Guidance

Alternative delivery models explained

Published 28 March 2017

1. Overview

Most councils no longer rely solely on in-house operations to deliver either public services or their own internal functions (such as HR, finance, payroll and IT). Many have used their legal powers to establish a mixed portfolio of provision, involving delivery models that operate across areas including adult social care, children’s services, youth services, building control, and adult education.

Services that are not delivered ‘in-house’ involve some form of alternative delivery model (ADM):

• Local Authority Trading Company (commonly referred to as a LATC)
• Public Service Mutual (commonly referred to as a PSM or mutual)
• outsourcing (to an existing social enterprise or charity; or to a for-profit provider)
• joint venture (JV - potentially involving ownership and control by a range of stakeholders including (but not limited to) staff, the council, or independent provider(s))

Any full or partly externalised service will fall within one of the delivery model categories listed above. These are not necessarily exclusive - PSMs can be LATCs and JVs under some circumstances.

A further delivery model option exists; the library service ‘remaining in house with re-engineering’. This option reflects the need for some level of change to take place, without externalising the service. It is therefore a delivery model option in its own right.

2. Alternative delivery models - in detail

Each of the 5 ADM options offers library services and councils something different in terms of ownership, governance/control and the flexibility to innovate. The table below summarises the high level characteristics of each option.

Delivery model	Ownership	Governance	Services
Remaining in-house with re-engineering	100% parent council	Within council management structures and hierarchy	Can only deliver local public sector services
Local Authority Trading Company (LATC) - sometimes referred to as a Wholly Owned Company	100% parent council(s)	Can be designed for flexibility/autonomy. Requires a council appointed board. Service Level Agreement (SLA)/contract with parent council(s) - control test	Flexible - but majority of services delivered on behalf of parent council(s) - function test
Public Service Mutual (PSM)	Variety of options: council and staff, staff and community, 100% staff	Can be designed as required. Board membership dependent upon ownership. SLA/contract with council(s). Well positioned to promote co-production	Flexible - can deliver services to councils, private or VCS customers
Outsource to existing social enterprise, third sector or private provider	100% third party provider	Arranged via contract. Well positioned to promote co-production	Contracted services delivered on behalf of council(s)
Joint venture	Potential for joint ownership, including staff, council(s) and/or third party provider	can be designed as required. SLA/contracts as required. Well positioned to promote co-production	Flexible - can be delivered to council(s) and private/Voluntary and Community Sector customers

Further details on each ADM option are provided below.

2.1 Remaining in-house with re-engineering

Option 1 - Remaining within the host council

The library service remains as a council operated service. Service re-design would be undertaken to improve systems, realise efficiencies, transform existing services or develop new services to meet the evolving needs of local communities. This could potentially be in conjunction with the development of a community led library service.

Case studies:

• Warwickshire Library Service - Globe House, Alcester
• Hampshire library service transformation strategy

Potential advantages are that:

• the ‘do minimum’ option is likely to require lower levels of resource (when compared to the establishment of other delivery model options) and will not require a procurement process
• depending on the scale of the re-engineering, the required level of change may be achieved relatively quickly and at (potentially) lower cost
• one-off savings and efficiencies could be realised in the short term

Potential disadvantages are that:

• re-engineering may result in efficiencies and savings being realised, however, these changes may in certain circumstances result in the library service budget being reduced to an unsustainable level, to the extent that the service finds it difficult to meet the needs of the population either now or in the future
• the library service is likely to remain primarily dependent on council funding, increasing the negative impact of any future reductions in council funding
• the decision to remain in-house may result in the library service not being able to benefit from increased freedom to trade that would help to improve the service’s sustainability and flexibility to innovate, potentially threatening the long term sustainability of the service

Option 2 – Partnership across 2 or more councils

Two or more councils may be in a position to work together to deliver public library services. This would involve partnership working between the councils, including the sharing of staff and other resources. It could also potentially involve the joint procurement of back office services and support systems, in addition to the sharing of best practice.

The option would not necessarily involve the establishment of a new delivery model, but would instead be based on a partnership agreement between councils. One of the partner councils could act as the host for the ‘shared service’ with staff and service delivery responsibility transferred.

