Select Committee on Foreign Affairs First Report


5  Management and leadership

Capability Review

97. In January 2005, the Collinson Grant review strongly criticised the management of the FCO. In response to our comments on the review's findings, the FCO said it expected to "see a step change in the quality of leadership across the FCO by 2008."[157]

98. The FCO was subjected to a further review between October 2006 and February 2007, as part of a sequence of "capability reviews" across Whitehall. The review's findings, together with the FCO's response, were published in March 2007. The review made many positive comments about the FCO. However, it also identified four key areas for action:

- articulating clearly (for staff, stakeholders and the rest of government) the Department's distinctive contribution to delivering the UK's objectives overseas and the implications for its future role, shape and business model;

- strengthening change management capability and communications, for example, bringing change programmes into a coordinated and integrated programme monitored by the Board;

- strengthening the strategic management of HR and knowledge to support the future role and shape of the Department, in particular developing a HR strategy with a workforce plan; and

- strengthening business planning processes and disciplines to underpin more effective performance measures and resource allocation.[158]

99. The review's findings were reflected in the Cabinet Office's survey of staff in the FCO Senior Management Structure, the results of which were sent to us by the FCO in February 2007.[159] The FCO performed better than external benchmark norms in most questions. However, four of the five lowest favourable scores concerned management: only 18% and 36% respectively thought that poor management was dealt with effectively in the Department and were satisfied with the approach to performance management; only 28% thought that change was managed well in the Department (5% less than the Senior Civil Service overall); and just 29% thought that the FCO Board modelled a culture of effective teamwork.[160]

100. We asked the FCO to update us on progress against the first key area for action in the Capability Review. Apart from its work on developing new cross-departmental PSA targets (discussed in Chapter 3 above), the FCO told us that it had also:

- established a strengthened Policy Planning Staff;

- created a new integrated Communications Directorate; and

- established a "Future Role of the FCO" project (discussed in Chapter 3).[161]

101. Regarding the second area for action, we asked the FCO whether, given the levels of confidence in performance and management expressed by FCO Senior Management Staff in this survey, it remained confident that it had the necessary staff skills to drive forward change.[162] In response the FCO explained that it had now created a new Director General of Delivery and Change and that the new Director had appointed an "experienced" Director of Change, on secondment from HM Revenue and Customs, to lead the new Change Unit. The FCO added:

We are also increasing the project and programme management skills of our people by ensuring an increased level of professional qualification among our people directly employed on our major change initiatives. At a local level we will introduce a Change Management course for FCO managers in the autumn designed to improve the skills and confidence of our operational staff to deliver and implement the major changes planned.[163]

The FCO has also told us that all of its Board Members are required to complete a "skills audit" when they take up their position.[164]

102. In both of our last Reports into the FCO's Annual Report, we have recommended that the FCO should bring itself into line with the rest of Whitehall by recruiting more professionally qualified, experienced people to top and middle roles in management.[165] We therefore welcomed the news in February 2007 that the FCO had recruited a qualified Management Accountant, previously Finance Director for the Metropolitan Police, Keith Luck, via open competition to the role of Director General of Finance.[166] We were also pleased to hear about the appointment of an experienced Finance Director for FCO Services, Clive Heaphy, formerly Finance Director of the English Sports Council (Sport England) and of a national commercial housing association.[167]

103. We also asked the FCO how it was improving its strategic management of human resources, in light of the third key area for action highlighted in the Capability Review. It replied

The key actions we are taking in response to the Capability Review - including a clearer articulation of how and where the FCO adds most value, and a more consistent and rigorous business planning framework - are designed to ensure that our resources are allocated to our highest priority activities and countries.

