THE FUTURE OF CHESHIRE SHARED SERVICES

26/11/2013

THE FUTURE OF CHESHIRE SHARED SERVICES
STRATEGIC OPTIONS APPRAISAL & HIGH LEVEL BUSINESS CASE
Updated 13 December 2012
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CONTENTS
Section Page
1. Executive Summary.........................................................................................................................4
2. Strategic considerations for Externalisation...................................................................................5
3. Future Delivery - Options Appraisal................................................................................................6
3.1 Do Nothing (stay as is) ............................................................................................................7
3.2 Disaggregation ........................................................................................................................9
3.3 Transfer Model / Split Hosting..............................................................................................12
3.4 In-house trading....................................................................................................................16
3.5 Outsource..............................................................................................................................19
3.6 Joint Venture......................................................................................................................... 27
3.7 Separate Legal Entity ............................................................................................................32
4. Recommended Delivery Option....................................................................................................39
4.1 Rationale for Recommendation............................................................................................39
4.2 Strategic & Financial Business Case ......................................................................................40
4.3 Proposed Business Model.....................................................................................................43
4.4 Target Operating Model........................................................................................................45
4.4.1 Target Operating Model processes................................................................................... 46
4.4.2 The current shared Services Target Operating Model (Top Level) ...................................48
4.4.3 Current position – moving towards full implementation .................................................48
4.5 Approach for Proposition Development & Strategic Marketing ..........................................50
4.6 Market Analysis.....................................................................................................................51
4.7 Governance Arrangements & Shareholder Considerations..................................................52
4.8 Expected Benefits .................................................................................................................55
4.9 Risks ......................................................................................................................................56
4.10 Implementation Plan ............................................................................................................58
5. Assumptions..............................................................................................................................60
5.1 Discounted Cashflow ............................................................................................................60
5.2 Internal Trading.....................................................................................................................60
5.3 Transfer Model......................................................................................................................60
5.4 Disaggregation ......................................................................................................................60
5.5 Joint Venture / Outsourcing..................................................................................................60
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5.6 Separate Legal Entity (SLE)....................................................................................................61
6. Appendix 1 ................................................................................................................................62
DOCUMENT CONTROL
Version
Number
Date Comments Author Approved
By
Approved
Date
0.1 Sept Draft Structure &
doc build
Sharon Barclay JOB & JC 28 Sept 12
0.2-0.6 17 Oct 12 Various iterations of
content
Sharon Barclay Mark Wynn /
Chris Mann
18 Oct 12
0.7 19 Oct 12 Marketing &
Financials included
Sharon Barclay
0.8 19 Oct 12 Draft for approval Sharon Barclay Lisa Quinn 21 Oct 12
0.9 22 Oct 12 Final draft for
circulation
Sharon Barclay Lisa Quinn 22 Oct 12
1.0 13 Dec 12 Updated financials Sharon Barclay Lisa Quinn/
Chris Mann
13 Dec 12
DOCUMENT APPROVAL
Date
Julie Gill Senior Responsible Officer/ Co-Chair of Joint Officer Board
Director of Resources, Cheshire West & Chester
Lisa Quinn Senior Responsible Officer/ Co-Chair of Joint Officer Board
Director of Finance & Business Services , Cheshire East
Joint Committee
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1. Executive Summary
Since their creation in 2009, Cheshire East (CE) and Cheshire West & Chester (CWaC) Councils have
been successfully sharing services and to date has achieved significant savings of £6.7m in the areas
of ICT and HR & Finance.
With the formation of two new local authorities, each with their own cultures and identities,
combined with the impact of an economic recession and austerity measures, it is understandable
that the development of shared services has been of one of learning and maturity. There have been
teething troubles, and difficulties along the way, but what has been achieved is remarkable. Both
authorities have been able to fully depend on back office shared services to deliver high quality
services to their citizens while reducing costs.
Over the last 18 months Cheshire Shared Services have been on a journey of continuous
improvement to ensure the Councils receive the level of service they expect. These shared services
have been benchmarked against peers to understand their market position. This baseline position
have been used to inform new ways of working including operating models, financial and
performance management, governance, and culture change to raise customer satisfaction and
promote confidence in service delivery.
Through shared service governance, it was recommended in November 2009, pending outcome of
further investigation, that these shared services are developed into a company which has the
capability to reduce costs and generate income. Achieving this aim requires a change in the business
model from one of constitutional governance to a commercial company model referred to as a
separate legal entity (SLE). As an SLE, “The Company” will have greater autonomy to run its business
affairs, but will be accountable to the local authorities as shareholders and also as a supplier of
goods and services.
In 2010 Price Waterhouse Coopers (PWC) were commissioned to assist in this analysis. A
programme of comprehensive research was undertaken and the following key outputs were
produced; Strategic Options Appraisal for Shared Service
1
; Collaboration & Trading – High Level
Business Strategy
1
; Market Analysis for Shared Services
1
; Due Diligence Outputs
1
.
This document does not seek to replace this detailed analysis, but to review the original decision to
provide reassurances that this remains credible given the passage of time. It is intended to provide a
high level summary of the strategic delivery options that are available for the councils to take; the
strengths, weaknesses and implications of each option; and to examine in closer detail the
recommended way forward proposed by the Joint Officer Board – to create a separate legal entity
(SLE).
A key objective of this document is to establish the basis for the council to take the decision on
whether to proceed with the externalisation of these services. A formal decision is scheduled for
early January 2013. It is also intended to confirm the scope and phasing of any externalisation
option and authorise officers to commence implementation activity.
1
1
These are large documents and can be made available on request
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2. Strategic considerations for Externalisation
There are numerous national drivers for change and an increasing focus on Local Authorities to
externalise service provision. This section does not attempt to provide an exhaustive list of external
drivers. It merely seeks to serve as a reminder of two of the most current drivers for change.
