There are many benefits to employee-owned organisations – but risks in setting them up too
Successful public sector mutuals are increasingly held up as the future of public service delivery. They appear to offer opportunities to drive cost reduction, increase productivity and enhance user satisfaction.
However, creating an employee-led or employee-owned organisation, whether from scratch or as a spin-off from an organisation, is no soft option. It requires painstaking business and transition planning and testing of the idea, as well as securing investment funds and future income.
Some public sector organisations have already embarked on this course. For example, in July, My Civil Service Pension (MyCSP) was launched, offering 475 former civil service staff co-ownership of their organisation through a mutual joint venture between staff, the government and a private sector partner. However, if Cabinet Office minister Francis Maude's plans for wholescale mutualisation of public services are to be delivered, a number of key considerations need to be addressed quickly.
The first is the assumption that organisations can create employee mutuals by directive leadership and financial incentives (in terms of underwriting pension liabilities or providing an early-years order book from the parent body). This will not be enough though, unless there is entrepreneurial leadership and member support. Setting up and running businesses involves taking on risks and liabilities (often personal to the directors and governors) that few are able and willing to bear. In addition, mutuals will have to deal with complex liabilities such as Tupe conditions that will create a cost burden of employee protections.
The second factor is that mutuals face the same demands as any other business. They need working capital, investment capital, recognition and security from financial institutions and face potential increased liability for the fixed costs and overheads previously carried by the parent organisation.
One way of mitigating the risks is to engage a commercial partner. This is the approach adopted by MyCSP and an established model elsewhere. For example, Circle, a private sector health care partnership, uses co-ownership to share accountability and risk. The organisation comprises two elements: the Circle Partnership (49.9% of the company) is owned by its practitioner and consultant partners with shares allocated on the basis of performance and Circle International plc (50.1% of the company) is owned by a group of City financial institutions which receive shares for investment.
Another important factor is the extent to which the mutual will have the freedom to operate in the open market. If a mutual operates principally in the public sector, it will be subject to the rigour of the EU procurement regime and public sector regulatory constraints. While it may diversify its customer base over time, in the early years it will need to continue to serve the public sector.
Equally, a move away from its original market may create supply chain issues for the parent body so it may place restrictions on the mutual's operation. So the new organisation will need to carefully choose its market to benefit from commercial, charitable or regulatory status.
One possible model is that adopted by the Norse Group, a holding company that brings together a thriving facilities management company and care provider to create joint ventures with local authorities. The joint venture companies operate as commercial companies and have the flexibility to work with private clients, offering opportunities for transferred employees to gain new commercial skills.
Mutuals need to understand the threat to their business from a shrinking public sector. While this is no different to any other commercial enterprise, public bodies considering mutualisation will need to bear in mind the risk of failure and the possible need for a buy-back.
Despite these challenges, the case for enabling employee involvement or ownership is a compelling one. The UK Employee Ownership Index shows that, over the last 19 years, employee-owned companies have consistently out-performed the FTSE all-share index by an average of 11.5%.
There is evidence that employee-owned organisations create the opportunity for deeper, more personal relationships with the customers they support. As Charlie Mayfield, chair of the John Lewis Partnership (the largest and oldest employee-owned organisation in the UK), said: "The strengths of an employee-led model, such as an empowered and informed workforce and a close alignment of motivation between managers and employees, has helped us create a strong culture of trust, innovation and customer service."
These quantifiable benefits of customer satisfaction and returns in productivity and performance can only be delivered if the challenges to the development of mutuals are recognised early and discussed honestly. That way they can be planned for and overcome.
Without that careful work, there is a risk that the current enthusiastic but rather naïve rush to establishing mutuals to transform public service delivery will lead to wide-scale mutual failure.
Karen Cherrett is a public sector service delivery expert at PA Consulting Group
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