Local Authority Trading Companies - an alternative delivery model

by Craig Dearden-Phillips 23/12/2014

Commercialism in Councils has been growing steadily since 2010. Though data is patchy, more Councils are now setting up new businesses than ever before. These tend to come in three forms; partnerships or joint-ventures, (such as those which ten 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 Civitas (Birmingham). 

Of the three approaches, LATCO is, it appears, the default preference of most authorities.  Indeed of 150 people attending a recent series of 'TradeUp' workshops we did 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 public realm is preserved?

A look around at some existing LATCOs may be a useful place to start.   Not all have been successful.  SKSolutions in Stockport, a facilities management company hit the news when a £5m black hole appeared in its accounts. Essex Cares has always been dogged by question marks about whether or not it's really working as the Council wanted. Suffolk's Facilities Management Company struggled badly in its early years before it was turned around. The list goes on. Other LATCOs, however, have, so far been very successful, such as Optalis in Wokingham which has transformed the cost-base of its services and successfully branched into providing services for private payers, as well as a partnership offer to other Councils. 

So how do you create a successful company as a Council?  The best place to look for answers are existing high-performing commercial companies from across sectors. The learning from  great companies points to the importance of five things: independent governance, empowered culture, a competitive market, a customer-orientation and a preference for growth. Let's look at each in turn.  

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, everyone's favourite company. 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 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 board has conflicting loyalties to anyone but John Lewis and everyone is there on merit. The lessons for Councils here are many: don't pack your company's new board with Councillors.   Indeed, having them there can create divided loyalties as their duties as Councillors and their fiduciary duties as Directors do not always sit easily together. Get the very best Board you can and always choose an independent chair. Letting go in this way can be hard for Councils, but it is the price of success. If you want to retain control, just keep things in the Council and don't waste energy on setting up a new company.

Empowered Culture.  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 Ltd (the outdoor clothing people), several time winner of the Sunday Times Best Places to Work Award. The lesson for Councils is that LATCOs need to allow their boards to turn local authority culture on its head and replace it with different, more commercial norms.  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. This 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 business.

A Competitive Market.  The best companies, like the best athletes, become the best by slowly getting the better of their competition. The effect of the competition is to set a bar. This is why LATCOs must also, from the very beginning, subject themselves to competition. The key thing here for Councils is to resist the urge to use the TECKAL exemption which, in effect, allows the Council to just give its owned-company a contract, year on year, with no competition. This is akin to creating a law saying that people have to shop at Tesco? Do you think that TESCO would become a better grocer if Sainsbury and Aldi weren't allowed to trade? Of course not. To get better, a company has to take risks, bring down costs, always be thinking of a better way to help the client. Giving un-contested Council contracts, year on year, to a LATCO is not really commercialism at all as it replaces one form of non-competition inside the Council with another. Teckal renders a LATCO more like a public body than an actual  business.   

A Customer-Orientation. The greatest companies are not just liked by their customers. They are loved. Companies like Apple under 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. The learning for Councils is that to be more commercial means becoming exceptional at meeting the direct needs of customers and not thinking at all about the whims and daily political dramas of the Council! In a public sector setting this isn't always first nature, as 'managing upwards' is often as important as serving the direct need of the customer. But LATCOs, if they are to work, need to become fantastic business-to-consumer (B2C) enterprises and is the only way to put them at several-arms-lengths from the Council itself.

Preference for Growth.  Businesses are either growing or shrinking. The best businesses, like Lidl or Aldi,  grow because demand for what they do goes up rather than down. It is important that Council-owned businesses are free to grow both within and beyond the Council boundary. Growth of course requires investment and a longer view. Seeing a LATCO as a kind of council-ATM to be yanking money from  the minute it hits profitability is going to hold a good  LATCO back. Successful businesses tend to retain most of their profit with very little coming out as Dividends. The number of Councils  I hear talking about their services as though they are Cash Cows worries me. In truth, most UK businesses struggle to make a modest profit and just keep head above water. If it's a big fat cheque by election time that you're looking to your new LATCO  for, 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 here to Councils is that if you're going to commercialise your services then look at what successful businesses do. Create a professional, non-political board. Deliberately create a new, commercial culture that breaks with the past.  Resist the urge to use TECKAL beyond the first year of the business. Commercialism is intrinsically about engaging with the market, not hiding away from it.  This isn't commercialism, its a rather lame version of  municipalism and it won't end well. Instead choose true commercialisation. And watch the results.

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