How to share services effectively

Frank Jennings and Simon Bellm advised Merton Council on its shared HR services arrangement with Sutton Council. In this article they examine what is needed for such projects to work successfully.

The country is reeling from a massive public sector deficit, the like of which we have not seen in our lifetime. The coalition government has decided to tackle this head-on and is looking for savings across the board of 25%, but has ring-fenced some areas from the cuts and this means that other areas have to make savings of up to 40%.

Whether or not the government can achieve this level of savings without decimating public services or suffering general strikes threatened by the unions, one thing is sure – the public sector has to make drastic efficiencies. Sharing services is one model that some public sector bodies have used to great effect following the Gershon Review and Total Place and, not surprisingly, is being scrutinised by others to see if it can deliver efficiencies.

Sharing services is not new. Large private sector corporations have been sharing services since the 1980s when Ford centralised its accounting functions and introduced new systems and technology to avoid having to pay all its suppliers and collect money from all its customers from hundreds of outlets. The FT reports that savings from a shared service arrangement are likely to be 20-30% within two to three years derived from a 50% reduction or redeployment in staff. Intel managed to cut its costs to process an invoice from $8 to less than $1.

Choosing the right model

So what are shared services and how can you implement them? In essence, a shared service model refers to collaborating or partnering to provide services at one end of the scale, such as simple cooperation through a secondment or pooling of people and equipment, to a fully transferred or outsourced model at the other end of the scale, where one organisation will act as a lead or host to the other. The common theme is that funding and resourcing are shared between the bodies and, by doing so, can be reduced thus producing the much sought-after savings. Each model raises issues which are worth a closer look.

Basis of the relationship

Whereas companies legislation gives a private sector corporation plenty of freedom to rearrange its functions as it (and its shareholders) see fit, the public sector is more rigidly constrained by statute. In a widely-reported case from 2009, the Court of Appeal ruled that Brent Council did not have the power to participate in the London Authorities Mutual Limited (LAML) insurance company. This has caused some to doubt whether shared services can work without government intervention.

Nevertheless, cooperation between NHS bodies and local authorities under so-called “Section 75 agreements” has proven successful. Also, the Local Government Acts contain numerous provisions that can assist, such as the requirement on local authorities to secure continuous improvement in the way in which its functions are exercised. Then, there is the “well-being power” which grants local authorities the power to do anything which it considers is likely to achieve the promotion or improvement of the economic, social or environmental well-being of its local area. Also, two or more local authorities can exercise any of their functions jointly and have the power to do anything which is calculated to facilitate or is conducive or incidental to the discharge of its functions.

Notwithstanding the set-back over the LAML case, the public sector has success stories. For example, there is the HR tie-up between neighbouring London Boroughs, Sutton and Merton with savings reported to be £500,000 in 2010/11. Or take the sharing between Adur and Worthing Councils which is extending beyond simply sharing senior officers – including a chief executive – to sharing other service areas, which is set to generate a total net revenue saving of £4.4m in the period to 2012/13.

Overcoming the issues

Where the shared service is of the informal “partnering” type with the pooling or secondment of staff, the borrowing of equipment and lending of premises, each participating body is likely to retain its responsibility and risk in relation to the outcomes of the service, as well as the staff, equipment and other resources. This might be an effective way of carrying on providing services without fundamentally changing the method of delivery and without having to undergo constitutional change or restructuring and redundancies. This relationship is not for everyone as the lack of overall control can lead to tension and possibly a breakdown of the relationship.

For example, the seconded employee might be paid more than his new peers because of different pay structures between the two parent bodies and this information, once known, could prove divisive. Also, who will be responsible for disciplining the employee if the need ever arises? Who will maintain the condition of the loaned property, particularly if it was not in top condition to start with? If the two bodies continue with their own procured supplier relationships, this will mean different suppliers providing the same facility to the shared arrangement possibly with different pricing and invoicing procedures. Of course, over time the relationship could take on the guise of a fully shared arrangement but, without having considered this or provided for it upfront, this could lead to further complications.

