1. Title heading © Capita Business Services Limited 2011 Capita Consulting Transforming Further Education FHE Principal and Vice Principal Briefing November 2011

2. © Capita Business Services Limited 2011 Drawing upon evidence from institutional mergers in FE in the UK, overseas and private sector, and research on Collaborations, Alliances and Mergers (CAMs)  Key factors that drive success or otherwise of institutional CAMs  Lessons learned and main issues institutions should consider and address when contemplating CAM  New business models - shared services and the cost sharing exemption  Barriers to be overcome  Critical success factors Scope of this briefing

3. © Capita Business Services Limited 2011 Trends and drivers for mergers in FE  Recent trend is for strategic CAMs, sector generated and led  Drivers for change:  Possible future political support or pressure to restructure sector  Government allowing financially weak institutions to fail  Reduced public funding  Enhanced competition between FECs  Student experience - need to improve and differentiate  Role of Private Sector – levelling of playing field

4. © Capita Business Services Limited 2011 Other drivers for merger and collaboration Business Case  Resolve financial instability  Realise efficiencies (better estates utilisation or shared services)  Share risk  Improve competitiveness  Support economic regeneration Education Case  Improve student experience  Foster innovation  Address quality issues  Increase participation  Achieve academic synergy / viability

5. © Capita Business Services Limited 2011 Degrees of partnership 1. Collaboration 7. Merger 2. Partnership 3. Soft Federations 4. Hard Federations 5. Joint Ventures 6. Group Structure

6. © Capita Business Services Limited 2011 A continuum of trust

7. © Capita Business Services Limited 2011 Vehicles for closer working Joint Statutory Committees Joint Venture Companies Memoranda of Understanding

8. © Capita Business Services Limited 2011 Lessons from Private Sector merger  50-75% of mergers fail outright or do not achieve expected benefits  Mainly due to poorly managed post-deal integration:  Lack of appropriate planning (direct correlation between quality of planning and success of merger)  No clear vision and strategy  Lack of open communication  Whole range of people and cultural issues

9. © Capita Business Services Limited 2011 Success factors – Private Sector mergers  Allocate sufficient resources to establishing strategic objectives and a clear vision  Successful mergers have direct correlation with amount and quality of planning involved  Carry out sufficient due diligence  Run dual companies/Boards for a transition period  Over-communicate especially with employees – make it a group experience and check what support is needed  Understand emotional, political and cultural issues which arise  Managers should lead by example and monitor own reaction to the change  Faster is not always better for integration

10. © Capita Business Services Limited 2011 Critical success factors for FE CAMs  Strong educational (not financial) basis  Need a shared vision, strategic fit and strong leadership  Examine all collaborative options – rather than be solution driven  Put in place effective CAM planning and implementation process  Address staff (payroll & pension), student and cultural issues – open communication essential  Make realistic cost estimates – don’t overestimate potential savings and underestimate level of upfront investment required  Complimentary mission and culture make success more likely – especially evident in HE / FE mergers  Actively manage benefits realisation – devise and track measures of success

11. © Capita Business Services Limited 2011 Assessing intended and actual outcomes from merger Did it result in…?  Increased stability  Shared identity and common strategy  More capital funding  More investment in key areas of research and teaching  Improved student experience  Better estates utilisation  Stronger regional or national voice

12. © Capita Business Services Limited 2011 Shared services in FE  In the past shared services typically meant sharing of ‘back office’ operations like processing records, payroll, finance and benefits  Shared services are now being looked at across a wider range of services both front and back office – e.g. IAG  Shared services can be a key component of institutional collaboration  Shared services may also be a stepping stone towards partial or full integration

13. © Capita Business Services Limited 2011 The cost sharing exemption model  FECs are partially exempt hence incur substantial irrecoverable VAT  Whilst to make efficiency savings, FECs may wish to share services and VAT is regularly cited as a barrier  This may be alleviated by the implementation of the cost sharing exemption (available via the European 6th Directive) subject to the terms of its implementation  HMRC are consulting on the possible form of its implementation  Quite distinct from a VAT grouping which, as a Cost Sharing Group (CSG) may not be under the control of one member  FECs as partially exempt bodies will likely be eligible to be members of a CSG

14. © Capita Business Services Limited 2011 What are the basic conditions of the exemption?  The Cost Sharing Group (CSG) must be independent  CSG members must make exempt and / or non-taxable supplies  The supplies by the CSG have to be made at cost (exact reimbursement)  The services provided by the CSG must be ‘directly necessary’ for the members exempt and / or non-business activity.  Cost sharing must not cause a distortion of competition  The Advocate General in Taksatorringen stated in paragraph 122 of his judgment: “This means that the group must be entirely transparent and that, from an economic point of view, it must not have the characteristics of an independent operator seeking to create a customer base in order to generate profit.”  HMRC was consulting to end of 9/11 on each of these points and will thereafter advise Ministers regarding the exemption’s implementation

15. © Capita Business Services Limited 2011 What next?  Scenario modelling is a critical next step for institutions which requires:  Being clear as to levels of exempt / non business and taxable activity  Identifying and prioritising potential services for inclusion in a Cost Sharing Group (CSG)  Importance of considering partners beyond FE that may be able to a join a CSG - but will need to address process and system alignment  Calculating potential business benefits (in terms of cashable and non cashable savings) from the inclusion of such services in a CSG  Becoming Lean before embarking