Externalisation of services: risk issues for consideration

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Many authorities have embarked upon significant partnerships/externalisation programmes with different providers. The theme of this article is to touch upon some of the salient aspects of the risk transfer process which authorities need to consider when undertaking such a process. The article is aimed at large scale transfers and not for the day to day partnership workings of say an after school club. Experience is drawn first hand from the writer being involved in three such programmes and the emphasis here is on externalisation of services (eg, highways and the like).

The risk and insurance team of the authority should be involved from the outset of the process or as soon as is practical. The earlier the involvement, the greater chance the ‘end product’ has of being something akin to the authorities wishes. Also, it is recommended that, at each stage, consultation is held with the authorities risk and insurance consultants as well as insurers, so that matters develop in a logical and recognised procedure and are in tune with what may or may not be insurable, should that be the authorities wish.

Stage one

Once the authority has an idea of the services to be externalised, it should draw together a working party of informed personnel to identify all the risks (both existing, new, and possible future risks) associated with the transfer, and then, having shortlisted them to a workable and relevant number, decide who it feels should take on the risk and be responsible for the risk post transfer, ie the authority or the partner.

Stage two

Having completed phase one, the authority needs to make sure that the legal team representing the authority and drawing up the partnership agreement have a clear understanding of stage one findings. At this stage, they can also advise what risks may or may not be possible to transfer. The key is that the agreement should reflect the desires and aims of the authority and, more pertinently, the authority should have a clear understanding of the risk to be retained or transferred and the consequences of either action.

Stage three

Once stage two is complete, the risks, through discussions and the agreement, can be articulated to the partner. It is recognised that there maybe some discussion and fine tuning of which party actually ultimately retains which risk but again, once agreed, both the authority and the partner can then go and seek the written agreement of their insurers. The relevant consultants to the authority/partners can make sure the policy wordings reflect the content and the aim of the agreement, where insurable risks maybe the subject of a transfer to an insurer.

Stage four

This should really be the finalisation and placement of the risk management procedures to be adopted for the organisations managing the risk, and the relevant insurance protection, where available, affordable, desirable and adequate for its purposes.

General comments

1. The authority needs to ensure that the partner has the necessary risk management skills and controls in place to manage the risks effectively, failure of which may adversely affect the service delivery.

2. Evidence should be sought for the adequacy of the insurance protection in place by the partner. This role needs to be undertaken by a trained technician and authorities should not be satisfied with simply seeing the certificates or to whom it may concern letters. Reference and copies of the actual policy documents should be made, to ensure they fulfil the requirements of the Partnership Agreement.

3. Most of the partnerships are for a number of years and it is vital that the authority keep a log of employees that transferred day one of the partnership and who then come in and out of the partnership as it progresses. The reason for this is that on some occasions, the Employers Liability risk may transfer to the partner and they may well readily embrace the risk along with their insurers. Should the partnership though dissolve (say through bankruptcy of the partner or just through expiry), it is vital the authority can trace who worked within the partnership and what were the Employers liability arrangements. This will help the authority deal with, say, any disease type claim which may present itself some twenty years later, being made against the authority, and find its correct home and more importantly the correct insurers.

4. I am sure most readers will have been faced with the disease type claims, relating to an exposure many years ago, and found it almost impossible to trace insurers and the like. Remember the persons who put the partnership in place are unlikely to be in situ some twenty years later and if they are, will they be able to recall the fine detail of the arrangements. All the policy coverage and the documents to be documented and safely retained.

5. Claims management procedures need to be agreed and thoroughly understood prior to the partnership commencing. If the authority is to rely on the partner providing timely and accurate information to assist with the management of a claim, then certainty that this information will be delivered and needs to be paramount in discussions.

6. If the nature and content of the partnership alter mid term then the above steps should be followed again.

7. Risks to consider include the following but this is not meant to represent an exhaustive or definitive list of risks:

  • assets – property/people/vehicles and the like
  • liabilities
  • business continuity planning – service critical functions
  • health and safety
  • TUPE related issues
  • run off insurance protection for certain risks
  • default of the partner
  • risks post partnership
  • reputation
  • financial
  • service delivery

The above is no more than a summary of the key aspects to consider and an overview of the issues, with the aim of preventing what happens all too often in reality – where the risk and insurance issues get left to the end of the process and the agreement very often bears little relationship to the understanding of both parties as to what risks are or have been transferred.

Phillip Farrar

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