Local authorities across the UK have set up trading companies to deliver services ranging from care to waste collection. Many are successful, but there are pitfalls to be avoided. Critical steps need to be taken to ensure they operate effectively.
The following five factors have been identified as key to the success of many flourishing local authority trading companies (LATCs):
1 Adopt a clear business strategy from the beginning
Taking the time to set the company up correctly with a proper business case and real clarity about objectives is important. That means being clear about whether the company needs to make a profit, to take the service back into public control to be more efficient, or a combination of these factors.
Most successful companies start small and build the business slowly. They usually begin with one service and then look for new opportunities, making sure that they have a valid business case to support each plan for growth.
2 Create a commercial culture by getting the right people
No company will succeed without a commercial culture. Good quality services will only be provided if the right people are on the front line. This can be difficult to achieve if the whole service is transferred into the company without any external recruitment. Getting the right people in the new company is essential. It is important to recognise that commercial skills may well be different from those found in the local authority. External recruitment is critical in driving the new approach.
Culture change can take time. But successful companies speed this up through incentives that reward good business behaviours and by a clear focus on effective staff engagement.
3 Underpin your LATC with an effective governance structure
Politics should be kept as far away as possible. The governance structure should enable the company to trade freely with the private sector, respond in an agile way to changes in market conditions and be able to challenge if the council takes an overly risk averse approach. But it is essential to ensure there is a right balance between commercial freedoms and the need for transparency. This will ensure the shareholding council knows what the company is doing.
4 Be realistic about timescales
The new company will not be able to provide benefits overnight. There are unlikely to be profits in the first three years and just turning a failing service into a company won’t fix the original problems. If the service is not working then, whatever its structure, it will need a careful review of what is going wrong. And a clear programme to deal with the issues.
5 Don't let resistance to commercial approaches get in the way
When setting up a trading company councils need to consider the regulatory barriers to commercialising statutory services. The authority will always be the provider of last resort. A further challenge has arisen with the fall out from Carillion’s failure potentially risking the public sector's confidence in commercial approaches. This may reduce the willingness to consider new arrangements due to fear of political, public or other resistance to commercialisation.
LATCs are making a real difference to the provision of local authority services as they can realise efficiencies and improvements. There is also significant scope for further growth, particularly through collaboration via joint venture companies that can facilitate scale economies. But in an increasingly crowded market it is vital that these companies are properly structured, have the right leaders in place and a clear understanding of the challenges of trading in these conditions.