Case studies:

• Libraries West
• London Libraries Consortium

Potential advantages are:

• the ability to tap into expertise and intellectual property held across a number of councils
• reduced duplication and the development of efficient shared services across a number of councils
• possible savings opportunities, depending on the degree of sharing across councils
• the ability to realise increased purchasing power across a number of councils
• that in-house services are not required to pay VAT or corporation tax

Potential disadvantages are:

• the inability of councils to agree on the scope and scale of the partnership
• differences in operating systems and organisation cultures across the councils involved in the partnership
• the need to agree the terms of the partnership, particularly in relation to the level of investment and the sharing of risks and rewards

2.2 Local Authority Trading Company (LATC)

LATCs are bodies that are free to operate as commercial companies but remain wholly owned and controlled by the parent council(s). As trading bodies, LATCs are in a position to provide their services to a wider market than a council department.

Procurement process and commercial freedoms

LATCs are contracted by the parent council (or councils) to provide services back to the council(s) via a service contract. The council may decide to apply the Teckal or in-house exemption which allows the authority to establish a LATC without the requirement for a procurement exercise. It is based on case law but has recently been codified in the Public Contracts Regulations 2015. In general, the terms of exemption require:

• the council to control the vehicle as if it were an internal department, with there being no direct private share or ownership participation in the company (this is known as the control test)
• more than 80% of the vehicle’s activities to be with its ‘parent’ council (this is known as the function test)

If the council decides to undertake an open procurement, the Teckal requirements would not need to be in place.

Staff transfer

Employees of the library service would transfer to the LATC with their employment conditions protected by Transfer of Undertakings (Protection of Employment) regulations (TUPE).

Pensions

Although not dealt with under the TUPE Regulations, there is a statutory requirement in the UK (issued under the Local Government Act 2003) which provides both that transferring employees’ accrued pension benefits are protected and that they are given access to a scheme that is, at a minimum, ‘broadly comparable’ to the pension rights they had as council staff. The LATC may be in a position to apply for Admitted Body Status, enabling members of the Local Government Pensions Scheme to continue with their pension arrangements. Should the LATC not be in a position to secure Admitted Body Status, a broadly comparable schedule will need to be offered.

The LATC can also apply for Function Provider status, enabling members of the Teachers’ Pension Scheme to continue with their pension arrangements.

The new LATC would usually be expected to meet the cost of staff remaining within these pensions schemes.

Use of surpluses

The LATC’s surpluses may be returned to the council (in the form of dividends or service charges) or re-invested into the delivering of services. The exact use of surpluses would be determined by the LATC’s constitution and the nature of the agreement between the LATC and the council. Like any company, LATCs are required to pay corporation tax on profits.

Potential advantages

Potential advantages are:

• if the Teckal exemption is used, no procurement exercise is required
• a clear commissioner/provider split exists, meaning that the council can incentivise the LATC to realise efficiencies and develop service offerings
• two or more councils can work together to establish a library service LATC, potentially offering further opportunities to realise efficiencies
• the council retains a high degree of control over the organisation, which may be a more politically palatable option than, for example, the PSM or outsourcing delivery models
• an LATC can transition into alternative forms of delivery (for example a PSM) in the future
• that despite certain restrictions on the type and level of commercial activities, LATCs possess greater freedom than in-house library services to develop and trade services, including the development and delivery of new non-statutory services which can generate a surplus for the organisation
• that depending on how the LATC has been set up, the council may be in a position to ‘claw back’ surpluses from the service
• an LATC may be able to achieve social enterprise status

Potential disadvantages

Potential disadvantages are that:

• the process of establishing an LATC can be complicated, resource intensive and time consuming
• the process would be undertaken ‘on top of the day job’ by library service staff, while it requires close working with a number of council departments (such as legal, finance, HR, property/premises etc.) and support from external experts
• as a Teckal LATC needs to be owned and controlled by one or more councils, there is limited potential for other stakeholders (such as staff, community groups, or Friends Groups) to influence the strategic direction of the company
• due to its close association with the council, a Teckal LATC is unlikely to achieve charitable status
• the ability of a Teckal LATC to access external funding is limited because it is owned by a public body
• as it is owned and controlled by the council, there is the risk that the creation of a LATC results in ‘more of the same’ being delivered
• should a Teckal LATC wish to develop new (non-statutory) service lines, the income from these services is limited to 20% of the LATC’s total turnover
• the LATC may be required to transfer surpluses back to the council, limiting the LATC’s ability to develop new services
• should the LATC be able to retain a proportion of the surpluses it has generated, these would be subject to corporation tax
• like any company, LATCs are required to pay VAT

2.3 Public Service Mutual (PSM)

The Department for Culture Media and Sport (DCMS) defines a PSM as an organisation:

• that has left the public sector (also known as ‘spinning out’)
• which continues to deliver public services
• which has a significant degree of employee control, influence or ownership

Case studies

• Explore York
• Inspire Culture, Learning and Libraries
• Libraries Unlimited
• Suffolk Libraries IPS

Ownership, control and influence

Typically a PSM will involve an element of employee-ownership (or at the very least a significant level of employee control or influence through, for example, membership of management boards). There is evidence that this empowerment of staff can result in increased staff engagement and productivity.

