Wednesday, December 14, 2011

My piece for the Guardian this week

We've all heard a lot about public sector mutuals: the government's vision of millions of public sector workers setting up shop as employee mutuals and selling their services back to the state.

In truth, progress has been slow. The Mutual Support Fund, launched at the beginning of December, has been a long time coming. Councils in particular have had other things on their mind over the past year. Overall, it is probably fair to say that public service mutuals have not, as yet, set the world on fire.

Is this about to change? Possibly. At a structural level, it is clear to that the public sector's days as a provider of services are numbered. Selby council, in north Yorkshire, now employs just 14 people. The rest are with external providers. This is the direction of travel and the new localism bill will make challenge to direct public provision a lot easier.

The question now, therefore, is who is going to take on services, update them and bring down their costs most effectively.

Let's be realistic here, the private sector is very good at organising councils' back-office services, mending the roads and collecting the bins. But there are areas where private companies are not so good – like providing social, community and healthcare services that bring together public resources with the energies of communities and individuals. This is, or should be, the "sweet spot", which mutuals and social enterprises can address.

One example of such a service is NAViGO, the ex-NHS service which was overall winner of the Guardian Public Service Award 2011.

But there are big hurdles to overcome for the future NAViGOs. The biggest by far is procurement. At the moment, the norm in public services is to run a tender process for virtually any service, even when one isn't strictly necessary. For the nascent mutual this can feel like climbing Everest. With no trading history or commercial skills, being pitted against experienced competition is a deterrent. Why go to all the trouble of forming a mutual only to get knocked out in round one?

There is, however, a way through the procurement conundrum, one supported by Cabinet Office minister Francis Maude – though, strangely, not one you hear so much about. Joint-venture mutuals – new ventures which bring together public sector staff with a seasoned external partner to set up a new company on a 50/50 basis – can run a procurement, not for the contract to provide but for a suitable external partner for the staff-led mutual, which will itself become the provider.

This transforms the staff's position in the procurement from one of nail-biting underdog to one of a judge in a beauty contest between different organisations hoping to partner the new mutual. Potential joint-venture partners can be selected, or dismissed, on the basis of their experience, skills and cultural match to the staff in the mutual.

This is arguably a far more attractive proposition not only for the staff, who also get help in setting up the mutual, but also for the public bodies, which will be able to transfer a lot of the start-up costs on to the new joint-venture partner.

Can this idea fly? Yes, if it is given the same amount of attention and support as the idea of stand-alone spinouts, with all of their attendant risks and complications.

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

Monday, December 5, 2011

Cry Freedom - why the stepped out leaders never want to go back - My recent piece for 'Third Sector' magazine

During 2011 we at Stepping Out have helped 25 leaders to cross the aisle from the public to the third sector, and their stories have inspired me to write a new book, published this week. How to Step Out’ is a guidebook for people in the public sector who want to take their service out as a mutual organisation or social enterprise.

What can be learned from these freshly-minted converts? Three things stand out. The first is that they have come into the third sector, with all its uncertainties, because of the unique freedom it offers: freedom from the senseless bureaucracy and brutal top-down management of the public sector: and freedom from its alternative - the hollow profit-grind of the private sector. For all of them, joining the third sector is like breathing mountain air after years of choking industrial smog. In the words of one of the newly liberated: “We are free – you cannot believe the energy and value this unleashes”.

The second bit of learning from this cohort of new third sector leaders is that good, old-fashioned leadership is absolutely key to seeing through major change. Convincing public sector workers to give up their ancient comforts for a life of competition in the free market is not an easy pitch. In their move from public sector caterpillar to third sector butterfly these leaders provide a masterclass in how to take people with you. You put yourself out there. You communicate until you drop. You listen. You engage people in the change. You put your money where your mouth is. Again, in the words of one recently stepped-out leader, ‘you have to make your case hundreds of times – then all over again’.

Another thing that can be learned from this group is that third sector providers should be involved in new-style public service provision in a big way. My book abounds with stories of how these organizations have achieved amazing things with former public sector services and saved public money at the same time. These leaders show us that the civil society sector is a viable alternative to the public and private sectors - not just a cherry on the cake.

This is perhaps the most important point to make. The cold logic of long-term austerity – possibly running into the 2020s - means that old-style public services are, sooner or later, going to run out of road. They will either have to stop or be replaced with stuff that is cheaper and better. We have to be part of the answer, in my view. If we refuse to be properly involved, and remain in our historic comfort zone, we will end up as bystanders to probably the biggest privatization of public services in the developed world.

One final thing that really hit me hard when we researched this book was the total unanimity on one question: ‘Would you ever go back to the public sector?’ Nobody, not even the ones who have struggled since stepping out, would ever entertain the idea. This says volumes for what is good about the third sector. You might not see it that way, but this sector, despite all its irritations, is probably still one of the best places in the world in which to work.