Improving forecasting at the Home Office

Allocating resources to ensure provision of the services required of the government of the United Kingdom is a mammoth task. To inform this process, each department provides the Treasury with a forecast of its spend every month. The Treasury uses these forecasts to manage total spending, meet annual budgets, and make decisions about resource allocation, so the degree of accuracy of each forecast has an impact on outcomes.

Government has generally tended to lag behind industry in keeping up with best practice and the most efficient methods. Furthermore, the 50 ministerial and non-ministerial departments that make up UK central government have operated in a very siloed way, and there has been little standardisation of processes between them. To build a modern finance structure, and put finance at the heart of decision-making, a financial management review was undertaken across government in 2013.

Angela Wilson, ACMA, CGMA, chief management accountant at the Home Office, has played a pivotal role in efforts to improve forecasting at the department following a government-wide goal to tighten forward-looking financial reports. Improved forecasting can, in principle, help minimise borrowing costs, promote more efficient spending, and help reduce deficits. In a large organisation such as a government, it can help identify underspends earlier or help manage any projected overspends.

The Home Office looks after security and policing, borders, and immigration in the UK. Some of these issues and services are of increasing priority in terms of urgency, making good resource allocation even more important. Focusing on increasing the accuracy of forecasting means finance has been better placed to help the board make prioritisation decisions with added confidence.

Wilson has sought to improve the management information that goes into the forecast and raised awareness of the significance and implications of accurate forecasting to colleagues inside and outside of finance and throughout government departments. Her approach has been a prime example of finance business partnering.

Here are some of the steps she took:

Forecasting and risk toolkit. To raise awareness of the significance of accurate forecasting, and to communicate best practice both to finance colleagues and budget holders from other disciplines, Wilson created a forecasting and risk toolkit as part of a cross-government team. The toolkit was launched at a government conference in 2016 and is available to colleagues via the Civil Service Learning website and the One Finance website.

Technical aspects covered in the toolkit include the principles of effective forecasting, such as aligning it to the operational model and business and strategic focus, as well as identifying the elements which should be prioritised.

Prioritising forecasting efforts. The prioritisation guidance section of the toolkit includes a matrix that enables users to identify high-materiality and high-volatility spends and ensure they are focusing their efforts in the right place. This involves forecasting volatile, material items on a monthly basis. "Whereas elements which are highly material, but very low volatility, such as the Police Grant, don't need to be monitored throughout the year," Wilson explained.

Encouraging decision-makers to test forecasts. The toolkit also contains a set of questions senior decision-makers should ask the operational or finance staff when they provide a forecast. The questions are designed to challenge and test the data to give decision-makers confidence in the robustness of the forecast and help them understand the volatility and sensitivity involved.

The toolkit invites individuals to consider the forecasting challenges faced in their section and plan ways to address those challenges.

Spreading the word. To spread the message on the importance of accurate forecasting and demonstrate how to use the toolkit, Wilson has been hosting lunch-and-learn sessions in other government departments and inviting budget holders (who are often non-finance people) to attend. Although some participants have an understanding of the impact any degree of inaccuracy in their forecasts have on their own department, the impact that has on decisions being made at the Treasury level comes as quite a surprise to some, said Wilson.

Aligning assumptions. "As austerity has kicked in and we have got ever-decreasing budgets to live within, finance has come into its own," Wilson said. "There have got to be more informed decisions, so we have to make sure that the forecasting is more accurate and that we're all talking about assumptions and risks in the same way."

Accountability and ownership. Part of the communication effort has been around accountability. "We talk a lot about accountability and ownership because we find that it's really important with our budget holders. It's their forecast — it's not finance's. Finance are there to advise, guide, and help them with the decision-making but at the end of the day it's pushing the accountability back to the budget holder."

