Austerity and the need to do more with less have driven councils to consider different ways of working. And there is a growing recognition that revenue generation can play a part in that.
Since the 2011 Localism Act gave local authorities new powers to trade, there has been a surge in the creation of new companies. Local authority trading companies (LATCs) now deliver a wide range of services across the country. These range from wholly owned companies, joint ventures with either the public or private sector, to social enterprises.
Outsourcing versus local authority trading companies
The rise of trading companies is, in part, due to the decline in popularity of outsourcing. The majority of outsourced contracts operate successfully, and continue to deliver significant savings. But recent high profile failures, problems with inflexible contracts and poor contract management mean that outsourcing has fallen out of favour. The days of large scale outsourcing of council services has gone. To find out more download our latest report, In good company: Latest trends in local authority trading companies [ 5414 kb ]
Advantages of local authority trading companies
LATCs offer some clear advantages over other service delivery models. They mean councils can keep direct control over their providers, offering an opportunity for any profits to come back into the authority. Equally the chance to change local authority terms and conditions, particularly with regard to pensions, can bring significant reductions in the cost base of the service.
Creating a separate company also lets the service or activity move away from the constraints of the council’s decision-making processes, becoming more agile and responsive to changes in demand or funding. In addition, the wider powers to trade through the Localism Act provide the company with the opportunity to win contracts elsewhere.
Choosing the right company model
The most common company models adopted by councils are: wholly owned, joint ventures (JVs) and social enterprises. Wholly owned companies are common because they allow local authorities to retain the risk and reward. And governance is less complicated. Direct labour organisations such as Cormac and Oxford Direct Services have both transferred out in this way.
JVs have become increasingly popular as a means of leveraging growth. Pioneered by Norse, Corserv and Vertas are amongst those organisations now developing the model, as seen in our latest report, In good company: Latest trends in local authority trading companies [ 5414 kb ]. Alternatively, if there is a social motive rather than a profit one, the social enterprise model is the best option, as it can enable access to grant funding to drive growth.
Getting it right through effective governance
While there are pitfalls in establishing these companies, those that have got it right are: seizing the advantages of a more commercial mind-set, generating revenue, driving efficiencies and improving the quality of services. By developing effective governance they can be more flexible and grow business without micromanagement from the council.
LATCs need to adapt for the future
It is clear that LATCs are here to stay. There is still plenty of growth potential for existing and new companies to tap into, especially in exploring further public sector collaboration and options for scaling up by going beyond local boundaries.
But LATCs must adapt to developments in the external environment. These include possible changes to public procurement rules after Brexit and new local authority structures. They will also need to respond to an increasingly crowded and competitive market where there could be more mergers and insolvencies.
Local authorities' ongoing need to be open to different ways of doing things will drive further developments of new trading companies. This will relieve the pressures on councils' to find the most efficient ways of doing more with less in today's austere climate.