The real guide to VfM in housing

By Kate Murray and Alis tair Mc Intosh, with inp ut from Ian Par ker

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Eric Pickles – Secretary of State for Communities and Local Government

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There is a good reason why our name is the Housing Quality Network...

We stand for one thing and one thing only. All of our members want to deliver top quality services. We support them to do that in every way we can. This paper suggests new ways of keeping great services going with less money. That is the number one issue for everyone.

Housing organisations face many threats to their income:

• Welfare reform means that lots of tenants will struggle to pay their rent and service charges • Councils face yet another tough year so they are looking for savings wherever they can

• Ministers see the billions in surpluses made by housing associations today and wonder why they fund the sector at all.

It may look like the housing association sector is in rude good health right now. But will this continue post welfare reform?

And in fact the real picture is uneven. More than a quarter of associations already struggle to pay off their loans using their rental income. Fifty or so associations run on quite tight margins – less than 10% of turnover.

The truth is that all housing organisations must save money. But does this mean you must sacrifice quality and cut to the bone? We’d argue you don’t and that, with a bit of bold thinking, there is a way of delivering great services for less money.

Our approach was inspired by a council leader who said: “Why can’t we do what Capita and Serco do – but keep the money for ourselves?”

We worked with some of our members to see if we could bring together the benefits of the way the public and private sectors go about things. The pilots we worked with were:

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• Shepherds Bush Housing Group • Brighton and Hove Council

• Cheshire West and Chester Council.

At Shepherds Bush and Brighton and Hove we:

• Ran short inspections to test the quality of housing management (in both cases this was good) • Asked the private sector housing manager Pinnacle to work up its price for the same standard of service

• Challenged the landlords to reduce their prices in line with Pinnacle while still maintaining quality.

Shepherds Bush and Brighton and Hove passed this test and reduced costs without dropping standards. They made savings for themselves without the costs and delay of an EU tendering exercise. These savings can be significant:

• Shepherds Bush could reduce costs by £1m over five years • Brighton and Hove could save around £2m over five years.

Cheshire West and Chester was different as this was a new council, starting from a lower base in terms of quality. We inspected the service and then worked with tenants to design a better one.

The council decided to put this service out to tender. Plus Dane won the contract. Under this arrangement, costs fell and standards rose just like in our other pilots. On the capital works side, the contract should save around £5m. The cost of managing the homes will go down by £200,000 a year. Bear in mind that this will fund an improved level of service. It seems like value for money is contagious. Boards elsewhere are asking how their services compare to the Plus Dane price.

On the basis of our experience we think the public and private sectors should work together more on value for money. Why not invite commercial companies to price up your services? It will not lead to outsourcing unless you want it to. You could even swap prices with other associations and councils.

Now that would be real benchmarking. You get to compare prices for managing your homes to a given standard at a fixed point in time. Landlords will learn a lot from each other.

The CBI is calling for housing management to be put out to tender. They claim it would save 15% or £680m. Who knows if that prediction would turn out to be correct? Some of the savings would be lost because of the costs of tendering and VAT payments by associations. Remaining savings would take a while to come though as tendering exercises often last longer than a year. Far better then to build on what is already being done. We make no attempt to extrapolate the savings from our pilots.

There is a simple reason for this. None of them presented a static target. Each one was already making savings and improving services by the time we worked with them. It tends to be the good or striving organisations that put themselves forward for exercises like this.

Our pilots showed that sometimes you can have your cake and eat it. We delivered the sorts of savings the CBI want to see. At the same time high quality

services prevailed. This is a fusion of public sector ethos and private sector cost control. It is straightforward to get started. All you need to do is: • Assess current standards of quality objectively • Agree the standard you want to see delivered in the future

• Test your price versus a commercial firm or other landlord (with agreements on confidentiality and non-competition if you want) • Discuss the findings in detail

• Draw up an action plan to make savings/improve services (most of the time these can be achieved without the costs and delay of tendering).

This paper covers the work of our pilots. I hope that you find it useful. HQN would be happy to talk to you in more detail about the process and how you could do it for yourself.

Alistair McIntosh Chief Executive, HQN

THE PRICE OF QUALITY HQN QUALITY CHECK

• Onsite inspection •Service ratings

PINNACLE PRICE CHECK

HOW THE PILOTS WORKED REPORT

• What services should be improved?

• How much can be saved?