Localism Act 2011
The Localism Act 2011 introduces a new General Power of Competence (GPC), which explicitly gives
councils the power to do anything that an individual can do which is not expressly prohibited by
other legislation and to carry out activity for a commercial purpose and could be aimed at
benefitting the authority, the area or its local community. By giving councils the flexibility to act in
their own financial interests, the GPC will allow councils to do more than was previously sanctioned
under wellbeing powers. Councils, on their own or working with other public bodies, can be
enterprising by increasingly trading and charging. However activities for a commercial purpose must
be carried out through a company.
Public Sector spending
[In the decade ahead public services will need to adjust to significantly lower levels of central
funding than in the past. The Chancellor of the Exchequer confirmed in Budget 2012 that
significant cuts to departmental spending can be expected at least through to 2016/17. As it is,
local authorities are absorbing a 28 per cent cut to their core funding while facing mounting
pressures across service areas like adult social care, safeguarding children and waste
management. Cuts to Government grants have been further exacerbated by a loss of revenue
from existing fees and charges.
At the same time, councils are facing tough decisions about their council tax rates. Given that all
services are effectively paid for by the taxpayer, the service user or both, it makes sense to
consider whether it would provide more fairness to the taxpayer to ask those who benefit from
a service to cover part or even all of its costs.
Across councils, officers and members are becoming more and more commercial in their
acumen, outlook and skills to meet future funding challenges. Trading (i.e. to generate
efficiencies, surpluses and profits) and charging (i.e. to recover the costs of providing a
discretionary service) are important options on the menu of innovative ways of working to
meet local needs through delivering value for money, sustaining communities and providing
choice.
Councillors are playing a critical role, providing leadership to their councils and local partners
during these much tougher times. In this context, there are no easy choices. But where choices
have to be made they are best made locally by elected representatives who are in daily contact
with the people they serve.]
[Reference Source: Local Government Association (LGA) paper - Enterprising councils - Getting the most from
trading and charging 2012 edition]
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3. Future Delivery - Options Appraisal
Background
In August 2012, the Shared Service Joint Committee requested that the Joint Officer Board revisit a
wide range of strategic delivery options to ensure that the Joint Committee had all the pertinent
facts and information to make an informed decision on whether an SLE was the best option for both
authorities to take.
This Section 3 of the document looks at the baseline position (Do Nothing) and contrasts this with 6
other delivery options.
1. Disaggregate
2. Transfer Model (split hosting)
3. In House Trading
4. Outsource
5. Joint Venture
6. Separate Legal Entity
The appraisal for each option includes the following detail:
• What the option entails
• What this means for CE & CWaC Councils
• Assumed drivers for each option
• Examples of each of these Delivery Models (where appropriate)
• Analysis of the Strengths, Weaknesses, Opportunities & Threats (SWOT) associated with
each option
• Financial Illustrations
• High Level Risks
• Summary Overview
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3.1 Do Nothing (stay as is)
This option is included to provide a baseline position in which to consider future delivery
options.
3.1.1 Baseline Position
The current constitutional model for shared services has delivered significant financial and
efficiency savings in back offices services - £6.7m to date, but it has not been without its
challenges.
There are a number of issues that need to be addressed which drive the decision to move
forward with a different delivery option that is examined in this document.
A significant issue facing the current shared service arrangement is the limited
opportunities to “deliver more for less”. Other issues that need to be addressed in a future
delivery model can be summarised as follows:
• The gradually reducing level of core business
• Developing a commercial client focused culture within local authority context.
• Perception that the host Council has undue influence on the shared service.
• Time consuming financial management arrangements. A full cost recovery model
needs to be implemented
• Staff are seconded and employed on different terms and conditions.
• Governance is perceived as costly & bureaucratic and an alternative governance
structure would be required when working with additional partners.
• Perceived lack of control and trust by client services.
• Lack of unique identity – disparate services corralled under single branding.
3.1.2 Examples of Delivery Models
Other examples of successful constitutional shared services do exist, most notably LGSS, a
sharing arrangement formed by Cambridgeshire and Northamptonshire County Councils in
2011. Primarily focused on the sharing of core systems this shared service offers a range of
corporate services (HR, Finance, Audit, Legal, Pensions, Procurement, Asset Management
and transformation). LGSS are now offering their services to District Councils in the area.
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3.1.3 SWOT Analysis
3.1.4 Financial Considerations
Key factors contributing to the existing position & future forecast of income:
• The income from schools and academies significantly contribute to the overall cost of
network & payroll to both councils. There is evidence of some schools not buying back
from the current SBSA Proposition notably when schools move to Academy status.
• Declining headcount across both authorities as budget pressures continue to unfold
reducing the level of support activity required
• With both councils strategy to move to commissioning delivery models and exploring
other SLE/Outsourcing/Joint Venture opportunities, the existing staff establishment
which will in turn reduce the core business of the shared service and increase the cost
per unit for each council
3.1.5 High Level Risks
If we maintain the status quo it will present the following risks.
• Continuation of the downward volumes of core business
• Danger of focusing on doing the ‘wrong things’ for example cost cutting -v- developing
propositions to generate income commercially
• Quality of service deterioration
• Increases cost per unit
3.1.6 Summary Overview
For the reasons set out above, “do nothing” is not a recommended option. Other strategic
delivery options must be considered.
Strengths
• Minimal disruption.
• Clear ownership.
• Not governed by contract – in control.
Weaknesses
• Retains separate T’s & C’s.
• Continues perception of poor service.
• Lack of revenue opportunities.
• Duplication of roles and responsibilities.
• Lack of commercial acumen.
• Fosters perception of lack of
transparency and equity between
authorities within sharing arrangement.
Opportunities
• Does not preclude the addition of extra
factories into the current arrangement.
• Permits a focus on standardisation to
achieve savings/efficiencies.
