Local authorities have been outsourcing services for more than 30 years and this trend looks set to continue. As our recent article on shared services showed, 95 per cent of local authorities used outsourcing and other shared services in 2014 – saving them £357 million.
Despite the long-established use of outsourcing, there are a range of key risks that local authorities need to consider – and which are often overlooked. These relate to areas including assets, business continuity, health and safety, TUPE-related issues, and the risk of a partner defaulting.
All too often, risk and insurance issues are left until the end of a process and the final agreement does not reflect both parties’ understanding as to what the risks are and who has assumed responsibility for them. That’s why it’s crucial to embed risk and insurance planning from the outset – or as soon as is practical. The earlier the involvement, the greater chance that the ‘end product’ has of meeting an authority’s requirements, without exposing it to unnecessary risk.
So how can local authorities embed risk and insurance planning throughout the outsourcing process?
Once the service to be outsourced has been decided, the authority should draw together a working party drawn from relevant departments to identify all of the risks (including existing, new and possible risks) associated with the transfer. It should then be agreed whether the risks identified should stay with the authority after the transfer, or be assigned to the successful bidder.
Next, the authority needs to make sure that the legal team drawing up the partnership contract/agreement has a clear understanding of the step one findings. At this stage, the legal team can also advise on whether the outcome of step one is actually achievable.
It is crucial that the partnership agreement reflects the stated aims of the authority in outsourcing the service and that the authority has a clear understanding of the risks to be retained or transferred (as well as the consequences).
Once the agreement is under discussion with the proposed partner, the authority must make sure that the partner is clear about the risks that will become their responsibility. There may well be some negotiation about the balance of the risks being transferred and any changes should be reflected in the final contract/agreement. At this stage, both parties should also seek written agreement from their insurers to the proposals.
Next, the authority should ensure that the final risk placement is in order and that – where non-insurable risk is concerned – they have agreed risk management procedures with the successful provider.
If the nature and/or content of the partnership alters during the period of the contract, the above steps should be revisited and any risks changes documented and agreed by both parties
To help minimise the risks of any outsourcing arrangement, an authority should:
- Ensure that its partner has the necessary risk management skills and controls in place to manage the relevant risks effectively. Failure to do so could adversely affect the service delivery and could – in a worst case scenario – result in the service having to be brought back in house at short notice.
- Make sure its partner has adequate insurance protection in place. This should be done by a trained technician and authorities should not be satisfied with simply seeing insurance certificates or ‘to whom it may concern’ letters. Reference to and copies of the actual policy documents should be made to ensure they fulfil the requirements of the contract/agreement.
- Keep records of employees transferring over to the third-party provider under TUPE. This is important because if a disease-type claim were made several years after the transfer, it is unlikely the staff involved would still be in post and it may be necessary to identify who was the employer (and the insurer) at the relevant time.
- Keep all policy documents and other relevant information relating to the contract for a sufficient period beyond the length of the actual agreement.
- Agree claims management procedures before the partnership starts, including performance indicators if the authority is to rely on the partner providing timely and accurate information to assist with the management of any claim.
- Consult its insurance broker and insurer at every stage of the process to ensure they are fully aware of the impact any transfer will have on the authority’s insurance and risk management programme.
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