VfM is not just the latest regulatory obsession that needs to be gamed and put safely away. It will be the crucial buffer that enables providers to manage increasing risks and still have the resources to make and contribute to new supply Julian Ashby, Chair of the HCA Regulation Committee If all social housing management was open to competition, potential savings of £680m could be achieved CBI – Open Access We are practising what we preach – my own department is cutting its running costs by 42% Eric Pickles – Secretary of State for Communities and Local Government By Kate Murray and Alistair McIntosh, with input from Ian Parker
Transcript
VfM is not just the
latest regulatory ob
session that needs
to be gamed and put
safely away. It will
be
the crucial buffer th
at enables providers
to
manage increasing risk
s and still have the
resources to make and co
ntribute to new suppl
y
Julian Ashby, Chair
of the
HCA Regulation Committee
If all social housing management
was open to competition, pote
ntial savings
of £680m could be achieved
CBI – Open Access
We are practising what we preach – my own departmentis cutting its running costs by 42%Eric Pickles – Secretary of State forCommunities and Local Government
By Kate Murrayand Alistair McIntosh,with input fromIan Parker
2 3
We stand for one thing and one thing only. All of ourmembers want to deliver top quality services. Wesupport them to do that in every way we can. Thispaper suggests new ways of keeping great servicesgoing with less money. That is the number one issuefor everyone.
Housing organisations face many threats to theirincome:
• Welfare reform means that lots of tenants willstruggle to pay their rent and service charges
• Councils face yet another tough year so theyare looking for savings wherever they can
• Ministers see t he billions in surpluses made byhousing associations today and wonder why theyfund the sector at all.
It may look like the housing association sector is inrude good health right now. But will this continuepost welfare reform?
And in fact the real picture is uneven. More than aquarter of associations already struggle to pay offtheir loans using their rental income. Fifty or soassociations run on quite tight margins – less than10% of turnover.
The truth is that all housing organisations must savemoney. But does this mean you must sacrifice qualityand cut to the bone? We’d argue you don’t and that,with a bit of bold thinking, there is a way ofdelivering great services for less money.
Our approach was inspired by a council leader whosaid: “Why can’t we do what Capita and Serco do – butkeep the money for ourselves?”
We worked with some of our members to see if wecould bring together the benefits of the way thepublic and private sectors go about things. Thepilots we worked with were:
• Shepherds Bush Housing Group
• Brighton and Hove Council
• Cheshire West and Chester Council.
At Shepherds Bush and Brighton and Hove we:
• Ran short inspections to test the quality ofhousing management (in both cases this was good)
• Asked the private sector housing managerPinnacle to work up its price for the samestandard of service
• Challenged the landlords to reduce their pricesin line with Pinnacle while still maintaining quality.
Shepherds Bush and Brighton and Hove passed this test and reduced costs without droppingstandards. They made savings for themselveswithout the costs and delay of an EU tenderingexercise. These savings can be significant:
• Shepherds Bush could reduce costs by £1m overfive years
• Brighton and Hove could save around £2m overfive years.
Cheshire West and Chester was different as thiswas a new council, starting from a lower base interms of quality. We inspected the service and then worked with tenants to design a better one.The council decided to put this service out totender. Plus Dane won the contract. Under thisarrangement, costs fell and standards rose just likein our other pilots. On the capital works side, thecontract should save around £5m. The cost ofmanaging the homes will go down by £200,000 ayear. Bear in mind that this will fund an improvedlevel of service. It seems like value for money iscontagious. Boards elsewhere are asking how theirservices compare to the Plus Dane price.
On the basis of our experience we think the publicand private sectors should work together more on value for money. Why not invite commercialcompanies to price up your services? It will not leadto outsourcing unless you want it to. You could evenswap prices with other associations and councils.
There is a good reasonwhy our name is the Housing
Quality Network...
