Sizing up Local Government mergers and service integration

Transcription

1 Sizing up Local Government mergers and service integration

2 Mergers and service integration in Local Government: Sizing up This document considers experiences from the recent Local Government Reorganisation (LGR) and previous merger and integration activity in the public and private sectors to identify lessons for any local authority considering integration or merger. It seeks to define an approach that authorities should follow to ensure that such collaborations achieve real and additive benefits. Context Since the Gershon Report of 2004, most local authorities have been striving to improve the efficiency of their operations and, as a result, many have already undertaken numerous activities to extensively reduce their costs. However the level of cuts to public spending, announced as part of this year s Spending Review (SR), have changed the game for the public sector. Local authorities now need to consider radical new approaches to deliver against budgetary cuts as they endeavour to maintain positive outcomes for local citizens. It is unsurprising then, that several local authorities are taking a fresh look at mergers and other corporate restructuring activity. For example: The London Boroughs of Kensington and Chelsea, Hammersmith and Fulham and Westminster are considering merging a range of services through formalised tri-borough collaboration with anticipated savings of 100m per annum by 2013/14. The two district councils of Babergh and Mid Suffolk are planning a merger with planned savings of 1.3m a year. Bromsgrove and Redditch district councils in Worcestershire have merged services, but maintained separate political structures. Ten authorities in Greater Manchester announced that they are to combine a range of services, to create what the press have called a super-council, responsible for commissioning transport, housing, post-16 education and integrating economic development policy. Closer examination of these proposals shows that although larger in scale than traditional cost reduction initiatives, the majority are actually exploring large scale back office shared services or front line service integration as opposed to a full scale political merger. Newer and more substantial models are being considered which include both a complete operational merger, retaining existing political structures, through to the creation of a new single council. The range of options being considered can be summarised as shown in figure 1 below: Figure 1. Maturity Level Degree of change Collaboration Shared/integrated services Operational merger Political merger Example characteristics Sharing ideas. Sharing project resources. Procuring major contracts together (co-sourcing). Integrating major front-line and/or back-office services with: A single management team for in-scope services. Integrated teams. Common systems, processes & policies. A pooled budget. Delegating authority. Integrating all core services & management: Effectively creating a single management team, corporate infrastructure and consolidated budget. Exploiting a range of legal vehicles and delivery models for different services. Retaining existing political structures. Creating one optimum-sized council with: One cost of democracy. Fewer elected Members. One management team across all services. A new constitution. Complete operational integration. Type of approach Tactical Service transformation Strategic transformation Political 1

3 It is clear that integrating front and back office services and potentially merging organisations is an option that should form part of local authorities response to achieving the SR savings. Regardless of whether authorities embark on service integration or contemplate a full merger, the key challenge is sifting through a myriad of potential options to decide which course of action to take, ensuring that collaborative efforts deliver optimum value. These include: functional scope; governance options; drivers for change. Figure 2. Scope A potential view of scope could be, for example Political structures Council A Council B Strategic management Council A Council B The case for change What are the additive benefits of merger or service integration? Service commissioning Council A Integrated Council B Supply chain leverage (e.g. aggregation of purchasing demand). Frontline service delivery Integrated Reduced overhead/fixed costs (e.g. corporate mgmnt, property, ICT, fleet, support services, etc). Back-office service delivery Integrated Reduced cost of improvement (buying into an existing, better solution). Assets (e.g., IT & property) A Integrated B Wider considerations Governance Legal entities Financial arrangements Political oversight and scrutiny? Constitution delegation powers? Retained functions and touch points? Type of legal entity for different services/functions: commercial trading entity, trust, charity, co-op? Pooled budgets and payment by results? Sizing up Local Government mergers and service integration 2