DISCUSSION

• Full and frank debate on recommendations between HQN, Pinnacle and the landlord

ACTION

• Landlord implements agreed improvement and savings

• The pilots did this for themselves without tendering

• Onsite visits and interviews • Price-based on real workloads

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INTRODUCTION We hear a lot about value for money. But what do we really mean by the concept in housing? Is it all about the money side of the equation – or ‘rooting out waste’, as Communities Secretary Eric Pickles puts it? Or should the focus be on the value in value for money, in other words the added social benefits housing providers deliver with every pound they spend? The answer is a bit more than the sum of the parts.

Getting to grips with what value for money involves in housing is now a political and regulatory priority.

Beyond that, it’s a necessity for housing providers looking to direct more money into tackling the challenges of welfare reform or building new homes for those who need them. But for housing providers to respond effectively to the value for money challenge, they need to understand both what VfM means for their organisations and communities, and how to assess it.

Traditional methods of measuring VfM will no longer be enough. Housing providers will of course have to look at what others are doing within the housing sector to bear down costs and deliver more for less.

But they will also need to find new ways of getting more value from what they do, drawing more heavily on the experiences of the voluntary and private sectors in the process.

In this report, we look at some new approaches. We highlight ways in which providers are challenging themselves more effectively to not just to bear down on costs but to run their organisations in the most efficient and effective way for their communities.

THE VALUE FOR MONEY CONTEXT Achieving value for money is a constant refrain in the national political debate. For Prime Minister David Cameron, it’s about ‘doing what businesses do

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every day’ – getting ‘more bang for their buck’. His government has been explicit in its aim of opening up public services to competition from the private sector, an approach ministers believe will secure better value from dwindling public spending. The private sector is ready to take advantage. The CBI’s recent report Open Access claims £22.6bn-worth of savings could be made were more services taken on by private providers. Of this, £680m in productivity savings would come from ending what the CBI calls the state monopoly of social housing management. It says: "Local authorities and registered social landlords spend £4.6bn a year on managing the UK’s social housing. Less than 2% of social housing by market value is managed by independent providers. The research identified savings of 15% where they are managed by independent providers." In particular, it points to Pinnacle’s work managing homes in Westminster.

Housing providers are of course only too aware of the need to stretch their cash further. Efficiencies will release valuable resources for their work as they face the twin pressures of shrinking public funding and the risks of welfare reform squeezing their revenues.

Yet it may be tempting for some in the housing sector to dismiss the pressure for more private sector involvement. After all it’s an option that’s often been considered as purely ideologically-driven.

But housing providers cannot afford to ignore the new context. They may point to their history and ethos: a track record of helping the most vulnerable in society. But it’s in acknowledging the drive for greater competition, and responding positively to it, that they can best ensure a strong future for themselves. Outsourcing may remain a minority choice, but new ways of adapting the best the private sector can bring will not.

Transparency over costs is a government priority: we have seen over the last couple of years how ministers expect openness over spending to be the ‘default setting’ for housing associations as for local authorities. The pressure for more information about costs and value for money will not be driven just by government, but by residents and communities too as they expect to see cash well spent in their communities to support local priorities.

For the regulator, value for money is now one of the standards on which housing providers will be judged (see box below). Providers will be expected to have a comprehensive approach to understanding and delivering value for money in the services they provide. They will have to demonstrate how they are meeting the VfM standard in an annual self-assessment from October 2013.

Yet drilling down into costs and value for money is challenging, as the regulator itself admits. An HCA analysis of providers’ unit costs, published this summer, explained around half of the variation of costs between different providers. Factors such as providing supported housing, paying higher salaries

in certain parts of the country and operating in deprived neighbourhoods all play their part in higher costs. But the HCA’s analysis found less evidence of a link between issues such as dispersed stock or group structures and costs. If only half of the variations can be explained by the regulator’s analysis, then essentially it’s down to organisations to do much of the work on this. As the HCA puts it: "Understanding costs and outcomes at a provider level, and what accounts for differences with peers, is a task for individual providers and their boards."

Providers need to be able to demonstrate how higher operating costs are linked to underlying cost drivers and delivery against their objectives.

WHAT THE REGULATOR SAYS:

VALUE FOR MONEY IS NOW ONE OF THE KEY AREAS OVERSEEN BY THE REGULATOR. BUT WHAT IS IT LOOKING FOR?

The value for money standard says: "Registered providers shall articulate and deliver a comprehensive and strategic approach to achieving value for money in meeting their organisation’s objectives.