THE PRICE OF QUALITYHOW THE PILOTS WORKEDHQN
QUALITY CHECK
•Onsiteinspection
•Serviceratings
PINNACLEPRICE CHECK
•Onsite visitsand interviews
• Price-based onreal workloads
REPORT
•What servicesshould beimproved?
•How much canbe saved?
•Full and frankdebate onrecommendationsbetween HQN,Pinnacle andthe landlord
DISCUSSION ACTION
•Landlord implementsagreed improvementand savings
• The pilots did this forthemselves withouttendering
Now that would be real benchmarking. You get tocompare prices for managing your homes to a givenstandard at a fixed point in time. Landlords willlearn a lot from each other.
The CBI is calling for housing management to be put out to tender. They claim it would save 15% or £680m. Who knows if that prediction would turnout to be correct? Some of the savings would belost because of the costs of tendering and VATpayments by associations. Remaining savings wouldtake a while to come though as tendering exercisesoften last longer than a year. Far better then tobuild on what is already being done. We make noattempt to extrapolate the savings from our pilots.There is a simple reason for this. None of thempresented a static target. Each one was alreadymaking savings and improving services by the timewe worked with them. It tends to be the good orstriving organisations that put themselves forwardfor exercises like this.
Our pilots showed that sometimes you can have yourcake and eat it. We delivered the sorts of savingsthe CBI want to see. At the same time high quality
services prevailed. This is a fusion of public sectorethos and private sector cost control. It isstraightforward to get started. All you need to do is:
• Assess current standards of quality objectively
• Agree the standard you want to see delivered in the future
• Test your price versus a commercial firm orother landlord (with agreements on confidentialityand non-competition if you want)
• Discuss the findings in detail
• Draw up an action plan to make savings/improveservices (most of the time these can be achievedwithout the costs and delay of tendering).
This paper covers the work of our pilots. I hope thatyou find it useful. HQN would be happy to talk toyou in more detail about the process and how youcould do it for yourself.
Alistair McIntosh Chief Executive, HQN
54
We hear a lot about value for money. But what do wereally mean by the concept in housing? Is it all aboutthe money side of the equation – or ‘rooting out waste’,as Communities Secretary Eric Pickles puts it? Orshould the focus be on the value in value for money,in other words the added social benefits housingproviders deliver with every pound they spend? Theanswer is a bit more than the sum of the parts.
Getting to grips with what value for money involvesin housing is now a political and regulatory priority.Beyond that, it’s a necessity for housing providerslooking to direct more money into tackling thechallenges of welfare reform or building new homesfor those who need them. But for housing providersto respond effectively to the value for moneychallenge, they need to understand both what VfMmeans for their organisations and communities, andhow to assess it.
Traditional methods of measuring VfM will no longerbe enough. Housing providers will of course have tolook at what others are doing within the housingsector to bear down costs and deliver more for less.But they will also need to find new ways of gettingmore value from what they do, drawing more heavilyon the experiences of the voluntary and privatesectors in the process.
In this report, we look at some new approaches. Wehighlight ways in which providers are challengingthemselves more effectively to not just to bear downon costs but to run their organisations in the mostefficient and effective way for their communities.
Achieving value for money is a constant refrain inthe national political debate. For Prime MinisterDavid Cameron, it’s about ‘doing what businesses do
every day’ – getting ‘more bang for their buck’. Hisgovernment has been explicit in its aim of opening uppublic services to competition from the privatesector, an approach ministers believe will securebetter value from dwindling public spending. Theprivate sector is ready to take advantage. The CBI’srecent report Open Access claims £22.6bn-worth ofsavings could be made were more services taken onby private providers. Of this, £680m in productivitysavings would come from ending what the CBI callsthe state monopoly of social housing management. Itsays: "Local authorities and registered social landlordsspend £4.6bn a year on managing the UK’s socialhousing. Less than 2% of social housing by marketvalue is managed by independent providers. Theresearch identified savings of 15% where they aremanaged by independent providers." In particular, itpoints to Pinnacle’s work managing homes in Westminster.
