The Financial Director interview - The heart of the matter

And we all like to think of ourselves as experts on the NHS – which makes it a particularly emotive topic whenever someone tries to change things. Take targets, for instance. Targets have been a political football for years, going back years to the time when the NHS was crumbling under the burden of waiting lists.

As these things happen, the big news story about targets broke about a week after our interview with Douglas when John Reid, secretary of state for health, announced a huge shake-up in the system. “Health targets ditched”, screamed that day’s London Evening Standard, claiming that “dozens of key pledges” were being “abandoned” in a “major U-turn”. The BBC Six O’Clock News also used words such as “ditching”, while the New Statesman wondered whether the government had a target for reducing targets, and suggested that the proposal to get rid of more than 700 central targets to replace them with 24 ‘core standards’ and ten ‘developmental standards’ was an indication that “Whitehall is meeting whatever targets it sets itself for inventing gobbledegook”.

Reid wrote to the Evening Standard to complain that its story was misleading and that his aim was to devolve power to the “front line”, enabling staff to set their own goals for quality and standards. Other officials from Reid’s office are reported to have leaned on BBC News which subsequently claimed that the government was adopting a “slimmed down set of targets”.

Looking back at the transcript of our interview – which finished about 15 minutes before Douglas had a meeting with Reid (to finalise the targets proposal? Who knows?) – we see that in fact the word “incentive” is used more often than the word “target”. The word “standards” is used most of all.

Ironically, given the furore that would break within a week, our conversation with Douglas on the subject of targets is more concerned with the difficulties they cause, not their worth. With so many different – often conflicting – targets, we wonder whether this actually serves to make the Health Service ungovernable. Douglas puts up a stout defence of what’s gone on before, arguing that “the targets don’t come from people sat with wet towels around their head”, he says. “Everything that we’ve tried to do in terms of setting targets and standards is to reflect what people are saying are their priorities.” He adds, however, that the number of targets has actually been decreasing over a number of years, “to focus on priority areas”.

But there have certainly been instances of health service managers engaging in little tricks that help nudge the statistics the right way – or even blatantly falsifying the records. The point is that, without what we call a ‘common sense override’, what gets measured gets massaged.

“I don’t know any instances where there was no ‘common sense override’ for people,” Douglas insists, though he admits: “Targets can create some perverse incentives. But they also give very, very clear focus on what matters to people.”

Moreover, Douglas maintains that whenever there has been manipulation it has been dealt with – “and it is very, very, very small scale”, he says. But, without complaining about how the press has treated the NHS, he says that individual instances of abuse “are just pulled out of all proportion”.

The change in the structure of targets comes as part of a major shift in the balance of power in the health service from Whitehall to the front line organisations – which is why there is now so much less emphasis on nationally-set targets. “As the NHS gets to a position where the standards that people are expecting are being delivered universally, then that opens up greater scope for more flexibility locally for particular local priorities,” Douglas says.

Organisations go through “different phases of development”, says Douglas, who has been at the Department of Health three times in his career. When he first joined the health service in 1990 the departments’ billions were controlled centrally. Money may have been earmarked or ringfenced, but it was effectively all managed from Whitehall. Several restructurings later – there have been 18 major upheavals in the last 20 years, according to the Commons Health Committee – Douglas returned as finance director in 2001 to an NHS that had largely devolved into 28 strategic health authorities, 300 primary care trusts (the main local community health unit) and a similar number of other trusts covering hospitals, ambulances, mental health and other services. Douglas now has some 600 finance directors working for him.

Devolving power in this way is a process that Douglas admits has been compared to lifting the yoke of communism from the eastern bloc, foisting free markets onto a willing but differentially competent population. It’s also a process that, if it’s to work properly, “puts a premium on good corporate governance”. To this end, he and his team have compiled two detailed reports, entitled Delivering Excellence in Financial Governance and The Role of the Finance Director in the NHS. The former report sets out the department’s governance framework and has some very detailed checklists and a model finance service level agreement. (Readers from any industry sector may well wish to compare their own governance manuals with Douglas’s by downloading it from www.doh.gov.uk/financialgovernance/index.htm.) As more responsibility for spending gets pushed out to front line organisations – some of which are very new – “you’ve got to make sure that they have the systems, the process, the governance to manage that effectively and deliver it well,” Douglas says.

Douglas’s role now has four elements to it, as he sees it. First, he has to secure the necessary resources from the Treasury: “We’ve got to understand what it will cost us to deliver the standards that the government has set, be confident that over a period of years we fully understand what will happen in terms of demographic pressures, price pressures, in terms of pay, in terms of drug costs,” he says.

