Merger or Sharer? … you
decide
Collaboration in social
housing
There’s lots of noise
in the sector about mergers right now – but are we in danger of becoming a ‘one
trick pony’ in our delivery response to the increasing challenge of driving
greater value for money … Sharon Collins
argues that shared services, for some, can be a viable merger alternative
The model of social housing is changing. The continuing challenges of our operating
environment driven by austerity and reform means we must find new solutions to
increasingly complex problems if we’re to continue to drive cost savings, generate
efficiencies from which to build more homes, and better sweat existing assets.
And yet our response as a sector has been to merge – in
fact, merger upon merger, even mega-mergers between housing organisations in our
drive to save money.
But why do we seem to be consumed by merger mania? Are we in danger of being faced with
providers too big to rescue in the event of collapse? Do shareholders, do boards, do residents - as
our major stakeholder - continue to be comfortable being ‘swallowed up’ as part
of successive groupings?
Is (merger) ‘marriage’ all that it’s cracked up to be?
Is (merger) ‘marriage’ all that it’s cracked up to be?
Independent research by the CIH research[1]
found that increased scale/size through merger doesn’t necessarily deliver VFM
and, despite best (business case) intentions, mergers offer no guarantee of
improvement.
This is a view supported by repeated studies which find that
more than 50 percent - some even suggesting 70-90 per cent - of mergers destroy
rather than create value. But despite
this, the corporate merger ‘wedding’ season has been in full swing, and looks
set to continue.
But, let’s be clear.
I’m not saying that mergers aren’t right for some – indeed if done well,
they can produce the financial capacity, leverage and scale to protect front
line services whilst generating capacity to build more homes than would be
possible alone – but, what I am saying is there are other delivery options
available.
Choosing the best mix
between independence, scale and capacity is one of the key strategic challenges
facing the sector. But if mergers aren’t
for you … what opportunities do shared services bring?
Sharing ... the technical bits
Unlike mergers, operational control and ownership of shared services
are retained, owned and controlled by partners in the group. Partners retain their independent identities
and therefore their sovereignty and retain their capital assets. They typically have equal stakes (although
some may have a majority) in the shared business and in decision making, whilst
benefiting from pooled resources, surpluses, investment and keeping all the efficiencies
gained.
Shared Services - key facts:
• Shared
services are a collaboration of two or more public organisations forming an
independent Cost-Sharing Group (CSG) which supplies members with ‘directly
necessary’ services exempt from VAT
• Governance
varies, but typically comprise equitable stakes or lead partner arrangements
• The
CSG is owned and activities directly controlled by members of the group –
similar to that which it exercises over its own services
• Partners
retain independence
• Services
are supplied at cost
|
Local authorities have been leading the way in shared
services for some considerable time, generating savings nearing £0.5bn[2]. The lion’s share of savings has been made in
back office shared arrangements, with shared management and shared Chief
Executives, procurement and customer facing services following close
behind.
A notable sharer within the LA housing sector is East Kent Housing. In April 2011 four district councils of
Shepway, Thanet, Canterbury and Dover formed a ‘super ALMO’ to deliver housing
management and associated services across their retained council homes. With shared set up costs of £450K plus staff
time and some legals, the shared arrangement delivered £702K savings in Year 1,
with £200-300K recurrently plus an annual 15% efficiency target – with further
savings still to be realised through fully integrating IT systems.
But despite East Kent’s success, the appetite for sharing
services within housing is taking time to gather momentum. Why is this?
Is there a lack of knowledge about the benefits of sharing as a viable
merger alternative? Are operating
margins still too buoyant? Is there
simply a lack of appetite?
So who’s doing what …
Since 2012 when changes to the Finance Act enabled 20% VAT
savings through the formation of Cost Sharing Group (CSG) exemptions[3],
there have been a small but growing number of shared arrangements within the
housing association market. Here’s a
quick peek at four of them:
In April 2013 ‘Jobs at home – Three Rivers and Watford’ formed
a social enterprise providing jobs for out of work tenants created through
collaboration between Watford Community Housing Trust and Thrive
Homes.
Initially focused on providing a redecorations service in some of the
9,000 homes owned by the two landlords the scope has now expanded with the
additional of B3Living to the group in 2014 to include aids and adaptations,
a handyperson service, grounds maintenance, clearance and support for
Watford’s own in-house repairs team.
Not only has the CSG enabled
job creation for previously unskilled, long term unemployed tenants, but it
has also delivered 30% cost savings, despite increased management time in
mentoring, training and coaching.
|
In the North East and Cumbria 17,000-home Isos has been supplying heating services to neighbour Two Castles (3,500 home) via a CSG,
Isos Complete Support (ICS), since April 2015.
