Guidance

Stage 6: business case

Published 28 March 2017

1. Overview

The development of a business case is sometimes (but not always) required by the council. The purpose of a business case is to weigh up the costs and benefits of a suggested course of action and thereby present the argument for a new way of delivering library services. This document is sometimes considered through formal decision-making processes within the council. A business case may not be required where there is agreement to proceed straight to the business planning phase.

2. Why undertake a business case?

A business case provides the opportunity to undertake a comprehensive analysis of the preferred option identified as a result of the options appraisal stage.

The level of detail required within a business case may vary depending on how it is being used. For example, a business case that is being used to justify further exploration of a particular delivery model option might contain fairly high-level information around the likely costs and benefits of any new model.

However, a business case being used for the decision to proceed with a new model will need to:

• contain well-developed costings
• contain clear estimates of timescales involved
• identify the benefits that will be delivered by the new model
• consider the most suitable procurement route

Development of a coherent and realistic business case and, subsequently, business plan was key. In particular, it gave finance colleagues in the council confidence that the organisation could survive and thrive as an independent organisation. It also demonstrated that we were serious about our future and recognised that we would need new skills, particularly financial and commercial skills.

Libraries Unlimited

Many councils use, or base their business case templates on, the ‘five case model’. This is a structure for a business case that was developed by central government. It contains the following core elements:

Strategic case

Outlines the overarching strategic context and identifies key drivers for the council considering a library services delivery model. It explores business synergy and strategic fit, as well as considering external factors that may influence.

Economic case

Develops the economic case for progressing the preferred option. The overarching aim is to demonstrate that these options will be justifiable on the basis of value for money.

Commercial case

Examines some of the technical areas like contracting, procurement rules, state aid issues and other related topics.

Financial case

Outlines a financial case and implications for the preferred option.

2.1 Management case

Describes the overall deliverability of the preferred option and considers practical aspects such as implementation timescales and pathways.

These sections are described in greater detail below. Full government guidanceon the five-case model is available.

We have developed a (downloadable) business case template with guidance for you to use. Alternatively, if your council follows a project methodology such as PRINCE2, the business case can be developed using that methodology. It may be a good idea to use a format that has precedence within your local authority.

From developing a case for change and case for externalisation, you will have undertaken some of the thinking required to inform the business case process.

3. Strategic case

The aim of the strategic case is to present the overarching case for change. This is done by exploring the strategic context and drivers for the library service’s delivery model. This might include areas such as:

• the council’s strategic aims and objectives
• relevant regional and national policies, strategies and plans
• demographic and demand trends
• broad trends across library services

The fit of the preferred option will be considered against these areas within the strategic case, and this will demonstrate any potential benefits of the preferred option when compared with the doing nothing or other options.

4. Economic case

The economic case aims to test whether the preferred option represents a value for money proposition. This can be determined through considering the likely costs and benefits of the new delivery model (in terms of both finances and service outcomes).

Typical costs that may be considered include:

• contract value
• investigation and set up costs (including staff time and establishment costs)
• stranded costs that will be realised by the council after the new model is established

Typical benefits that may be considered include:

• savings being realised
• reduced dependence on council income (if desirable/required)
• social impact and social value realised through the delivery of the library service’s new function

For senior officers their acceptance was through a business case to make savings rather than full appreciation of the mutual journey, which became an issue when considering disaggregation of central support services.

Inspire Culture, Learning and Libraries

5. Commercial case

The commercial case outlines the procurement and contracting implications of the preferred model.

This should consider aspects such as commissioning arrangements, an assessment of the current marketplace, and how the new service will be planned and managed in accordance with relevant procurement regulations.

5.1 Procurement route

If the proposal is for library services to be delivered through a new delivery model, several typical procurement routes are available to the council. The precise options will depend on what the preferred option is. Typically councils will seek specialist advice on procurement, either from their procurement team or external experts. The options for procurement will include:

5.2 Direct award of the contract

In some instances it is possible to directly award the contract to the new delivery model. With this approach there is the potential of challenge from other providers, so the council must agree that it is willing to accept this risk. There are some instances in which the risk of challenge is much lower – for example, where the new delivery model is owned by the council and therefore subject to the Teckal exemption.

5.3 Regulation 77 reserve contract

Under the latest procurement rules it is possible to reserve certain contracts for tendering by organisations that meet certain criteria. This can be used to restrict competition where the council is intending to award a contract to a new PSM.

Full public procurement exercise

In some instances a full public procurement exercise is needed. This option carries a degree of risk that the contract may not be awarded to the new delivery model.

