Shared Services in the Public Sector

Many public sector agencies as well as local authorities are looking at shared service vehicles as opportunities to reduce costs and create business efficiencies. We review some of the issues that clients often come up against in their quest for savings and productivity improvements.

Key to success is the price that will be charged for the service but in reality this is driven by the objectives of the public sector stakeholders in the shared service vehicle. For example, pricing may be set at a level which permits the vehicle to break even or it may be set at a level that is in line with market rates with benefits to stakeholders coming from shareholder returns (against which can be set the set up costs of the vehicle) and from economy gains through scale.

As the vehicle is expanded to include other public sector customers who will be asked to pay market rates for services and with whom trading takes place the question arises as to whether these customers should also become shareholders in the shared service vehicle. If they do, the founding stakeholders may wish to set prices at a market level since this will be a fairer and simpler outcome for all. Alternatively if the founding stakeholders are to remain the only stakeholders then market prices should be charged to customers whereas founding partners could be charged below market rates.

We suggest that ultimately service prices will be set at a level that permits local authority stakeholders to pay a price at or below market price and also permits the shared service vehicle to generate a reasonable return and therefore for its managers (e.g. directors if the share service vehicle is to be a limited company) to fulfil their fiduciary responsibilities to the Company and to ensure that the vehicle makes sufficient returns for its own future re-investment needs.

Pricing will also be influenced by taxation issues around transfer pricing particularly where it is apparent that the public sector shareholders are infact partially exempt for VAT purposes and therefore suffer a slightly higher per unit price per service.

C Finlayson
1 July 2010