Housing providers are of course only too aware of theneed to stretch their cash further. Efficiencies willrelease valuable resources for their work as they facethe twin pressures of shrinking public funding andthe risks of welfare reform squeezing their revenues.
Yet it may be tempting for some in the housingsector to dismiss the pressure for more privatesector involvement. After all it’s an option that’soften been considered as purely ideologically-driven.But housing providers cannot afford to ignore thenew context. They may point to their history andethos: a track record of helping the most vulnerablein society. But it’s in acknowledging the drive forgreater competition, and responding positively to it,that they can best ensure a strong future forthemselves. Outsourcing may remain a minoritychoice, but new ways of adapting the best theprivate sector can bring will not.
Transparency over costs is a government priority:we have seen over the last couple of years howministers expect openness over spending to be the‘default setting’ for housing associations as for localauthorities. The pressure for more informationabout costs and value for money will not be drivenjust by government, but by residents andcommunities too as they expect to see cash wellspent in their communities to support local priorities.
INTRODUCTION
THE VALUE FORMONEY CONTEXT
For the regulator, value for money is now one of thestandards on which housing providers will be judged(see box below). Providers will be expected to have a comprehensive approach to understanding anddelivering value for money in the services theyprovide. They will have to demonstrate how they aremeeting the VfM standard in an annual self-assessmentfrom October 2013.
Yet drilling down into costs and value for money ischallenging, as the regulator itself admits. An HCAanalysis of providers’ unit costs, published thissummer, explained around half of the variation ofcosts between different providers. Factors such asproviding supported housing, paying higher salaries
in certain parts of the country and operating indeprived neighbourhoods all play their part in highercosts. But the HCA’s analysis found less evidence of a link between issues such as dispersed stock or group structures and costs. If only half of thevariations can be explained by the regulator’sanalysis, then essentially it’s down to organisationsto do much of the work on this. As the HCA puts it:"Understanding costs and outcomes at a providerlevel, and what accounts for differences with peers,is a task for individual providers and their boards."Providers need to be able to demonstrate howhigher operating costs are linked to underlying costdrivers and delivery against their objectives.
The value for money standard says: "Registeredproviders shall articulate and deliver a comprehensiveand strategic approach to achieving value formoney in meeting their organisation’s objectives.Their boards must maintain a robust assessmentof the performance of all their assets andresources (including for example financial, socialand environmental returns). This will take intoaccount the interests of and commitments tostakeholders, and be available to them in a waythat is transparent and accessible. This meansmanaging their resources economically, efficientlyand effectively to provide quality services andhomes, and planning for and delivering on-goingimprovements in value for money."
The specific expectations spelled out by theregulator are that providers should:
• Have a robust approach to making decisions onthe use of resources to deliver the provider’sobjectives, including an understanding of thetrade-offs and opportunity costs of itsdecisions
• Have performance management and scrutiny functions which are effective atdriving and delivering improved value formoney performance
• Understand the costs and outcomes ofdelivering specific services and whichunderlying factors influence these costs and how they do so.
Boards will be expected to demonstrate howthey are meeting the standard, includingpublishing an annual self-assessment on howthey are achieving value for money.
In the light of the regulator’s expectations,organisations are realising that they need tobe explicit about their approach to value formoney. This will mean setting out what valuefor money means to them, how they deliver itand how residents and other stakeholders canbe confident of the value they provide.
WHAT THE REGULATOR SAYS:VALUE FOR MONEY IS NOW ONE OF THE KEY AREAS OVER-SEEN BY THE REGULATOR. BUT WHAT IS IT LOOKING FOR?
76
So how then should organisations look to understandand then demonstrate their value for money? Partof the answer will lie in looking at their costs,driving further efficiencies and being transparentabout the money they spend. The other key elementwill come in demonstrating the social value theybring. How to measure social value is a growingpreoccupation in the housing world. Not only willsocial value need to be considered by organisationsletting contracts once the Social Value Act comesinto force this year, but housing organisations areincreasingly recognising that in these straightenedtimes it’s crucial to show the value of the work they do.
