Start a public service mutual: the process

How to set up a public service mutual and 'spin out' of a public service organisation.

Applies to England

Public service mutuals are organisations with the following 3 characteristics:

  • They have left the public sector (also known as ‘spinning out’);
  • But continue to deliver public services; and,
  • Importantly, staff control is embedded within the running of the organisation

Stage 1: Exploring Mutualisation

Why do public sector staff set up a mutual?

Often public service mutuals are set up because the staff believe that they:

  • can run a service more effectively, achieving better outcomes for users
  • can deliver a service more efficiently, saving on costs and time
  • have identified a gap in service provision
  • want greater control and autonomy over the service you work in

Starting your journey

As you start your journey of exploring mutualisation and what it might mean for your service, it is necessary to recognise that at this early stage you probably won’t have all the answers. The important thing at this stage is becoming aware of the types of questions to do with spinning out that you will need to think about.

A good starting point is to think about why you want to spin out (including the benefits of doing so) and your vision for the service. Our Starter’s checklist (PDF, 67KB, 2 pages) can help you in thinking about these issues.

Our interactive map of all live public service mutuals across England can be useful for contacts in your sector and region for advice.

A mutual is not a legal form. Being a mutual is instead about staff control and how you run your organisation.

There is no one legal form that a public service mutual must take. The most common are Co-operatives or Community Interest Companies – companies that are set up if they are run for the benefit of the local community - that are then either limited by Guarantee or by Share.

Many public service mutuals are Community Interest Companies and also social enterprises as they re-invest profits back into the service and/or local community.

You don’t need to decide on a particular legal form at the outset, but it’s helpful to start considering which legal models may best suit your purposes. In all cases, the legal form must follow the function of the mutual.

Legal form Overview Ownership Liability
Company limited by guarantee Usually not-for-profit Members control the company. Typically, members can attend general meetings and vote, and in most companies they can appoint and remove the directors, and have ultimate control over the company Members have limited personal liability, usually up to £1. This is usually written into the articles of association
Company limited by shares Usually profit motivated Shareholders with voting rights ultimately control the company. Other shareholders can exist with non-voting rights Shareholders have no personal liability if the company goes into debt
Co-operative Organisation that is often equally owned by members Members, often consumers, producers or employees, own and democratically control the organisation Can be limited or unlimited where each member takes on the full liability of the organisation if it falls into debt

Test your ideas and get agreement from stakeholders

Once you have a vision think that it is viable, you’ll need to start testing your idea and get support from stakeholders.

As a first step, you need to identify who your important stakeholders are. Stakeholders are individuals/groups of individuals with a vested interest in the service. For example: staff members; local partners such as VCSE organisations, schools, local businesses; and, local council members.

The most important group are staff members as without their support, any transformation will likely not succeed. It is worth therefore considering how you would wish to engage other members of staff as they will have initial questions over what any changes would mean for them (for example, pay, pension, job security, etc).

Our Planning stakeholder engagement activity: a guide for public service spin-outs will provide you with a starting point for who your most important stakeholders are (PDF, 175KB, 7 pages).

As you plan your approach, it could be useful to produce a stakeholder map, which plots stakeholders according to their influence and interest and will help to prioritise them. You should then be in a position to produce an initial engagement strategy which will outline how you tackle each of your stakeholders.

In terms of your commissioner(s) or local authority, you may have to submit an expression of interest that you wish to explore the concept of mutualisation for your service(s). Whether or not this is a formal requirement, it’s good practice to start producing a document, which you can use externally, that demonstrates you’ve thought about the main issues.

Making quality your business: the right to provide (PDF, 94.3KB, 11 pages) has suggestions for things you should consider when making an expression of interest.

Stage 2: Producing a business case

When you know what setting up a mutual involves and have gained early support, you will most likely have to produce a business case to take to Cabinet. Here, if successful, you may receive ‘in principle’ support to ‘spin out’ as a public service mutual.

Writing a business case is an iterative process and your local authority will have guidance on what they will expect to see.

Usually, when writing business case, you may wish to think about:

  • developing a robust and commercial 5 year business plan with an accompanying financial model
  • possible legal form of the public service mutual
  • governance and operating model (including staff control)
  • staff and stakeholder engagement
  • communications and marketing strategy
  • measuring impact

This is not an exhaustive list.

Robust and commercial 5 year business plan with an accompanying financial model

It’s essential to have a realistic but robust and commercial, working business plan and financial model when you’re setting up a new organisation. A business plan typically includes the following sections:

  • Proposition - the public service mutual’s service vision, mission and objectives
  • Competitor and market analysis
  • Marketing, communication and sales strategy
  • Funding requirements and financial forecasting
  • Governance and operating model
  • Transition plan

A template document is here to support you with drafting your initial business plan.

When considering the legal form of your potential public service mutual, that form must follow function.

From a legal perspective, there are 2 stages to setting up your mutual:

  1. Choosing a legal form: determining what sort of body your mutual is in the eyes of the law. The two knowledge sharing documents below provide an overview of the most common different types of legal forms to help get you started: * Comparative overview of legal forms * Guidance to legal forms and organisational structures

  2. Producing a governing document such as articles of association which sets out the constitutional principles governing your organisation.