It gave the example of the expansion of the mission in Afghanistan (discussed in Chapter 7) as "evidence of the Department's determination to move resources rapidly to where they are most needed.[168] In September 2007, it also told us that it had recruited a professionally qualified HR Director.[169]

104. On the fourth key area for action (strengthening business planning processes), the FCO informed us that:

[…] a simpler and more consistent, corporate and professional business planning process has been introduced and is being rolled out across the Department. The new framework is built around Strategic Priority Strategies and Country Business Plans. This will increase the accountability of Strategic Priority Owners and Heads of Mission for delivery against their respective Strategies and Plans. We are developing a performance reporting framework to support the business planning reforms. This will apply consistently across the Department.[170]

105. Sir Peter Ricketts told us that he would be happy to brief us further on the steps the FCO was taking in response to the Capability Review's findings.[171] We welcome Sir Peter Rickett's commitment to improving management capability in the FCO, in particular signs that the FCO is opening up competition for senior management roles to professionally qualified, experienced individuals from outside the FCO. We recommend that in its quarterly management reports to the Committee, the FCO continue to update us on progress against the four key areas for action highlighted in the Capability Review.

Financial management

106. There have been signs since our last Report that the FCO's management of finance continues to need improvement. The FCO's Board minutes for April 2007 noted the Audit and Risk Committee's "desire to see further urgent improvements in the finance function within the next 18 months" and the urgent need to improve the quality and timeliness of financial data.[172] While the amounts lost to fraud in the FCO have fallen significantly since 2004-05 (from £957,000) they still stood at £344,000 in 2006-07.[173]

107. As in 2005-06, the FCO had a significant capital underspend over the financial year 2006-07. Its capital spend in 2006-07 was projected to be £139 million in its Annual Report, about 8% less than the budget of £150 million set out in the 2005-06 Annual Report.[174] When we wrote to the FCO about this underspend it replied:

[the underspend] should be seen in the context of an estate and ICT programme that stretches over five years. We fine tune spending across programmes towards the end of each FY to get as close to our annual targets as possible but it is very difficult to turn the flow of capital spend on and off easily. In this case a prudent approach was taken which resulted in an underspend.[175]

As we have commented in our previous Report,[176] the underspend is not in itself a huge difficulty since it can be carried over to this financial year. However, it does highlight poor programme management.

108. The FCO's Board minutes for April 2007 also showed that the FCO was facing pressure on its budgets for this financial year (2007-08). The minutes stated that this was due to "new commitments" since allocations were made in 2005, "ongoing uncertainties around visa and consular income" and "a need to free up resources to invest in preparations for shared services". As a result the FCO had to free up about £23 million and at its April meeting, the Board agreed reduce Administration budget allocations to Director Generals by £5million on a pro-rata basis, to hold back £10 million from the bilateral and Global Opportunities Fund budgets and to reduce the allocation of the Departmental Unallocated Provision to the Information Technology Directorate.[177] We asked Sir Peter whether the Board had assessed the impact of reining in budgets. He replied:

We certainly did […]. we assessed the impact of holding money back […] and we concluded that we could do it without doing violence to programmes that were already committed. Provided we took the decision by mid-year, we would be able to recommit some of the money if we found that we still had it.[178]

109. We are not convinced that the decision taken by the FCO Board in April 2007 to hold back money from some of its programmes will not have affected their work. We are especially concerned about the possible impact on bilateral projects and the Global Opportunities Fund. We recommend that in its response to this Report the FCO set out these programmes' current financial position and whether money has been recommitted to them.

110. There have been indications since our last Report that the FCO is seeking to improve its financial management. In 2006, the FCO ran a "Faster Closure exercise", committing additional resources and a dedicated Project Manager to closing the FCO's Resource Accounts for 2005-06. The Accounts were laid before Parliament in accordance with the Treasury target and received an unqualified opinion from the NAO.[179] The Resource Accounts for 2006-07 were also laid before the summer recess.