Housing providers are looking to improve the quality ofthe services they offer – and with their communitieshard hit by the economic squeeze to continue tooffer more than just a core housing managementproduct. But they will increasingly be expected tojustify why it’s worthwhile to offer more than abare bones service. A number of different approachesto measuring social value are being worked up, somefocusing on intensive analysis of the return onparticular investments by housing providers, otherslooking more widely at the social impact of not-for-profit providers. Think tank ResPublica has evensuggested requiring housing associations to produceevidence of the social value of the work they do.While regulation is unlikely, it is clear that providersneed to be explicit about the benefits of their spendingto government, residents and other stakeholders.
For the housing world, then, social value needs to beseen not just in the context of supporting localcommunity and social businesses, important as thatmight be. Increasingly it’s about demonstrating theimpact of providers’ presence in the communitiesthey serve. While work still needs to be done onbringing consistency to that analysis, a greaterfocus on social value will need to be a key part ofensuring value for money.
Outsourcing part of a housing service, or even theentire landlord function, may well be driven byfactors other than value for money. Nonetheless,given the political, regulatory and financial imperatives,outsourcing needs to be given serious considerationas part of a value for money strategy. In thatcontext, the lessons learned in the most recentsignificant outsourcing exercise are instructive.
Cheshire West and Chester Council’s primaryobjective in outsourcing the management of itsstock was to improve services to residents. Itsexperience shows how both efficiencies and serviceimprovements can be prioritised as part of theprocess, thereby delivering real value for money.
The authority explicitly built ‘drivers for excellence’into its criteria for the selection of a provider forthe contract. As part of the process, performancecriteria and social value considerations were highlighted.
Key features of the exercise included:
• A specification which was built on outcomesrather than processes
• A 70/30 weighting in favour of quality over price
• An incentive to meet key performance indicatorswas built into the contract process – withbidders asked to specify the percentage oftheir management fee they were willing to riskfor failure to meet the KPIs
• Bidders were expected to deliver outcomes beyondcore housing management. Their potentialcontribution in four key areas – strategichousing and meeting demand, regeneration,locality services and local employment – wasgiven a 10% weighting as part of the evaluation
• The capital works part of the deal was basedon targets. Bidders were asked to state whatpercentage of savings would be shared with thelocal authority and what the contractor woulddo with their share. In Plus Dane's case theyagreed to a 50/50 share and that they wouldreinvest 90% of their share in to the service
• A ‘competitive dialogue’ method was used duringthe process, which, say those involved, allowedthe bids to be refined to produce the bestpossible outcomes for the future service
A VALUABLE SPEND:DEMONSTRATINGSOCIAL VALUE
• Tenants and staff were heavily involvedthroughout the process, including in agreeingthe priorities for quality and price and inevaluating the bids.
The contract was awarded to Plus Dane, which tookon the running of the service in July this year.Clearly, to win the bid it needed to show how itstrack record of good performance, both in housingmanagement and beyond, would be transferred tothe running of the new service, as well as meetingthe performance targets set out as part of the deal.In Cheshire West and Chester, Plus Dane will beexpected to up the performance of the housingservice significantly: the aim is that by 2014 itshould achieve upper quartile performance and beequivalent to a two-star rated service, with a three-star performance by the end of the contract. Yetalthough performance and social value are clearly sokey, efficiencies will also be achieved. The contractwill deliver savings on housing management. Ataround £200,000 a year, they are relatively small,yet nonethless significant given that substantialservice improvements are being expected. On thecapital works side, the contract is expected todeliver savings of some 15% – or around £5mdepending on the final cost of the capital works.
Outsourcing can, then, be targeted in the newoperating environment towards real improvements inservice quality as well as the cost savings with whichit has often been associated. Yet outsourcing is notthe only way to involve the private sector indelivering better value. As we’ve seen, thetraditional approach to assessing value for money isno longer enough. Housing providers are recognisingthat they need to go beyond ‘apples and pears’comparisons with their peers. Involving the privatesector, without going down the outsourcing route,
can bring more rigour into the process. The work of onelocal authority, Brighton and Hove Council, and one housingassociation, Shepherds Bush, shows the potential forintroducing external challenge from the private sectorin order to gain a real understanding of costs andservice quality.
