This review of lessons learned summarises the particular points to consider when looking at governance and performance management of commercial activity within councils.
Councils are increasingly developing innovative commercial solutions to increase income while improving outcomes for local residents. Councils are finding that commercial operating models can make services more responsive to residents’ needs while also improving the quality of the services provided.
Commercial approaches can enable councils to facilitate the delivery of services that the market does not supply or provide services at risk of not being otherwise feasible. They can also allow councils to provide an affordable alternative for people if a lack of competition has inflated local prices or left gaps in the market. New discretionary income-generating services can provide residents with more choice.
Yet running commercial operations is not without risk, as described in several public interest and value for money reports that have been published by external auditors in recent months relating to council commercial activity. Several of these reports identify governance and performance management as a major cause of concern. While these reports only involve a small fraction of council commercial activity, the lessons identified offer an invaluable opportunity to learn.
This review of lessons learned looks at eight recent public interest and value for money auditor reports to identify performance management lessons under the broad themes that they have identified and offers thoughts on avoiding similar pitfalls.
All the reports reviewed recognise the complexity of governance and performance management of commercial enterprises. Unsurprisingly, all councils took specialist legal advice in establishing their enterprises, yet this was not enough to assure success. What is surprising are the clear similarities in the lessons identified from across the reports – purpose, structure, skills, and business case.
Few developed a meaningful purpose for their commercial enterprises, hampering the creation and application of relevant values and strategic objectives and making it difficult to link performance and decision-making with the delivery of benefits. Mapping delegated authority against expected outcomes was poor, leading to confused ownership and accountability, ‘mission creep’, limited unity of effort and inadequate staff buy-in.
Understanding of how commercial companies that are looking to achieve social value operate and interface with councils was lacking. Governance structures can be complex, but in these examples they were poorly communicated, with documentation lacking in coherence. Roles, responsibilities, tasks and delegated authority were ill-defined and decision-making was therefore slow or represented substandard governance.
In these examples, suitably qualified and experienced people were not employed to oversee the three key functions – owner, supplier and customer. Members and officers were asked to undertake functions for which they were neither experienced nor trained. Boards and committees frequently lacked the breadth and depth of capability to provide appropriate support and challenge or hold individuals accountable.
Business case assumptions, financial models and revenue forecasts lacked sufficient depth or breadth. Due diligence was generally superficial. Services provided were ordinarily long-term, complex and sometimes demand-dependent. Despite this, few plans took account of agency, cost increases, revenue shortfalls, changes or disputes. Risks were usually not integrated into council strategic risk registers and mitigated appropriately. Commonly, a drive for social value replaced sound business decision-making.
While commercial enterprises will each have their own context, the reports contain lessons that can be applied widely.
The most important lesson identified is that setting up and managing commercial enterprises requires a multi-disciplinary team. As well as expert legal advice, councils need to draw upon experts in corporate management of organisations that are looking to achieve social value, and technical, market and financial specialists. This team must work alongside the in-house executive, Section 151 officer, monitoring officer and client-side teams.
The second most important lesson is to agree a meaningful purpose. Purpose sets out why the organisation conducts its activities, articulating what societal challenge, need or benefit it seeks to address. The purpose must be embedded in the governance documents. The values, vision, mission, and strategic performance objectives should be mapped back to the purpose to enable delivery of this purpose to be evidenced. This evidencing should be via a set of deliverables or measures of performance (either outcome or process / output).
Drawing a diagram of the governance structure will enable greater clarity and understanding, and councils should then test this against scenarios for agency, variations, change and disputes. These scenarios may include changes in priorities, scope, demand, inflation, costs, and revenue. Processes should then be agreed, captured and distributed to the owners, supplier, and customer.
It is important to clearly define roles, responsibilities, tasks and delegations; and recruit and train for each role, ensuring these provide the agreed balance of skills and knowledge within each board or committee. In line with commercial best practice, a performance review regime should be set up to ensure the board of directors/trustees of a council commercial enterprise and any council shareholder sub-committees are evaluated for effectiveness on a regular basis.
Comprehensive and coherent business cases must be presented formally. To better understand risk, assumptions, financial models and revenue projections must be robustly challenged by experts. Due diligence must also be substantial in nature and challenged. Relevant and proportionate risks must be integrated into the council’s strategic risk register and mitigations agreed.
This review of lessons learned highlights that good corporate governance is crucial for council commercial enterprises, since it influences the behaviour of key stakeholders and impacts on performance and the creation of sustainable value over the long term. Good governance provides clarity of purpose and strategy, promoting ethical behaviours, regulatory compliance, and transparency.
Executive Head of Commercial
Havant Borough Council