• Able to provide certain services to other
public bodies
Threats
• Represents a missed opportunity to
develop and exploit asset.
• Doesn’t attract talent
• Does not address the retraction of
income into the shared services
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3.2 Disaggregation
This option involves dissolving the current sharing arrangements to allow CE & CWaC to
autonomously decide on the future delivery models to recreate the existing and future
service provision. There is a 12 month notice period to withdraw from the current
arrangements. This is the most costly and potentially disruptive of all the delivery models
assessed.
3.2.1 What this means for the councils
In this event CE & CWaC will need to “replicate” the service delivery for each authority –
essentially duplicating the current business model.
The key areas to be that would need to be replicated by each Council are:
• Service Desk and field engineers (there are diseconomies of scale issues associated
with disaggregation and an assessment of skills gaps that this option would create is
essential to understand true impact/costs to each authority
• Application Support: including Microsoft Infrastructure
• Oracle Infrastructure
• Networks (noteworthy of mention: we are currently committed to jointly procuring
a Public Sector Network solution along with other partners)
• Data Centre, servers and storage equipment and on-going management
• Key line of business systems
o Small number of these are joint
o Some are same product but different instances
o Majority are different products e.g. CRM’s, Revs & Bens, Social Care
• 3
rd
Party spend
Undoubtedly each authority would consider different delivery options for different services
e.g. consider collaboration with different partner, enter into outsource/JV for some or all of
service delivery.
3.2.2 Assumed Drivers for this Option
• A desire for sovereignty & independence
• Simplified governance & commissioning processes to assist in decision making
• Alignment of future service delivery models to own organisational strategy
• Control of change agenda & risk management
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3.2.3 SWOT Analysis
Strengths
• Independence/sovereignty.
• In control of own destiny.
• Simplified decision-making process.
• Avoid commissioning process.
Weaknesses
• Substantial one-off and on-going costs.
• Split of existing TOM into two authorities
– duplication of current position.
• Loss of opportunity for new
developments during transition.
• Staff morale.
Opportunities
• Potential for service redesign.
• Opportunity to remove management
layers.
• More responsive to own organisational
and local stimuli.
• Less complex governance.
Threats
• Delivery costs increase – rebuilding to
pre-LGR level.
• Staff attrition.
• Loss of skills/talent.
• Potentially lengthy and acrimonious
process.
• Perceived as sharing failure – negative
reputation and political cost.
3.2.4 Financial Considerations
Disaggregation would incur high one-off and on-going costs as set out below to duplicate the
infrastructure and to create separate instances of current shared systems. There is also
significant loss of economies of scale.
YEAR
1 2 3 4 5 6 7 8 9 10
£000 £000 £000 £000 £000 £000 £000 £000 £000 £000
2,406 2,899 5,082 5,082 4,831 4,831 4,831 4,831 4,831 4,831
Using a discounted cashflow mechanism the 3, 5 and 10 year position is:
No of
Years £000
3 9,117
5 16,753
10 31,959
It concludes that there is no financial business case to support a decision to disaggregate.
3.2.5 High Level Risks
• Highly disruptive to service delivery and to staff
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• High degree of staff attrition which leave the authorities vulnerable to loss of key
operational skills to run & manage critical business systems. Covering skill gaps at short
notice is highly likely to come with significant additional costs.
• The huge costs associated with this option will provide budget challenges elsewhere in
the organisation to fund this option.
• A negative perception of sharing failure could potentially damage any future sharing
options/arrangements. Other partners may exploit perceived vulnerabilities – the
authority’s negotiation leverage may start from a weak position as there will be a need
to quickly replace the current arrangements.
3.2.6 Summary Overview
This option is (highly) not recommended for the following reasons:
• Huge cost
• Creates unnecessary duplication
• Highly disruptive
• Reputational damage - potentially undermines any future sharing plans
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3.3 Transfer Model / Split Hosting
The current Cheshire Shared Service arrangements for ICT and HR and Finance are “hosted“
by CWaC underpinned by a formal Administrative Agreement and Financial Memorandum
both of which are legally binding. The costs of these services are shared on a 50:50 basis and
there is a 12 month notice period to withdraw from the sharing arrangement.
At LGR there was no appetite to transfer employees destined for the shared services to the
host authority. Therefore staff working in the shared services are currently employed by
either CWAC or CEC under the auspices of a formal Secondment Agreement with associated
cost being equally shared. In effect this arrangement means that each employee retains the
Terms and Conditions (T’s & C’s) of their employing authority. However in practice it has
been necessary to develop a series of HR Scenarios to help manage day to day HR issues
arising in the shared environment. The scenarios aim to ensure consistency in the treatment
of individuals and a balance of employees between the councils
The current operations for both ICT and HR/Finance are located in Chester, where the
majority of staff are based (there is a small presence of staff in Winsford). This situation
predominantly reflects that pre-LGR and therefore relocation of staff and jobs was not an
issue when setting up the sharing arrangements between the two new councils.
Since the shared services were set up both Councils have reviewed T’s & C’s of employment
and it is evident that the consequent divergence is having an impact in shared services. An
example of a material and vexatious issue is the policy decision CE has taken to freeze
incremental pay increases, whereas CWaC have continued to award. This is estimated as an
avoided cost for CE in 12/13 of £42,822.
3.3.1 What this means for the councils
The implementation of a transfer model would require that one or other of the Councils
become the lead authority and effectively employ all the staff working in a shared service
therefore putting everyone on the same T’s and C’s. However it is considered unlikely that
either Council would be in a position to take on the lead for both the ICT and HR and Finance
functions and all that this entails. Therefore splitting the functions and assigning a lead
authority for each service might be considered as a workable way forward.