Brighton and Shepherds Bush worked with HQN andPinnacle, with HQN inspecting the services and Pinnacletesting the cost of services as if it were tendering. Inneither case was this a prelude to outsourcing theservice. Both landlords were good and improvingperformers. But both wanted to improve both theirefficiency and the quality of services they offered.Both report that after the inspection and pricingexercise they were able to take forward valuablelessons on performance and potential savings. In essencein analysing their performance and spending, they arenow in a better position to understand the cost/qualityrelationship and drive improvements on both fronts.
As Nick Hibberd, previously head of housing at Brightonand Hove and now head of regeneration at the authority,puts it: "For us it was about saying ‘What would theprivate sector do? In times of public sector austeritycan we challenge ourselves to be as efficient as theprivate sector?’ If you work in local authorities at themoment, the challenge upon us to demonstrate thatevery pound is well spent is greater than ever before."
Paul Doe, chief executive of Shepherds Bush, says forhis housing association it was similarly important to getmore from the investment it spends. "We did it tochallenge our own organisation, so we can take the nextsteps," he says. "It’s about getting more for what weput in."
Both Brighton and Hove and Shepherds Bush werestarting from a good base. Both landlords knew theywere driving costs out of their services. Both wereproviding good services, as the inspections by HQN aspart of the cost challenge process demonstrated. Andin both, although Pinnacle’s potential price to run theservice would be lower, there was no recommendationto tender out. But both landlords recognised that thecost of their service had historically been seen ashigh. The process allowed them both to track theirprogress in making efficiencies and to draw up firmproposals for further work on value for money.
MEETING THE VALUEFOR MONEY CHALLENGE:THE ‘NEW’ OUTSOURCING
MEETING THEVALUE FOR MONEY CHALLENGE:A REAL CHALLENGE FROM THEPRIVATE SECTOR
98
• A short-notice style inspection looks at thequality of services on offer. In Brighton andHove’s case, the inspection found it would havescored a solid two stars at inspection – amarked improvement on the situation in 2009.Shepherds Bush’s service was rated as ‘at leasttwo stars and possibly three stars’
• A pricing exercise analyses the savings whichcould be made were the service to beoutsourced to the private sector. The standardswould be the same. Brighton and Hove couldsave £2m over five years. The figure forShepherds Bush is £1m. Savings would be a lothigher but you have to allow for set up costsand VAT at associations. At Shepherds Bush
VAT and the costs of an EU tender slashesthe level of savings from 24% down to 10%.Of course if the landlord makes the savingsfor themselves there are no set up costs.We explain the Pinnacle approach to savingmoney opposite
• A recommendation is made for the futuremanagement of the stock. In neither of ourexamples was tendering out recommended.This was partly because of the time and costsassociated with letting a contract and the riskof service improvement stagnating during thisperiod. But lessons from the pricing exercisewere highlighted to allow both landlords tocontinue their work to improve value for money.
"People said this was brave – but I saw it as anopportunity to take another step. We wanted tosee firstly what the private sector could offer ifthey operated in our environment, and secondlyhow far we had got on our value for money journey."
Paul Doe, Shepherds Bush Housing Group
"It has given us a robust way of saying thatwe understand the cost drivers in the serviceand the relationship between quality and cost.It allowed us to take stock to see whether weare on the right track and to rise to thechallenge of the private sector."
Nick Hibberd, Brighton and Hove Council
Analysing costs and service quality in a rigorous wayoffers obvious benefits to providers as they work toimprove both performance and efficiency. They canidentify where they are performing well – and wherethey need to focus more resources. They can identifyareas for further savings. But just as importantly,they can use the process to highlight the real valueto their residents and communities of certain choicesthey make. For example, rationalising offices may beone way of making cost savings. But when residentsconsistently stress the importance of easy access tohousing offices and frontline staff, closures may bea step too far.