The model also allows for the involvement of a range of other stakeholders, possibly including community groups and the council.

Depending on the intended ownership and governance arrangements, stakeholders (staff, community groups, Friends Groups and the council) may own part of the PSM and sit on the board of directors. Several advisory groups could be established to ensure that stakeholders are effectively represented and are able to influence the PSM’s strategic direction.

2.4 Commercial freedoms

PSMs have significant commercial freedoms and flexibility to ‘deliver differently’. As staff will play an important role within the new entity, they (along with community stakeholders if included within the PSM’s governance structure) are well placed to influence the PSM’s strategic direction and the type of services delivered. Staff and communities can play an important role in shaping services to reflect local needs, piloting innovative services through the re-investment of surpluses generated by the PSM.

Procurement process

PSMs are typically established by a staff group ‘spinning out’ of the council. This requires the support of councillors and council commissioners, as well as broad support from library staff.

Councils can make use of a number of procurement routes: from the council directly awarding the contract to the PSM, through to undertaking a public procurement exercise. An analysis of the potential procurement routes and the role of the council as an ‘expert commissioner’ is provided in section 5 of the business case. There is also a case study with further details on the role of the council as an expert commissioner.

Typically the PSM will hold a contract with the council, often referred to as the ‘core contract’. Despite the core contract, the PSM will need to think commercially, which may mean looking for ways to reduce dependence on the core contract (e.g. diversify income streams through the expansion of current services or the development of new services).

Use of public assets

The PSM’s constitution may include an asset lock to ensure that assets transferred to the PSM by the council are solely used for community benefit.

Staff transfer

Same as for the LATC.

Pensions

Same as for the LATC.

Use of surpluses

As an independent entity, the PSM is typically in a position to decide how it uses any surpluses that it generates, although it is possible to include some council ‘claw back’ of surpluses as part of the core contract. Options for surpluses retained by the PSM include reinvestment in new services, investment in new assets or channelling funds into a reserve account. The use of surpluses may be limited by the PSM’s status, should it operate as a social enterprise or charity.

Like any company, PSMs are required to pay corporation tax and VAT.

Potential advantages

Potential advantages associated with PSMs include:

• becoming an independent PSM can provide the library service with the opportunity to break from the past and establish an organisation with a single focus on libraries
• the business plan would demonstrate how the strengths of the organisation can be maximised while, at the same time, developing plans to address areas of weakness
• operating as a PSM may increase the level of freedom and autonomy experienced by staff and managers, enabling them to be more creative within their roles
• a new organisational culture can be established, leading to staff playing an increasing role in making decisions at an operational level which in turn can increase levels of staff engagement and motivation
• depending on the ownership and governance model assumed by the PSM, staff, community groups and Friends Groups (as well as other relevant stakeholders) will be in a strong position to influence the strategic direction of the organisation, thus giving the community a voice
• involving stakeholders (staff, community groups and Friends Groups in the decision making process, will provide them with power to address issues and bring about a positive change
• decision making processes may involve fewer layers of bureaucracy, resulting in more timely decisions being made which benefit staff, communities and increase the sustainability of the PSM
• as PSMs experience a high degree of commercial freedom, they are able to explore new areas of service growth and may be incentivised to generate income from new sources to offset reductions in the level of funding received from the council
• by empowering employees and communities to design and improve their services, PSMs are well placed to encourage innovation, for example they could pilot new services (designed by staff and communities) on a small scale
• if pilots are successful, and show significant social impact and value, they can be scaled up and potentially procured by public bodies
• as an independent entity, the PSM will be in a position to reinvest profits back into the organisation, fuelling innovation and a needs-led approach to service delivery
• they appear to demonstrate greater levels of efficiency, particularly in terms of lower levels of absenteeism and staff turnover
• being in a position to procure services in a more cost effective way (for example back-office support services)
• depending on the chosen legal form and constitution, a library service PSM may qualify as a social enterprise or charity, meaning that it may be eligible for grant funding opportunities not available to in-house council services

Potential disadvantages

The process of establishing a PSM can be complicated, resource intensive and time consuming. The process is often undertaken ‘on top of the day job’ by library service staff. It requires close working with a number of council departments (such as legal, finance, HR and property/premises) and support from external experts. Please refer to case study: the journey from investigation to establishment for further details, including details of the resources required to support the process.