The Lead Authority (transfer) arrangement would require a new Administrative Agreement
and Financial Memorandum but the Secondment Agreement would no longer be necessary
as TUPE regulations would apply. The new arrangements would need to be drawn up to
reflect the changes and the delegation of functions between the councils e.g. buy back from
the lead council would need to be agreed through a contractual relationship with SLA’s.
However a transfer situation is not an immediately fix to the T’s & C’s issues in the current
shared services. The financial quantification of the differences in T’S & C’s is estimated at
(based on actual spend to Sept 12):
Expenditure HR / Fin
£000s
ICT
£000s
Total
£000s
Staff Mileage (excl relocation) 4 24 28
Overtime 3 17 20
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The real issue is the dissention within the ranks which differing T’s & C’s creates, which
impedes the creation of a solid base to create one culture. A Transfer Model will not
eradicate this issue, in fact both councils will inherit staff on differing T’s & C’s and will need
to undertake a review of the workforce terms and conditions or operate with a two-tier
system.
The key to the success, or otherwise, of this being a viable delivery option is to reach an
amicable & timely decision on which service transfers to CE. CE would be likely to want to
reserve the right to exit current buildings and to relocate staff within the CE borough but it
should be recognised that such a move will build in cost e.g. relocation expenses.
3.3.2 Assumed Drivers for this Option
• To provide equity in a future sharing arrangement
• To eradicate the perception that the current host has undue influence on the current
shared service
• Provides clarity of ownership and service delivery as it presents an opportunity to create
a unique identity and strong culture for the service.
3.3.3 Examples of this Delivery Model
Whilst there are examples of staff transferring through Joint Venture or Outsourcing
arrangements none appear to exist in public sector sharing arrangements. One of the
primary reasons for this appears to be a reluctance (although perhaps unfounded) to be
seen to be moving jobs out of one area to another.
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3.3.4 SWOT Analysis
Strengths
• Clarity on Shared Service
ownership/responsibilities.
• No procurement issues if functions
properly delegated
• Relatively flexible
• Public sector ethos, rules and
procedures
Weaknesses
• Represents a holding pattern.
• Not appropriate for partnership working
with private sector
• Can be bureaucratic
Opportunities
• Politically acceptable.
Threats
• Threat to staff morale as differing T’s &
C’s continue.
• Fragmentation of Target Operating
Model.
• Duplication of client functionality.
• Realignment of perceptions of bias inline
with recalibrated service hosting.
• Danger that services become viewed as
internal departments of and driven by
the host authorities organisational
agenda.
3.3.5 Financial Considerations
The following financial profiles look at two options for split hosting and comprise mainly of
redundancy and relocation costs. The figures do not include any future costs that the
current host may incur due to unoccupied office space.
Net impact per year based on ICT moving East
YEAR
1 2 3 4 5 6 7 8 9 10
£000 £000 £000 £000 £000 £000 £000 £000 £000 £000
0 429 252 252 0 0 0 0 0 0
Net impact per year based on HR/Finance moving East
YEAR
1 2 3 4 5 6 7 8 9 10
£000 £000 £000 £000 £000 £000 £000 £000 £000 £000
0 986 188 188 0 0 0 0 0 0
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Using a discounted cashflow mechanism the 3, 5 and 10 year position is:
HR East ICT East
No of
Years £000 £000
3 1035 593
5 1184 793
10 1184 793
3.3.6 High Level Risks
• Potential for staff attrition if staff relocate – plus associated costs of VR and CR.
• Potentially protracted decision-making - who decides which service goes where?
• Each council would have TUPE issues and differing Terms & Conditions issues to resolve.
3.3.7 Summary Overview
This option is not recommended for the following reason:
• There is a significant imbalance between cost/risk and benefit that can be achieved.
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3.4 In-house trading
This type of delivery model entails setting up a joint In-House trading operation similar to
the former Direct Services Organisations (DSO) which operates as an ‘arms length’ part of
the council. It is effectively a pooling of staff, resources and support services. The In-House
trading service is still legally part ofthe Councils for approval of its activities and the setting
of its targets, fees and charges. The Councils still provides the revenue budget for which
officers are responsible and accountable. The budget – income and expenditure – is
ringfenced to the DSO and is not used to sustain other Council budgets or activities.
3.4.1 What this means for the councils
This can be quickly delivered with a modest level investment. The clear limiting factor with a
DSO type delivery model is that it cannot be truly commercial to external clients. It cannot
act as a trading company (SLE) that is wholly owned by a council and cannot generate
any profits to pass back to the council through dividends or service charges. Surpluses
cannot therefore be used to hold down council tax and/or be invested into frontline
services.
A DSO provides potential to generate additional income from selling additional discretionary
services but it is restricted to full cost recovery. A DSO can trade with other public bodies
but commercial/for profit trading with the private sector must be via a company.
Pooled budgets can be established to add a new partner to the arrangement to share costs
and revenues with another public sector organisation.
A DSO would have complete flexibility to create its own identity & brand and it does not
prevent the removal or addition of other in-house business units.
Commercial or contractual framework/incentives could be applied to the DSO including
notional penalties to make the relationship feel more commercial.
The DSO has complete flexibility to change scope & service standards at short notice; subject
to normal rules such as staff consultation.
The DSO could also use existing corporate services and to commission on a more commercial
basis through use of Service Level Agreements (SLA’s).
All current and future employees have the right to join the Local Government Pension
Scheme (LGPS).
3.4.2 Assumed Drivers for this Option
It would provide minimal disruption to business as usual service provision.
It could be seen as an incremental step change to drive more commercial culture behaviours
and culture.
There is complete flexibility to change the legal structure. Service would continue
indefinitely until the councils decided to:
• Outsource some or all of the service
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• Convert to an SLE owned by the Councils
• Convert to a staff mutual or Joint Venture
3.4.3 Examples of this Delivery Model
Essex Cares is an in-house company operated by Essex County Council providing Adult Social
Care services. It generates income for non-discretionary services which are then re-invested
to improve services. The opportunity to work on a more commercial footing has created
greater responsiveness and accountability. Essex Cares competes with Private Sector
providers whilst safeguarding frontline services from cut-backs or the loss of control
associated with outsourcing.