111. At the FCO Board's invitation, the NAO has recently reviewed the FCO's financial controls. The review took the form of a series of Key Control Frameworks covering the main finance business processes that surround Prism (Oracle). The NAO's overall conclusion was that:

[…] in most cases the process level controls exist but there appear to be fewer of the Management/Higher level controls identified as being in existence or operating. It is of course the latter that provide the overview to ensure that management information appears reasonable, and provides assurance that the process level controls are operating effectively. Put another way, good higher level controls are the key to reliable systems and data.[180]

Keith Luck told us that the review had proved "very useful in the management of our accounts; and although it will not of itself necessarily speed up the production of the accounts, it will improve and enhance their quality."[181]

112. The FCO's accompanying letter to the Committee stated that it had agreed to introduce the additional controls the NAO had recommended and that it would use the Key Control Frameworks as a basis for future internal audit testing. This letter also reported that the FCO had asked Pricewaterhouse Coopers to use their Oracle interrogation tool "GATE" to conduct a series of audits evaluating the controls within Prism, which would be copied to the NAO.[182]

113. The FCO is also acting in other areas. In June 2007, the FCO told us that it had established a new "Financial Skills Team", which reports directly to the Director General Finance and leads on policy and delivery, in order "to provide impetus and coherence to financial skills and training". It also informed us that the Audit and Risk Committee was about to consider a business case for an 18 month financial skills project which would aim to improve financial skills "through both internal staff development and a limited amount of external recruitment". The FCO described the key features of the project as follows:

[…] developing a financial skills framework that maps skills needed to jobs; delivering those skills through an improved finance training programme; establishing a trainee accountants scheme; and recruiting external finance specialists to a small number of key jobs.[183]

114. In August 2007, the FCO told us that it was continuing to improve its monitoring and reporting mechanisms in order to provide more accurate and timely management information on capital spending.[184] Keith Luck told us that the FCO was taking "action to improve the timeliness and quality and completeness of the Board reports—and those reports that go to our budget holders across the organisation."[185] The FCO is also seeking to combine a number of change programmes within the finance function, under a programme called Five Star Finance.[186]

115. The FCO has learnt lessons from the huge accounting fraud at the San Domingo Embassy in August 2006, which we considered in our previous Report. During our last Annual Report inquiry, the FCO told the Committee that "the fraud was allowed to take place because of non application of prescribed procedures rather than gaps in the control framework".[187] Keith Luck told us that in response the FCO "immediately wrote to all embassies to ensure that they saw the originals of bank statements, and […these] now come into our accounting centre in Milton Keynes." "In due course", he wanted the FCO "to move to a position where we can actually see the bank account details from the centre and have banking arrangements regionally or, indeed, globally around the world." [188]

116. We asked Keith Luck whether the FCO had considered internet banking. He replied:

Absolutely, and our intention under the shared services programme is to do precisely that, but we run up against some peculiar technical difficulties with internet and electronic banking, particularly around the security constraints that were referred to earlier; for example, the use of Firecrest. In the past few months, we have engaged actively with the Treasury, which is keen to run pilots with us. Oslo is particularly keen, as is Washington, for internet banking.[189]

117. Another lesson learnt from the San Domingo fraud was to focus the financial compliance unit on high cash posts. Keith Luck explained that the ever-increasing cash balances, which were a feature of the San Domingo fraud, had "become a red flag to us." He added:

[…]when our internal audit teams and the National Audit Office do a visit now, we ask them to follow through with four specific checks to highlight precisely the sort of fraud that we found at Santo Domingo. There is no complacency on our part […] [190]

118. We welcome the faster closure of the FCO's accounts and the steps being taken to improve financial controls and management in the FCO. We recommend that the FCO keep us updated on the progress it is making in this area, including its Five Star Finance programme.

