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1.1 This report is presented to the Scottish Arts Council as part of the review which The Scottish Executive asked the Council to undertake of the systems which it operates to monitor its financial relationship with the national arts companies.
1.2 The Council commissioned Morgan Harris Burrows early in January 2000 to provide independent advice on best practice in financial monitoring of grant recipients and on the proposals formulated by the SAC in the light of the lessons learned from the recent financial difficulties within the Scottish Opera and Scottish Ballet companies.
1.3 The SAC asked that the consultants' report should cover specifically
1.4 The commission had to be completed within the deadline of 8 February which the Scottish Executive set for the SAC to submit its report on the review. This meant that in practical terms the consultants had to work to an even shorter deadline, so that they could inform the SAC of emerging findings and recommendations and at the same time could assess the proposals which the SAC were formulating from the lessons learned from the growing deficit of Scottish Opera and Scottish Ballet which came to light in the autumn of 1999.
2.1 Within the overall timetable the assignment had necessarily to be carried out very quickly by means of study of relevant documents and correspondence both published and unpublished and by a programme of interviews within the SAC and with others principally involved with Scottish Opera and Scottish Ballet.
2.2 The consultants took as the essential context the whole process of management planning and control. They reviewed the place of SAC and its monitoring within that process. The work was informed but not directed by the complex circumstances and events which led to identification of the growing deficit of Scottish Opera and Scottish Ballet and the subsequent the decision by the Scottish Executive to make available additional grant funding of £2.1m. to support them.
2.3 The focus for the work was the exercise of monitoring by SAC, but it inevitably moved to interrelationships with the companies and to the wider aspects of management planning and control in which SAC and the companies have their own but complementary interests, reflecting their respective roles.
2.4 The work concentrated on management change and improvement for the future and on the ways in which systems and processes can contribute to this process. Attention was in the first instance given to the SAC but it was also necessary to look to what was to be expected from a well managed company in playing its part to strike the crucial balance between artistic endeavour and the resources available to make it possible.
3.1 The report which follows is designed to be free-standing, commenting on the proposals which the SAC has formulated after drawing upon lessons to be learned from recent events, which culminated in The Scottish Executive making available extra resources, so that the SAC could pay additional revenue grant to Scottish Opera and Scottish Ballet.
3.2 The report is directed to management arrangements and systems, with the focus on the SAC but with due attention to the requirements and expectations of well managed arts companies. This broader approach is necessary because of the interrelationship of the two types of organisation in ensuring proper use and management of revenue grants which represent substantial - and continuing - public investment in the companies.
3.3 The report is in the following sections
4.1 The detailed events leading to identification of the growing deficit of Scottish Opera and Scottish Ballet are for the SAC to review and draw lessons for the future, but the developments in recent years have had a direct influence on shaping the present situation, from which it is necessary to move in introducing change and improvement, particularly in monitoring arrangements.
4.2 There is a history of extensive discussions and negotiations about levels of
4.4 The last undertaking led to the proposal to merge the administrative and technical functions of Scottish Opera and Scottish Ballet: this led in turn to the decision to form a single merged company structure, which is planned to come into full operation in April 2000.
4.5 It is also necessary to build recommendations for practical change and improvement on a clear understanding of the position of the national companies.
4.6 The companies have therefore to budget very carefully and to exercise close budgetary control. Even so they often incur deficits and they have to make use of bank overdraft facilities.
4.7 This is the essential context - partly constitutional and legal, partly financial - within which the SAC's monitoring has to be assessed and improvements worked out.
5.1 MHB were asked specifically to advise on
5.2 Financial monitoring is bound to be examined in a management context, especially where it involves two distinct forms of organisation, the SAC and the national companies. In order to set an framework for informed, reliable and practical advice we studied and analysed the management roles and responsibilities, procedures and systems related to the commitment of major investment of public money in national arts companies - concentrating on revenue grants to Scottish Ballet and Scottish Opera. Our main attention was on the SAC, though it was also necessary to look at its interrelationships with the respective companies and at the requirements which they have to satisfy as independent companies limited by guarantee, with charitable status and governed by companies and insolvency legislation.
