All in agreement

Zurich Municipal concluded recently in its 'Public Sector Supply Chain; risks, myths and opportunities' report that senior officers in local authorities were ill-equipped to manage the risks involved in outsourcing and partnerships transactions.

Local authorities, they said, were exposed to financial, legal and reputational risks which were neither fully understood nor managed. Senior managers and partnership directors needed to work together to manage risk at a strategic level.

Good risk management is integral to the delivery of a successful partnership. Closely aligned to this is good governance if a partnership is to enjoy enduring success.

The challenge for lawyers is to develop a partnership working approach that ensures governance arrangements are sustainable and fit for purpose.

There is now great scope for local authorities to choose different ways of delivering services beyond simply selecting between in-house delivery and traditional outsourcing. Partnerships with other public, private and voluntary sector bodies have been flagged by government as avenues they should consider.

Characteristics of partnerships

Partnership services may be housing and other building maintenance services; social care services; waste management services or housing/accommodation management services. Real partnership relies on an alignment of goals between partners, with an emphasis on the importance of relationships and delivering more value than a traditional contract. The partnership may be a service delivery contract by one body on behalf of another or it may involve joint working. Partnership agreements should carry a fair sharing of risk and reward and should be designed to be flexible to accommodate changes in scope over time.

With a focus on outcomes rather than outputs, a good partnership will encourage the sharing of ideas and resources, being open and honest (e.g. open book accounting) and looking for continuous improvement in service delivery. Partnership should offer mutual benefits to the partners.

A partnering approach

The foundation for a good partnership is the formal contract. Both partners must be clear about what they want and certain they understand fully what is being proposed. Risk management arrangements should be stated clearly.

In contrast to procurement which concentrates on what the provider would do for the commissioner, with fewer commitments in return, partnering focuses on what can be achieved together. A collaborative approach is required throughout, which may involve compromise from either party. Incentives can be used to align the differing objectives between commissioners and providers that will doubtless exist at the start. Contracts that reward providers for helping to deliver business objectives, but without attempting to transfer risks best managed by the commissioner, are essential foundation for a good partnering arrangement.

Principles

Strong leadership is vital. Each organisation needs to ensure senior management commitment to the partnership and identify people within who can build and maintain open relationships. As well as technical and business understanding, they need to be good communicators with diplomacy and problem solving skills. It may be necessary for each party in the partnering organisation to modify its own particular behaviours and ways of working to make partnering a success. Sound contract management should guide both parties.

Managing a relationship built on trust presents challenges. Local authorities must have controls which provide evidence to demonstrate that the provider has delivered the agreed level of service. The provider has to be confident that unreasonable demands will not be made. It will involve reasonable compromise to ensure that local authorities comply with their requirement to demonstrate openness, equity and value for money without imposing undue burdens on the provider.

Partnership contract

The partnership contract should address risk management and governance and enshrine partnering principles. In terms of governance, it should contain detailed provisions for managing the relationship (possibly via a joint partnership board) at a strategic level and at a programme and operational level. This should include relationship management roles. The Office for Government Commerce (OGC) recommends that strategic relationships are managed via a joint supervisory or partnership board with direct input from designated senior responsible officers on behalf of both the commissioner and the provider who report directly to their own internal boards or equivalent (e.g. Cabinet). Day-to-day management should be undertaken by designated programme management teams in both organisations, with this work being coordinated via a joint programme management office established as part of the partnership. Relationship management roles designed to maintain an open and constructive working should be created so that problems are identified early and resolved or escalated as necessary.

Provisions for benchmarking services and ensuring value for money and continuous improvement will assist the local authority with its internal reporting requirements. Increased benefits and savings for the commissioner will justify additional provider profit; for both parties, there could be profit share in return for improved efficiency. The contract should contain a performance management process including clear milestones, outcomes and delivery dates coupled with a process to monitor performance and act on the results.

The partnership contract must also address the rights of the workforce (particularly on termination and handover); contain provisions for the termination, arbitration and exit/transition management; contain provisions for supply chain management and for dealing with changes in the type and volume of services and any changes in the law and national policy. Implementation of open accounting should ensure actual costs and agreed profit margins are transparent, while also creating an understanding of the commissioner's budgetary restrictions.

The contract should detail the audit requirements that will apply both to partnership activity and to the parties involved.

The provider should be required to cooperate with the local authority's statutory audit obligations. Conflicts of interest and clear standards of probity and conduct should be defined including requirements for declarations of interest. A communications protocol should be included to cover any public announcements by the partners and how these are to be managed. In these days ofsensitivities around personal data, it is important to set out how such data will be managed and how FOIA requests will be handled. Provisions for ensuring compliance by the local authority with any other public law duties should also be included, as well as how stakeholder and service user consultations will be run and how complaints via the Ombudsman will be handled.

A separate 'charter' to complement the formal contract terms should be produced setting out the principles, attitudes and ideals that will characterise the relationship including the degree of openness, the spirit in which problems will be handled, the desired 'tone' of the relationship, principles for communication and the behaviours of staff.

Modifying existing governance arrangements

If the partnership is a significant and long-term relationship, the local authority will need to review its internal governance arrangements to decide how, if at all, these need to be revised to align them with the partnership. This may involve changes to the scheme of delegation, procurement standing orders and financial regulations. Consideration will also have to be given to how the partnership arrangements will be monitored by the local authority's scrutiny committees. If elected members are to be appointed to governance bodies within the partnership, the authority must consider how this will affect exercise of their democratic responsibilities and their obligations under the Model Code of Conduct.

Corporate joint ventures

Partnerships may operate through a joint venture company (JVCo) where the Partners provide capital, assets or personnel resources to a new limited liability company in exchange for shares. This arrangement is be underpinned by a shareholders' agreement which determines the respective rights and obligation of the partners in relation to the JVCo, i.e. share ownership, board composition and voting rights. Provision will also need to be made for property ownership. Joint venture property normally belongs to the JVCo and the shareholders receive profits through dividend payments.

A possible JVCo structure is set out above.

Local authorities need to consider the possibility of directors' liabilities for elected members or officers who sit on the JVCo board and what indemnities will be given to them (if any). There is also the potential loss of public accountability in delivering services through a JVCo, plus consideration of how conflicts of interest for elected members and officer board members are managed.

The terms of the constitution (memorandum and articles) of a JVCo should address decision making, looking at the balance of functions and delegation between the board and shareholders, and include provisions setting out which matters require unanimity.

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Risk management

Best practice risk management in partnerships should include a common approach to identifying and assessing risks. This may include introducing a joint risk register ensuring that partners share their risk assessments and adopt a joint approach to risk management. Open book arrangements help to ensure transparency in relation to financial risks. Clarity regarding who carries which risks should be incorporated in partnership agreements and will inform the view on the optimum allocation of risk and reward between the parties bearing in mind that overall service delivery and reputational risks will usually be retained by the local authority.

The introduction of joint risk review meetings as part of the partnership performance management arrangements is advised. The partnership agreement should determine the scale of monitoring and required intervention in relation to key risks. Contingency planning should be addressed to provide clarity regarding action to be taken e.g. 'step in' rights if there is a service failure. Partnership agreements should be reviewed to ensure that inherent risks have been assessed and addressed and that partners' objectives are fully aligned.

The Audit Commission recently published a diagnostic and improvement tool for improving strategic risk management in local public bodies and partnerships.

Conclusion

Partnership working does carry significant risks but it also has the potential to save on costs and improve services. A risk-based approach is essential to achieving success.