When considering how employee control fits into the legal model and governance structure, the Employee Ownership Association-Baxendale publication Making Employee Ownership Work is a useful resource. It draws on case studies from 25 large employee owned organisations in the UK.

As you begin to consider and finalise your legal form and produce an accompanying governance document, we recommend that you obtain legal advice.

Other external resources to help you choose the right legal model, include Get Legal, which is a free online reference and decision-making tool designed to help charities, social enterprises and mutuals choose the right legal form. The Charity Commission and CIC regulator also provide model governing documents

Staff engagement

When establishing a public service mutual, staff will have questions about how changes may affect them personally and professionally. Creating a staff engagement plan to help keep them informed and involved in the process is crucial.

Staff often have questions on pay, pensions, job security and working conditions. Typically staff will be transferring with you from the local authority (also known as the “Parent Body”).

Their rights are usually protected under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Under TUPE, as the employer you are essentially bound to consult employees about the proposed new arrangements and to make sure that their original terms and conditions are maintained. Read a guide to the TUPE regulations.

You’ll also need to make arrangements for your employees’ pensions and to make sure that these are in line with the government’s Fair Deal for Pensions. As you and your staff are likely to be transferring from the public sector, you have 2 options:

  1. The local authority agrees that all transferring staff can remain on the Local Government Pension Scheme (LGPS). Newly recruited members of staff usually need an alternative pension scheme sourced for them by the employer.
  2. An alternative pension scheme is sourced and provided for all members of staff (transferring and new). This pension scheme should be ‘broadly comparable’ to their existing pension scheme (the LGPS).

Communications and marketing strategy

Despite public service mutuals inheriting an existing customer base, it is still important to develop a marketing and communications strategy. The communications strategy should help to build your identity and reputation among the community and users - your customers.

Through your market analysis, which should have formed a core part of your business plan, you’ll have identified your main customers. The next stage of any communications strategy is to establish how you’ll retain existing customers or attract new ones. There are 2 main components to this:

  1. identifying the most appropriate channel for communication
  2. creating the right message for your audience

An essential aspect of any communications and marketing strategy is the creation of a recognisable identity or ‘brand’, which in its most simple form will include the creation of a name and logo. The main point with any branding is that it should reflect the essential mission and target group of your mutual.

Measuring impact

You’ll need to measure the impact of your service and demonstrate the specific social outcomes you’ve achieved. This can be very useful to monitor if you wish to secure future investment and win new contracts.

Measuring social impact can be difficult. Social Enterprises need to capture impact in terms of the positive effect on individuals who use the service and also the wider community.

The Social Return on Investment (SROI) framework provides a methodology for measuring and managing the outcomes of an organisation’s activities. Unlike other approaches, it places a monetary value on the outcomes so that the wider impact of the investment can be understood.

Although the methodology is still relatively new to the UK, it has attracted considerable attention from civil society organisations, government, funders and commissioners.

If you are looking to measure your social impact, then you may also want to consider signing up to the SE100 Index.

The Department of Health and Cabinet Office produced a report on how 5 social enterprises measured SROI: ‘Measuring social value’.

Stage 3: Set up your public service mutual

Once you have a business case and an outline business plan, you can apply for ‘in principle’ support from your local authority to set up your public service mutual

This will involve formally establishing your organisation, and transferring staff, assets and liabilities. Our Action checklist (PDF, 50.5KB, 1 page) provides a starting point for all of the tasks you will need to complete before you can finally go live.

As you move from vision to reality, you’ll inevitably encounter many challenges and frustrations - successfully setting up a mutual is not easy and requires real commitment and leadership. But you should also take heart from the many organisations which have overcome the obstacles and successfully got up and running.

Stage 4: Secure the future

Setting up a public service mutual is a major achievement. However, in reality it marks just the beginning of your journey. If you have been clear about your vision, thorough in your planning and developed arrangements for monitoring your progress, you will have laid many of the foundations for a successful future. And, hopefully, you’ll start to see a positive impact on staff morale and engagement leading to improved outcomes for your service users.

However, the transition from the public sector can bring significant challenges. While, for many, the change in culture can feel exciting and rewarding, for others it brings extra uncertainty and can be difficult to adapt to. It is, therefore, essential to have strong and committed leadership which can inspire people to give their best but also listens to their concerns.

In the early days, you’ll inevitably be focussed on successfully delivering your service. However, to get the most out of your staff you’ll need to make sure that they have opportunities to develop and build their own skills in the long term.

The biggest challenge that comes with leaving the public sector, though, is operating as a business. In the first year, you’ll be focussed on delivering your service and making your mutual work. However, as you build your experience and look to the future, you must start to think about opportunities for expansion and growth. In this respect, it will be helpful to think about:

  • the likelihood of existing funding streams continuing
  • how you’ll secure new contracts
  • if you intend to develop or expand
  • what demand there is likely to be from additional customers, and how you will attract them
  • how you’ll adapt to changing circumstances
  • how you’ll build skills and capacity
  • the main growth areas

The process of setting up a mutual and securing a successful future is cyclical rather than linear - as you go forward, you’ll revisit all of the questions you started with.

Published 31 July 2014