5.3 Our findings are derived from analysis of the range of reports and correspondence which were made available and from interviews with key figures in the SAC and Scottish Opera and Scottish Ballet. The findings are grouped under four headings, though to some extent they are interrelated
5.4 Within the respective headings we identify strengths and weaknesses, outline key requirements for the future and make recommendations for change and improvement.
6.1 A clear and consistent understanding of the role of the SAC and its relationship with the national companies is fundamental to a positive approach to improving monitoring.
6.2 As a non-departmental public body the SAC is responsible ultimately to the First Minister of The Scottish Executive. Its role in essence is to encourage, support and develop the arts in Scotland and it does so by means of making grants of public money and also distributing Lottery funding to different organisations and projects.
6.3 The SAC faces huge demands for grant support from many sources throughout Scotland. It has a major and continuing task in drawing priorities and making decisions about the best disposition of the resources allocated to it. These decisions often involve assessing conflicts and seeking to make the best overall judgements. The SAC pays grants, large and small, to many organisations and individuals. The largest grants are paid to the national performing arts companies, which are private companies limited by guarantee, have charitable status and provide not only artistic performances and programmes but discharge significant education and outreach functions. These revenue grants currently account for no less than 46% of what the SAC spends in Scotland. Decisions on them inevitably have an impact on what is available for support of other arts activities. Proportionately small movements in them can have disproportionate effects elsewhere.
6.4
6.5 The SAC is publicly accountable for ensuring the proper and responsible use of public funds, while the companies have a responsibility to produce programmes and carry out activities within the resources available to them. This is the crucial point of financial relationship between the SAC and the companies and the SAC is bound to manage this relationship by monitoring, which relates to finance as well as to artistic quality. The SAC is bound to assess the quality of what the companies produce with the strong funding support which they receive through the SAC.
6.6 It has been suggested that the SAC's relationship to the companies is more akin to that of a "public banker", with the right to ensure that grant conditions are being complied with and to be satisfied that the companies are being well managed. It is however for the companies themselves - through their boards and executive staff - to achieve and maintain high standards of management. In the relationship the SAC cannot be a "shadow" director of the companies; still less is it some kind of holding company for them. The companies are distinct legal entities with their own management responsibilities, including responsibility for budgetary control of the resources available to them - a large part of which are public grants.
6.7 At the same time there is a clear expectation on the part of companies that the SAC has on occasion to give "management or business leadership", when issues of common interest arise for all the companies or when individual companies have to face up to issues which are ultimately for their own boards but may well have implications for other companies and on occasions more widely in the arts field in Scotland. There is perceived to be a need periodically for a "broker with power" who can as the major funder bring the representatives of boards together round the table to consider major issues and in this way help the boards themselves to come to informed and responsible decisions. There is a delicate balance to be struck in the exercise of this type of leadership, which has to be exercised not just diplomatically but with a clear sense of business purpose, balancing artistic and financial considerations.
6.8 Our conclusion is that the role of the SAC is not consistently understood and is open to differing interpretations, especially when companies are confronted with serious issues over the amount of grants and with conflicts of priorities. Better understanding of the SAC role would help improve mutual trust and confidence and would provide a secure basis for measures for improving budgetary control, monitoring, forward planning and management of change for the future.
7.1 The SAC should take every opportunity to define and publicise its role in relation to the national companies and the purpose of its monitoring and the form it takes; not only should the SAC do this in correspondence and in business exchanges; it should look to chairmen and chief officers of the companies to promote understanding of its role and functions among board members and staff, especially when there are changes of personnel.
7.2 The SAC should specifically define the role to be played by SAC observers at meetings of the boards of the companies to deal with questions or information required from time to time about the SAC and its activities and to draw attention to suggestions aimed at promoting good management; this dual remit of observers should be conveyed clearly to the companies, in order to underline the limits of the SAC role and the companies' own management responsibilities.
7.3 In order to ensure consistency of relationship with the companies and at the same time ensure direct and speedy communication on questions and problems arising from time to time, the SAC should reaffirm the designation of one of its Directors as the main point of contact for each of the companies and as its observer at board meetings, taking account of the spread of responsibility among Directors and the scale of grant investment in each company. The designated Artform Directors should be responsible for ensuring corporate SAC responses to any problems or questions which arise, taking the views of relevant colleagues and involving the Director of the SAC, if they judge it necessary.