4 Separating the myths from reality Historically mergers have achieved relatively low levels of success with 30% at worst and 50% at best being considered successful. However, organisations have become more adept at planning and executing mergers with greater focus on integration as well as the transaction itself. Mergers based on a clear and aligned strategy with a focus on outcomes and delivery of benefits, have produced better results. A dogmatic view that big is always best is unlikely to deliver benefits. So what does the evidence of past public sector mergers tell us? Local Government Reorganisation in 2009 demonstrated the savings potential of merger On 1 April 2009, the two-tier council areas of Bedfordshire, Cheshire, Cornwall, Durham, Northumberland, Shropshire and Wiltshire were reconfigured to form new Unitary Authorities. We took a selection of service areas that should be significantly impacted by cross-tier merger and compared their respective pre-merger (2008/09) and post-merger (2009/10) costs, comparing them with non-lgr authorities. The source of information for this analysis was CLG Revenue Out-turn data. The results demonstrated that the LGR service areas reduced expenditure by 13.4%, whereas in the non-lgr authority expenditure in these areas increased by 2.1%. The variations for some services are dramatic: Housing Benefit administration costs reduced by 8.2m (27.4%) for LGR authorities, but increased by 33.6m (6.2%) for the rest. Corporate and Democratic Core costs reduced by 51m (30%) in LGR authorities, while non-lgr authorities saw an increase of 92m (5.5%). Waste Collection and Disposal costs reduced by 6.0m (2.4%) in LGR authorities, but increased by 14.4m (0.5%) on average for all others. In overall terms, across the selection of services we investigated, there were only two areas (Council Tax Collection and Development Control) in which the LGR authorities performed less well than other councils. On balance, LGR would suggest local government mergers can deliver material financial benefits. Integrations/mergers result in proportionately lower management costs Not in all cases. Depending on the service in question, the culture of the organisation and the sophistication of processes, greater size can often create bureaucracy, layers of management and waste. An analysis of Corporate and Democratic Core costs demonstrates that they can begin to grow disproportionately when an organisation swells, as strategic managers struggle to control the organisation and over-compensate to get closer to customers, creating additional infrastructure and creating waste. Procurement aggregation delivers best value Exploiting economies of scale is in line with Sir Phillip Green s advice to the Government on procurement, but it may also clash with competing supply chain policies regarding, for example, the promotion of small businesses and black and minority group enterprises. In addition, while aggregation can bring significant value, particularly for commoditised goods and services, strategic commissioning and service redesign is more likely to deliver material savings for complex areas such as social care. The two aspects of design and aggregation need to be tackled together, while the buying approach needs to reflect the nature and behaviour of the actual supply market. Integrated services will require fewer front line staff Not necessarily. Integration could catalyse the roll out of a best in class, optimally efficient service across a larger area. However, it is important to recognise that for frontline delivery staff (i.e. direct resources) there is ultimately an optimum productivity level that is achieved through the design of the process. We would assert that after a particular tipping point, additional productivity gains are not driven by the size of geography, number of customers or volume of transactions. Structural change improves outcomes Structural change in its own right rarely achieves benefit. It can only serve as part of a solution; employee co-location and pooled budgets are not golden bullets. 3

5 In Scotland, Community Health & Care Partnerships (CHCP), were cited in the report by Sir John Arbuthnott on how the public purse could save hundreds of millions of pounds, and were held up as an example of agencies working more closely together. While some have proved successful, redesigning commissioning models, there have been some very public failures. Local authorities should only consider integration with neighbours It is important to separate place-based and location independent services. Some services can be delivered from any location, for example: transactional processing, many corporate services, phone/mail customer contact, and even social care brokerage functions. Meanwhile, place-based functions (e.g., face to face contact with customers, leisure services, street scene, waste, etc) are ideal candidates for co-terminus or bordering organisations to tackle together. Structuring the approach to integration From Deloitte s experience, in both the corporate and local government sectors, it would be fair to say that not all organisational mergers or major service integrations, such as shared services, deliver the expected return on investment. Deloitte has experience of supporting over 450 major integration programmes in the public and private sector and the causes of under-achievement relate to three principal factors: An ill conceived business case for merger: not developing a realistic business case based on a practical analysis of the tangible benefits and synergies that can be achieved, and an assessment of the costs of change. Poor execution: not creating a robust plan and performance management framework to test progress and success. A recent NAO report into central government reorganisations highlighted this as having been a key weakness, leading to escalating costs, suboptimal operations and further structural change. Lack of recognition that people and cultural issues tend to be the most common cause of a poorly executed merger and failing to plan for the political and emotional changes that are heightened in the context of a merger. It is sensible that any merger or shared service venture uses a structured approach, punctuated by key decision points, drawing on lessons from the significant level of mergers and acquisition activity across the corporate sector as shown in figure 3 below: Figure 3. Strategy and Planning Execution Phase I Strategy Phase II Screen and approve Phase III Mobilise Phase IV Integrate design, build, deploy Phase V Transform Define the drivers for potential merger. Define the boundaries of potential merger. Define the potential options. Blueprint the potential model. Build Outline Business Case & prioritised transition plan. Scrutinise the proposed model. Evaluate the effectiveness of the proposed governance/decision making mechanism. Assess impact on: Customers & citizens Staff Members Conduct due dilligence & operational gap analysis. Major service policy Financials HR policy ICT and property Operational service performance Define financing strategy. Revise benefits case. Initiate the programme & change management activity. Deliver priority projects, e.g.: Governance Organisation design Customer service Commissioning & delivery process Budget alignment Strategic review. Initiate optimisation projects: Process & systems People & culture Supply chain Organisation design Performance management Revise outline business case & plan. Approve merger proposal. Create detailed/prioritised integration plan. Property ICT: infrastructure, DR, governance Sizing up Local Government mergers and service integration 4

