Tuesday, December 6, 2011

To JV or not to JV...that is the question

How are we to get more people ‘stepping out’ from public services into Mutuals or social enterprises? One of the major stumbling blocks – of the many – concerns how groups of workers obtain an initial contract.

While there is nothing in the rules preventing the formation of a mutual or social enterprise by a Council, it is made abundantly clear in a paper on Procurement (just released by the Cabinet Office on its new Mutuals Information site) that the usual rules on procurement will apply to any aspiring spin-out.

This means, in effect, that if you’re a forming up a new venture to, say, run a social care service within your Council, you need to prepare for the possibility that you’re going to have to compete from the beginning with one or more existing providers – with all the tendering experience, financial muscle and reportable track-record they can bring.

There are however, five ways out of this for any group looking to spin out:

1. ‘Shadow’ company. Here you establish the venture, at first, as a kind of virtual-company, working within the Council ahead of a tender two or three years down the track. Staff are seconded in and there is an ‘arms length’ arrangement that mimics what it would be like to be legally separate. The idea here buy some time for the new venture to be gotten into shape for a competitive tender. You're not, of course, your own company, but you at least can operate more freely in preparation for competition.

2. Teckal company. Another approach is to set up a TECKAL company, one that just trades with the local authority and is still under its control . A TECKAL company has to do 90% of its business with the local authority and have an intention to remain primarily for that purpose only. The trouble with these is that they have to remain 'one client' companies in perpetuity - which is a bit of a limiter.

3. Joint Venture. An option increasingly under discussion is turn the procurement from a race you're in to be the provider into a contest for the joint-venture partner to help your staff group into a new mutual that delivers the service. You definitely continue to provide under the banner of a new JV mutual or SE - just not on your own. This will bring third party expertise and energy – but will mean you’re sharing control with a new JV partner.

4. Local Authority Trading Company. There exists 1990s legislation which allows LAs to trade so long as this is within their statutory purposes. This means an independent company can be set up with your staff in it – but that your company is wholly owned by the local authority whence you came. So not really an option for staff set on becoming employee-owned – but fine if the priority is simply to ‘spin out’.

5. Prove there is no market for what you do. For many services this are may well be possible, particularly those which are community-based, innovative or in some way unusual. You need to be confident though, so that the local authority feels safe from any external challenge. Some local authorities have also set up social enterprises in order to develop the local marketplace where they don’t feel comfortable with the range of alternatives to state provision, for whatever reason.

All of these provide a clear ‘way out’ for aspiring staff group of immediate open procurement of the service they run. However, all involve big compromises from all involved. It isn't just a ticket to freedom. The original idea of front-line being free, by right, to lead a spin-out – as happened in the NHS on Right to Request (2008-11) isn’t being envisaged this time around. Right to Provide (as it is being termed) is quite different to what happened with NHS spin-outs. It isn’t so much a right to provide as a right to tender.

What of joint-ventures? Much is being made of this as the real opportunity here. Instead of competing to run a service, what you get instead is a contest to partner with staff to set up a mutual. My hunch is that this is the option that most attracts the Coalition. Why? Because this involves other parties, including the private sector who can bring both cash and business expertise.

At the moment, there are relatively few live examples of such ventures actually happening. One reason for this, I am guessing, is that it isn’t really being presented yet by Government as the choice option for spinning out. The language is all about front-line workers emerging into newly minted ventures that they themselves have created. If the line was taken that joint-ventures were a preferred model, I am sure this would change.

And are they the best way forward? Well, joint ventures certainly solve some problems. The costs of setting up a spin out can be estimates at somewhere between 3% and 10% of first year turnover – and typically come in at somewhere between £250,000 and £500,000, all said. Plus JV is in many respects a more straightforward proposition. A JV, by its nature, can side-step a lot of the origination, developmental and commercial experience issues that dog new spin-outs. A well-positioned JV partner can turn an assault course into a relative walk in the park.

So, what’s not to like? Two things come to mind as possible obstacles. One is that a joint-venture is not the same as setting up your own business. You are not in control in the same way. It’s more akin to running a franchise than setting up on your own. Another is that you need JV partners which make sense for you, that share your values, which bring something to the party beyond what you bring yourself. Yes, a tender process should flush this out, but to even get to that stage, you've had to go through a lot on your own and it can be hard then to share the venture with new third parties that have come through a procurement process, people with whom you have no history.

Where do we stand? I am personally supportive of there being more JV spin-outs. I cannot see where the origination costs can come from otherwise. And, to be honest, I see a certain level of waste when it comes to the origination of spin-out businesses which could easily be absorbed by new JV entities eager to get into the game.

But it is the fact that JVs get around a lot of the difficulties around procurement that make it particularly attractive as a model. Otherwise, one is into all sorts of difficulties: When or whether to tender? How to set this up to give a mutual a chance of winning without breaking EU rules? How to create a clear pathway for staff which is not off-putting?

Therefore a JV will always get my vote ahead of the other main get-out option – the local authority trading or TECKAL company, which tends to more closely resemble its former self than feels comfortable. These entities are perfectly legal and achieveable and there are some great ones around but they do not give employees any more stake than was possible under state control. Which, if we're talking about employee ownership and its concurrent benefits, somewhat misses the point

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