8.1 The SAC's monitoring directly reflects its role and responsibilities for ensuring that public funds are properly used for the purpose for which they are granted and the recipient companies are well managed. In terms of the circumstances of the companies (outlined in paragraph 4.4) this means monitoring budgetary control and cash flows, as well as monitoring artistic quality.
8.2 The SAC's rule of making use of the companies' own financial management documents rather than making specific extra demands on them seems sound and sensitive. The main documentation on which the SAC relies for financial monitoring is appropriate to its role and its monitoring responsibility - board papers, annual budgets, annual audited accounts, annual cash flow statements, periodic management accounts and revisions of these documents.
8.3 Among these documents particularly important are management accounts reporting actual against budgeted income and expenditure and cash flow statements and forecasts. At present however their frequency, content and timing are variable, and SAC staff often rely on documents produced ad hoc, for example in relation to specific requests for grant payments. Management accounts are often produced at short notice, leaving only a very short time for the SAC - and board members - to study and react to them. These are not favourable arrangements for carrying out continuing monitoring, based on consistent information. There is a clear need to formalise and regularise the flow of documents, in parallel with the monthly reports prepared for the respective boards.
8.4 Within the SAC the first line of financial monitoring is the Finance Officer, who reports to the Director of Finance and Administration; he if necessary takes advice from the Artform Directors and takes any action. There is no specific output from the monitoring for example in the form of a report. This line of reporting is simple and adequate for routine purposes, but for situations where initial assessment suggests major questions or signs of future problems, it would be appropriate to expect the Finance Officer to prepare a short written monitoring report to the Director of Finance and Administration and the appropriate Artform Director, identifying and assessing the issue and so to prompt such early corporate SAC response or action as the Directors conclude is necessary. The effectiveness of the SAC response will however depend on a consistent framework of information being supplied by the companies.
8.5 The number of SAC staff engaged to varying degrees in financial monitoring is small; this is entirely appropriate to such a small organisation, which seeks (successfully) to keep its administrative costs under close control. But smallness underlines the need to ensure quality and qualification of the relevant staff ; on the Finance side they are well qualified in accountancy and banking and have extensive combined experience of arts finance. Their monitoring and assessment often requires to be combined with or qualified by arts production considerations, about which the Artform Directors are particularly knowledgeable. It would assist and enhance the quality of corporate responses from and decisions by the SAC, if it ensured that its Directors were all kept well informed of latest developments - and problems - in arts finance, as they are encountered in different companies and organisations in Scotland and outside Scotland .This would ensure constant updating of accumulated knowledge and experience on which the SAC and its senior staff have to make decisions and assessments.
8.6 Monitoring is concerned primarily with highlighting financial performance to date against budget. It is therefore mainly after the event, but it can also be prospective in considering projections of future income and expenditure against budget within the year. From its scrutiny of regular management information and through its observers on the boards the SAC can be informed to some extent of the future and any likely problems, but this falls far short of involvement in forward planning before artistic and financial commitments are finalised by the companies. The companies are responsible for planning programmes within the resources available and likely to be available to them; the SAC cannot expect to follow them in every detail - nor should it attempt to do so. But the SAC, no less than the boards, should be satisfied that commitments are within plan and budget approved by the boards. They can be so satisfied if the commitments flow directly from forward planning endorsed by the boards, on which the SAC observers sit. Planning is discussed in paragraphs 8.1 - 8.3.
8.7 If it identifies a major problem or potential problem, the remedies or interventions available to the SAC are in theory clear but in practice they are limited- and particularly limited if the problem is identified in-year. At extremes the SAC can withhold or delay grant payments, precipitating curtailment of current programmes or even insolvency and closure. But that could be counter-productive, incurring a serious loss of previous public investment and would be undermining the SAC's supportive role in the art form represented by the company concerned. In practical terms the SAC can provide advice to the board, in order enable it to take corrective action, including adding to the expertise on the board or strengthening its staffing structure. Responsibility for corrective action however rests with the board and the SAC is bound to concentrate on supporting measures which enable it to be reasonably satisfied with the quality of management response. Ideally, any SAC intervention should emerge from careful and critical monitoring and assessment of management information regularly supplied to company boards, including the SAC observers. A reliable system of forward business planning, would provide scope for constructive intervention at an earlier stage when more options would be available for serious business assessment.
