Capita Consulting Transforming Further Education FHE Principal and Vice Principal Briefing November 2011

1. Capita Consulting Transforming Further Education FHE Principal and Vice Principal Briefing November 2011

2. Scope of this briefing Drawing upon evidence from institutional mergers in FE in the UK, overseas and private sector, and research on Collaborations, Alliances and Mergers (CAMs) • Key factors that drive success or otherwise of institutional CAMs • Lessons learned and main issues institutions should consider and address when contemplating CAM • New business models - shared services and the cost sharing exemption • Barriers to be overcome • Critical success factors

3. Trends and drivers for mergers in FE Recent trend is for strategic CAMs, sector generated and led Drivers for change: Possible future political support or pressure to restructure sector Government allowing financially weak institutions to fail Reduced public funding Enhanced competition between FECs Student experience - need to improve and differentiate Role of Private Sector – levelling of playing field

4. Other drivers for merger and collaboration Business Case • Resolve financial instability • Realise efficiencies (better estates utilisation or shared services) • Share risk • Improve competitiveness • Support economic regeneration Education Case • Improve student experience • Foster innovation • Address quality issues • Increase participation • Achieve academic synergy / viability

5. Degrees of partnership 7. Merger 6. Group Structure 5. Joint Ventures 4. Hard Federations 3. Soft Federations 2. Partnership 1. Collaboration

6. A continuum of trust

7. Vehicles for closer working

8. Lessons from Private Sector merger 50-75% of mergers fail outright or do not achieve expected benefits Mainly due to poorly managed post-deal integration: Lack of appropriate planning (direct correlation between quality of planning and success of merger) No clear vision and strategy Lack of open communication Whole range of people and cultural issues

9. Success factors – Private Sector mergers • Allocate sufficient resources to establishing strategic objectives and a clear vision • Successful mergers have direct correlation with amount and quality of planning involved • Carry out sufficient due diligence • Run dual companies/Boards for a transition period • Over-communicate especially with employees – make it a group experience and check what support is needed • Understand emotional, political and cultural issues which arise • Managers should lead by example and monitor own reaction to the change • Faster is not always better for integration

10. Critical success factors for FE CAMs Strong educational (not financial) basis Need a shared vision, strategic fit and strong leadership Examine all collaborative options – rather than be solution driven Put in place effective CAM planning and implementation process Address staff (payroll & pension), student and cultural issues – open communication essential Make realistic cost estimates – don’t overestimate potential savings and underestimate level of upfront investment required Complimentary mission and culture make success more likely – especially evident in HE / FE mergers Actively manage benefits realisation – devise and track measures of success

11. Assessing intended and actual outcomes from merger Did it result in…? Increased stability Shared identity and common strategy More capital funding More investment in key areas of research and teaching Improved student experience Better estates utilisation Stronger regional or national voice

12. Shared services in FE In the past shared services typically meant sharing of ‘back office’ operations like processing records, payroll, finance and benefits Shared services are now being looked at across a wider range of services both front and back office – e.g. IAG Shared services can be a key component of institutional collaboration Shared services may also be a stepping stone towards partial or full integration

13. The cost sharing exemption model • FECs are partially exempt hence incur substantial irrecoverable VAT • Whilst to make efficiency savings, FECs may wish to share services and VAT is regularly cited as a barrier • This may be alleviated by the implementation of the cost sharing exemption (available via the European 6th Directive) subject to the terms of its implementation • HMRC are consulting on the possible form of its implementation • Quite distinct from a VAT grouping which, as a Cost Sharing Group (CSG) may not be under the control of one member • FECs as partially exempt bodies will likely be eligible to be members of a CSG

14. What are the basic conditions of the exemption? • The Cost Sharing Group (CSG) must be independent • CSG members must make exempt and / or non-taxable supplies • The supplies by the CSG have to be made at cost (exact reimbursement) • The services provided by the CSG must be ‘directly necessary’ for the members exempt and / or non-business activity. • Cost sharing must not cause a distortion of competition • The Advocate General in Taksatorringen stated in paragraph 122 of his judgment: “This means that the group must be entirely transparent and that, from an economic point of view, it must not have the characteristics of an independent operator seeking to create a customer base in order to generate profit.” • HMRC was consulting to end of 9/11 on each of these points and will thereafter advise Ministers regarding the exemption’s implementation

15. What next? • Scenario modelling is a critical next step for institutions which requires: • Being clear as to levels of exempt / non business and taxable activity • Identifying and prioritising potential services for inclusion in a Cost Sharing Group (CSG) • Importance of considering partners beyond FE that may be able to a join a CSG - but will need to address process and system alignment • Calculating potential business benefits (in terms of cashable and non cashable savings) from the inclusion of such services in a CSG • Becoming Lean before embarking