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What is the recipe for sustainability and growth in Public Service Mutuals?

by Craig Dearden-Phillips 03/05/2016

So, is there a recipe for growth and sustainability among public service mutuals?

Here are a few observations based on 5 years of close contact with the PSM sector.

The experience of most PSMs seems to follow a pattern:   

Almost all are brought into existence by force of will by entrepreneurial leaders who, in the public sector context, are relatively unusual.

Most of these leaders have long service and an existing sense of ownership over their service. Many are charismatic in leadership style and enjoy the trust of staff. This enables the divest to happen on a promise of greater long-term security and empowerment.

These leaders tend to make quite natural CEOs. They enjoy being in charge, they relish new-found autonomy and can cope without the air-cover of a public sector body. While some report feelings of unpreparedness and, occasionally, imposter syndrome,  nearly all say they would never go back to their old life.

So are they any good? My view is that, as a cohort, they are very strong indeed. Exceptional even, given what they are willing to subject themselves to for little outward reward.      

They tend to be highly visible leaders, big on values, strong communicators, able networkers, resilient managers, capable champions of their business. They also show extreme commitment to the business and have stuck around. Many, I suspect will remain in positon for 5 years plus.    

An interesting dimension is their life-stage. A noticeable proportion of PSM CEOs are in the middle-stages of their career, aged 40-50 when they do it. Many have reflected on their life, their career and their purposes and leading a new business often seems part of their own redefinition as people.

Where are they wanting? Three areas I have noticed, as themes. Firstly, many are pretty raw in terms of formal management education as they become a CEO. Most have strong ops backgrounds but little grounding in finance, HR, marketing or strategy. 

As a result they can end up with imbalanced team, chock full of ops people, or converted ops people, that spend a ton of time on BAU and not nearly enough on securing the future. 

And when the future is under discussion, many CEOs and the immediate people around them lack the frameworks to lead the thinking.    

Building onto this, many CEOs struggle to achieve the kind of senior team, at least early on, that can capably lead a move from consolidation to growth. I have lost count of the number of PSMs in which it takes a huge crisis in the numbers to identify and install a proper Finance Director.

While early businesses in all sectors struggle to get the balance right, these are often very large businesses to start with and, looking at them from a distance, nearly all are thin on both financial and commercial expertise.

Of course, this isn’t just about the CEO. It’s about resource. 

Most PSMs have a tiny balance sheet for their size with little in cash or physical assets. Indeed for many it is only pre-payment on contracts that keeps them from trading close to cash limits. Few have the kind of resource to invest in commercial growth which is why so many are coming to Big Potential and the like. The contracts they have are often break-even and any surpluses are sensibly kept aside as a thin operating reserve. 

There is a case for these businesses to be capitalised at the beginning rather than 2-3 years in. They would if they were private businesses for sure.

Secondly, many of the PSMs CEO are more interested, we notice in ‘innovation’ and new products/services than the more boring business of doing more of the same for larger numbers of people. CEOs tend to be naturally curious and want to turn over new stones rather than grind out efficiencies by scaling up the core business. 

They do the latter, of course, but temperamentally, most prefer the shiny and new than the same-old-same-old. This can lead to a neglect of obvious adjacent opportunities in order to chase novelty. This is a pattern we see repeatedly, and advise against.

Thirdly, like in many Founder-led businesses, there are weaknesses around Governance that, after an initial period, get in the way. In many PSMs, the CEO is a benign dictator against whom there are few checks and balances. Tame Chairs are a very common sight in our experience.  

Often there is very little concept of corporate governance in a PSM, or there is the formal appearance of Governance without any real management of risk, setting of strategy or appraisal of performance taking place. This is tolerable in early businesses but is a handicap as a business matures.

Resultingly some of the PSMs are immature in governance terms and dangerously dependent on one person doing the right thing.  And sticking around. This is a risk to sustainability in my view.

One manifestation of this, is the mess a lot of PSM Boards find themselves in on the question of social investment. While this hasn’t always been well-sold to the sector, very few CEOs and PSM Boards have much experience of working with investors to achieve shared goals.   

While it is axiomatic that sustainable growth requires investment (as night follows day) this isn’t well-understood in the PSM sector whose boards are often chock-full of public sector types. So social investment has had a cool reception with hardly any PSMs taking it on, present company excepted.

Given all of this, the growth achievement of many of the PSMs has been remarkable.  A fairly thin, inexperienced top layer has, often by force of will, managed to win contracts and launch new services without a whole lot of backup. Growth rates compared to the wider economy have been favourable at 13% / year if Cabinet Office figures are correct – our own put a similar figure on this. 

I think it’s a MAGNIFICENT thing.  But I think the larger question is what might be achieved if these businesses have better support from the off:

  • Investment commensurate to the size and ambition of the business?  
  • The team & Board they needed from the get-go? 
  • The CEO fast-tracked through MBA101 in the first year?     

This is perhaps the question we need to explore for the next wave of PSMs – if we have one.   

For some of the existing PSMs, I am worried that growth will not be sustainable without all the above recipe. The initial rush of energy post-spin-out cannot be sustained. The invention and effort of the early years – which allowed PSMs to survive and grow beyond expectations are now past.  

Austerity and a fresh, gruelling round of contract negotiations are taking up vital time and energy. The early love affair is over and many PSMs are now in the long grind of a marriage with commissioners who have new calls on their attention.   

This next three years will be tricky because of the nature of the PSM CEO task (more bump and grind, less flight of imagination), their own personal  ‘second-lap’ in the business and the overall financial environment which will require them to revisit the cost base, brutally in many cases. 

Not to mention an uncertain political environment for PSMs operating in the NHS.  

So, do the PSMs currently have a recipe for sustainability and growth? In three words. Not Yet – Mostly. Classic business theory says that these entrepreneurial businesses will need to take on the attributes of conventional businesses very quickly if they are to be sustainable. 

Rounded senior teams. Stronger balance sheets. Stronger corporate governance. A relentless drive for efficiency. Greater focus on growing core business not endless novelty. The boring stuff.  

Behind this we will need patient investors who are willing to press the PSMs hard on all the above as they grow into mature businesses. 

And PSM Boards that can see how important investment will be to long-term success.

ADDITIONAL NOTE:

For those spin outs looking to address these issues and secure their future, the EOA and partners are hosting a 1 day conference: Public Service Mutuals: How to grow, diversify and compete. I will be there as Chair of one of the workshops and would encourage as many of you as possible to attend, book your place today, here. http://employeeownership.co.uk/event/public-service-mutuals-grow-diversify-compete/ 

 

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