The initial ‘courtship’ came from Two Castles, who had previously
used a commercial contractor procured via a consortium framework. Isos’s Direct Labour Organisation provided
a great cultural fit for Two Castles which, as well as reducing the need for
intensive contract management, sharing enabled significant savings on VAT and
reduced risk whilst delivering a better service to tenants. For Isos the shared arrangement meant it
was able to drive down unit costs by spreading management and overhead costs.
|
In Yorkshire, 31,000-home Wakefield
and District Housing (WDH) formed Northern Shared Services (NSS) in
partnership with 35,000-home Together
Housing Group (THG) in March 2013 to deliver a multi-trade repair and
maintenance service, including gas, mechanical and electrical-related works,
as well as the upgrade of THG’s void properties.
The first year achieved reduced Cost Per Property (maintenance) of
8.5% from £69.82 to £63.87.
Wider benefits include economies of scale, increased resilience,
greater market share and therefore greater regional presence, minimising
risks associated with commercial diversification and growth.
|
Following merger of Festival Housing and Worcester Community Housing,
15,000 home Fortis Living has also
established a CSG (Fortis Property Care) with its 6,500-home neighbour Rooftop Housing Group, in order to
share its in-house maintenance contractor, Fortis Property Care. Fortis
predicts the scheme will save £7.56m for its partners, via financial
efficiencies, over 10 years.
|
So why are they sharing?
The motivation to share services isn’t just about saving
money or efficiency, but wider commercial and social benefits are also
achievable.
Sharing – the benefits case
•
Reduce cost and retain efficiencies
•
Increase service resilience
•
Increase productivity, capability and capacity
•
Share investments
•
Improve business data intelligence
•
Share risk
•
Increase resource flexibility
|
But, as with mergers, sharing can have its pitfalls. Similar to the reasons merger strategies can crumble, they include:
- • lack of trust and difficulty in finding a suitable partner
- • lack of strategic appetite
- • leadership and cultural issues
- • system and process interface difficulties
- • inertia and poor project management
- • poor
communications
But despite risks, there are real driving forces for sector transformation – One per cent rent reduction, welfare cuts, universal credit, local housing allowance, withering grant, pay to stay, extension of the right to buy and more. Set in the context of the HCA’s recent regression analysis[4], there are such wide variances in costs that inefficiency must be a factor, suggesting significant scope for savings both in back office and front line provision – all areas where local government has already had reasonable success through sharing services.
With the
Regulator champing on the bit for ‘step change’ in operating efficiency and
maximising the potential of any latent resources within in-depth assessments of
VFM, how are boards rising to the challenge of “… understand(ing) the return
on assets …for improving VFM including
the potential benefit in alternative delivery models”[5]?
In preparing for this year’s Board
Away Day or strategic planning events how are you focusing hard on risk … and
opportunity? What’s your balance between ‘commercial’ vs ‘social’? How are you mitigating exposures across
property portfolios? Are you planning for greater bad debt - reworking budgets,
cutting staff or planning invest-to-save strategies? What are your least:worst decisions? – and
ultimately, how do your current service delivery models stack up against this
new state of ‘normal’? If merging isn’t
for you, what opportunities can sharing bring?
So, if sharing is on your short list of
strategic options, what are my top tips to get started?
1.
Explore regional collaboration opportunities
and build trust
2.
Agree a compelling vision of the shared
service and keep this alive
3.
Build a strong business case - understand
any deal breakers early on
4.
Nurture and sustain relationships
5.
Communicate, communicate, communicate
6.
Jenga test the individual service to be
shared to understand the ripple effect on the rest of your business
7.
Road test your shared service before
implementation
I believe
shared services provide a real and viable strategic alternative to merger. But whatever route is right for you, collaboration, in whatever
form it takes, is critical to future
success.
Join
the conversation, go to www.sharedventures.co.uk,
comment on our blog, or tweet #CollaborateDebate
Sharon Collins
Director, Collins Corporate Solutions Ltd
Director, Collins Corporate Solutions Ltd
September 2016
About the author: Sharon is the Director of Shared Ventures Ltd
– a business-to-business collaboration service which enables public sector
organisations to share or co-produce front line or back office services, lever
shared investment and deliver savings whilst improving customer service.
Visit www.sharedventures.co.uk
[1]
CIH – Does Size Matter – or does culture drive VFM 2011
[2]
Local Government Association (LGA) website reports 387 Council delivering 416
Shared Services generating savings of £462m.
[3]
The introduction of a new Group 16 to Schedule 9 of the VAT Act 1994. More info: www.hmrc.gov.uk
[4] Delivering
better value for money: understanding differences in unit costs – summary https://www.gov.uk/government/publications/delivering-better-value-for-money-understanding-differences-in-unit-costs
[5]
Extract from VFM Standard