Risk management

119. The FCO has separate operational and strategic Top Risks Registers.[191] During our last inquiry we asked for, and received from the FCO, a copy of its Strategic Top Risks Register, on a confidential basis. We questioned why Iraq and the Middle East were not identified in the five strategic risks listed.[192] In response, the FCO said that it had recently reformed the way risks were reported to its Board to ensure the Top Risks Register covered the range of different types of risk which required Board-level input.[193] The FCO Board minutes for April 2007 show that Iraq is now included in the Top Risks Register as Strategic Risk 5.[194]

120. The FCO refused to send us a copy of this year's Top Risk Register,[195] a refusal which we discuss in Chapter 8 on the FCO's transparency and openness. However, the FCO did include information on its strategic Top Risks in the quarterly management report it sent us in September 2007. This stated that, in June 2007, the register included the following six strategic risks: Iran, terrorist attack, Afghanistan, Iraq, EU Constitutional Treaty and Pakistan.[196] The PUS told us that the Middle East peace process was not included as a strategic risk because it was "a risk that is well known and fully managed in the FCO; we have been working on it for years." He added:

With an issue such as Afghanistan, Iraq or Iran, there is more likelihood of a sudden crisis demanding more FCO resources, and it is therefore the sort of risk that the Board thinks we ought to keep under regular review.[197]

The FCO's Board minutes for June 2007 show that the Board agreed that the strategic Top Risks needed to be "revamped to focus more on the implications for the FCO as an organisation".[198]

121. The quarterly management report also listed the FCO's six top operational risks in June 2007. These were: physical security, FCO resources, systems of internal financial control, workforce planning, IT systems, and UKvisas control.[199]

122. The FCO's Board minutes for February 2007 referred to the Board approving recommendations from the Internal Audit Department's review of the FCO's risk management framework.[200] Sir Peter Ricketts gave us further details of the review's findings:

The Internal Audit review of our risk management arrangements concluded that they were satisfactory. It came up with a number of specific points about the communication of risks and what we were doing about them through the organisation. The Board is keeping those regularly under review.[201]

123. We welcome the fact that the FCO's Strategic Risk Register now better reflects potential sudden demands on its resources, such as Iraq, and we recommend that in its response to this Report the FCO explain to us its proposed changes to the Register. We also recommend that the FCO share with us the recommendations of its Internal Audit Department's review of the FCO's risk management framework and the action it is taking as a result.

Management consultants

124. Sir Ivor Robert's valedictory dispatch was quoted to have said that there had been an "explosion" of reports commissioned by management consultants, many of whose recommendations had done "little more than reverse the previous recommendations of management consultants 15 years ago".[202] In oral evidence he elaborated on this further:

Collinson Grant was a bad joke. I do not know who dreamt up that scheme, but in management terms Collinson Grant seemed to reverse most of the proposals for the organisation of the Foreign Office that had been introduced 15 years ago. […] you would think that these sets of management consultants were in collusion, and that one would say, "I'll tell you what. One year you propose that we double the number of human resources people, and then we'll come along five years later and say that they should halve the number. We'll each get a handsome fee for it, and the Foreign Office will be left in the same position as it was at the start."[203]

125. The FCO's expenditure on consultants rose by 46% between 2005 and 2006, from £24.07 million to £35.4 million.[204] When asked whether the FCO relied too heavily on consultants, Dickie Stagg replied:

[…] the large bulk of the money, by far the biggest single sum, is spent on Hewlett Packard, which is our IT partner in developing a new global desktop system. Whether you define this as a consultancy is really quite an interesting and esoteric question, but I am absolutely sure that we need to have some high quality, private sector input into that process.[205]

126. We asked Sir Ivor whether he felt the FCO had sufficient expertise to reduce its dependency on outside consultants. He replied, "[o]bviously, we need outside help to do what we are trying to do but in my experience of the process we have not gained experience to handle it ourselves successfully.[206] Sir Peter Ricketts told us that he wanted the FCO's dependence on consultants to reduce during his time in post, arguing:

I think we ought to be trying, where we can, to grow expertise in the Department that can take on some of the roles that consultants are rightly and inimitably helping us with at the moment, such as our IT programmes.[207]

127. We welcome Sir Peter Rickett's stated objective of reducing the FCO's dependence on management consultants. We recommend that in its response to this Report the FCO set out the exact areas, in which it is currently being assisted by outside expertise, where it plans to build internal skills and the expected savings in consultancy costs.

