Trading companies and success

Tick iStock 000013381987XSmall 146x219 John Layton sets out the key factors that can determine whether a trading company formed by a local authority pays off.

An increasing number of local authorities have now taken the step of forming a trading company. Getting the council’s decision to go ahead and form a trading company will be the first of many hurdles to jump over before that business will be a success.

But what makes the real difference between success and failure?

One of the first trading companies to spin out from a local authority in the 1980s, was a direct labour organisation providing building maintenance services to the council and others in the South West – a profitable business with a good reputation within the local authority. But just after a year as a trading company, the business closed having being put into administration. The new business had insufficient cash and had taken on loss-making contracts.

This highlights a number of lessons – success in the public sector does not guarantee success in the private sector; operating in the open market requires commercial acumen; chasing turnover without adequate costing systems risks trading losses; and of course, as always, cash is King.

Since then, working with local authorities and aspiring trading company management teams a number of lessons have emerged that I would like to share. Of course, every new trading business will be different and there is no one successful recipe that works in all situations.

  • Leadership is crucial – there is no model for leadership and it derives from a key individual or a team. There are many definitions but one that captures my view is "Leadership manifests in projecting your ideas and expertise in a way that gains the confidence of others. Ultimately, leadership becomes about trust — when that confidence inspires others to align their vision and level of commitment for the betterment of the new enterprise" (Phil Blair, Manpower Services, USA). In research undertaken for PricewaterhouseCoopers leadership was shown as the Number 1 factor that mattered in determining the success of any new initiative.
  • A sound and robust business case is essential. In some situations a business case can be an arbitrage i.e. it has a guaranteed success for a short term when it has guaranteed business with the council, cost plus prices, secure financing arrangements underpinned by guarantees from its sponsors. However, the current round of formations is driven by a need by local government to secure substantial cost reductions and this requires implementation of step change - it is unlikely arbitrages will be on offer and new teams will need to battle for commercial success.
  • Flexibility in ways of working. Working the same way as things have always been done is unlikely to be the way to achieve the scale of economies required. Removal of bureaucracy and overheads that come by working by within a local authority will not be easy and will be resisted by those wedded to existing ways of working. Of course, changes to ensure that checks and balances remain in place at all times and risk management is robust.
  • Systems used need to be adapted to the private sector working especially those needed to produce timely accurate management information covering financial and non-information is available to all those charged to its management. Knowing that you had losses or overspends two months after the event is not what is required. Cash flow forecasts which are seldom of any interest to public sector managers are key tools to private sector management teams.
  • Recognising the need to retain key employees – losing the principal leaders of the team can be a catastrophic development. You need to know who those people are and looking after them is a good private sector practice. Having private sector employment contracts and remuneration arrangements that encourage loyalty are essential for some new businesses.
  • Protecting intellectual property – some new business depend on techniques perhaps software. Local authorities have not generally made efforts to protect intellectual assets and often not even recognising its commercial value – ensure that any such rights are protected and not gifted to competitors.

Establishing a new trading business will be exciting and challenging and those embarking on this path are wished well and I hope that they will be successful.

John Layton runs John Layton Associates. He can be contacted on 07768 480977 or This email address is being protected from spambots. You need JavaScript enabled to view it..

This article first appeared in the Local Authority Companies and Partnerships (LACAP) bulletin for November 2014. LACAP is published online by LexisNexis. For more information go to Hann Books.