8.8 The SAC has to strike a careful balance between encouraging financial prudence and artistic quality. Hard experience demonstrates that there is no ideal balance. Artistic quality is often presented as "excellence" and this is unexceptionable as an aim but in the context of the need to produce works and carry out other activities within the resources which can be afforded within a particular time, the degree of artistic achievement is bound to be tempered to resources. This is at the heart of the companies' responsibility, and their boards have to approve plans which can realistically be achieved within resources. They are bound to make the decisions on the culmination of forward planning which combines the positive and responsible contributions of artistic and financial skills. The SAC can best ensure this combination through supporting development of systematic forward planning.
8.9 Financial monitoring is of major importance but it cannot be the whole story if the SAC is to be reassured that the public grants which it makes to the companies are producing works of high quality; some form of artistic monitoring is required to complement the financial monitoring. At present this is provided for through the scrutiny and judgement of art form directors and the committees of the Council. In addition unpaid assessors are asked to prepare reports on performances which are then sent in anonymous form to the companies. At present artistic monitoring relies heavily on individual judgements. There is scope for the SAC, acting with the companies, to devise arrangements which command confidence in providing continuing and more systematic assessments of audience reaction and incorporating reviews of performances.
9.1 The SAC should require the companies to convey regular management reports on budgetary control and cash flow and also interim balance sheets. These documents should be transmitted monthly at the same time as circulation to board directors, so that informed SAC comments and contributions can be conveyed to the board, if necessary at their meeting. The documents should be available three weeks after the monthly reporting period.
9.2 Within the SAC the financial reports should be scrutinised as a matter of urgency by the Finance Officer who should report through the Director of Finance and Administration to the designated SAC observer, who can then decide on the SAC response subject to the views of relevant fellow Directors
9.3 In cases where particularly serious questions are posed by the management information submitted, the Finance Officer should prepare a monitoring report addressed to the Director of Finance and Administration and copied to the designated Director and to other relevant Directors; it does however seem unnecessary to introduce written reports as the rule; their use should be reserved for situations which on initial assessment call for priority attention.
9.4 The SAC should review its financial staffing requirements to meet the needs posed by the arrangements proposed for improved financial monitoring.
9.5 The SAC and the companies should, wherever they can, use the forward planning system to identify options to resolve issues and problems in advance and so avoid sanctions or interventions at short notice which could result in insolvency and the loss of an invaluable contribution to the arts in Scotland.
9.6 The SAC should also improve its system of monitoring of quality of performance by adopting a more systematic approach ; it is understood that the SAC is already examining in some detail this aspect of monitoring to see how it can be improved for the future; significant elements for consideration are regular arrangements for gauging audience reaction and periodic artistic assessment of productions.
10.1 It is central to the success of the companies that they plan ahead their programmes and so lay the foundation of quality performances, on which their reputation rests. This involves artistic and financial managers working in concert to realise commercially the company's artistic vision.
10.2 All the companies plan ahead with varying degrees of detail and financial rigour, though some art forms take more forward planning than others; opera seems to require longest planning because of the inherent complexities of bringing quality work to performance. Recent experience however suggests the need for the companies to adopt a more disciplined system of forward planning to help them resolve the inevitable tension between the artistic vision and the resource reality.
10.3 Related to the levels of funding which the SAC expect to be available three years ahead, such business planning would make clear progressively the artistic priorities and the commitment and timing of resources. The main advantages would be:
11.1 The SAC and the national companies should devise urgently, building on the best management features of current planning and engaging external expertise if necessary, a forward business planning system with a time horizon of up to 4 years, adaptable to the needs and circumstances of individual companies.
11.2 The system should conform to all the disciplines of business planning in combining the artistic and financial dimensions, progressively rigorous from year 4 to year 1 , the plan should be rolled forward each year, as the budget for the year immediately ahead is finalised. The process should be subject to oversight by the boards and its SAC observers.
