefront of thinking. This is supported by the views of the stakeholders consulted and the survey of college Chairs, of whom > 90% believe that they are either 'effective' or 'very effective' in monitoring and controlling college finances. The main constraint facing colleges is the annuality of SFC funding and the problems this presents in managing their business.

Recommendations

• There was a very strong view expressed from the college sector to change the current annual financial cycle to one based on three years and DTZ endorses this as a recommendation of this study.
• As part of the induction process it is recommended that new Board Members are offered specific training to fully understand the financial systems, 'jargon' and acronyms in use the college sector and the nuances of its supply-led approach (often difficult for Board Members with a private sector background to grasp); and
• The implications of how the External Auditor appointed by Audit Scotland is going to treat pension liabilities is one of the key concerns of colleges. It is recommended that SFC review any implications for the colleges and, in particular, to identify the extent of differential impacts and how they are reported.