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Shared services: a brave new world?

Gareth Edwards and David Hansom, from leading national education law firm Veale Wasbrough Vizards, look at sharing services across HE

Shared services are high up the agenda across the higher education sector. In 2013, Universities UK’s modernisation task force identified ‘millions’ of possible savings. This builds on the major efficiency drive by institutions which BIS estimates has reportedly already saved the sector £1.38bn between 2005 and 2011.

Barriers to sharing services are well known, ranging from concerns over potential cost and complexity as well as dealing with changes to staffing and property requirements. In 2014, with institutions having to respond to a further 3% reduction in funding and ever more competition for students both nationally and internationally, many of these old barriers are starting to be broken down.

From a legal perspective, the decision to share services can create a wide range of problems including employee issues, property needs, assets, treatment of intellectual property and data protection. What is important, however, is that legal considerations alone do not drive the project. The first step in any decision to share services is a commercial one to identify the overall objective of the collaboration. For example, is the main driver to simply take cost overheads out of the institution, to drive up service quality, or both? Regardless of the aim, it will be imperative for institutions to maintain their reputations for quality and excellence.

Once the aim is identified, the institution will want to be clear on the scope of the collaboration. So-called ‘back office’ services (including HR, facilities management, payroll, security, estates, legal services and even procurement) have been shared and outsourced in the wider public sector for many years and are perhaps the most immediate candidates for collaboration in higher education. There is no need to stop there. Some institutions have taken sharing even further and examples include a partnership between a university with a local NHS trust to develop their own combined heat and power plant to reduce energy costs, as well as proposed projects to share student registry services.

The legal structure can then fit around the institution’s chosen objectives. The model does not need to be complicated or costly to establish but experience shows that early strategic planning is essential to ensure that the process goes to plan. Two of the biggest perceived barriers from a legal perspective in any model are public procurement and employment/pensions issues.

Models range from very informal through to outsourcing or corporate joint venture structures, and everything in-between. Administrative models (such as informal joint working agreements, service level agreements and/or ad hoc secondment of staff) are often short term, run on a cost-recovery basis and do not involve significant infrastructure or other investment. These arrangements do not always require a public procurement process and, under the forthcoming new procurement directives due later this year, there will be further flexibility for so-called ‘horizontal’ collaboration models to be put in place without being first required to tender.

The employment issues are also relatively straightforward to manage as, in the majority of cases, employees will remain with their original employing institutions. It is, however, important to ensure that there is clarity with employees in relation to any expectations of them during any period of collaborative working and to review whether any changes to employee terms and conditions are needed to facilitate the collaborative working.

Contractual models generally involve the award of a services contract either to another university, public organisation or to a private/public outsourcing provider. This could be on behalf of one or more universities. Public procurement is always relevant when a services contract is awarded by a ‘contracting authority’, which includes the vast majority of universities in the UK. Planning the procurement process early is key, particularly in testing the choice of procurement route and evaluation criteria for the award. Again, more flexibility will be introduced later this year under the new procurement directives which will introduce a new ‘innovation partnership’ procurement route. This could be attractive to institutions looking to push the boundaries on a shared services contract.

An important employment consideration is whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply to transfer employees. TUPE will generally be triggered where the activities performed by the employees transfer to another institution (or a third-party provider) who will be taking the lead in performing the shared services. Employees will transfer on their existing terms and conditions, but there may be limited protection for pension contributions which can be a real concern for employees and may require the legacy employing institution to build in contractual commitments to preserve pension provision in the transfer agreement. The institution or third-party provider receiving the employees will seek assurances that they inherit employees without any outstanding claims or, where claims exist, there is an appropriate indemnity in place. Similarly, early consideration needs to be given to the exit provisions on termination as to whether the employees will transfer again, or whether there will be a liability for redundancy payments if a project has been completed.

Corporate models typically involve the creation of a new corporate entity (possibly as a joint venture with other universities or the private sector) to run services, often with a view to a wider trading function. Historically, a major barrier to sharing services was unrecoverable VAT on service charges. Thanks to changes in the Finance Act 2012, independent entities (including universities) can form a cost sharing group (CSG), which can provide services to members of the CSG to recover each member’s share of the cost without charging VAT. Again, creative application of the public procurement regime may mean that it is possible to structure such arrangements outside of the rules.

In any procurement process, institutions may well want to take socio-economic criteria into consideration in awarding contracts, such as the extent to which the contract can benefit the local area, students, staff and the community. Considering these issues for procured services contracts is now a legal duty on universities under the Public Services (Social Value) Act 2012 and further measures to encourage socio-economic procurement will be unveiled in the new directives.

Sharing services is not just about saving cost, and the real challenge is to collaborate whilst retaining each institution’s competitive edge in attracting students and investment. Whilst not always an easy balance, the shared services path is increasingly well trodden and offers real tangible benefits to institutions to compete in a global economy.

Gareth Edwards and David Hansom are partners at national law firm Veale Wasbrough Vizards (www.vwv.co.uk), which is number one ranked for its work in the education sector. For further information or advice on any issue you may be facing, please contact either Gareth or David via gedwards@vwv.co.uk or dhansom@vwv.co.uk.

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