11.3 The SAC and the companies should in collaboration consider the main options for making an early start on a new planning system; an example would be for the companies - perhaps led by the new merged company - to take the lead in devising and bringing into operation a revised system, making use of such outside expertise as they considered necessary and seeking the agreement of the SAC at appropriate times.
12.1 The new board of Scottish Opera and Scottish Ballet, whose merger is planned to come fully into operation next April, has major challenges ahead of it . They may be summarised as:
12.2 Action on these fronts is firmly within the responsibility of the board and its staff, and it will require commitment of exceptional skills, professionalism and effort. The SAC has a close interest in the successful management of the company and the quality of its output in terms of performances and its educational and outreach work. It can play an invaluable supportive role, but the board itself will have to decide its dispositions to meet the three challenges successfully.
13.1 The SAC should review its staffing needs, in the light of the monitoring recommendations; additional staff effort will be required if the SAC is to play a positive part in supporting the companies in working through their substantial agenda and if, as is suggested in the conclusion, it is prepared to apply the recommendations to relationships with the other two national companies and to a number of the other large companies which it supports with substantial revenue grants.
14.1 The remit called for examination of other grant-giving organisations and their systems for their monitoring systems and procedures , in order to determine whether the SAC could draw upon them to improve its monitoring.
14.2 In the time available for the assignment three broadly analogous organisations were identified which provide continuing support by way of revenue grants to arts organisations -North West Arts (based in Manchester), Edinburgh Council and The Arts Council of England. In the event it proved possible to examine the systems and procedures of the first and second, though the work with North West Arts gave some insight into ACE systems. The Arts Council were not able to give any substantial help in the short time available, because of other working commitments.
14.3 Both NWA and Edinburgh make use of funding agreements and audited final accounts. They have similar progress meetings with client organisations (at least quarterly and monthly for some larger grant recipients). Both make regular use of meetings and correspondence between their arts officers and the recipient organisations.
14.4 Particular features are
14.5
14.6 On the whole, NWA seem to operate a more formal system, with considerable oversight of recipients, who are encouraged to use NWA documentation.
14.7 The SAC's system of monitoring has common features with those operated by NWA and Edinburgh Council, though in some respects (notably making use of the companies' own financial management information) it seems more sensitive to funded companies. Its system stands the test of comparison very well, considering the scale of SAC funding and the complexities of working with national companies covering a range of art forms. None of the features of the other organisations suggest that any additions or amendments should be made to the recommendations made in the earlier parts of this report for change and improvement. Indeed, the NWA system lends weight to the recommendation for devising and introducing a revised system of forward business planning.
15.1 The role of SAC as a public body supporting and developing the arts in their various forms in Scotland is very demanding. Its relationship to the national companies as independent bodies is particularly testing and calls for informed and balanced management. This is particularly true in relation to its monitoring of how the companies use revenue grants and therefore to monitoring of their budgetary control and cash flows.
15.2 This report points to the future and to building a secure foundation for the new company to plan and produce works of artistic merit and also to promote educational and outreach work. The remit requires the independent consultants to comment on the proposals which the SAC are making for change after carrying out the review prescribed by the Scottish Executive. The proposals listed in Part 1 of the SAC's report are in line with our 13 recommendations and therefore have our endorsement.
15.3 This report recommends action by SAC, but at the same time it assumes that the new company will build up a high standard of management capability within the board and its staff , bringing together the artistic and financial dimensions. The challenges ahead are serious and urgent. They call for a concerted effort and the recommendations should help the SAC to equip itself to play a positive part in supporting practical measures designed to achieve within available and planned resources a successful outcome for opera and ballet in Scotland.
15.4 The companies look to the SAC from time to time for "management or business leadership", to give a lead but to look to the boards of the companies to make responsible decisions. An opportunity arises for the SAC to exercise this leadership by pursuing the interest which it shares with the companies in operating more effective monitoring and in promoting the development of forward planning.
15.5 This report has concentrated on the SAC's monitoring of its financial relationship to Scottish Opera and Scottish Ballet, now being merged into a single company. But it is suggested that its recommendations could be applied to its relationship with the other two national companies and to other large companies which receive substantial revenue support from the SAC.
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