6 Get the basics right Objective analysis and a strong evidence base are critical. However, these will be meaningless if the resolve of elected members is not understood and their clear, explicit leadership is not visible. The history of local government shared services is littered with expensive business cases that were produced in isolation of elected Members endorsement and, therefore, sit gathering dust. A merger or major service integration is a strategic decision and should be led from the top with visible commitment from Members. Furthermore, the clarity of messages cascaded to staff must be consistent across all organisations involved and carefully co-ordinated. 6 weeks 3 months Define the drivers for a merger Define boundaries of potential merger Develop potential options Blueprint potential model Build outline business case & transition plan Why is the business case for working alone insufficient? What is the financial gap the merger must address? What are the key drivers to consider merging services? What analysis has already been undertaken? Why are two partners well suited? From a Member and Chief Officer perspective: What could be in-scope? What must be ruled out? What is the level of ambition? Based on scope and drivers, build the potential options for merger. Develop Governance options and potential delivery vehicles. Work with Cabinet and Senior Management Team (SMEs) to shape & test potential options. By major service cluster/function: Identify areas of commonality/synergy: strategy, policy, pressures, etc. Shape/test whether merging services can add value & why. Identify & evaluate barriers to merger. Develop the outline business case and transition plan for the potential merger: Functional scope. Drivers. Implications for staff/ Members/customers Financial and outcome benefits. Cost of change. Governance/legal solution. Refine option(s). Plan for merger. Clarity, focus and consensus 5

7 Not all mergers are a good idea. To test any proposal, we would start with the basic question of why working with another authority is genuinely additive; both financially and in terms of customer outcomes? Within the first phase of a potential integration programme, we would suggest considering the following questions: Does the other organisation have something you cannot achieve more economically on your own? These may be assets and resources, or services, for example: an optimised service design/commissioning model, IT systems, accommodation, skills/expertise, etc. Will a merger enable a whole systems approach to service design, reducing waste and improving outcomes? For example, tackling the push of service users between health and social care systems for older people which creates failure demand and a poor customer experience. Will greater purchasing power genuinely leverage lower prices, expand the market and improve services? Will consolidation radically reduce overhead costs, such as IT, accommodation and support services? Quantifiable savings and benefits need to be soundly based, and the range of potential options to achieve savings and benefits need to be explored to provide reassurance that the preferred collaborative option is the right choice. Most authorities reiterate that partnership projects progress as fast as the slowest organisation and, therefore, the case to integrate services must be compelling. Authorities must accept that there will be significant set up costs associated with any integration and these must be factored into the overall budget projections, for example, TUPE, change management, ICT implications, redundancy etc. If it is assumed that integration will be low cost, it would be fair to challenge the likelihood of achieving material benefits. Due diligence must be undertaken on the financial, legal, technological, operational, cultural and staffing positions of the organisations involved before the decision to execute. Often this can unearth critical factors that could lead to escalating project costs or even service failure. Basic project management is critical, not only during execution but also during the exploratory stages. The basics all need to be in place: clear objectives, definition of workstreams, roles and risk management processes. Finally, a key factor in voluntary local government merger projects is trust, cultural alignment and interpersonal relationships. An integration or merger programme will face many problems; this is normal. Trust, openness and a willingness to tackle wicked issues sensitively will be the most important ingredients to making a well conceived venture a success. Ask Deloitte Deloitte has extensive design and delivery experience across central government, local government, and the private sector advising clients on how to get the most out of mergers and collaboration initiatives. Deloitte has supported many high profile recent corporate mergers: for example, budget airlines, UK retail banking and food manufacturing sectors. We understand what can go wrong, and the factors that are critical to success. Sizing up Local Government mergers and service integration 6

8 Authors Richard Haynes Director, Local Public Services Consulting Neil Boss Partner, Post Merger Integration Local Public Services contacts Mark Lawrie Local Government National Partner John Binns London & South East Local Government Partner Ian Stone South West & Wales Local Government Partner Gus Miah Midlands Local Government Partner Ian Washington North West & North East Local Government Partner Angela Mitchell Scotland Local Government Partner Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) Fax: +44 (0) Designed and produced by The Creative Studio at Deloitte, London. 9477A Member of Deloitte Touche Tohmatsu Limited