1. Alternative Service Delivery Models October 2013 www.pwc.com

2. PwC Alternative Service Delivery Models Background and Context 2 October 2013 ASDN - Impact on Internal Audit

3. PwC Blurring the boundaries Delivering public services Prioritisation of activities in the context of cost efficiency drives the need to consider a wider range of delivery methods. These include not delivering the service at all and letting the market deliver it, if the need is there. Third parties (e.g. private sector, social enterprise, communities) can be involved in the delivery of public services to achieve better value for money where appropriate. Where the decision is to involve a third party, the underlying commercial reality of the deal (e.g. value, governance, operations, risk transfer and staff) will drive the use of different commercial delivery models. 3 October 2013 ASDN - Impact on Internal Audit

4. PwC Choosing the right model for your needs Influences and pressures Risk Efficiency Cost Commerciality Provider Control Benefits Governance Commissioner Policy Community Influence Strategy Localism 4 October 2013 ASDN - Impact on Internal Audit

5. PwC Choosing the right model for your needs Process Strategy FeasibilityStructuringImplementation Objectives Vision Policy Optional appraisal Business Case Stakeholder management Benefits analysis Risk assessments Structuring Vesting/Reform / transaction Capability Capacity Implement Project Plan Benefit realisation 5 October 2013 ASDN - Impact on Internal Audit

6. PwC Reviewing service delivery models… Options Analysis Increasing demand and shrinking resources Financial Pressures Collaboration Agenda Pressure on Partner Organisations Big Society and Localism Place Based Budgets Public-Public PartnershipsPublic-Social Partnerships Retain In-House Private Sector Partnerships NO “ONE SIZE FITS ALL” SOLUTION Risk Control Benefits Governance Policy Strategy Commissioner vs. Provider 6 October 2013 ASDN - Impact on Internal Audit

7. PwC Key features The organisation retains all responsibility for delivering the service. - outsourced entirely, or a joint venture setup with a partner; - For outsourcing, an external private sector partner is paid to provide the service to or on behalf of the organisation; - For Joint ventures, a legal entity is setup between the parties to jointly deliver the service for a finite period of time. Typically, the private sector partner is the majority shareholder in these arrangements. The partnership can operate on a contractual basis, via SLAs, on a constitutional basis, or a joint venture can be setup. For SLAs, the relationship is contractual with one public sector organisation delivering service to another. A shared service is where the delivery of a service is shared between public sector organisations using a constitutional arrangement for governance and equity. For Joint ventures, a legal entity is setup between the parties to jointly deliver the service via contracts. There are a number of potential vehicles, the main ones being Social Enterprise, Mutuals or Cooperatives. A Social Enterprise is a socially-oriented venture created with other organisations, often involving local communities on a not-for- profit basis. A mutual is an enterprise which is owned by those who do business with it. A cooperative is similar to a mutual as it is owned by those who do business with it, but generally deals in goods and products rather than services. Retain In- House Public- Private Public- Public Public- Social 7 October 2013 ASDN - Impact on Internal Audit

8. PwC Alternative Service Delivery Models Impact on Internal Audit 8 October 2013 ASDN - Impact on Internal Audit

9. PwC Case Study 1 – Private Sector Provider - Outsourcing Service Agreement Supplier Local Authority ObjectiveKey Issues Maximising cost effectiveness and delivering a return on investment Contractual arrangement between the LA and a private provider to deliver an agreed service. Able to obtain value from scale advantages of existing providers, flexible pricing, reduced upfront costs and output-based incentives. Typically requires setup costs to cover any procurement, the TUPE of staff and potentially the redesign of the retained organisation. Maintaining or improving service quality Able to access skills available in the wider market and to contract for defined outcomes. Can be sufficiently flexible to allow for services to be changed over time. Contract management is important to maintain overall service quality. Strategic Fit Enables strategic control of service whilst transferring operational control. 9 October 2013 ASDN - Impact on Internal Audit

10. PwC Outsourcing – Risks and Impact on IA Service Agreement Supplier Local Authority Managing the strategic relationship Skills and capability to effectively manage the contract? IA capability to assure? Service delivery risks – reputation risks cannot be transferred Strength of 1 st and 2 nd Lines of Defence Do internal audit…. ‘duck the bullet’ ? Or Look to drive more assurance from more sources? 10 October 2013 ASDN - Impact on Internal Audit

11. PwC Robust contract management More Assurance – More Sources Align and focus risk management activity Clarify and define the risk and audit universe. Identify the gap between proposed audit areas and total risk universe. Independent third party assurance over design and operation of key controls for outsourced contracts and shared services. 1 st & 2 nd LoD 3 rd LoD Outsourcing – Risks and Impact on IA 11

12. PwC Service Agreement ObjectiveKey Issues Maximising cost effectiveness and delivering a return on investment No legal construct. Organisation can take different corporate forms (society, company). Can trade for profit, but any surplus is returned to the members. Could achieve cost reductions in service due to scale increase or sharing of expertise with other public sector partners. Does not allow the Council to benefit from any additional revenues as any profit could not be redistributed. Vesting costs could be significant. Maintaining or improving service quality The ability to reward clients and employees directly through their shareholding or membership may improve services through incentivising them to accurately reflect user needs. The reduced ability to attract external private sector partners may limit the ability to provide service improvements. Strategic Fit Strategic control of the company is difficult for the Council to maintain as the shares would typically be owned by its employees or the users of the service. Local Authority X% Ownership Y% Ownership Employees/ Clients Mutual Council/Clients Case Study 2 – Mutual 12 ASDN - Impact on Internal Audit

13. PwC Mutual – Risks and Impact on IA Financial risk due to the initial investment in vesting costs Succession planning and investment to remain upskilled Fraud and error risks Operational risk - transfer of people to a new company under new management Governance structures Do internal audit…. Adopt the same approach? Or Adopt a more collaborative approach? Service Agreement Local Authority X% Ownership Y% Ownership Employees/ Clients Mutual Council/Clients 13 October 2013 ASDN - Impact on Internal Audit

14. PwC Mutual – Risks and Impact on IA What does good governance look like? Where do boundary lines lie? Controls optimisation Policies, procedures Clarify risk appetite Advise on risk profile Embedding key controls Support & collaborate Train and involve Clarify risk strategy 14 October 2013 ASDN - Impact on Internal Audit

15. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2013 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Adding value for our clients Chris Gallagher Director – PwC Tel:+44(0)161-245 2484 Mobile:+44(0)7801-823 290