Stephen Hughes: Commercial nous

Stephen Hughes is the former chief executive of Birmingham City Council and a strategic adviser to local government

There is a strong cultural feeling that the commercial approach of the private sector, whose focus is on self-interest and profit, is anathema to the public sector with its concern with service and well-being. However, there is a growing movement within local government that is seeking to exploit the skills needed to be successful commercially, in order to sustain public services through austerity. This extends even to using public sector assets to growing income streams and making profits as a substitute for grant losses and to subsidise essential services.

This movement is not just about the opportunistic exploitation of ad hoc opportunities, important though that is. For the most successful authorities it is about changing the culture of the organisation, and getting staff at every level thinking in a commercial way, even when providing traditional services. That is because the techniques and approaches needed to make a profit are also critical in delivering services.

First and perhaps foremost is strong customer service. The private sector knows that in a competitive market to be successful it needs to give customers a positive experience as well as provide them with quality products. The public sector has too frequently ignored the customers’ experience, perhaps because it is a monopoly supplier or because systems have been set up to provide a gatehouse approach to public services. People have to prove their credentials to get what they need, and the system is established to be suspicious and deny access whenever possible. Inadvertently this adds cost as well as alienating the public we are here to serve.

Secondly, the private sector is always seeking to reduce costs whilst maintaining quality. One might think that, at least in these times of financial constraint, this was true of public service as well. However, it has been deeply ingrained in the psyche of the public servant that pounds equals service. We tend to measure both growth and cuts in service by movements in total spend rather than quantities of services provided or quality of people’s lives. A commercial approach to public service is always thinking about how to improve outcomes for people by changing how services are provided and by doing it in a more cost effective way, not just at the top of the organisation but at every level enabling front line staff to influence and control how they work.

A third characteristic of commercialism is about product differentiation and market segmentation. This acknowledges that for all sorts of reasons one single product doesn’t satisfy the market. Some people want to pay more for extras, or meet their needs in different ways. The expansion of personal budgets in social care has demonstrated the value of this approach enabling local authorities to divest out of high overhead services such as day centres that can’t meet all the needs of all clients saving money and improving customer choice and satisfaction. But this is a principle that has widespread application in public service where the public is willing to pay for more than the basics.

Getting these and other characteristics embedded within an organisation is a critical first step. One authority that has recognised this is Nottingham. A programme initiation document launched an approach that recognised the need to change the culture of the organisation, to have support services and self-service tools that enabled a commercial approach to work and a clear strategy of how to achieve both cashable (£6m by 2016/17) and more indirect benefits. There was clear acknowledgement that a council-wide initiative backed by the political leadership of the council was essential to make progress.

The actual opportunities that councils have embraced are wide and varied. Some take advantage of particular circumstances that affect that place but many have almost universal application. Lots of authorities have built in added services to leisure facilities to generate profit lines that help the basic service. Similarly, many have exploited the opportunities for advertising either in public spaces or on their websites. Local authorities have used their powers to set up trading companies and or mutuals to exploit markets they were already in. This might be services to schools or even adult social care where the paid-for market is massively bigger than what councils operate.

Here and there one comes across inspirational examples. My ex-colleague Mark Rimmer’s approach to registration of births marriages and deaths in Brent was amazing. Within his service he embedded a commercial culture that enabled it to make net financial contributions to the council whilst still meeting all statutory duties and keeping the public service ethos. He made me aware of what was possible.

One of the good things about public service is the willingness to learn from each other. The Local Government Association has been actively working with authorities at the forefront of the movement. It has developed a website where examples have been collated and other resources published that will help councils learn what is happening and how to avoid some obvious pitfalls.

One important theme is the exploitation of physical assets. Many local authorities are asset rich and all have access to cheap financial resources. Turning this into an income stream or to help meet key social objectives can be very important. For example, Eastleigh had a strategy of buying local physical assets to generate a £2m net yield after meeting financing costs. Manchester have done large scale property based deals with their pension fund, as well as sovereign wealth funds, to deliver thousands of new homes in the city.

Another key issue is around contract management. Far too often the public sector sees procurement as a legal and assurance process where compliance with EU law and internal contract procedures is the objective. A commercial approach would be far more concerned with outcomes, commercial terms, how the contract will develop and adapt over time, the chemistry between the supplier and the business and other intangible factors. The consequence can be a concentration of effort on the report that members approve to let the contract and putting a big tick in that box. More and more councils though are seeing procurement not only as a key way of reducing costs but of achieving other objectives conditional on the contract and factoring in ways in which other commercial goals can be supported.

Contract management remains critical. There might be a temptation to believe that once the contract is let a “partnership” relationship will focus on achieving the council’s objectives. A successful contract requires vigorous oversight and management and not just of the KPIs set out in the contract terms. It is important to maintain some expertise in-house in order to sense check what is being done in the council’s name, and at its expense. There have been some spectacular failures of contract management in the public sector, such as the “tagging” contract for Ministry of Justice where amongst other things the ministry was charged for prisoners who had died! MoJ have learnt their lesson and put in place a comprehensive training and cultural change programme to get all staff thinking about contract management as well as strengthening specialist expertise. It is worth continual forensic testing of invoices and charges of large value contracts to ensure that you are not paying over the odds.

Despite the scale of public-private contracts it will still be the case that support functions are proportionately still more geared to help the “make” option (e.g. HR, finance, IT and legal) than the “buy” option (commissioning, procurement and contract management). Partly that reflects the relative difficulty of “making” and “buying”, but it is often a sign of under-investment in managing contracts.

There are limitations to what can be done commercially by the public sector. There are some legal and regulatory constraints, for example, EU law, the limits on what trading organisations can do, limits on charges that can be made, and what work can be transferred to newly created trusts and mutuals. It is important to get proper advice on those sorts of matters and the LGA web site is a good starting point. There are other issues that common sense tells you have limitations – after all, not every council can have a shared service centre that sells to other councils. However the opportunities are only really limited by your imagination, aspiration and ambition and the leadership shown by politicians and senior officers.