Public sector spin-outs: innovative or chips off the old block?

I am living proof that social entrepreneurship is not always terribly glamorous.

Most of my days are spent in featureless buildings owned by councils or the NHS, helping the services based there to set up as new ventures, or ‘spin-out’; often owned and controlled by staff but often some kind of joint-venture between employees, the public body itself, social investors and users.

Such spin outs are seen as an alternative to traditional outsourcing with social investors providing the money, staff and leading the culture-change and users finding a new relationship with the service. The public sector spin out, while ‘social’ in motivation, operates quite like a management buy-out (MBO), except the business is owned by all staff and is normally socially driven. Most take the form of community interest companies (CIC’s) rather than conventional companies.

Public service mutuals are big business

Public service mutuals, as they are called in England, have been around since about 2008. They started life under the Labour administration until 2010 and continued after that in the Coalition Government.

About 100 public service mutuals have been created since 2010 and I have been involved with about 30 of them. In and around Cambridge, I have helped set up several including:

• Independence Matters CIC | a £12 million social care business
• Provide CIC | a £56 million healthcare business
• Leading Lives | a £6 million care business
• Allied Healthcare Professionals | a £3 million physiotherapy business
• Realise Futures CIC | a £12 million employment support business
• Thurrock Lifestyle Solutions | a £3 million disability services business

Together these new firms employ about nearly 2000 people and have a turnover of in excess of £85 million.

So why spin out?

Normally, the motivation for setting up a spin-out comes from staff teams, and their managers, wanting to do a much better job at a far lower price than can be achieved within bureaucracies of the public sector. Councils and NHS bodies are often vast, multipurpose organisations with complex chains of command. Innovation, change and business-improvement can be as difficult as is in any very large company.

According to the few research studies undertaken on this phenomena, spin outs tend to ‘liberate’ the people involved in part of the business to find investment and grow that part of it free from the constraints of the larger parent.

Indeed, there appears to be a significant ‘culture dividend’ associated with becoming a separate entity though whether this is about ownership, specifically, or merely new working practices isn’t yet truly understood. The results however are fairly clear in terms of far lower rates of absenteeism, increases in productivity and perceptions of staff and user satisfaction.

Are public sector spin outs innovative?

One of the odd things about a spin-out is that it is ‘born’ in the form it took in the public sector. Occasionally these take the form of innovative, ‘skunk works’ type projects. But more often, the public service mutual starts life as just a traditional service-provider as a result, new public sector spin-outs often look outdated, in terms of operating model, when set aside proper start-ups.

From here, I have observed, one of two things happen. Either the spin-out quickly uses its new commercial freedom to come up with new ways of approaching problems – or they remain frozen in the ice of their former life as part of the state.

In truth, both things happen simultaneously. While most spin-outs tend to improve their management quite quickly and bear down hard on costs, many do struggle to truly innovate in the way that both new and established private companies do.

Few invest heavily in new innovation due to a legacy-culture that doesn’t really understand the way investment and return really work when it comes to social innovation.

While new research is underway, I would be surprised if there was much evidence of radical innovation. Although ‘new’ organisations, they can actually be as hamstrung as any large, longstanding organisation in terms of making change happen quickly. The mutuals that do succeed are those that recognise the need to invest hard in new ideas and a creative culture in their organisations. So far, such organisations are the exception not the rule.

A complex and challenging process

If turning public sector services into shiny new social enterprises all sounds nice and simple, it is not. Getting a new spin-out up and running can take years. It is exhausting for those who lead them. Finding a way through labyrinth of public sector politics and bureaucracy is really tiring – even when it is clear that more social good can be achieved ‘out’ rather than ‘in’. Public service mutuals also suffer from trade union opposition, even when they are supported by a majority of staff, who become owners in the business.

That is why there are still only 100 public sector spin-outs in the whole of England. These employ around 35,000 people and count for only £1.5 billion of public spending out of £650 billion in 2013.

Nearly five years into the UK Government’s mutuals agenda, I am disappointed by progress, given how threatened many public services now are, particularly in the NHS and English Councils. In my darker moments I sometimes believe that Councils would rather close a service than change it.

However, given the financial cliff-edge after the 2015 General Election facing the public sector in England and Wales, it seems clear to us that more spin-outs will simply have to happen.

The fact that they are an improvement on what went before, I believe, is not particularly in doubt. Whether or not they are socially innovative, however, is a far more open question.