'There are a number of reasons for it,' Mr Edwards explains. 'There was the compulsion pressure arising from the 1980 and 1988 Local Government Acts. Direct service organisations must have clear accounts, and charge, for example, legal services to their profit-and-loss accounts. That forced the legal departments to recognise that they were selling services to other departments. It's about introducing cost-centre management, transparency, and market-testing of services.'
The Government last week announced the timetable for introducing compulsory competititive tendering (CCT) for support services. Legal services and construction-related services, such as architects, engineering and property management, are to be market-tested by October 1995. By then a third of each council's legal services, and 90 per cent of construction related services, must have been subjected to tenders. The DoE suggests that to meet this target, authorities should begin market-testing for these services next year. CCT will be in place for information technology, housing management, finance and personnel by April 1997.
To enable support services to compete with external tenders they must have a clear understanding of their own costs and will need to operate internal trading accounts. This in turn leads to devolved management responsibility, and the creation of semi-independent business units. Recognising the move towards internal trading accounts (ITAs), the Chartered Institute of Public Finance and Accountancy (Cipfa) has this month issued guidance notes on how ITAs should be operated, and a discussion document considering the detailed implications for local authorities.
Those authorities that first instituted business units are now introducing voluntary competitive tendering. Sir Peter Bowness is leader of the London Borough of Croydon, where many services are now being 'externalised'. 'We've had business units for some time,' he explains. 'We're now looking to get ahead of the game of CCT. We've gone a long way with business unit and service level agreements, which have increased the powers of management and made clear the costs of functions. Units are charged with the responsibility of not making a loss, and client departments are aware of the costs of services they are seeking to use.'
Croydon has just agreed the principle of allowing the business units to become fully independent trading companies, either as management buy-outs or through association with existing businesses. This should be implemented over the next two years. Once established as independent contractors they will be in an effective position to compete against other external tenderers when contracts are renewed.
'We support the idea of CCT, and see business units as a step along that road,' Sir Peter says. 'We don't see any difference between creating business units and allowing them to move towards a clear and separate identity. Externalisation will allow them to compete, not necessarily based in council offices - indeed, one of the benefits we see is that we will not require the same amount of office accommodation in the future.'
Derek Lawrence, Croydon's personnel director, says that the introduction of business units has been successful, allowing managers to use their judgement. 'There is a freeing of initiative, an ability to operate flexibly.' Mr Lawrence believes that business units will provide an opportunity to introduce less rigid contracts of employment, although this has not yet happened in Croydon. 'They might adopt a different pay structure, a different working week. Some managers are working up their own ideas such as on performance related pay. They may also come up with their own improved purchasing arrangements.'
Lincolnshire County Council is another of the forerunner authorities introducing business units. Peter Hale, Lincolnshire's principal assistant of corporate services, says a competitions policy agreed in 1987 has been the basis for widespread market-testing. 'The thrust was to put to competition those services where it was legal and practical to do so.' Tendering of conveyancing, internal audit and management of council-owned farms led to both the conveyancing and farm management being contracted out.
'Our trading units operate as separate organisations, reporting to their own committee. They have to meet all their costs themselves. For example, personnel services as a contractor has to sell their services to other departments.' However, for the time being those other departments are not able to contract elsewhere if they are unhappy with the service provided. Lincolnshire is looking to extend the process by externalising all its business units. 'That's a live issue now,' says Mr Hale. 'It pre-empts the requirement under CCT where it was feared that staff may lose contracts.'
Kieron Walsh, Professor of Public Sector Management at Birmingham University, says that the introduction of business units brings many advantages. 'It gives clarity of costs, allows you to be clearer on unit costs, provides better control, enables managers to understand their costs better so that they know how to control them, and it may encourage units to pay more attention to their customers.
'But there are disadvantages as well. There is the obvious bureaucracy, sending other people's invoices and so on. It can be difficult to set up unit pricing. There is a tendency for a conflict of values between the purchaser and provider.' Professor Walsh fears that some issues may be ignored. 'If you introduce performance measures then the tendency is to work to those measures.'
Another problem identified by Professor Walsh is that errors can occur in the process of adapting existing budgetary systems to operate for tighter and smaller units. 'It is a lot easier to work out budgets for an authority as a whole than for small units. You don't want trading accounts to make vast profits, so you have to claw back surpluses. You must have a strong central system to control the operation of devolved management.'
Professor Walsh warns that the move towards internal markets may be going too far. 'Markets tend to drive out volunteerism and they can lead to a need for increased surveillance.' Professor Walsh is concerned that business units can undermine the process of political control. 'There are real issues about accountability,' he says. 'This is formalising the lack of accountability.'
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