The more formal type of arrangement through a lead/host or a joint venture organisation is likely to include the legal transfer of employees and equipment. The typical position at law is that both organisations have to comply with employment obligations but from the point of transfer, the lead organisation generally takes on responsibility and liability for the transferring employees. The bodies need to think about this in advance, particularly where there are different pay structures. In addition, what about the pension schemes? Further, unless shared premises are sold to the lead organisation, it is preferable that they are occupied pursuant to a formal lease. Also, some rationalising of suppliers is likely, possibly by postponing new procurements in the short term but then undertaking a joint procurement once the shared arrangement is up and running.

This transfer of staff, equipment and resources means the arrangement is more complicated and is suitable for longer-term proposals but is the one which is more likely to deliver substantial savings.

Getting started

Establishing a clear business case from the outset is vital. Implementing a fully shared arrangement effectively is not easy. It requires a commitment to the project and a compelling business argument to win over those who doubt its benefits. From the outset a clear business case identifying the benefits of the arrangement needs to be established. Not only must that clear business case be robust but it needs to be supported by a senior sponsor within the partner authorities who has both the accountability and the authority to deliver the new service.

The key is to look only at those issues which need to be resolved in order to move the shared services arrangement forward. Too much time can be spent worrying about issues which will never ultimately arise. An effective way of dealing with the problem is to establish basic principles upon which the division of responsibilities and liabilities will be based and for a robust internal dispute resolution process to be established. The organisations entering the arrangement can then agree the principles upon which they will operate and will agree the process by which those principles will be applied without having to iron out every last issue which may risk derailing or delaying the project.

Inevitably there will be practical operational issues which will arise as a result of the merging of different organisations, day-to-day operations, policies and procedures, employees and other resources. A constructive consultation process may well produce some of the answers to the complicated issues that will be thrown up and those answers can be captured within a protocol which can work alongside any formal shared services arrangement.

Inevitably service sharing has become synonymous with the drive to reduce costs within the public sector and while unions may be enthusiastic to consult on the rationale behind a shared services arrangement, they are unlikely to embrace the idea warmly as they will fear the loss of jobs. Employee liabilities may be a sensitive area of negotiation between the partners. Whether those are liabilities in respect of employee relations issues relating to the transferring staff or whether they are liabilities arising from the actions of the staff, complex questions arise.

Furthermore, the organisations need to plan ahead and work out how to unpick the relationship. Will the service be separated back out? How will the staff and other resources be split? Who will bear the costs of the reorganisation, for example redundancy liabilities?

Post arrangement issues

Almost certainly the shared services arrangement will be followed by some form or reorganisation of staff and other resources. It may well be that a fresh process of consultation is required, particularly if large scale redundancies  are anticipated or if employees are to move to harmonised terms. It might be possible to sell-off unused equipment and premises in which case who will reap the rewards?

Another sensitive issue is performance management. Who is responsible for performance management, particularly where services are rendered to an organisation other than the host or lead authority? How does the “non-host” partner raise concerns regarding the performance which is not directly within its control? This is probably best resolved by appointing a joint management board with a junior representatives meeting regularly to take operational decisions and senior representatives retaining overall control and resolving disputes.

Last but not least comes the issue of culture. Shared services arrangements are largely about people, about putting together a collaborative unit to deliver services more effectively. That collaboration will only happen if an investment is made in ensuring that those participating share the same set of values and a shared goal. That investment must start from the outset.

Key lessons

• The project needs the support of a senior sponsor with the authority and accountability to drive it forward and to overcome obstacles what will be put in its path
• A clear and cogent business case should be established from the outset
• Keep the project to a size and complexity that is manageable. Don’t bite off too more than you can chew
• Choose a model which best suits the service position on the ground
• Maintain a focus on the customer at all times.
• Look at the hurdles immediately ahead. Don’t be distracted by issues which may well never arise. Accept some issues cannot be resolved now. Establish principles and a process for resolving them later
• Appoint a joint management board to ensure the project runs smoothly both before it starts and afterwards

Frank Jennings and Simon Bellm are partners in the Public Sector Group at DMH Stallard LLP.