House of Commons - Foreign and Commonwealth Office Annual Report 2007-08

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

6 FCO SERVICES

125. On 1 April 2006, FCO Services was transformed from an internal department of the FCO into an Executive Agency. On 1 April 2008, it became a Trading Fund. This transition is discussed in more detail below. Since 2006 FCO Services has concentrated on delivering a range of services including language training, IT facilities, security, logistics (vans, cars, diplomatic bags), film and print production and protocol for internal visits. It employs approximately 1,000 staff and contractors, the majority of them employed at Hanslope Park estate, on the outskirts of Milton Keynes. Overall it comprises 36 different businesses.

126. In June 2008 we visited Hanslope Park, and the following month we took oral evidence from Chris Moxey, Chief Executive of FCO Services, and other witnesses from the organisation.

127. In its written evidence, FCO Services told us that its "overriding issue" is to "embed the culture change needed to develop a more commercially-focused mindset and to operate as one organisation, using consistent processes and interacting with our customers in a consistent way."[176] It states that it will look to build on the cultural shift that took place as a result of its change to Agency status by: embedding the use of a standard commercial process; ensuring availability of robust and timely management information; completing the organisational restructure, with a move away from a structure based on its services to one that is customer-facing; and ensuring the right mix of skills, both through developing FCO Services staff and recruiting for external specialist skills where needed.

Activities during 2007-08

128. FCO Services' annual report for 2007-08 states that its business strategy focuses on what it perceives to be its core strengths: the provision of secure ICT, secure logistics and the provision of a secure environment. The services which it provides fall broadly into seven market segments:

Biometrics and border control: FCO Services has "extensive technical expertise in biometrics". It has worked with UKvisas to "complete the global roll-out of biometric data collection technology in 135 countries, enabling UKvisas to enrol over one million biometrics applicants to date"

Secure network services

Establishment security

Global Management Services

Secure Logistics

Vetting

Translation and Interpreting: FCO Services' services include: interpreting; providing full textual translation; aligning different language versions of treaty and agreement texts; and translating and typesetting material for printed or electronic publication.[

177

129. During 2007-08, FCO Services' turnover increased to £130.2 million (from £120.6 million in 2006-07) and it attained a net surplus of £8.3 million.[178] The annual report also draws attention to a series of initiatives undertaken in the past financial year:

— "vital" construction projects in Afghanistan and Iraq to support British embassies and other UK Government personnel operating in these countries, including a new transit facility at Baghdad international airport and continuing improvements to the Baghdad Embassy;

— work with Hewlett Packard "to design, plan and begin deploying the FCO's new global IT infrastructure";

— growing its vetting business to include customers from other government departments and the private sector;

— shipping over 100,000 diplomatic bags securely;

— rolling out biometric data collection with UKvisas, and

— designing and implementing secure video conferencing facilities.[179]

Trading Fund status

130. On 1 April 2008, FCO Services became a Trading Fund.[180] In July we asked Chris Moxey how the transition had gone. He replied that:

181

131. As a Trading Fund, FCO Services remains an integral part of the FCO. The Foreign Secretary retains overall strategic control, the FCO must agree its annual business plans, and the intention is that, even as revenue from non-FCO customers grows, the FCO will remain FCO Services' "principal customer and stakeholder".[182] However, as a Trading Fund, FCO Services will enjoy greater commercial and management freedom.[183] It is intended that FCO Services' revenues will be wholly self-generated and that it will be possible to retain and invest any future surpluses to support further development.[184]

132. During our oral evidence session we asked about the ways in which the Foreign Office might benefit from FCO Services' Trading Fund status. Mr Moxey told us that it would help make the FCO a more "professional customer" because it had to be clearer about "how it wants services provided and about what the constituent parts of value for money are to be."[185] Mr Moxey also raised the issue of lower costs:

186

133. FCO Services' largest customer is the FCO: 90% of FCO Services' turnover (£117.7 million) was generated from the FCO in 2007-08, with the remaining 10% coming from the wider market (£12.5 million) comprising other government departments and the private sector.[187] In our last Report we welcomed the benefits that had been realised as a consequence of FCO Services' earlier transformation into an Executive Agency, but expressed our concern over the risk that both its conversion to a Trading Fund and its increasing reliance on non-FCO clients could result in poorer quality services for the FCO.[188] In its response to our Report the FCO told us:

189

134. In oral evidence to us, witnesses from FCO Services told us that the likelihood of tighter budgetary constraints being imposed on the FCO in the future, combined with the gradual conclusion of a number of large-scale FCO projects, meant that it would be necessary to look to new markets and new customers including private sector clients. We were also told that FCO Services' aim is to increase the proportion of its business conducted in wider markets to 30% of its business, and "perhaps more", over the next three to five years.[190]

135. We asked FCO Services whether, in the light of the recent economic conditions, they anticipated having to scale back their ambitions to engage more external customers. Mr Moxey told us that he was conscious that it will be difficult to secure new business given the current climate, but that expansion remained crucial nevertheless. He added:

191

136. We also queried whether FCO Service's targets for 2008-09 were attainable given that FCO Services failed to meet its target for income growth in wider markets during 2007-08, achieving an increase of 1.4% against a target of 5%.[192] Mr Moxey acknowledged that the target had not been met but argued that this did not necessarily present an accurate picture of the overall strength of the organisation:

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Assessing performance in 2007-08

137. FCO Services achieved a weighted average Return on Capital Employed (ROCE), an indicator of profitability, of 90.9% in 2007-08 against a target of 3.8%. The FCO Services Annual Report and Accounts explains that "although this figure may appear high, the ROCE achieved is a reflection of the fact that FCO Services is a people-based organisation with a disproportionately small asset base relative to its turnover".[194]

138. We asked FCO Services witnesses whether they thought that its 2007-08 target had been set too low in light of its actual profitability performance. Clive Heaphy told us that the figure is "calculated on an average of the balance sheet over the course of the year, and that average brings out the 90%". He added:

195

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139. We conclude that FCO Services' existing target for measuring profitability is wholly inappropriate. We recommend that FCO Services sets itself an internal profitability target that is more suitable and challenging.