In addition to the procurement route, you should also consider a number of other technical areas including:

5.4 Contracting

Should the delivery model be awarded the core contract, the arrangement between the delivery model and the council will be formalised in a series of legally binding agreements. These agreements are likely to include the following:

Commissioning agreement

Confirming the nature of the services to be delivered over a given period, in addition to the contract fee. Performance related requirements will be identified.

Leases and asset transfer agreement

Identifying the assets that will transfer from the council, the terms of use, maintenance responsibilities and duration of agreements.

Support services agreement

Should the delivery model be required to purchase back-office support services from the council, this agreement will outline these arrangements and specify the costs and service requirements, in addition to timescales etc.

Admission Agreement (LGPS) and Function Provider Agreement (Teachers’ Pension Scheme)

See pensions.

5.5 Service requirements

The exact scope of services that are to be delivered by the potential delivery model should be considered. You will already have done a lot of this thinking during the function stage. It is helpful to consider this from a number of perspectives, including:

The council

Whether there is any change to the services the council would consider funding for delivery on an ongoing basis.

Library users

The needs of users of the library should be considered, as there may be the potential to offer additional services that meet local demand. The potential for any additional traded services should be considered.

Other important stakeholders

When scoping service requirements, needs of other important stakeholders should be considered (such as Friends Groups, library users, councillors and community groups).

Pension arrangement and liabilities

Should the intention be to establish a new delivery model, it will be in the position to apply for Admitted Body Status, enabling staff who are members of the LGPS to continue with their pension arrangements.

For the LGPS, the delivery model will be required to agree either an open or closed superannuation rate, while the model will be required to arrange a body or indemnity.

The way in which pension liabilities could be shared between the council and the delivery model must be considered. Some important things to consider include:

• whether the pension scheme is open or closed, for example, for example whether new joiners are able to access the scheme or are offered alternative pension provision
• the employer’s contribution rate (ECR) must be considered - an actuarial assessment is usually undertaken to determine this
• the status of the LGPS, it may currently be in deficit, if this is the case, the council and delivery model would be required to agree a risk share agreement to demonstrate who is responsible for past and future liabilities, requiring the new delivery model to take full responsibility for this deficit risks setting the delivery model up to fail

For staff who are members of the Teachers’ Pension Scheme, the delivery model is required to apply for Function Provider status, while the new delivery model is also required to provide a guarantee that is acceptable to the Department for Education.

Assuming the delivery model is able to achieve Admitted Body Status and Function Provider status, the arrangements covering the delivery model’s membership of these schemes will be outlined within the Admission Agreement (LGPS) and Function Provider Agreement (Teachers’ Pensions Scheme).

The technical issues that caused us most problems included:

• procurement (process for the council to contract with Inspire)
• transfer of IT infrastructure
• central services - costing and desegregation
• data ownership and transfer

Inspire Culture, Learning and Libraries

Redundancy liabilities

Staff transferring from the council to any new entity will have built up redundancy liabilities (note – these liabilities will not materialise unless redundancies are made).

While staff are employed by the council, this liability remains the responsibility of the council. As redundancy costs are in part calculated by the length of continuous service (protected under TUPE), it is essential that the council and delivery model reach agreement in terms of a risk sharing arrangement to cover this liability, should part of it materialise.

The council risks setting the delivery model up to fail if it expects the delivery model to cover part or all of this liability, particularly if the delivery model is required to make redundancies as a result of funding decisions made by the council.

Asset transfer

There are often assets (such as property and equipment) that may be transferred from the council to the new delivery model. At this stage some consideration should be given to what these assets are, as well as:

• the way in which assets could be transferred from the council to the delivery model (for example lease or transfer of freehold)
• upkeep and replacement of assets - how this responsibility would be shared between the council and the delivery model
• possible arrangements regarding maintenance responsibilities

Asset lock

An asset lock is a constitutional provision designed to ensure that the assets of the delivery model (including any profits or other surpluses generated by its activities) are used for the benefit of the community. A council may (or may not) feel that an asset lock is required for any new entity. It removes the scope for members to make speculative capital gains resulting from the dissolution, disposal or conversion of the society into a company.

Charities (including charitable community benefit societies) and Community Interest Companies have statutory asset locks. Registered societies can adopt a voluntary asset lock, but only community benefit societies have the option of adopting a statutory asset lock.

State aid

State aid is any advantage granted by public authorities (including councils) through state resources on a selective basis to any organisations that could potentially distort competition and trade in the European Union.

