Charities are finding it increasingly difficult to win public sector funding: both national and local government are reducing the number of grants they offer and aggregating contracts to a size beyond the bidding capacity of most charities.
One result is that some voluntary sector providers that have successfully delivered public services in the past have either been driven out by commercial competitors or had to accept a new role as subcontractors.
But others are competing for the larger contracts by forming specialist consortia. Neil Coulson, a consultant who has worked with many of them, thinks there could already be several hundred local consortia in the UK, ranging in size from three or four members to more than 100. Many of them, he says, have won contracts worth millions of pounds, and some are hoping to increase the figure to tens of millions.
Coulson says the growth in consortia is in part a defensive reaction from local third sector organisations that want to hang on to traditional government sources of income and realise they must compete with private providers and national charities for large contracts. They can employ full-time experts in bidding and supply chain management, he says.
"If commissioners aggregate contracts to save on costs, small organisations cannot compete for those," he says. "They require a breadth and range of provision that niche providers cannot offer. It's important to establish a local infrastructure that can compete on a continuous basis with commercial providers. Serco, for example, is always scouring websites and thinking about how to bid for business. It is constantly brokering deals. You need people who can do this for the sector."
A key benefit, he says, is that consortia can establish close relationships with commissioners. A consortium can speak to a commissioner every week.
John Gillespie, a business planning consultant at the chief executives body Acevo who has supported a number of consortia, says many local authorities and health bodies recognise that the voluntary sector is better at delivering some types of service, but are reluctant to deal with 30 or 40 niche providers. A consortium provides a single point of contact for them. "Now feels like a critical time for consortia," he says. "It's flavour of the month in some parts of government."
Most of the action is at local level, he says, where local authorities are interested in consortia development among third sector organisations. But there is also support from central government departments, including the Communities and Local Government department, the Cabinet Office and the Ministry of Justice.
This means there is room, Gillespie says, for larger organisations - such as 3SC, the consortium formed to bid for welfare-to-work projects under the previous government - to bid for national contracts. He is hopeful that more will emerge.
Coulson, however, doubts whether consortia will ever reach the scale of big private providers. "It would be difficult for the voluntary sector to get to that sort of scale," he says. "Voluntary sector organisations are unlikely to be driven by growth in the same way. In some ways, I wouldn't want an organisation as large as Serco in the sector. It could be too skewed towards growth and subject to mission drift. I'd prefer to see local organisations forming alliances across boundaries."
HOW DOES IT WORK? THE STANDARD MODEL
The sector chief executives body Acevo and the specialist consortia consultant Neil Coulson (right) recommend that charities interested in bidding for larger contracts should establish a consortium as an independent organisation, normally a charity. The membership should be made up of third sector bodies interested in becoming suppliers, and the trustees drawn largely from the local sector.
Their standard model involves two levels of membership: full members that are ready to bid for contracts and associate members that are not, but which are interested in becoming involved. The consortium then employs specialists in bid writing and supply chain management. They identify contracts that members stand a good chance of winning, liaise with commissioners and work with charities to select the ones that will deliver aspects of each contract.
The consortium acts as the delivery agent for all contracts and selects its subcontractors from its membership. Members are free to bid against the consortium for a contract, so long as the consortium is aware of their plans. Typically, somewhere between 5 and 10 per cent of the contract value is used by the consortium to pay staff and to help the consortium to grow.
FINANCE - A CHANGE OF ATTITUDE?
Those involved in consortia often see the lack of finance as the major barrier to its growth. "A lot of the work we look at is payment-by-results, and that needs a big balance sheet," says Martyn Oliver (right), chief executive of the charity consortium 3SC (see interview). "You're never going to become a Serco by saving up."
A number of social finance organisations have been set up to provide investment, but he feels they do not always understand the needs of their investees: "There is undoubtedly a willingness to help, but there is a language barrier between social finance organisations and social enterprises."
In a traditional business, a critical source of risk capital funding is equity investment, where investors provide the capital needed in exchange for a share in the company. Third sector organisations cannot offer equity, Oliver points out, but they can afford to pay comparable returns.
He favours a structure similar to a 'preference share', where an investor does not receive a vote in the running of the business but receives payment based on the organisation's success. "We need equity-type investment if we're going to broaden and deepen our pipeline," he says. "We also need it so we do not have cash-flow issues when we deliver payment-by-results contracts. If the sector is going to survive and thrive in the environment of government contracting, it has got to crack this."
Coulson would also like to see more 'risk capital' investment in consortia. At present, he says, some receive grant funding, whereas others have taken loans from social investors.
He says grants are often too small to form a consortium and can take too long to attract, while loan funding often has to be repaid before a consortium is ready. "It can take a few years for a consortium to win its first contract," he says. "They need patient capital that is willing to wait until those first deals come in.
"I would like to see Big Society Capital put money into a fund that lends money to set up consortia - ideally about £100,000 to £250,000 a time, with repayment based on the consortium's success in winning contracts."
Coulson says that charities need to be more open to investment funding. "I think we need a change in attitudes to social investment," he says. "The sector is built on a culture of entitlement. We're used to getting this money freely, but that's not necessarily the best way."
COMMISSIONING - 'ENGAGE WITH KEY PEOPLE'
Coulson says a major barrier for charity consortia is the attitude of commissioners: some are enthusiastic, but others refuse to accept that a consortium constitutes a single organisation. In particular, they are reluctant to take the track record and balance sheets of all its members into account in a pre-qualification questionnaire.
"Commissioners don't necessarily understand consortia, and who's going to enter into a contract with something they don't understand?" says Coulson. "You need to spend time engaging with key people to make sure they understand your business model."
Commissioners also have problems accepting that a consortium is permissible under EU procurement laws, he says. But he insists that there is no good reason why a consortium model cannot be acceptable.
Shani Lee of Cavsa, the umbrella body for charities in the London borough of Hammersmith & Fulham, says that in her experience the attitudes of commissioners are beginning to change.
"Many of them have an old-fashioned approach to the sector," she says. "They're not really aware of us. But those who have had a conversation with us like what we're doing. They're pleased to see the sector getting organised. That's why it's important for consortia to have full-time staff, who can talk regularly to commissioners."
- Read our interview with Kirsty McHugh, chief executive of the Employmnet Related Services Association