There may be significant costs to change, the nature of which need to be understood by all parties. It should also be accepted that changes to the way services are delivered may take time. The immediate challenges for PSMs once established usually involve ensuring business continuity and stabilising the service after significant reductions in funding and the move to a new organisational entity.

While PSMs may realise significant efficiencies, the decision to establish a PSM should not be primarily motivated by making efficiencies. Councils investigating the PSM model from a cost cutting perspective risk ‘setting the organisation up to fail’. Equal (if not more) attention needs to be paid to ensuring the sustainability of the service through delivering differently, modernising the library offer and diversifying income streams across the service.

Initially at least, most PSMs are reliant on their core contract held with the council. Over-reliance on this is a significant business risk. The challenge for PSMs is to diversify their income streams and reduce their dependence on the core contract.

Ensuring the involvement of staff, community groups and friends groups in the process can be a challenge. While it may be widely accepted that ‘doing nothing is not an option’, there is often resistance to change. The challenge of engaging with a wide range of stakeholders is significant, although it also presents the opportunity of meaningfully involving them in designing the service’s future function and strategic direction.

The staff group transferring to the PSM often does not possess all of the skills and capabilities needed to operate a commercially disciplined business. While training and development can help, PSMs may need to employ new staff at a management level or recruit non-executive directors to the board to make sure the organisation has the necessary skills, experience and expertise to be sustainable.

Like any independent company, PSMs are required to pay VAT and corporation tax.

2.5 Outsource

The process of outsourcing a council’s library service involves the procurement of a third party to deliver the library service on behalf of the council via a contract. The outsourcing of library services may take several forms, including:

• procuring an existing social enterprise or charity to deliver the service on behalf of the council
• procuring local community groups to deliver library services on behalf of the council (with funding, professional library services and back-office support and systems).
• procuring another council to deliver the service
• procuring a for-profit provide to deliver the service on behalf of the council

Case studies

• Hounslow library service
• Lincolnshire library service

Ownership, control and influence

An outsourcing arrangement would conventionally involve a contract between the council and the appointed provider. Typically the council would have no involvement in the day-to-day running of the organisation (or its ownership or governance structures), but would instead by able to influence the way the service is run via the following means:

• the terms of the contract agreed between the council and the third party
• ongoing contract monitoring, which may include a regular monitoring and review process, service planning meetings etc
• potentially including an asset lock within the terms of the contract or lease, requiring the provider to use council assets for the purposes of the contract

Commercial freedoms

The council would specify within the contract the level of funding to be allocated to the service (for example the contract value).

Depending on the type of organisation that is procured and the nature of the contract, the procured provider may or may not be in a position to generate additional income through the delivery of (non-statutory) services included within the contract and service specification.

Staff transfer

Same as for the LATC.

Pensions

Same as for the LATC.

Use of surpluses

The procured provider is likely to seek efficiencies across the library service’s operating model, while also (potentially) identifying areas where income generation could be increased. This could lead to the provider realising a profit on the contract.

The council should therefore consider the treatment of profit prior to undertaking the procurement process. It may decide to state that any profits realised can be retained by the provider, or that a certain amount should be spent on the library service. Each option will create different incentives for the provider which are likely to have direct implications for the library service.

Potential advantages and disadvantages

Due to the large number of outsourcing options available to a council, it is difficult to be specific in terms of the potential advantages and disadvantages that could be realised.

The theoretical basis of outsourcing derives from the notion of competition as the driver of efficiency, quality improvement and innovation. However, some counter-arguments have been put forward which highlight theories of market failure in public services.

Potential benefits associated with outsourcing include:

• the ability to tap into expertise (for example digital) to deliver an improved service
• increased purchasing power, shared systems and intellectual property
• savings and efficiencies can be realised as a result of the library service being part of a wider organisation
• savings can be underwritten in the contract

Potential disadvantages associated with outsourcing include:

• greater levels of opposition to the move from staff, councillors, friends groups, library users and communities
• the risk of the council realising ‘stranded costs’ if the outsourced provider accesses their back office support from an alternative provider other than the council. (This concept assumes that the council currently delivers back office services (e.g. HR, payroll, finance, ICT, legal etc.) to the library service. Should the library service procure back-office services from the market, the council may realise a stranded cost if those employees previously delivering back office services to the library service: (i) remain employees by the council; and (ii) are not required to deliver back office support to other services).
• risks associated with the provider not fulfilling the requirements of the contract (such as poor performance against contractual requirements)
• the risk that the procured provider may not reinvest operating profits back into the library service

2.6 Joint venture

The term joint venture can describe a range of different commercial arrangements between two or more separate entities. Each party contributes resources to the venture and a new business is created in which the parties collaborate together and share the risks and benefits associated with the venture.

