Merger or Sharer? ... you decide

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?

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

September 2016

Copyright ©Shared Ventures [2016] all rights reserved. The content of this document is copyright and may not be reproduced without the permission of Shared Ventures Ltd.   

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  

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[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