In Brighton and Hove, the pricing challenge gavefurther impetus to the authority’s programme ofmoving from single-service housing offices to multi-service access hubs. The strategy allows the council
to keep a good geographical spread of access yetstill reduce its core overhead on buildings – with aback-office headquarters in an outlying part of thecity and shared offices in other parts of the city with,for example, a library and children’s and youth services.
These are increasingly the sorts of choices housingproviders will need to make. Protecting the frontlineservices residents value and offering new ones tosupport their residents through tough times willdemand an ever stronger focus on real value.Rigorous challenge will allow providers to maintaintheir focus on quality and service delivery, whiletaking a robust approach to bearing down on costs.It will also allow for the greater transparency andmore choice about the priorities in service provisionwhich both government and residents demand.
THE PINNACLE STORY:HOW DO PINNACLE WORKOUT A PRICE FOR DELIVERINGTHE SERVICE?
KEY ELEMENTSOF THE PRICE CHALLENGE
PROCESS
WHAT THEY SAID:
Pinnacle use their knowledge of market prices.The firm has bid for and won tenders for similarservices at Woking and Westminster.
The price is for a two-star level of serviceclimbing up to three stars over the life of thecontract. Pinnacle is set up to hit satisfactionrates of over 80%.
Pinnacle works on the basis that TUPE andpension rights apply for the life of the contract.
The price is for a five-year contract as this isusual in the market.
Pinnacle shares costs with its other contracts.This can include:
• Back office functions
• Contact centres
• Managers
• Technical expertise
• Overheads such as human resources and IT.
The price includes a profit margin. Pinnacle doesnot engage in the suicide bidding we saw fromsome elements in the maintenance industry.
It is worth noting that there is no fixed privatesector price as it can be affected by:
• The level of competition for the contract – ifseveral credible bidders are interested thetemptation is to reduce your price to win
• The proximity of the contract to others held bythe company – this increases the scope for costsharing and economies of scale.
As Pinnacle sinks or swims by its ability to wincontracts it probably pays more attention to thebottom line than most councils and associations.Key features of the approach that Pinnaclesuggested at our pilots include:
• Reducing the number of staff – in one case thisdropped from 90 down to 70 – the lower figurewas closer to the figure at similar landlords in abenchmarking club
• There would be much more generic and flexibleworking than specialist officers
• The service would operate out of less expensiveand/or fewer offices (offices that saw fewcustomers would close)
• Electronic communication would be boosted
• The Pinnacle call centre would receive callscentrally 24 hours a day and seven days a week
• Some rent collection functions would be handledby Pinnacle centrally.
These measures to save money cannot all come inon day one. Pinnacle’s price takes into account arealistic approach to managing change.
Pinnacle is not the only organisation that canmake savings. The Plus Dane tender for CheshireWest and Chester was also competitive.
1110
•We can run a pricing exercise toassess the price and quality ofyour services just like we did atBrighton and Shepherds Bush. It’s far quicker, sharper and lessresource-intensive than traditionalbenchmarking. It’s tailored to yourorganisation and based on today’scosts and performance – nothistoric ones
•Use our newly updated value formoney toolkit (incorporating thelatest standards) to measure howwell you’re doing
•Gain HQN’s stamp of approval byhaving us validate your self-assessment and reassure you andyour board. We’ll include pointers onbest practice and identify the keypriorities you need to address
•Repairs costs analysis model – areyou confident your repairs service isvalue for money? Let us model yourrepairs costs to see how theycompare with others and how you canreduce them
•Book an in-house training course toincrease awareness about what canbe done to improve VfM. Suitablefor a wide range of staff andmanagers as well as board membersand involved residents
•Looking for something else? Whetherit’s general advice or acomprehensive value for moneyreview – get in touch and we can talkthrough how best we can help you.