3.4.4 SWOT Analysis
Strengths
• Move to a commercial charging model –
full cost recovery basis.
• Transparency of full cost recovery.
• Creates a more customer-focused
culture.
• Set-up cost low.
• Clear ownership.
Weaknesses
• Negative perception born of awareness
of full-cost.
• Legal restrictions to trade commercially.
Opportunities
• Repeatable process; we have done this
before e.g. CBS.
• Development of own branding.
• (Limited) trading opportunities.
Threats
• Harder sell – prospective clients see real
cost and withdraw.
• Danger that this model becomes a
permanent holding pattern.
3.4.5 Financial Considerations
This shows modest investment requirement with relatively low set-up costs which will in
turn provide a return on investment in the medium term.
YEAR
1 2 3 4 5 6 7 8 9 10
£000 £000 £000 £000 £000 £000 £000 £000 £000 £000
115 727 -283 -333 -333 -333 -333 -333 -333 -333
Using a discounted cashflow mechanism the 3, 5 and 10 year position is:
No of
Years £000
3 518
5 6
10 -1,042
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This can be seen as a low risk option which will deliver financial benefits over the medium
term providing the income targets ca n be achieved.
3.4.6 High Level Risks
• Achievement of softer benefits such as improved staff motivation, attendance, creativity
and commercial focus may prove difficult as staff will remain Council employees.
• No opportunity to transfer risk from the Councils.
• Ability to trade may be limited by lack of expertise, unless an investment is made at a
similar level to what is required to set up an SLE.
• A jointly owned DSO will require similar levels of governance to those we have now.
3.4.7 Summary Overview
This delivery option is not recommended.
It requires similar investment levels to that of an SLE but does not offer the same
commercial opportunity as an SLE to monetise offerings; partnering and trade opportunities
to increase income and achieve efficiencies & economies of scale; or provide the
opportunity to create value.
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3.5 Outsource
For outsourcing, an external private sector partner is paid to provide the service to or on
behalf of the Councils.
3.5.1 What this means for the Councils
Outsourcing the shared service would require an OJEU procurement following the
competitive dialogue process as this type of procurement would be almost certainly deemed
to be complex procurement. A particularly complex contract means a contract where the
contracting authority is not objectively able to define ‘the technical means’ in terms, or
specify and identify the legal/financial make up. As there is the potential for several phases
of dialogue with three or more participants, the time taken can vary significantly from one
project to another. The resource available to the project will also impact on the time taken,
as updating and controlling the versions of schedules; documenting and responding to
points of clarification; and arranging, attending and following up actions taken from
meeting, are resource intensive activities. Where limited resource is available the time taken
to move through the phases of dialogue will be protracted.
Based on experience, the time expected for a potential outsourcing of this kind would be 12
to 18 months from the publication of the notice to contract signature. It should be noted
that a considerable amount of work is needed pre-procurement to base line the current
position. The costs of a procurement of this scale, particularly given the specialist nature of
ICT services are estimated at £490K, approx 50% of this is notional as the councils’ do have
some in-house expertise. However, due to the complexity of the ICT service it may be
necessary to retain specialist technical expertise from an external source at an additional
cost in the region of £80k.
In terms of potential to add other business units within the final arrangement, this is
possible with the agreement of the outsource company, but potentially restricted if not
included in the scope of the original procurement. Similarly a new partner cannot be added
to the arrangement unless this was covered in the OJEU notice.
3.5.1.1 Illustrative approach an outsource company would take
Outsourcers would assess the viability of the shared services in 3 key stages and carry out
levels of assessment, due diligence and negotiation:
• Bid team (often called the Black Team) – to respond to the ITT
• Contract Team (often called the Red Team) – to make the full & final offer
• Post award – a team carries out detailed due diligence
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Outsource companies will assess:
Area of Assessment Typical approach
Assets A relevant example would be the approach to People. They
typically will cherry pick people, likely to only TUPE management
team and staff considered to be key knowledge holders. Look to
agree a secondment model for remainder of staff for an infinite
period likely until the end of contract. (subject to the Legal Position
on TUPE)
Age Profile - All
assets including
people
Looking for tenure liabilities and end of life risks. Noteworthy of
mention is the approach to staff retention. High staff retention is
viewed as a poor risk, whilst high staff attrition is attractive so as to
provide more future flexibility to the outsourcer.
Liabilities Likely to only underwrite any buildings liabilities for a short period
but will seek to reserve right to exit our existing properties
Budget Structure Looking for savings/realignment opportunities within their
organisation
Associated overheads Looking for savings/realignment opportunities within their
organisation
Existing contractual
commitments
They will factor these into the “pot” – particularly will be looking at
the impact of any change/transformation commitments will affect
their bottom line targets.
Operational
Assessment
They will look for a % improvement gains in productivity and cost
To ensure that there will be sufficient margin of opportunity between cost & price,
Outsource companies will use an Operational Assessment model similar to that shown
below:
A typical example of an Operational Assessment approach:
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Outsourcers will operate a gain/share mechanism in realising savings opportunities e.g. they
will underwrite a % of the predicted savings and they will seek to achieve the remainder of
the savings in a risk/share basis, often resulting in outsourcers retaining 50%.
3.5.1.2 Disciplines used to drive cost improvement
In terms of cost improvements Outsourcers will use the following disciplines:
Cost savings: The lowering of the overall cost of the service to the business. This will involve
reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring.
Access to lower cost economies through offshoring called "labour arbitrage" generated by
the wage gap between industrialised and developing nations
Cost restructuring: Operating leverage is a measure that compares fixed costs to variable
costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable
cost and also by making variable costs more predictable
3.5.1.3 Typical Pricing Structures
Outsource arrangements use cost savings/restructuring disciplines described above to
determine Output & Outcome pricing structures.