140. In the area of customer satisfaction FCO Services only narrowly missed its 2007-08 target. 84% of customers were rated as satisfied or very satisfied against a target of 85%. FCO Services' Annual Report described this as "an impressive result, particularly given the significant amount of internal change we have undertaken during the year".[197]

141. We conclude that FCO Services has made a promising start following its transformation to a Trading Fund. However, it is still very early days, and there must be concerns about its ability to expand into wider markets under current economic conditions. We shall continue to monitor its performance.

EFFICIENCY TARGETS AND THEIR IMPACT ON STAFF

142. In its written evidence to us, FCO Services stated that it had to deliver £2 million in savings through price maintenance in order to support the FCO in achieving its CSR 07 obligations.[198] We were told that the aim was to meet its target through: greater use of strategic procurement; reducing the ratio of contract staff to permanent employees; improving the cost efficiency of its business practices; increasing staff utilisation; removing duplication through the use of standard processes and, focusing on billable work.[199]

143. FCO Services had a target to increase its staff utilisation rate (the number of hours for which it billed as a percentage of total worked hours) by 5% in 2007-08. It met this target, with the utilisation rate increasing by 7.8% over the last financial year. Its annual report states that this "provides encouraging evidence that our recent efforts to increase our focus on billable work and reduce low value-add activities are starting to have an impact". [200] Its target for 2008-09 is to achieve a staff utilisation rate of 65%.[201] Mr Moxey said that the rationale behind this was two-fold:

202

144. We raised with Mr Moxey our concern that vacancies could affect the accuracy of the utilisation rate. He agreed that there was a difficult balance to be struck, and added, "[t]hat is why the FCO, and the advice that we together offer the Minister in setting these formal targets, is not setting the hurdle too high for us, given the change in arrangements that we have ahead of us in this the early stages—our first year—of our being a Trading Fund."[203]

145. FCO Services' annual report revealed that in 2007-08 it spent £17.3 million on payments to contractors, amounting to 19.9% of cost of sales and 14.2% of total costs excluding restructure. It also spent £9.4 million on agency staff and fee paid officers, equating to 7.7% of total costs excluding restructure, compared to £44 million on non-agency staff costs.[204] The annual report argues that this is necessary to ensure an appropriate skill mix is available, but adds that, "[o]ne of our key priorities will be to build the capabilities of our permanent staff, in order to reduce gradually the number of external contractors we use."[205]

146. We welcome FCO Services' commitment to reduce its reliance on external contractors and to focus on increasing the capabilities of its permanent staff. We recommend that in its next annual report, FCO Services should explain what progress it has made towards this goal. We also recommend that the FCO should take steps to ensure that the pressure on FCO Services to secure efficiency savings does not compromise the quality of the work it undertakes.

147. In our last Report, we expressed concern about the impact that redundancies resulting from FCO Services' business strategy could have on staff morale.[206] The Government pledged to keep the issue under review and monitor staff feedback in a variety of ways including via a survey looking at leadership, change management and communication and through the 'Investors in People' process.[207]

148. On the issue of how FCO Services measured staff satisfaction and dissatisfaction, Chris Moxey explained that surveys of staff were carried out by both the FCO and FCO Services.[208] These surveys showed that staff feel more engaged in the change process than they had previously, although he acknowledged that, "I suspect that there are shortcomings that we need to address" and that "we need to do more to reach their hearts and to help to bring greater salience to, and understanding of, the journey that we are undertaking together."[209]

149. We welcome FCO Service's recognition that staff engagement and satisfaction is crucial to the future success of the change process which is currently underway. We recommend that in its response to this Report the FCO provides us with an update on how FCO Services is addressing concerns identified in staff surveys.

176 Ev 131 Back

177 Foreign and Commonwealth Office, FCO Services: Annual Report and Accounts 2007-08, HC 610, 30 June 2008, pp 14-33 Back

178 Ibid., pp 5 and 10 Back

179 Ibid., pp 5 and 10 Back

180 A Trading Fund is a Government department, or an Executive Agency or part of the department, which has been established as such by means of a Trading Fund Order made under the Government Trading Funds Act 1973. The significance of a Trading Fund is that it has standing authority under the 1973 Act to use its receipts to meet its outgoings. A Trading Fund can only be established with Treasury agreement. Back

181 Q 2 Back

182 Foreign Affairs Committee, Foreign and Commonwealth Office Annual Report 2006-07, para 137 Back

183 Foreign and Commonwealth Office, FCO Services: Annual Report and Accounts 2007-08, HC 610, 30 June 2008, p 4 Back

184 Ibid., p 5 Back

185 Q 19 Back

186 Q 20 Back

187 Foreign and Commonwealth Office, FCO Services: Annual Report and Accounts 2007-08, HC 610, 30 June 2008, p 74, Table 2 Back