Their boards must maintain a robust assessment of the performance of all their assets and resources (including for example financial, social and environmental returns). This will take into account the interests of and commitments to stakeholders, and be available to them in a way that is transparent and accessible. This means managing their resources economically, efficiently and effectively to provide quality services and homes, and planning for and delivering on-going improvements in value for money."

The specific expectations spelled out by the regulator are that providers should:

• Have a robust approach to making decisions on the use of resources to deliver the provider’s objectives, including an understanding of the trade-offs and opportunity costs of its decisions

• Have performance management and scrutiny functions which are effective at driving and delivering improved value for money performance • Understand the costs and outcomes of delivering specific services and which underlying factors influence these costs and how they do so.

Boards will be expected to demonstrate how they are meeting the standard, including publishing an annual self-assessment on how they are achieving value for money.

In the light of the regulator’s expectations, organisations are realising that they need to be explicit about their approach to value for money. This will mean setting out what value for money means to them, how they deliver it and how residents and other stakeholders can be confident of the value they provide.

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MEETING THE VALUE FOR MONEY CHALLENGE: THE ‘NEW’ OUTSOURCING

A VALUABLE SPEND: DEMONSTRATING SOCIAL VALUE So how then should organisations look to understand and then demonstrate their value for money? Part of the answer will lie in looking at their costs, driving further efficiencies and being transparent about the money they spend. The other key element will come in demonstrating the social value they bring. How to measure social value is a growing preoccupation in the housing world. Not only will social value need to be considered by organisations letting contracts once the Social Value Act comes into force this year, but housing organisations are increasingly recognising that in these straightened times it’s crucial to show the value of the work they do.

Housing providers are looking to improve the quality of the services they offer – and with their communities hard hit by the economic squeeze to continue to offer more than just a core housing management product. But they will increasingly be expected to justify why it’s worthwhile to offer more than a bare bones service. A number of different approaches to measuring social value are being worked up, some focusing on intensive analysis of the return on particular investments by housing providers, others looking more widely at the social impact of not-forprofit providers. Think tank ResPublica has even suggested requiring housing associations to produce evidence of the social value of the work they do.

While regulation is unlikely, it is clear that providers need to be explicit about the benefits of their spending to government, residents and other stakeholders.

For the housing world, then, social value needs to be seen not just in the context of supporting local community and social businesses, important as that might be. Increasingly it’s about demonstrating the impact of providers’ presence in the communities they serve. While work still needs to be done on bringing consistency to that analysis, a greater focus on social value will need to be a key part of ensuring value for money.

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Outsourcing part of a housing service, or even the entire landlord function, may well be driven by factors other than value for money. Nonetheless, given the political, regulatory and financial imperatives, outsourcing needs to be given serious consideration as part of a value for money strategy. In that context, the lessons learned in the most recent significant outsourcing exercise are instructive.

Cheshire West and Chester Council’s primary objective in outsourcing the management of its stock was to improve services to residents. Its experience shows how both efficiencies and service improvements can be prioritised as part of the process, thereby delivering real value for money.

The authority explicitly built ‘drivers for excellence’ into its criteria for the selection of a provider for the contract. As part of the process, performance criteria and social value considerations were highlighted.

Key features of the exercise included:

• A specification which was built on outcomes rather than processes

• A 70/30 weighting in favour of quality over price

• An incentive to meet key performance indicators was built into the contract process – with bidders asked to specify the percentage of their management fee they were willing to risk for failure to meet the KPIs • Bidders were expected to deliver outcomes beyond core housing management. Their potential contribution in four key areas – strategic housing and meeting demand, regeneration, locality services and local employment – was given a 10% weighting as part of the evaluation • The capital works part of the deal was based on targets. Bidders were asked to state what percentage of savings would be shared with the local authority and what the contractor would do with their share. In Plus Dane's case they agreed to a 50/50 share and that they would reinvest 90% of their share in to the service

• A ‘competitive dialogue’ method was used during the process, which, say those involved, allowed the bids to be refined to produce the best possible outcomes for the future service

• Tenants and staff were heavily involved throughout the process, including in agreeing the priorities for quality and price and in evaluating the bids.

The contract was awarded to Plus Dane, which took on the running of the service in July this year.

Clearly, to win the bid it needed to show how its track record of good performance, both in housing management and beyond, would be transferred to the running of the new service, as well as meeting the performance targets set out as part of the deal.