Leadership forums

128. In our last Report we welcomed the FCO's Senior Leadership Forum, comprised of the Board and about 20 Heads of Mission, which meets every six months.[208] One aspect of the Senior Leadership Forum's role is "contributing to the development of policy" and the Forum has in the past discussed the UK's strategic relationships with China, India. and Russia. However, the Forum's main focus is on corporate issues.[209] Sir Ivor Roberts told us:

At the last one I attended there was a series of events at which we were going to be talked at on various corporate governance issues. I feebly protested, saying, "Shouldn't we have something on the agenda covering Iraq, the middle east peace process, Iran and so on?" I was told, "Oh, well, I expect we'll find some time over lunch to have a chat about that."[210]

129. The FCO also has an Annual Leadership Conference, which brings together Heads of Posts from all around the world and senior managers based in London. The purpose of the Conference is described as "to strengthen […] corporate leadership" and to ensure "the Government's international agenda is delivered across the network".[211] Sir Ivor's dispatch was reported to have said:

It's been an excellent initiative to bring together senior ambassadors from around the world twice a year but it would make better sense - even if occasionally uncomfortable for the home team - if we were allowed to debate foreign policy rather than corporate governance.[212]

In oral evidence Sir Ivor told us:

[…] something that I found quite shocking [was] when the Foreign Office assembled all ambassadors throughout the world a month before the Iraq war. The Iraq war was not on the agenda; it was not there to be discussed at all. That is extraordinary.[213]

130. We recommend that there should be discussions of both foreign policy and corporate issues at the Senior Leadership Forum and Annual Leadership Conference.

Grievance procedures

131. In December 2006, the NAO reported on its review of the FCO's grievance procedures, which was initiated after the receipt of three complaints from FCO employees. The review found that before 2004, when the FCO revised its grievance procedure in accordance with statutory changes, the Department's arrangements for handling grievances were deficient - written guidance lacked precision, investigating and resolving grievances took too long and management information was poor. The NAO report concluded that the revised procedure complied with good practice in most aspects, but set out areas for further improvements, which included:

132. In response the FCO said that it accepted all the NAO's recommendations and was putting together an action plan to implement them. There was one exception: the FCO declined to accept the NAO's recommendation that it should offer expert mediation to the three initial complainants, arguing that it had done as much as any employer could reasonably be expected to do to resolve outstanding issues related to cases that predated its current procedures and that no further action was appropriate.[215] In oral evidence Sir Peter Ricketts reiterated this argument and added:

[…] we would never have decided not to accept a recommendation of the NAO without serious thought. These were advisory recommendations and in the end […] we had to take a view on whether mediation would add to what we had already been through with these particular members of staff.[216]

David Warren also told us:

The NAO invited us to consider—and made it clear that we were at liberty to reject—the suggestion that we should reopen old cases that we considered to be closed and should invite independent mediation to resolve issues that we no longer considered to be disputes.

It is an important point of principle for us that, having gone through what we believe are exhaustive and very careful processes, and having done all that any responsible employer could reasonably be expected to do to resolve these disputes, we believe […] it would not be correct to reopen these cases […]. I recognise that that leaves an issue of disagreement, as it were, between us and the NAO. However, the NAO was content for us to respond in that way, as this was a report to FCO management.[217]

133. We conclude that the FCO's rejection of the NAO's recommendation to offer expert mediation to those individuals whose complaints initiated the review of grievance procedures sends the wrong message about its commitment to improving its procedures. We recommend that the FCO reverses this decision.


