As financial pressures on the NHS continue to mount, several Trusts are pursuing a different model for the provision of their Estates and Facilities Management (EFM) Services. The wholly owned subsidiary company is a model that could bring financial benefits as well as operational efficiencies, but as with anything that involves change, it isn’t without its critics. With the help of a team of experts from Grant Thornton UK LLP, Pulse takes a look at the model and how to make it a success.
Establishing a wholly owned subsidiary company should only be considered if there is a genuine business case to do so - and that does not mean the often referred to cost benefits around tax and staff. That is the message from Grant Thornton.
“The business proposition for the subsidiary company should be unequivocal,” stresses Rhiannon Williams, Director in Healthcare Advisory at Grant Thornton. The reality to this is going to be different for each individual Trust, depending on their circumstances and their strategy for providing services.
“As a department in an NHS Trust, Estates and Facilities is a support function, however when the services and capability are transferred to a new subsidiary entity, the vision and purpose of the entity will be focused entirely on Estates and Facilities. The new entity’s primary obligation will be the provision of services back to the Trust under a Service Level Agreement, but over time this can evolve and the entity could expand its offer to new clients. In addition, it is likely to develop new services, such as Strategic Estates Management, which is becoming more important with the move towards Integrated Care Organisations.”
Paul Deverill, Associate Director at Grant Thornton adds: “There is currently much greater scrutiny of business cases by NHS Improvement and DH, and a commercial case that is dependent on a tax saving alone is unlikely to be approved.”
The business model
In legal terms the wholly owned subsidiary company could take many different forms, but essentially it is a company wholly owned by the hospital Trust - or Trusts, if two or more want to jointly own a subsidiary to supply services across each Trust.
There’s nothing particularly new about this; local authorities and the education sector have been using the ‘subco’ to provide services for many years. Hospital Trusts were given the opportunity to set up wholly owned subsidiary companies around 10 years ago*, but until recently not many had.
During a commons debate in November, Philip Dunne, the then Minister of State, Department of Health said that NHS Improvement was aware of 39 subsidiaries consolidated within the accounts of Foundation Trusts as of March 31, 2017. These subsidiaries vary in size (both in terms of number of staff and turnover) and the services offered also differ. Some may involve only a relatively small number of staff supplying a specific service - outpatient pharmacy is a good example.
But the appetite for NHS wholly owned subsidiary companies has grown, as has the ambition for the extent of the services and number of staff involved. It is probably this, in combination with the fact that we are increasingly talking about the NHS, which has prompted the flare-up of media and union interest - and opposition - to the current schemes. “Local authority outsourcing seems to be less controversial than it is in the NHS,” says Paul Deverill.
It isn’t only the unions that are opposed to this trend. In January, MP Liz Twist tabled an Early Day Motion for the government to “block the creation of any further NHS wholly owned subsidiary companies.” At the time of this issue going to press the motion had been supported by 19 Labour Party MPs.
Unions have focused on the terms and conditions of existing and future staff in their opposition to the ‘subco’ trend. They have also attacked projections for financial savings. Negotiating with the unions is currently delaying the plans of several Trusts.
The terms and conditions for existing staff who TUPE transfer into the new business are protected. New staff joining the company, however, will be employed on different terms and conditions, which will be influenced by the local employment market. Already some wholly owned subsidiaries are reporting that the increased flexibility they have over pay, terms and conditions for new recruits is producing positive results, improving their ability to fill vacancies, retain staff and therefore provide better services to patients.
Pulse has also spoken to Trusts that have identified concerns from existing staff members who feel that they are not being given full information, or fear that things will change after the transfer. Engaging fully and communicating effectively with staff is therefore critical.
Rhiannon Williams emphasises the importance of communication: “The Trust should engage with staff early in the process. This gives people sufficient time to really understand the benefit of the change, to raise questions and ultimately to support the change. It is important that staff feel they can influence the outcome and not that they are having something imposed on them for purely financial reasons.”
The NHS and other parties should “be excited by the opportunities - for all - but make it clear that staff are still part of the NHS family. If the ethos of the wholly owned subsidiary is shared with that of the Trust and is focused on delivering the best possible patient care, every employee is still part of that journey.”
Making it work
The move to a wholly owned subsidiary to supply Estates and Facilities services represents an opportunity to speed up the rate of change, transformation and modernisation of the service. The ‘subco’ has more control and is able to drive its own agenda more swiftly, smoothly and efficiently.
However, it should be understood from the beginning that a private company is not just legally different to an NHS Trust. It isn’t just the rules that change - although these are important - the business has to behave like a business, which requires a different mindset.
“From what we’ve seen so far from Trusts that have gone through this process, the ones that don’t change their mindset and simply move people across are not as successful as they might be because they continue to behave like a hospital Trust,” says Rhiannon Williams.
“A business needs to look and behave differently. It can take risks and has greater agility to transform and change. How it will manage risk and the governance that needs to be in place are processes that should be agreed from the beginning.
“The NHS is good at being a customer, but it is now acting as an investor in the ‘subco’. This requires different skills and it’s essential to invest in the process, to dedicate sufficient time, skills and experience to make it work.”
It’s also important to be clear about roles and responsibilities. The Director of a private company has a responsibility to ensure the company’s obligations are met and promote the success of the company. The directors are effectively agents of the company and should exercise independent judgement.
One of the main challenges when setting up a subco, is that whilst most businesses start small and manage their growth over a period of time, an NHS wholly owned subsidiary is a substantial business from day one, often with hundreds of staff and a multi-million pound turnover. A business of this size has a very fundamental requirement for other core skills, such as those provided by a Finance Director, a Company Secretary, a Human Resource Director and a Commercial Director. It may not be possible to fulfil these roles from the staff transferring into the new company and it may therefore be necessary to bring in new recruits.
Privatisation
For some Trusts the wholly owned subsidiary option represents a way of keeping control of the Estates and Facilities services in-house and avoiding having to outsource more to a third party. It is therefore ironic that critics have also called this model privatisation through the back door. “We knew we couldn’t stay the same, we knew we couldn’t do the minimum and we didn’t want to outsource more,” said one former Estates and Facilities Director and now Managing Director of a wholly owned subsidiary company.
The issue was been debated in Parliament in November. Justin Madders, Shadow Minister for Health and Social Care said: “Be in no doubt: this is another step down the road of privatisation.” He asked what steps were in place to stop these companies being sold off in future “to the highest bidder.”
Philip Dunne didn’t provide any assurances, but accused Madders of: “seeing privatisation fairies where there are not any.” He said: “this is about finding the right structures to allow, for example, the back offices of different NHS bodies in an area to be combined. That requires a structure and a number of Foundation Trusts are setting up subsidiaries to provide those services to each other.”
Fail to plan, plan to fail
“The devil is in the detail,” says Mark Stocks, Partner at Grant Thornton. “There are generic factors that are relevant to every new subsidiary company, but there will also be bespoke factors which need to be worked through. The more time spent building the business case, understanding all the technical arrangements of taxation, financial and legal requirements and opting for the business model that suits the individual organisation’s strategic aims the better.”
Emily Mayne, Senior Manager at Grant Thornton adds: “There are successful examples out there, but the reason for doing this has to be sound from the very beginning.”
Foundation Trusts have the authority to establish wholly owned subsidiaries whereas Trusts have to apply for the necessary permissions through NHS Improvement.
Grant Thornton hosted a Round Table on this topic in July 2017. It provides a positive summary of how NHS companies have made a success of setting up subsidiary companies and includes examples of Estates and Facilities Management companies. PDF copies of the report may be downloaded here.