Starting earlier. As well as improvements to tools and management information, building capability in the finance function, and educating budget holders and senior decision-makers as to how they can support more accurate forecasting, one of the first things Wilson and her team in the Home Office did was to start monthly forecasting discussions with business partners earlier in the month. Moving the conversation forward allows time to assess the consolidated picture and review major areas of concern. It also means a timely and informative board report can be produced. According to the Financial Management Reform Forecasting and Risk toolkit, this report "presents forecasts clearly and communicates the level and causes of uncertainty around estimates. Risks are understood, quantified and an aggregated view is presented to the Board."

Getting results

One outcome is that finance business partners are now spending less time reviewing forecasts and more time helping the business understand what their priorities are, explained Wilson.

The Home Office has seen forecasting accuracy improve by several percentage points in about 18 months, and the Treasury is seeing an improvement across the board.

Wilson is currently acting senior finance business partner for the Crime, Policing, and Fire group. The prioritisation matrix has enabled the group to focus its efforts on the high-materiality, high-volatility items, leading to improved forecasting, identifying underspend, and ultimately reprioritising spending more quickly.

Elsewhere, Wilson and her counterparts are using the improvements to identify slippage in major projects at an early stage and the effect that might have on future years' budgets, which is driving them towards more medium-term planning.

"If, for example, the first iteration of an IT project design doesn't work, or you hit a programming snag, you have a delay, which may mean £20 million of the allotted £50 million can't be spent this year. You've potentially got £20 million that you're going to have to spend next year which is not budgeted for.

"Then you ask, "˜What are the things we've got planned to start next year? Can we move some of them into this year to take up that slack?' Project 2 may not have been scheduled to start until April because the money was not available until then. But it might now be able to start in October and utilise some of the funding allotted to Project 1 that cannot be used this year because of the delay.

"So, not only do we ensure a value for money spend in-year, but we also alleviate pressure on future years, ensuring we still deliver all our projects."

Knowledge sharing

To ensure the ongoing development of knowledge on forecasting and the lasting impact and legacy of the project, Wilson convenes the government-wide forecasting and risk knowledge network. The network, which includes finance representatives and anybody in the department who looks after forecasting, meets every six weeks to share resources and best practice and promote collaboration between departments.

The group has been looking at how the toolkit is being used and what improvements could be made. Wilson also discovered through the network that different departments had different training materials, so she was able to draw on the best elements of each to contribute to the Government Finance Academy work on building forecasting training.

Lessons learnt:

• Simply having a knowledge network that people can be part of, and where they can clarify understanding, air problems, and share ideas, has proved very valuable and generated enthusiasm among colleagues.
• Make sure the people who are actually doing the job are involved in the network, because they have the best ideas and are aware of what the issues are, because they come up against them on a daily basis.
• Address the simple stuff first; don't look for big, complicated solutions.

Samantha White is a CGMA Magazine senior editor.

Avoiding common pitfalls of forecasting

Pitfall: Slow preparation.
Solution: A focus on the efficiency and effectiveness of core processes supported by quality people and technology.

Pitfall: Optimism bias.
Solution: Establishment of an open and honest culture based around accurate forecasting used as a course correction tool.

Pitfall: Lack of support for assumptions.
Solution: Clear explanations for assumptions made based on sound evidence of cost behaviours.

Pitfall: Poor data quality.
Solution: Consolidation of data sources and education of preparers to ensure a single version of the truth.

Pitfall: Lack of ownership and accountability.
Solution: Accountability assigned alongside budget management responsibilities.

Pitfall: Misalignment of incentives.
Solution: Alignment of forecasting to operational model and business and strategic focus (including the costs that are material and volatile).

Pitfall: Lack of forecasting skills in team.
Solution: Focused training and recruitment to enhance forecasting skills base.

Pitfall: Lack of understanding of risk and volatility in the forecast.
Solution: Investigation and clear documentation into the risks, volatility, and sensitivities of key cost behaviours presented alongside the forecast.

Source: Financial Management Reform Forecasting and Risk toolkit.