Output Pricing: Fixed/tangible unit costs – tends to be based on known usage; e.g. Network,
data, utilities, volume metrics such as no of payslips.
Outcome Pricing: Intangible costs based on an agreed outcome e.g. merge revenues
services. The approach will look specifically at People, Systems and Processes with the view
of generating same output with fewer people; or, generating higher output as capability is
optimised. Outcomes will need to be clearly defined at the outset of the contract.
Negotiating Outcome pricing is attractive to an outsource company as it is a way for the
outsourcer to further drive the “change” agenda. It is often how outsourcers incentivise
organisations to extend deals by constantly renegotiating the goalposts and shifting the
“honeypot” further out as “change” introduces time delay and benefits erosion.
3.5.1.4 Typical Investment & Savings profile of Outsourced arrangements
The purpose of the model is to illustrate from an Outsourcers point of view (black line) the
attraction of a contract that provides investment up front with planned savings based on
contractual obligations based on no changes to the contract. The red line is introduced to
depict the often “reality” as outsourcers drive the change agenda to push out savings
realisation.
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If an external partner is contracted to both CE & CWaC via an outsource or JV, they may well
bring partially or fully constructed solutions (assets) with them to perform the change – but
still at a cost. They will also need to secure a profit from their work, as well as fund their own
staff to manage the contract. The sum of these costs forces the realisation of return / cash
savings for Cheshire much further into the future
3.5.2 Assumed Drivers & Expected Benefits from this Option
• Cost Savings & cost restructuring: predictability of returns
• Improved quality - Achieve a step change in quality through contracting out the service with
a new service level agreement.
• Knowledge: Access to intellectual property and wider experience and best practice
knowledge.
• Contract: Services will be provided to a legally binding contract with financial penalties and
legal redress. This is not the case with internal services.
• Operational expertise: Access to operational best practice that would be too difficult or
time consuming to develop in-house.
• Staffing issues: Access to a larger talent pool and a sustainable source of skills.
• Capacity management: An improved method of capacity management of services and
technology where the risk in providing the excess capacity is borne by the supplier.
• Catalyst for change: An organisation can use an outsourcing agreement as a catalyst for
major step change that cannot be achieved alone. The outsourcer becomes a Change agent
in the process.
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• Reduced time to market: The acceleration of the development or production of a product
through the additional capability brought by the supplier.
• Commoditisation: The trend of standardising business processes, IT Services and application
services enabling businesses to intelligently buy at the right price. Allows a wide range of
businesses access to services previously only available to large corporations.
• Risk management: An approach to risk management for some types of risks is to partner
with an outsourcer who is better able to provide the mitigation.
3.5.3 Examples of this Delivery Model
Many outsource models of service delivery are evident across the public sector e.g:
• Avarto / Bertlesman providing IT, Revs and Bens and front office support to East
Riding and Sefton Councils
• BT providing IT, consulting, business process services to ,Rotherham, South Tynside,
Suffolk and Sandwell councils
• IBM providing IT, consulting, business process, outsourcing services to South West
One and Essex CC
• Serco providing consultancy and facilities management to Glasgow City Council
• Steria providing back office services to the NHS
Suffolk CC have been the most ambitious in this area with a vision to outsource the majority
of services and to propel them into becoming the ultimate commissioning council. However
the vision lacks public support has been slow to materialise.
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3.5.4 SWOT Analysis
Strengths
• Can utilise companies with proven track
records – access to private sector
delivery capability.
• Risk transferred.
• Immediate return on investment/asset.
• Aligns with local governmental
commissioning models.
• Highly predictable returns (but they may
be under-ambitious).
Weaknesses
• Cost of OJEU – plus at least 18 month
timescale.
• Potentially rigid contract – hard to
renegotiate, lengthy – typically 5-8
years.
• ‘One size fits all’ solutions – not locally
bespoke or imbued with public sector
ethos.
• Outsourcers tend to sweat assets – client
becomes outdated and slow to change.
• Client/customer dissatisfaction grows
over time – frustration levels at lack of
change/competitive edge.
Opportunities
• Opportunity to create a core vender
management skill base within client.
• Improved quality of service.
• Opportunity to remove legal and cultural
issues out of the organisation.
Threats
• Already cashed in significant –
potentially not an attractive proposition
to an outsource company.
• Likely to operate an aggressive revenue
generation/saving model to achieve
targets.
• Danger that revenue generation culture
supplants public representation/service.
• Governance purely contractual.
• Outsource company will respond to
most active/lucrative client – we could
be neglected.
• Political sensitivities to pure outsourcing
– trend of in-sourcing evidence.
• Success dependant on financial stability
of the outsource company.
3.5.5 High Level Risks
The risks below are not by any means exhaustive but are presented as the key high level
risks to consider.
3.5.5.1 Handing over efficiencies
The current “package” of ICT and HR & Finance services will more than likely be viewed as a
limited opportunity for Outsource companies to make an acceptable return. They are likely
to seek a long term tie-in and include other services. Their interest would undoubtedly lie in
transactional services which are ripe for transformation/automation. CE & CWaC’s
Customer Contact Centres and Revenue Collection services would be seen as lucrative areas
for Outsourcers to make their returns as there is scope for removal of duplication,
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downsizing capacity and standardisation. To illustrate this, the estimated savings from
merging two Councils’ Revenues services is circa £360k, which the Councils would in effect
be “handing” to an outsourcer as part of a deal and they are likely retain at least 40% as
contribution to their profit target. It is important to note that this is an, informed,
illustration. Accurate % retention can only be determined via a competitive dialogue
process and subsequent due diligence phases.
