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Staff mutuals - stepping out on the journey

The timing has never been better for local authority departments to establish staff-led mutuals:

  • the Cabinet Office has highlighted the manifesto commitment to facilitating the right to mutualise and is driving the policy forward; 
  • the Public Contracts Regulations 2015 are in force, removing a longstanding hurdle by introducing a limited route to awarding contracts to staff mutuals; and
  • public service mutuals have proven their viability in the market place, delivering significant savings to their parent authorities.

Although the scene is set, that is not to say the journey will be easy or one that every local authority department will wish to embark on. In this article we look at the top five considerations for those contemplating establishing a staff mutual. 

Planning 

As with embarking on any journey, preparation is key; the route, the destination - the things that are essential to get you there.

When considering establishing a staff mutual it will be necessary to do significant groundwork up front; from establishing the drivers and the case for mutualisation; to scoping out and ring-fencing the service to be spun-out through to strategy for the new entity.

At the outset of the project, planning will be required to address each of the key issues in relation to every phase. An essential element of that planning will be to ensure that the right legal, financial and strategic advice is available, be it internal or external.

Addressing the legal issues

While there are obvious benefits to be gained from mutualisation, the establishment of a staff mutual can pose an array of legal issues. Careful consideration must be given to the form of legal entity to be adopted; governance, the ownership structure, how property and other assets will be held, procurement, state aid, tax, pensions, employment and TUPE. 

While the legal issues are complicated, they are by no means insurmountable. The insight of advisors, experienced in the issues unique to the public sector and to staff mutuals can be key to the success of the project.

Securing funding 

Throughout the journey there will be funding considerations, from initial start up costs through to resourcing growth plans and diversification. The new entity will need to develop robust finance plans to ensure a steady income. Initially funding is likely to be derived almost exclusively from the parent local authority, and a resilient contract will be required to secure this. 

Going forwards, the business model may involve decreasing support from the parent authority and the new entity will be required to look at alternative sources of funding, and perhaps consider external investment. 

Identifying, understanding, deciding upon and contracting for sources of revenue will be key new challenges for entities used to focusing primarily on the delivery of public services. 

People 

The fact that employees will have a high level of management and governance, if not ownership rights, in the new entity means that the importance of people and their attitude to the project will be paramount. Perhaps more so than for any other kind of organisation, the success of a staff mutual will depend on staff buy-in. At each stage it will be important to involve and engage staff. The challenge will be to protect and nurture the public sector ethos while embracing the changes required to ensure the success of the new entity.

Aside from mind-set, there will an array of practical people considerations such as shareholding, management structure, TUPE and pensions. There will also be significant work to do in looking at human resource issues and assessing whether the department to be spun-out has the requisite skill set for the new entity or whether further resources (internal or external) are required. 

Operating commercially

While the main aim of the new entity will be to deliver services to public end users rather than creating a profit, that is not to say that the entity will not need to operate commercially. 

The exemption from the public procurement rules only applies to contracts for three years. After that period the staff mutual may be required to compete in the open market. It may be that the strategy for the entity is not only to re-win its original spin-out contract but to compete for other similar contracts from other local authorities. 

Commercial expertise and self promotion will be key new skills that will need to be developed to thrive in this new business environment.

Committing to the journey

It would be a mistake to underestimate the challenges in establishing staff mutuals but the potential benefits are significant. The alternative delivery model can deliver substantial savings to parent authorities, foster a culture of improvement and innovation, and benefit from high levels of staff engagement. 

There are undoubtedly risks, but with due consideration of the issues, good advice and careful planning, lean, robust alternative delivery models can thrive. It is likely that an increasing number of local authority departments will decide to navigate the journey.

For more information contact Philip Roberts, associate in TLT’s Public Sector team on +44 (0)333 006 1057 or philip.roberts@TLTsolicitors.com.

Contributor: Claire Welch

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com


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