Crucial steps to commercialisation

by Craig Dearden-Phillips 03/02/2015

Commercialism in councils has been growing steadily since 2010. Although data is patchy – we know that about 30 councils have or plan to set up trading companies for their social care services – it is clear that more councils are setting up new businesses than ever before. These tend to come in different forms: private sector partnerships or joint-ventures, (such as those which 10 English councils have formed with Public Sector Plc. to leverage council estates), public service mutuals (such as Thurrock Lifestyle Solutions CIC) or local authority trading companies, such as Optalis (Wokingham).

Shared services between councils normally take the form of a publicly-owned company – e.g. LGSS, owned jointly by Cambridgeshire and Northamptonshire CCs.

Of the three approaches, the Local Authority Trading Company (LATCO) is, it appears, the default preference of many authorities.

Of the 150 people attending a recent series of ‘TradeUp’ workshops we conducted around the country, most envisaged some kind of council-owned company.

So, if this is the road you are looking to go down, what must you do to ensure not only that the company succeeds, but that your local public realm is preserved?

A look around at some existing LATCOs is a useful place to start.

Don’t assume success. Not all LATCOs have worked.

Solutions SK in Stockport, a facilities management company, hit the news in 2013 when a £5m black hole appeared in its accounts.

Essex Cares had always been dogged by question marks about whether or not it was really working as the council wanted.

Suffolk CC’s facilities management company struggled badly in its early years before it was turned around. The list goes on.

Other LATCOs have so far, been very successful, such as Optalis in Wokingham, which has transformed the cost base of its services and branched into providing services for private payers, as well as a partnership offer to other councils.

How do you create a successful company as a council?

The best place to look isn’t just at other councils. Instead, look at high-performing commercial companies, regardless of sector.

The wisdom from great companies points to the importance of five things:

  1. Top quality governance.
  2. An empowered culture.
  3. A competitive market that drives improvement.
  4. A customer-orientation.
  5. A preference for growth.

Top quality independent governance

Every great company is led by a first-class board made up of executive and non-executive directors.

Take the John Lewis Partnership (JLP), where everyone round that table has business expertise, even if this comes from just working in that company day-in, day-out.

Sitting in the middle is chairman Charlie Mayfield, appointed by the shareholders (in his case, his staff), a person of wisdom and experience who supports the managing director to steer the business.

No-one on the JLP board has conflicting loyalties to anyone but JLP and everyone is there on merit.

The lessons for councils is not to pack your new company’s board with time-served councillors.

Having lots of members there can create divided loyalties as their fiduciary and community obligations do not always sit easily together with those of a company director.

Of particular importance is an independent chair who is highly experienced in the commercial sector. Letting go in this way can be hard for councils, but it is the price of success.

If a council wants to retain control that much, it should just keep things in-house and not waste energy on setting up a new company at all.

Empowered culture

The top-performing companies always have turned-on, excited people, who love the company and give their all for it.

You get this by pushing power and responsibility down to employees and changing the rule book so that a different kind of mind-set can take hold.

Take Gore Apparel (the outdoor clothing company), and for many times the recipient of the Sunday Times’ Best Places to Work Award.

The lesson for councils from Gore is that LATCOs need the freedom to turn local authority culture on its head and replace it with different, more commercial norms and values.

It needs to feel different if people are to act differently and do a better job than they did before.

If the productivity gap between public and private sectors is to be bridged by a LATCO, then the culture has to change.

That means a new name, no council branding and a conscious change to a new set of expectations.

The past has to become another country if a commercial mind-set is to really permeate the LATCO.

A competitive market

The best companies, like the best athletes, improve only by slowly getting the better of their competition.

The effect of having proper competition is to set a bar. That is why LATCOs must subject themselves to competition right from the start.

Being protected from the market is going to hold the business back. Therefore, councils should resist the urge to use the Teckal exemption which allows un-contested contract, year-on-year, with no competition.

Do you think Tesco would become a better grocer if Sainsbury and Aldi weren’t allowed to trade? Of course not. To get better, a LATCO has to take risks, bring down costs and always be thinking of a better way to help the client.

Giving a LATCO uncontested council contracts year-on-year is not commercialism at all and makes a LATCO more like a public body than an actual business.

Customer orientation

The greatest companies are not just liked by their customers, they are loved.

Companies like Apple, under the stewardship of Steve Jobs, earned that love by trying harder than the rest to bring them great products or services at prices the customer is willing to pay.

Life in these kinds of businesses is all about the customer. Nothing else matters.

Companies like this base every decision on the customer’s needs. The needs of everyone else – the staff, the board, the bank – come a poor second.

For LATCOs to be more commercial they must not think about the whims and daily political dramas of the council. The only way to do this is put the business at several arm’s lengths from the council itself.

Preference for growth

Businesses are either growing or shrinking. The best retail businesses, like Lidl or Aldi, grow because demand for what they do goes up, rather than down.

It is important therefore that council-owned businesses are free to grow both within and beyond the council boundary.

Growth, of course, requires investment and a longer view. Therefore, a LATCO should not be treated by councils as an ATM to have money yanked out of it from the minute it hits profit.

Successful businesses tend to reinvest most of their profit. Relatively little comes out as dividends.

The number of councils I hear talking about their services as though they are cash cows worries me.

If it’s a big fat cheque by election time that you’re looking for from your new LATCO, think again.

If you do end up with a success on your hands, resist the urge to pick all its fruit. A growing LATCO needs investment, not asset-stripping.

Overall, the big message to councils is that if you are going to commercialise your services, then look at what successful businesses do.

Create a professional, non-political board. Deliberately deliver a new commercial culture that breaks with the past.

Resist the urge to use Teckal beyond the first year of the business. This is a lame version of municipalism and it won’t end well. Instead, choose true commercialisation and watch the results.

As published in The MJ magazine -

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