3.5.5.2 Dissatisfaction & loss of control
In outsourcing arrangements there is a high degree of risk that is particularly pertinent to ICT
as it is usual practice to novate existing contracts to the Outsource Company. The
Outsourcers tend to push one of two agendas; to sweat assets or push for standardisation.
The former has a high degree of risk of products going beyond “end of life”, the latter may
not provide satisfaction in the medium/long term as the Outsourcer will not be driven by the
councils change agenda. Evidence shows that dissatisfaction and loss of control of the
change agenda are key factors in why a number outsource arrangements are deemed to be
failing. This position could be improved by the councils through robust commercial and
contract management skills and practices.
3.5.5.3 Approach to assets & liabilities
It is crucial to understand the structure of the long term contract and the approach the
Outsource Company intends to take with future investment of assets and mitigation of
liabilities. Key areas of risk for the councils are:
• Outsourcers are minded to only TUPE senior management team and “key
knowledge” staff and push for a staff secondment model over an infinite period.
Future liabilities for staff remuneration, redundancy and pensions would therefore
remain with the employing authorities. They would also seek to ensure that the
unfunded deficit of the pension fund remains with the councils.
• Outsourcers will more than likely factor in existing property liabilities but would seek
to limit their underwriting, typically for no longer than 2 years, and reserve the right
to exit existing property/locations. This would leave the councils with properties to
sell/lease/sublet in the future.
3.5.5.4 Step in rights & Exit Arrangements
It is critical to agree robust step-in rights within the contract and clear exit arrangements &
associated costs. This is often the maximum point of leverage between the
customer/outsourcer. There are a number of arrangements we could learn from, notably
the arrangement between Sainsbury’s Bank and Bank of Scotland where the exit costs run
into £100m’s.
Failure of the arrangement would require either transfer of service and staff in-house and
re-tender. Or, sourcing new provider at short notice at, potentially, higher cost.
3.5.6 Summary Overview
This option is not recommended for the following reasons.
There is evidence that there is a “honeymoon” period with these arrangements unless there
is a high degree of flexibility in the initial procurement & subsequent contract. In the
honeymoon period there is a high degree of satisfaction when predicable “knowns” are
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delivered. Dissatisfaction tends to appear later down the line when the outsourcer fails to
deliver to a Council’s change agenda. This is particularly pertinent for ICT service delivery.
Other high level reasons why outsourcing is not a recommended option for the current
shared services:
• In the time it takes to undertake a competitive dialogue process and OJEU procurement,
the plan suggests that SLE delivery option would have started realising same level
benefits.
• Inability to create future value for the councils
• Handing over efficiencies to a third party – we could redesign our approach to capacity /
contract management and keep 100% of the savings.
• Lack of commercial control
• Difficulty in identifying qualified and reliable suppliers (there is a lot of evidence of
insourcing & negative publicity of failure of these arrangements for complex service
delivery).
• Disruption of supplies
• Potential security problems associated with the push to offshore work
Worthy of mention is that there is nothing preventing the proposed SLE to outsource some
of its current provision to optimise efficiency e.g. PSN, Cloud based solutions.
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3.6 Joint Venture
For Joint ventures, a legal entity is setup between the parties to jointly deliver the service for
a finite period of time. Typically, the private sector partner is the majority shareholder in
these arrangements. Contract tenure is a longer term tie-in, typically 8-10 years. An OJEU
level procurement, including a competitive dialogue process will be needed.
3.6.1 What this means for the councils
There are a great many similarities between Joint Venture (JV) and Outsource arrangements
and the methods and approach that potential partner will take.
Rather than repeat section 3.5, in this section we will look at the key differences of a Joint
Venture arrangement.
JV partners will still use output / outcome based pricing (as described in the outsourcing
section 3.5).
3.6.1.1 The key difference between Outsourcing & JV arrangements
Transparency in accounting
Joint Venture organisations use Open Book / Open accounting methods
Open book: e.g. income, expenditure & charges (e.g. reserve against a risk)
Open Accounting: Councils will see the construction of the all production costs.
However, what isn’t seen is the cost of the parent company (Costs charged between
JV partner and its parent company).
To illustrate this: A Parent company currently have a 48% profit margin on their outsourcing
deals – the JV partner typically realise 12-14% margin.
The perceptions of open book can be a very vexatious and learning’s from the marketplace
indicate that it is big cause of tension in JV arrangements when renegotiating planned
delivery within the contract. As customers feel they have full transparency but actually they
don’t.
Tenure & Outcomes for the JV
The tenure of the contract usually has a long tie-in, often 8-10 years. In terms of
shareholding it is normally 49/51 and the partner would often want the casting vote (highly
dependent on financial/taxation model agreed). Also dependent on the structure of the
deal dividends may be paid at different ratios – a typical model, after realising the minimum
commitment in the contract, is on a 50/50 share basis.
Areas of potential future conflict are typically:
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• Timing of investments – availability of funding / conflicting priorities driven by
council pressure from budget cuts and wanting to postpone planned events and/or
planned investments often lead to compromises being made that fuel lack of trust in
the relationship.
• Conflict of interest in external market planning – Cheshire choose to sell their
contact centres to SME, sales effort (introducing competition the parent company
may not approve of)
• Approaches to the management of risk
3.6.2 Assumed Drivers for this Option
Undoubtedly a Joint Venture would present opportunities and it is the delivery model of
choice if the key strategic drivers are:
• Diversification
• Growth
• Improvement
3.6.3 Examples of this Delivery Model
“Service Birmingham” is a joint venture between Birmingham City Council and Capita
providing ICT, Customer Centre, Learning and Knowledge and project services with a view to
expanding into HR and payroll services. Based on sound systems and operating models and
built around investment in the local economy and job creation this successful partnership is
set to continue until 2021 with a total worth of £1 billion
Edinburgh City Council recently renewed its contract with BT until 2016 after it achieved 88%
of its improvement targets. The Council stands to profit from £22 million in savings. This
joint venture has focused on standardising infrastructure to drive out efficiency to be
reinvested in the project.