In Cheshire West and Chester, Plus Dane will be expected to up the performance of the housing service significantly: the aim is that by 2014 it should achieve upper quartile performance and be equivalent to a two-star rated service, with a threestar performance by the end of the contract. Yet although performance and social value are clearly so key, efficiencies will also be achieved. The contract will deliver savings on housing management. At around £200,000 a year, they are relatively small, yet nonethless significant given that substantial service improvements are being expected. On the capital works side, the contract is expected to deliver savings of some 15% – or around £5m depending on the final cost of the capital works.

MEETING THE VALUE FOR MONEY CHALLENGE: A REAL CHALLENGE FROM THE PRIVATE SECTOR Outsourcing can, then, be targeted in the new operating environment towards real improvements in service quality as well as the cost savings with which it has often been associated. Yet outsourcing is not the only way to involve the private sector in delivering better value. As we’ve seen, the traditional approach to assessing value for money is no longer enough. Housing providers are recognising that they need to go beyond ‘apples and pears’ comparisons with their peers. Involving the private sector, without going down the outsourcing route,

can bring more rigour into the process. The work of one local authority, Brighton and Hove Council, and one housing association, Shepherds Bush, shows the potential for introducing external challenge from the private sector in order to gain a real understanding of costs and service quality.

Brighton and Shepherds Bush worked with HQN and Pinnacle, with HQN inspecting the services and Pinnacle testing the cost of services as if it were tendering. In neither case was this a prelude to outsourcing the service. Both landlords were good and improving performers. But both wanted to improve both their efficiency and the quality of services they offered.

Both report that after the inspection and pricing exercise they were able to take forward valuable lessons on performance and potential savings. In essence in analysing their performance and spending, they are now in a better position to understand the cost/quality relationship and drive improvements on both fronts.

As Nick Hibberd, previously head of housing at Brighton and Hove and now head of regeneration at the authority, puts it: "For us it was about saying ‘What would the private sector do? In times of public sector austerity can we challenge ourselves to be as efficient as the private sector?’ If you work in local authorities at the moment, the challenge upon us to demonstrate that every pound is well spent is greater than ever before."

Paul Doe, chief executive of Shepherds Bush, says for his housing association it was similarly important to get more from the investment it spends. "We did it to challenge our own organisation, so we can take the next steps," he says. "It’s about getting more for what we put in."

Both Brighton and Hove and Shepherds Bush were starting from a good base. Both landlords knew they were driving costs out of their services. Both were providing good services, as the inspections by HQN as part of the cost challenge process demonstrated. And in both, although Pinnacle’s potential price to run the service would be lower, there was no recommendation to tender out. But both landlords recognised that the cost of their service had historically been seen as high. The process allowed them both to track their progress in making efficiencies and to draw up firm proposals for further work on value for money.

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KEY ELEMENTS OF THE PRICE CHALLENGE PROCESS • A short-notice style inspection looks at the quality of services on offer. In Brighton and Hove’s case, the inspection found it would have scored a solid two stars at inspection – a marked improvement on the situation in 2009.

Shepherds Bush’s service was rated as ‘at least two stars and possibly three stars’

• A pricing exercise analyses the savings which could be made were the service to be outsourced to the private sector. The standards would be the same. Brighton and Hove could save £2m over five years. The figure for Shepherds Bush is £1m. Savings would be a lot higher but you have to allow for set up costs and VAT at associations. At Shepherds Bush

WHAT THEY SAID: "People said this was brave – but I saw it as an opportunity to take another step. We wanted to see firstly what the private sector could offer if they operated in our environment, and secondly how far we had got on our value for money journey."

Paul Doe, Shepherds Bush Housing Group

Analysing costs and service quality in a rigorous way offers obvious benefits to providers as they work to improve both performance and efficiency. They can identify where they are performing well – and where they need to focus more resources. They can identify areas for further savings. But just as importantly, they can use the process to highlight the real value to their residents and communities of certain choices they make. For example, rationalising offices may be one way of making cost savings. But when residents consistently stress the importance of easy access to housing offices and frontline staff, closures may be a step too far.

In Brighton and Hove, the pricing challenge gave further impetus to the authority’s programme of moving from single-service housing offices to multiservice access hubs. The strategy allows the council

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VAT and the costs of an EU tender slashes the level of savings from 24% down to 10%.