157   Foreign and Commonwealth Office, Eight Report from the Foreign Affairs Committee Session 2005-06: Response of the Secretary of State for Foreign and Commonwealth Affairs, Cm 6791, January 2007, response to recommendation 12 Back

158   Civil Service, Capability Review of the Foreign and Commonwealth Office, March 2007, pp 6-8 Back

159   Ev 21 Back

160   Civil Service, Foreign and Commonwealth Office Home and Diplomatic Services Highlights Report Back

161   Ev 78 Back

162   Ev 111 Back

163   Ev 114 Back

164   Ev 49 Back

165   Foreign Affairs Committee, Eighth Report of Session 2005-06, Foreign and Commonwealth Office Annual Report 2005-06, HC 1371, para 38 and Foreign Affairs Committee, Second Report of Session 2005-06, Foreign and Commonwealth Office Annual Report 2004-05, HC 522, para 57 Back

166   Ev 14 Back

167   Ev 49 Back

168   Ev 111 Back

169   Ev 118 Back

170   Ev 69 Back

171   Ev 52 Back

172   Unclassified minutes of FCO Board, 20 April 2007 Back

173   Ev 99 [Sir Peter Ricketts] Back

174   Foreign and Commonwealth Office, Departmental Report 2006-07, Cm 7099, Table 6, p 131 and Foreign and Commonwealth Office, Departmental Report 2006-06, Cm 6823, Table 10, p 85 Back


176  175   Foreign Affairs Committee, Eighth Report of Session 2005-06, Foreign and Commonwealth Office Annual Report 2005-06, HC 1371, para 45 Back

 Back

177   Unclassified minutes of FCO Board, 20 April 2007 Back

178   Ev 99 Back

179   Ev 14 Back

180   Ev 77 Back

181   Ev 99 Back

182   Ev 77 Back

183   Ev 78 Back

184   Ev 114 Back

185   Ev 99 Back

186   Ev 99 [Keith Luck] Back

187   Foreign Affairs Committee, Eighth Report of Session 2005-06, Foreign and Commonwealth Office Annual Report 2005-06, HC 1371, Ev 94-95 Back

188   Ev 99 Back

189   Ev 100 Back

190   Ev 99 Back

191   Ev 100 [Sir Peter Ricketts} Back

192   Foreign Affairs Committee, Eighth Report of Session 2005-06, Foreign and Commonwealth Office Annual Report 2005-06, HC 1371, para 56 Back

193   Foreign and Commonwealth Office, Eight Report from the Foreign Affairs Committee Session 2005-06: Response of the Secretary of State for Foreign and Commonwealth Affairs, Cm 6791, January 2007, response to recommendation 11 Back

194   Unclassified minutes of FCO Board, 20 April 2007 Back

195   Ev 114 Back

196   Ev 118 Back

197   Ev 100 Back

198   Unclassified minutes of FCO Board, 29 June 2007 Back

199   Ev 118 Back

200   Unclassified minutes of FCO Board, 27 February 2007 Back

201   Ev 100 Back

202   "Former envoy makes devastating attack on Blair's 'bullshit bingo' management", The Independent, 27 April 2007 Back

203   Ev 172 Back

204   Foreign and Commonwealth Office, Departmental Report 2005-2006, Cm 6823, Table 25, p106 and Foreign and Commonwealth Office, Departmental Report 2006-2007, Cm 7099, Table 21, p 146 Back

205   Ev 96 Back

206   Ev 177 Back

207   Ev 96 Back

208   Foreign Affairs Committee, Eighth Report of Session 2005-06, Foreign and Commonwealth Office Annual Report 2005-06, HC 1371, paras 32 and 33 Back

209   Connect, Issue 23, February 2007, p 3 Back

210   Ev 178 Back

211   Foreign and Commonwealth Office, Departmental Report; 2006- 2007, Cm 7099, May 2007, p 10 Back

212   "Former envoy makes devastating attack on Blair's 'bullshit bingo' management", The Independent, 27 April 2007 Back

213   Ev 177 Back

214   National Audit Office, Handling staff grievances at the Foreign and Commonwealth Office, 4 December 2006 Back

215   Ev 12 Back

216   Ev 107 Back

217   Ev 107 Back


 
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Prepared 19 November 2007