So much is written and said about shared services these days, but what do these arrangements comprise and what are the likely areas of difficulty?

What are “shared services”?

In the current economic climate, the concept of “shared services” is emerging as an attractive option for public bodies wishing to minimise costs. What are shared services? As the name suggests, the model involves public sector providers joining together to share expertise and improve efficiency by sharing operation of key services, particularly in reasonably generic administrative areas such as back office functions. Shared services can be contrasted with the idea of “outsourcing”, where a public body typically pays a private sector specialist provider to run the service. It has been the norm for, for example, groups of local authorities, to share services between themselves for some time now. What is newer is the extension of the principle to the sharing of services by and amongst diverse types of public bodies, for example, an arrangement between a local authority, a PCT and a foundation trust.

What are the attractions of a shared services model?

The drive behind any shared services arrangement is to improve efficiency by pooling resources to deliver services to a broader customer base on a larger scale, and thus, more cheaply. Public bodies also see the model as an opportunity to make money from noncore functions which traditionally would not have provided a revenue stream; for example, a public body selling HR services to other public bodies.

What are the key legal issues and challenges?

The most significant legal issue is whether the contracts between the participating public bodies are subject to the public procurement regime. As we will see below, this will greatly depend on the detail of the structure adopted. In addition there are likely to be accompanying issues around limitation of liability and indemnities, employment and pensions, tax treatment, data protection, freedom of information and whether the public bodies have the requisite statutory powers to do what is being proposed.

Where there are several different types of public body involved there will be different limitations and governance/tax issues for each depending on their legal form. It is also more likely that each of the public bodies within the arrangement has a different suite of interests and incentives, all of which need to be reconciled.

Will the public procurement regime apply?

As readers will know, where a public body lets services contracts over a certain threshold (roughly £100,000) then there is likely to be a requirement to open that contract up to competition in accordance with The Public Contracts Regulations 2006 (the “procurement rules”). This applies even where the service provider will be another public body rather than a private sector entity. This means that some shared services arrangements will attract the application of the procurement rules.

In principle, the following arrangements are unlikely to bring the procurement rules into play:

  • Mere informal collaboration (for example, delegation of work where one particular public body is overstretched).
  • Non-binding arrangements or service level agreements, for example, the delegation of functions under the Local Government Act 1972, or joint committee arrangements.
  • Where services contracts are awarded by public bodies “in-house” to a company which is 100 per cent owned by the public bodies, and which undertakes the vast majority of its activities with those public body owners only (the so-called Teckal exemption).

On the other hand, the following features are likely to attract the application of the procurement rules:

  • Where one “lead authority” acts as a formal contractual service provider to other public bodies.
  • Where a group of public bodies contract with a third party (public or private sector) to provide services.

Bear in mind that arrangements which initially begin as informal agreements may over time evolve into more definite structures and thereby fall within the scope of the procurement rules.

Other issues

Limitation of liability and indemnities.

The arrangements should protect each of the public bodies against the possibility of a breach by one of the partners.

Data protection and Freedom of Information

If the arrangement involves the sharing of personal data, each of the public bodies involved must have the power to share data with other organisations and must comply with the Data Protection Act 1988 and Human Rights Act 1998. Consideration will also need to be given to whether any new vehicle established by the arrangement is subject to the regime under the Freedom of Information Act 2000.

Transfer of Undertakings (Protection of Employment) Regulations 2006

(TUPE). If the arrangement involves the transfer of any staff to any new entity, the TUPE regime will bite to protect employment conditions for transferring staff.

Powers

Local authorities must ensure that it has the statutory powers needed to enter into the new arrangement or risk the arrangement amounting to an “ultra vires” act.

Corporate vehicle issues

Where the arrangement contemplates the establishment of a new corporate joint venture vehicle, thought will need to be given to matters such as the powers to appoint directors, the weighting of voting rights, how conflicts of interest will be managed and exit provisions.