Of course if the landlord makes the savings for themselves there are no set up costs.

We explain the Pinnacle approach to saving money opposite

• A recommendation is made for the future management of the stock. In neither of our examples was tendering out recommended.

This was partly because of the time and costs associated with letting a contract and the risk of service improvement stagnating during this period. But lessons from the pricing exercise were highlighted to allow both landlords to continue their work to improve value for money.

"It has given us a robust way of saying that we understand the cost drivers in the service and the relationship between quality and cost.

It allowed us to take stock to see whether we are on the right track and to rise to the challenge of the private sector."

Nick Hibberd, Brighton and Hove Council

to keep a good geographical spread of access yet still reduce its core overhead on buildings – with a back-office headquarters in an outlying part of the city and shared offices in other parts of the city with, for example, a library and children’s and youth services.

These are increasingly the sorts of choices housing providers will need to make. Protecting the frontline services residents value and offering new ones to support their residents through tough times will demand an ever stronger focus on real value.

Rigorous challenge will allow providers to maintain their focus on quality and service delivery, while taking a robust approach to bearing down on costs.

It will also allow for the greater transparency and more choice about the priorities in service provision which both government and residents demand.

THE PINNACLE STORY: HOW DO PINNACLE WORK OUT A PRICE FOR DELIVERING THE SERVICE? Pinnacle use their knowledge of market prices.

The firm has bid for and won tenders for similar services at Woking and Westminster.

The price is for a two-star level of service climbing up to three stars over the life of the contract. Pinnacle is set up to hit satisfaction rates of over 80%.

Pinnacle works on the basis that TUPE and pension rights apply for the life of the contract.

The price is for a five-year contract as this is usual in the market.

Pinnacle shares costs with its other contracts.

This can include: • Back office functions • Contact centres • Managers

• Technical expertise

• The proximity of the contract to others held by the company – this increases the scope for cost sharing and economies of scale.

As Pinnacle sinks or swims by its ability to win contracts it probably pays more attention to the bottom line than most councils and associations.

Key features of the approach that Pinnacle suggested at our pilots include:

• Reducing the number of staff – in one case this dropped from 90 down to 70 – the lower figure was closer to the figure at similar landlords in a benchmarking club • There would be much more generic and flexible working than specialist officers

• The service would operate out of less expensive and/or fewer offices (offices that saw few customers would close) • Electronic communication would be boosted

• Overheads such as human resources and IT.

• The Pinnacle call centre would receive calls centrally 24 hours a day and seven days a week

It is worth noting that there is no fixed private sector price as it can be affected by:

These measures to save money cannot all come in on day one. Pinnacle’s price takes into account a realistic approach to managing change.

The price includes a profit margin. Pinnacle does not engage in the suicide bidding we saw from some elements in the maintenance industry.

• The level of competition for the contract – if several credible bidders are interested the temptation is to reduce your price to win

• Some rent collection functions would be handled

by Pinnacle centrally.

Pinnacle is not the only organisation that can make savings. The Plus Dane tender for Cheshire West and Chester was also competitive.

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HQN CAN HELP YOU WITH VALUE FOR MONEY...

•We can run a pricing exercise to assess the price and quality of your services just like we did at Brighton and Shepherds Bush.

It’s far quicker, sharper and less resource-intensive than traditional benchmarking. It’s tailored to your organisation and based on today’s costs and performance – not historic ones •Use our newly updated value for money toolkit (incorporating the latest standards) to measure how well you’re doing

•Gain HQN’s stamp of approval by having us validate your selfassessment and reassure you and your board. We’ll include pointers on best practice and identify the key priorities you need to address

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•Repairs costs analysis model – are you confident your repairs service is value for money? Let us model your repairs costs to see how they compare with others and how you can reduce them •Book an in-house training course to increase awareness about what can be done to improve VfM. Suitable for a wide range of staff and managers as well as board members and involved residents

•Looking for something else? Whether it’s general advice or a comprehensive value for money review – get in touch and we can talk through how best we can help you.

FOR MORE DETAILS PLEASE CONTACT BUSINESS MANAGER ANNA PATTISON ON...

01904 557197 OR EMAIL ANNA.PATTISON@HQNETWORK.CO.UK

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Rockingham House St Maurice’s Road York YO31 7JA

Telephone 0845 4747 004 Fax 0845 4747 006

Internet: www.hqnetwork.co.uk Email: hqn@hqnetwork.co.uk