A party may provide land, capital, intellectual property, experienced staff, equipment or any other form of asset. Each party generally has an expertise or need which is central to the development and success of the new business which they decide to create together. It is also vital that the parties have a ‘shared vision’ about the objectives for the joint venture.

In the case of libraries, a joint venture may involve the council and one or more third party establishing a new entity.

Ownership, control and influence

Ownership of the joint venture would conventionally be split across each of the parties involved. Typically this would be determined by the appetite of the council to share ownership, and the level of investment and risk taken on by each party.

Commercial freedoms

There are no specific limitations within the joint venture model, although the founding parties may wish to limit the remit of the venture in terms of the nature, scope and scale of services that can be provided. Depending on the legal form assumed, there may be limitations in terms of which services can be delivered and how.

Procurement process

Similar to the outsourcing option, the council would procure joint venture partners via a procurement process.

Staff transfer

Same as for the LATC.

Pensions

Same as for the LATC.

Use of surpluses

The treatment of surpluses will be determined by the type of joint venture created and the entity’s constitution.

Potential advantages and disadvantages

Due to the large number of joint venture options available, it is difficult to be specific with regards to the potential advantages and disadvantages that may be realised. The HM Treasury guidance note page 18, provides an overview of the advantages and disadvantages associated with each legal form for a joint venture.

3. Summary of the main legal forms

It’s important to note that the ADM options listed in the overview do not relate specifically to legal form, but instead describe the type of delivery model and indicate the nature of the relationship between the delivery model and the council.

The term ‘legal form’ refers to the way a particular delivery model is structured, in terms of what type of company it is. Examples of legal form include a Company Limited by Guarantee or Shares, a Community Interest Company or a Community Benefit Society (previously referred to as an Industrial and Provident Society).

Assuming that (via the options appraisal) you have identified a PSM or joint venture as your preferred delivery model, you will be required to identify a legal form for the new entity.

This section provides you with an overview of the main legal forms to consider. As outlined elsewhere within the toolkit, it is essential that you first consider the function of your service. Once this has been determined, a decision needs to be taken in terms of the appropriate delivery model for the service. Once these have been confirmed, the identification of the preferred legal form for the service should be relatively simple to identify.

Please ensure that you receive qualified legal advice before confirming your legal form and registering your company.

3.1 Incorporated or unincorporated

Before considering which legal form is most appropriate for your delivery model, you must first consider whether you intend to establish as an unincorporated association or incorporated company.

Unincorporated association

An organisation set up through an agreement between a group of people who come together for a reason other than to make a profit (for example, a voluntary group or a sports club).

Individual members are personally responsible for any debts and contractual obligations.

Further information on unincorporated associations is available here.

Incorporated company

Incorporation is the process by which a new or existing business registers as a limited company. A company is a legal entity with a separate identity from those who own or run it. The vast majority of companies are limited liability companies where the liability of the members is limited by shares or by guarantee.

Further information on incorporated companies is available here.

It was clear that there was a choice of models and legal forms. The key lesson is not to get too hung up on legal form, but consider what type of organisation you want to be and your local context, objectives and ethos / values and then find what best fits.

Inspire Culture, Learning and Libraries

This table provides an overview of the main types of incorporated legal form and some of their important characteristics. When you come to identify your legal form, it is really important that you understand and consider the characteristics of each legal form and how they will or will not support your delivery model to successfully deliver its function. We recommend that you seek legal advice before deciding on your legal form and registering your company.

4. Social enterprises and charities

The terms ‘social enterprise’ and ‘charity’ refer to the status of the delivery model. This is because whether an organisation qualifies for social enterprise and/or charitable status depends on its function and legal form. This is why status is usually considered at a later stage.

4.1 Social enterprises

Social enterprises are defined as ‘businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners’.

Further details on the characteristics of social enterprises can be found here.

4.2 Charities

A charity is defined by the Charities Act as an institution which:

• is established for charitable purposes only
• is subject to the control of the High Court’s charity law jurisdiction

We set up a trading arm to deliver purely income generating services. This helped us to easily see what was core charity business and what wasn’t.

York Explore

Details on the types of charity structure can be found here.

The next section covers a staged approach to investigation and establishment of an alternative delivery model.