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Solace blog

5th November 2018

Improving commercialization through local authority trading companies

The landscape of local government service delivery has changed forever as austerity and the need to do more with less have triggered councils to be more commercially minded.

With local authorities increasingly seeking proactive measures to achieve financial sustainability, the adoption of local authority trading companies (LATCs) has risen as councils move to embrace new collaborative ways of working. But whilst trading companies provide an opportunity for more control to respond flexibly to funding challenges, cut costs where needed, improve quality of service and generate revenue if required, it is important to understand what makes them work well. Especially as others have failed to live up to their promise, and in some cases, been dissolved.

Ensuring LATCs operate effectively
There are several critical steps that must be taken to ensure LATCs operate effectively, including having a clear strategy; getting the right culture; good governance; investing in technology, and being realistic with returns on investment. No LATC is a quick fix – transferring a service into a company will not automatically create efficiencies and time is needed to shift the culture of the trading company to one in which commercial behaviours become second nature.

Taking time to choose the right LATC model for your local authority is also fundamental to ensuring its success. Joint ventures (JVs) have become increasingly popular as a means of leveraging growth. Pioneered by Norse, Corserv, and Vertas are amongst those organisations now developing the model, as seen in our latest report, In good company: Latest trends in local authority trading companies. Alternatively, if there is a social motive rather than a profit one, the social enterprise model is the best option, as it can enable access to grant funding to drive growth.

Avoiding the pitfalls
Even with many LATC successes, there have been some failures with companies wound up and services brought back in house. This is often in relation to the inappropriate governance of the company as it is easy for the owning authority to become too involved in the day-to-day running. LATCs need their freedom to operate in the commercial world. This situation can be further exacerbated when elected members have seats on the boards of these companies – this can both stifle innovation and growth and can mean serious conflicts of interest that pose a risk for
members. Elected members have clear political leadership and representation roles. These do not sit well with the statutory responsibility of a company director.

Despite the challenges, LATCs are here to stay as local authorities’ ongoing need to be open to different ways of doing things will drive further developments of new trading companies. And there is still plenty of growth potential for existing and new companies to tap into if they adopt the right strategies – from taking advantage of the Teckal exemption to enter into contracts, to further public sector collaboration and looking beyond local boundaries. LATCs will relieve the pressures on councils’ to find the most efficient ways of doing more with less in today’s austere climate.

For more information download our new report: In good company – Latest trends in local authority trading companies

By Vivien Holland, Associate Director of Local Government Advisory, Grant Thornton UK LLP