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Why shouldn’t local authorities turn a profit?

02/06/2017 minute read Gordon Wilson

Whether it’s to service highways, houses, public buildings or public spaces many local authorities are now operating their own Trading Organisations - previously referred to as DSOs (Direct Service Organisations) and DLOs (Direct Labour Organisations) - to carry out the maintenance that was once the domain of contractors. The shift away from outsourcing these services gathered momentum in 2011 when VAT rates increased by 2.5% to 20%. This meant that labour costs, which typically account for between 60-70% of the cost of running a repairs and maintenance service, simply became unaffordable – forcing organisations to review their structures and costs.

Local authorities had also experienced other problems when using contractors. Despite the promises made at tender, the level of service sometimes proved to be poor, and the cheap parts used in order to provide competitive pricing meant that repairs often did not last very long. Contractors could unexpectedly fold overnight, and in emergencies, such as heavy snowfall, they would often prioritise their largest customers - leaving public sector bodies in disarray.

Setting up an internal Trading Organisation seemed to resolve these issues. Costs could be controlled, quality parts purchased, skilled staff selected and employees were more likely to do a good job – after all, they would be the ones returning to fix the problem if not. Staff were also encouraged to take a holistic view of each situation, flagging up any possible future issues. However, launching a Trading Organisation proved to be a big commitment requiring a sizeable investment in people, vehicles, equipment and insurance – and this was set against a backdrop of budget cuts and reductions in grants. Many local authorities realised that if they wanted to avoid increasing rates for their residents then they needed to boost their income another way.

Some saw this as an opportunity to stop being seen as a “costly necessity” and instead to get involved in the commercial world and make some money to offset these costs. The rules and regulations were already in place to accommodate such trade, and it had in fact been going on for years in various forms. For example, Birmingham City Council provided Building Control services for Marks & Spencer up and down the country, rebranding itself as a separate entity. BT Global started as the IT department for British Telecommunications, bringing in a large profit and finally becoming a separate organisation. Newcastle City Council has grown to be the largest furnished tenancy provider in the UK via its Newcastle Furniture Services (NFS) company, providing furniture for its own homes and to other housing providers, voluntary organisations and local authorities throughout the UK. NFS is a subsidiary of Newcastle’s Housing ALMO Your Homes Newcastle. There are many business opportunities for Trading Organisations who can offer valuable skills and quality products to other public sector bodies and within the commercial world.

Those Heads of Trading Organisations who are doing well and making a surplus have been encouraged to share best practice with others and help start up new initiatives. However, it is vital that the right platforms and processes are in place before new Trading Organisations are established. In a recent conversation, a Finance Director of a local authority told me “in order to turn a profit we first need to get a handle on our costs – walk before we run”. Cost and profit centres need to be created so that overheads are allocated and profitability can be closely monitored. The information systems within many local authorities are at present incapable of running such trading accounts; they simply haven’t been developed to provide the level of information required.

Integrated works order management solutions, such as Siclops from Advanced, enable each Trading Organisation to run a profit and loss account, clearly showing any surplus that is being made – not just for the organisation as a whole, but also within each individual job/project/capital scheme. It supports the day-to-day management of costs with one dashboard for all expenditure. The works order management solution is fully integrated into a finance platform so all repair bills for work done come into one live and transparent ledger giving local authorities total control over budget and expenditure forecasting. This unprecedented insight into critical management information improves efficiency, cash flow, cost-savings, revenue and productivity throughout the entire organisation.

In the past, the idea of public sector bodies making money was often frowned upon, not the ‘done thing’ for a department serving the community and local area. Instead of profit being discussed, it was “cost avoidance”, “financial gain” or “economic efficiencies”. However, there are clearly many good reasons to bring these services in-house. It can be a great way to save costs, control quality and generate significant income. With efficient, modern infrastructures, processes and systems in place to analyse costs and profits, local authorities can make accurate, data-driven decisions on investment and product/service direction. In this way, they can continue to offer reliable local employment and provide high levels of service to their communities – whilst turning over a nice little profit that they can invest in their future.