South West One is a joint venture set up with Somerset CC, Taunton Deane BC, Avon and
Somerset Police and IBM providing a range of corporate services. Savings were projected at
£1.7m year which enabled Somerset CC to levy below average council tax increases.
However poor consideration of the commercial offering and the failure to attract additional
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partners have led to reported losses of £31.5m and allegations that South West One is trying
to hide the extent of its bail-out of IBM, the dominant partner in the venture.
Liverpool Direct is a joint venture with BT offering customer contact support, ICT solutions
and management, HR and Revenue and Benefit services. Employing 1,100 people with a net
turnover of £80m p.a. it is the largest public-private joint venture in the UK. Liverpool Direct
started in 2001 and despite initial problems is now attracting new partners, most notably
Lancashire County Council. Its success is in delivering desired outcomes e.g. retained jobs,
security & expansion in terms of high speed networks across Liverpool.
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3.6.4 SWOT Analysis
Strengths
• Access to commercial skills & value
proposition development.
• Access to private sector delivery
capability – finance, talent, change
management.
• Early commercial dividend.
• Risk transfer to partner.
• Staff perceive venture as an opportunity,
tapping into experiences of large, private
sector organisation.
• Corresponds to local governmental
strategy to adopt commissioning
models.
• Access to experienced mobilisation and
management teams.
Weaknesses
• Cost of OJEU – plus at least 18 month
timescale.
• Loss of control of sales destiny
• Handing over efficiencies to partner.
• Difficulty of negotiating terms midcontract.
• Lengthy tenure of contract – usually
tied-in for 5-10 years.
• Pension deficit remains with local
authority.
• Current negative perception of JV’s, e.g.
South West One, Cornwall Strategic
Partnership.
Opportunities
• Attract additional business more easily.
• Sales and marketing methods &
disciplines including:
o Proposition development
o Sales
o Bid management
o Contract management
• Potential to increase employment in
local economy (depending on deal
structure).
• Downsizing local authority staff
numbers.
Threats
• Revenue growth will not be on the JV
partner’s agenda.
• JV partner will be more focussed on
scope change agenda to increase
profits/dividends
• Loss of control via novation.
• Need to invest in strong retained vendor
management – possibly have to ‘buy in’
in the short/medium term.
• Danger that profit generation culture
supplants public representation/service.
• Contractual difficulty of ‘stepping in’
should the authority not be content –
need clear exit strategy.
• Political sensitivities if deal involved job
losses in local economy.
• Stakeholder buy-in is critical –
staff/unions.
3.6.5 High Level Risks
• Term of the contract – a JV is likely to have a longer tenure due to the levels of
transformation & change
• Exit arrangements are extremely costly & disruptive.
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• Overhead expense is likely to higher than an outsource arrangement as there is more of a
requirement to have joint projects & management boards
• The councils will experience loss of control of the change agenda.
3.6.6 Summary Overview
This is not a recommended option for the same reasons as noted in the Option Appraisal for
Outsourcing - section 3.5.7.
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3.7 Separate Legal Entity
This model is appropriate where there is a desire to trade commercially for a profit with
other public and private sector organisations. It involves establishing a separate legal entity
(SLE) – i.e. a company - which will deliver services back to the contracting authorities. There
are a number of different forms a company can take such as
- company limited by shares or guarantee (either of which may be charitable);
- community interest company;
- industrial and provident society.
The most suitable structure will depend on the key aims and objectives of the SLE. A
company limited by shares will tend to be appropriate where the SLE is commercial in
nature. A company limited by guarantee is the traditional model for a non-profit distributing
company where the intention is to reinvest profits into the business. A CIC is designed for
social enterprise which operates as a business. An IPS is a form of employee mutual.
The most suitable structure for Cheshire Shared Services is a company that is limited by
shares and is Teckal compliant
2
3.7.1 What this means for the councils
Creating a Teckal compliant SLE limited by share requires:
• adoption of a commercial business model which will exact commercial behaviours (a
proposed business model is explored further in Section 4.3). The SLE will need to be
successful at “realising capacity or releasing capacity”. The model needs to be aligned
with a Business Plan so as to constant flex to levels of growth, reinvestment
opportunities through efficiency realisation and management of risk.
• investment in the current management structure which fully implements the current
Target Operating Model, to build a solid culture for the business to move forward. (the
current target operating model is presented in Section 4.4)
• focus on Strategic Marketing activity, to develop & monetise the company offering &
propositions (a proposed approach is included in Section 4.5)
3.7.1.1 Background to the Teckal exemption
If the SLE is to be established to operate under the Teckal exemption the Councils will be
able to contract with it without a procurement exercise. The Teckal exemption was
established by the ECJ in the case of Teckal SSRL v Commune de Viano and Azienda Gas
Acqua Concorzial (AGAC) di Reggio Emilia and is sometimes referred to as the in-house
exemption. For Teckal to apply, two conditions must be satisfied;
(1) The contracting authority must exercise over the service provider control which is
similar to that which it exercises over its own departments; and
(2) The service provider carries out the essential part of its activities with the
contracting authority.
2
A more detailed briefing document which explains the different SLE structures and Teckal exemption can be
produced upon request
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Control test
In respect of the control test it is not enough to simply own the SLE. The Councils must
retain the same degree of control as it has over its internal departments such that it has “a
power of decisive influence over both strategic objectives and significant decisions” of the
SLE. There can be no private ownership of the SLE as this would mean the control test is not
satisfied. The Councils will therefore own 100% the shares in the SLE between them. Whilst
the fact of ownership tends to indicate sufficient control, it is not decisive and additional
provisions will be included within the company articles which reserve certain decisions to
the Councils as shareholders. The control test may be satisfied by the reservation