Secondly, he has to allocate those resources fairly and effectively across the whole of the NHS. Thirdly, he has to “define and devise a system that properly incentivises people to use resources well.” In the days when everything was controlled from the centre, a lot of haggling went into securing an amount of money probably equal to “last year’s budget plus some more”, Douglas says. “That never incentivised anyone properly.” That’s why the new system has a national price tariff – so there’s a list price for a hip replacement operation, for example. “The efficient hospitals will have the potential to generate surpluses and use that for reinvestment locally,” he says. Inefficient hospitals will have an incentive to reduce their costs.

Finally, of course, Douglas has an accountability role – to ministers, to parliament, to the taxpayers. While the NHS is every political party’s favourite love-hate object – love the nurses, hate the bureaucrats – it’s instructive to hear just how much of the change in the organisation is now coming from within. Sure, there’s the mantra that the policy objectives are set by the government but the government takes advice in terms of how you deliver those.

But Douglas explains that a lot of development work regarding foundation trusts, for example, came from hospital chief executives saying “Well, if you give us a framework within which we have more freedom to operate [sic], more freedom within an overall set of rules from the NHS, then we’ll deliver better.” From there, a dialogue takes place between the NHS, the department itself (which is to say the Whitehall civil servants) and ministers – “and that’s the way most policy tends to develop,” Douglas says. “They’re operating the system, they’re seeing the flaws, the frustrations, the things that are stopping them from doing what they want to do and they come to us with the ideas.”

The NHS is now a highly devolved structure, with 600 FDs spending some £60bn between them and employing 1.3 million people. “And that makes it even more difficult,” Douglas says, ” because you’re trying to achieve things not through direct line management methods, but to get incentives into the system by persuasion, by influence.” That £60bn of spending power creates some typical central government problems. The health service has secured a five-year spending commitment from the Treasury – unique in Whitehall as every other department has just three years’ money lined up.

But it’s not as easy as that. “If we underspend on £60bn by two or three hundred million pounds a year, then, frankly, you’re crucified for it in the press”, Douglas says. It doesn’t matter that the underspend can be carried forward. Nor does it matter that, compared to the £60bn budget, you’re maybe talking about one or two days’ money. “I don’t forget about the small numbers,” Douglas says. “The small numbers are still money that people have paid in taxes to provide this service. I can’t just go rounding stuff off to the nearest billion pounds. A hundred million is an awful lot of money.”

And of course he’s not allowed to over spend by a penny. “So you’re really trying to bring in £60bn across 600 organisations to within £200m or £300m on a particular day in the year. And that’s not always that easy,” he says with commendable understatement. “It’s been likened by a previous secretary of state to landing a jumbo jet on a postage stamp.”

A large part of Douglas’s expenditure is a £5bn IT programme that will make all patient records available on computer, eliminating the notorious, illegible doctors’ scrawl, and provide an appointments booking system more akin to what we’re all used to in the private sector.

But it’s a huge programme, and the history of IT capex on such a scale is hardly encouraging, whether in the public sector or private. “The worry from everyone’s point of view [is to make sure] the implementation works right the way through the NHS,” Douglas says, “that people use this in the way that we expect them to use it, that it delivers the benefits that we expect.”

He has a lot of confidence in what he describes as a very strong, very experienced implementation team, headed by a national IT director. The right links are in place throughout the NHS, both managerially and clinically, and the whole project is subject to regular review by the Office of Government Commerce. “So I think we’ve got everything in place to make a success of this,” Douglas says.

Interestingly, while there are obviously a number of key suppliers from the private sector, this is not going to be a private finance initiative project. It’s all being financed by public funds. The view in the Treasury is that PFI just doesn’t work as a means of sourcing major IT systems.

For the construction of hospitals however, PFI seems to be proving its worth. Douglas – whose official title is director of finance and investment (“I got the ‘investment’ added partly because I’m also responsible for the overall national capital programme and the PFI programme.”) – says that the key to making PFI successful for the hospital build programme was to get a few done properly right at the start. That experience then helped to standardise the process as much as possible before rolling it out to other hospitals. “But getting the lessons from those first few was the critical thing,” he says.

Douglas acquired a lot of experience with the PFI programme during is second stint with the NHS as deputy FD in 1996-99. From there he went to be FD of National Savings which at the time was going through a massive change programme involving putting the whole of the back office – some 4,000 people – into an outsourcing partnership with Siemens, so his PFI background proved useful.

But on his return to the NHS he took back with him two things: the first was a belief that if you’re going to change something then “you almost can’t be too radical”, he says. “National Savings had the confidence to be radical.” The second thing was a belief in the value of a partnership between organisations. Up until his period at National Savings, he confesses, “what I had in my mind was the contract – but actually that’s not the way it worked.”

So having taken useful NHS experience to National Savings and experience from there back to the NHS, where does he head for next? “I really don’t know. This seems to me to be the pinnacle,” he says. “To be involved in a job where you believe you can make a real contribution to a more effective public service is quite an honour, actually.”