The definition of state aid is very broad because an advantage can take many forms. It is anything which an undertaking (an organisation engaged in economic activity) could not get on the open market. State aid rules can (among other things) apply to:

• grants
• loans
• tax breaks, including enhanced capital allowances
• the use or sale of a state asset for free or at less than market price

The rules can apply to funding given to charities, public authorities and other non-profit making bodies where they are involved in commercial activities.

Councils are responsible for ensuring their policy measures and projects comply with the rules. They should think about state aid early and seek advice to avoid problems and save time.

The rules can be complex and getting it wrong can mean recovery of state aid and suspension or withdrawal of aid schemes. This might have serious consequences for the recipients of aid (such as the new delivery model) and the delivery of policy objectives.

If the council intends to provide assistance, you should first check whether or not the assistance is likely to be deemed as state aid.

6. Financial case

The financial case tests whether the preferred option(s) represent financially viable and sustainable propositions. The basis of the case would usually involve a 5 year financial model which makes a range of assumptions around likely levels of future costs and income.

The model will outline anticipated levels of income and expenditure and should calculate profit and loss and cash flow over the 5 year period. The development of this model is particularly important for nascent organisations, in order to demonstrate the viability of the proposition.

The information you have developed while defining your function and undertaking market analysis work can be used to help inform the assumptions that underpin your financial model. Your growth strategy will provide particularly relevant information.

If we had stayed in house it would have led to cuts, closures and managed decline. We’ve now saved 33% but have enhanced and strengthened the service.

Suffolk Libraries IPS

The 5 year financial model should also consider any planned efficiencies. Where these are unknown, sensible assumptions should be made – these could be tested with the council if necessary.

Lastly, some sensitivity analysis should be undertaken on the financial model. This is a way to consider a range of different scenarios in which growth and costs may be lower or higher than the original model.

We have developed a (downloadable) financial model template to support you during this process.

7. Management case

The management case tests the feasibility of the preferred option, in terms of its deliverability within various tolerances. Typically the management case would cover the following areas:

Timescales

Likely timescales for establishment of the new organisation, with consideration given to how the different activities relate to each other. It may be helpful to include a project plan or timetable for transition within this section.

Cost

The cost of both transitioning to the new delivery model and developing the library service within the new structure should be considered, from the perspective of the council and the new service. This section should be clear as to which costs the council is likely to need to cover, and whether any other funding sources are available.

Available resources

The resources available to undertake the new venture should also be considered in depth. These might include assets such as property and equipment, along with less tangible resources such as staff time in setting up the new delivery model.

Management of risks associated with establishment

It is important to consider what risks are associated with the establishment of the new delivery model, their likely impact, and any mitigations that could be used to manage them.

Technical considerations

This section may also consider some technical areas, such as the legal form of the new organisation, its proposed governance structure, the mechanism for contracting services, and transfer of any assets to the new delivery model.

8. Intended outcomes/outputs

The final business case document should provide a clear narrative around the rationale for the preferred delivery model and highlight the relative benefits and dis-benefits across the 5 cases.

The document may be used within a formal decision-making process to allow the council to agree an intention to further explore, or implement, the new delivery model. This could take the form of a Cabinet meeting or a group of senior leaders or management colleague.

Be very clear about the benefits to the council as well as benefits to the service. Also be clear about how the council will control the service for example through a contract. We found that councillors were very concerned about this.

York Explore

It is important that the key messages within the business case document are clearly communicated to the stakeholders who will be making a decision regarding the potential establishment of the new delivery model. Where possible, you should engage with these stakeholders before the meeting to ensure they have an opportunity to air any concerns or ask any questions.

Nottinghamshire has a committee structure and therefore we had good interaction with councillors. In the process we ran 2 councillor workshops on the legal form and the contracting arrangements to ensure councillors were able to have cross party involvement.

Inspire Culture, Learning and Libraries

9. Lessons learnt and critical success factors

The CEO’s of the current library service delivery models have identified the following learning points in relation to the business case process. They are:

• to be clear on the benefits to the wider council as well as to the service
• clearly identify the risks and how they will be managed so stakeholders and decision makers can be reassured
• summarise what the options are and how they have been assessed during the options appraisal stage to come to the recommended approach
• have a thorough/robust strategy that can evidence ability to generate income
• support from staff and the public is really important and will require honest and open communications
• use evidence from services that have left a council to reassure stakeholders on technical matters, for example TUPE

The next section covers the seventh stage of the process - developing a business plan