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Project Daedalus:Creation of a scalable framework agreement coveringoutsourced back office services in the FE sectorINDEPE...
Contents1. Executive Summary.................................................................................................
1. Executive SummaryProject Daedalus examined      The project had a three-phase design to provide a logicalthe potential ...
Developing the Proposed Operating ModelProject Daedalus put significant effort into developing a more efficient operating ...
A number of additional considerations – governance, staffing, procurement and commercialconsiderations, and implementation...
2. Introduction to Project Daedalus2.1 Background and Project SummaryProject Daedalus was a proposal examining the potenti...
An outsourcing model best satisfied the key evaluation criteria for use within FE, when tested againstthe realistic altern...
2.2 Objectives and OutputsThe project looked to provide a balanced view of opportunities and challenges, and had the follo...
2.3 Structure of Report ExplainedThe aim of this report is to provide a summary that shows the approach used, why that app...
3. Working Practices and Principles3.1 Management of ProjectBoth Phase 1 and Phase 2 of the project were delivered on time...
3.2 Working PrinciplesThe Steering Group agreed the following principles, endorsed through an open workshop withcolleagues...
4. Developing the Target Operating Model4.1 OverviewProject Daedalus put significant effort into developing a Target Opera...
4.2 Approach SummaryThe operating model is the representation of how an organisation operates across all of its dimensions...
4.3 Baseline Operating ModelThe baseline position for the project was that all the Colleges operated as separate entities....
   Enquiry Handling: including course, assessment and eligibility enquires. Many of these processes     are similar and a ...
   All transactional activities associated with operational support (e.g. HR, Finance and     Procurement) would be part o...
Self-service channel - increasing the amount of activity carried out via self-service mechanismsenables the Target Operati...
4.5 SWOT Analysis of Proposed Target Operating ModelThe project produced the following table to help summarise key points ...
4.6 Developing the Target Operating Model - Level 2Level 2 - Target Operating ModelThe Level 2 activities provided a furth...
The delivery channels identified at Level 1 were further refined during Level 2 work. The followingsummarises these and th...
Although there are processes not included in the analysis, most of those relate to those activitiesthat are largely the co...
22
The above diagram showing     Levels 2 and 3 provided a useful     high-level view of the Target     Operating Model. Howe...
4.8 Retained OrganisationThe retained organisation is what would be left after staff and activities have transitioned acro...
5. Business Case and Project Benefits5.1 IntroductionAs generating savings was a core aim of the project, the business cas...
The operational benefits of the Target Operating Model were set out in an earlier section and aresummarised below:Benefit ...
A view on Daedalus was that the understanding of staff/payroll costs was generally good, but theunderstanding and capturin...
5.5 ConclusionsThe financial analysis suggested that on average the Colleges could make cash savings of around 27%– 33% on...
6. Additional ConsiderationsThe previous sections have highlighted a number of areas for consideration in progressing a po...
There are pros and cons to performing the role of contracting authority and intelligent customer “in-house” as opposed to ...
“fair treatment” that will impact both the financial savings case and staff attitude to the transitionplan.Employment Issu...
Issue                   AdvicePension                     Colleges can limit pension protection for future service to a mo...
Other Employment ConsiderationsThe potential location of the shared services centre needs consideration. There has been a ...
   The Colleges should award a framework agreement to a single supplier with the “pilot” project     being the first call ...
Issue               AdviceExit/termination        Colleges will always have the right to walk away from the deal and recov...
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
Project Daedalus Final Report
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Project Daedalus Final Report

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Transcript of "Project Daedalus Final Report"

  1. 1. Project Daedalus:Creation of a scalable framework agreement coveringoutsourced back office services in the FE sectorINDEPENDENT PROJECT SUMMARY FOR THEASSOCIATION OF COLLEGESMarch 2013 1
  2. 2. Contents1. Executive Summary...................................................................................................................................................... 22. Introduction to Project Daedalus............................................................................................................................... 5 2.1 Background and Project Summary..................................................................................................................... 5 2.2 Objectives and Outputs........................................................................................................................................ 7 2.3 Structure of Report Explained............................................................................................................................. 8 2.4 Overview of Sections............................................................................................................................................. 93. Working Practices and Principles.............................................................................................................................. 9 3.1 Management of Project.......................................................................................................................................... 9 3.2 Working Principles................................................................................................................................................ 104. Developing the Target Operating Model................................................................................................................. 11 4.1 Overview................................................................................................................................................................. 11 4.2 Approach Summary.............................................................................................................................................. 12 4.3 Baseline Operating Model.................................................................................................................................... 13 4.4 Developing the Target Operating Model – High Level.................................................................................... 15 4.5 SWOT Analysis of Proposed Target Operating Model.................................................................................... 17 4.6 Developing the Target Operating Model - Level 2........................................................................................... 18 4.7 Target Operating Model Level 3 and Detailed Process Work......................................................................... 20 4.8 Retained Organisation.......................................................................................................................................... 23 4.9 Section Conclusion ................................................................................................................................................ 245. Business Case and Project Benefits........................................................................................................................... 24 5.2 Summary of Key Benefits..................................................................................................................................... 25 5.3 Project Economics.................................................................................................................................................. 26 5.4 Key Uncertainties................................................................................................................................................... 27 5.5 Conclusions............................................................................................................................................................. 276. Additional Considerations.......................................................................................................................................... 28 6.1 Governance............................................................................................................................................................. 29 6.2 Staffing.................................................................................................................................................................... 30 6.3 Procurement and Commercial............................................................................................................................. 33 6.4 Implementation Readiness................................................................................................................................... 35 6.5 Wider Public Sector Experience of Shared Services......................................................................................... 377. Market Demand............................................................................................................................................................. 40 7.1 Introduction............................................................................................................................................................. 40 7.2 Market Testing Approach..................................................................................................................................... 40 7.3 Market Testing Outcomes..................................................................................................................................... 41 7.4 Conclusions............................................................................................................................................................. 418. Overall Conclusions..................................................................................................................................................... 43 8.1 Summary................................................................................................................................................................... 43 8.2 A Challenge to the Existing Approach................................................................................................................. 44 8.3 The Need for a Strategic Decision......................................................................................................................... 44 8.4 Way Forward Comments........................................................................................................................................ 45 8.5 Explanation of Why Daedalus Has Not Progressed........................................................................................... 46Annexes............................................................................................................................................................................... 47 Annex 1 - Strategic Risk Register for Procurement and Implementation of Contract...................................... 47 Annex 2 - Business Intelligence................................................................................................................................. 49 Annex 3 - The Colleges Involved in the Daedalus Project and Main Output Documents............................... 51NoteThis is a summary produced through an independent review of the extensive work that wasundertaken on Project Daedalus. The report has been produced on behalf of the Association ofColleges, who supported the project through the Collaboration and Shared Service Fund. The aimis to help provide lessons for a wider audience on the opportunities and challenges associated withshared services by testing an innovative model.  2
  3. 3. 1. Executive SummaryProject Daedalus examined The project had a three-phase design to provide a logicalthe potential for support examination and progression of the opportunity:services outsourcingacross the 12 participatingColleges to achieve Phase 1 - Business Case: confirmation of project scope,significant savings; improve development of operating model, financial appraisal andthe quality and timeliness market review.of business intelligence;strengthen organisationalresilience; and enableColleges to focus energy Phase 2 - Procurement Readiness: design of procurementand resources on core process and development of associated documentationbusiness. including legal review, output specification and key commercial principles.The aim of this report isto provide a summarythat shows the approachused, why that approach Phase 3 - Procurement Process: Undertaking the tenderingwas taken, the potential and contract award for the agreed requirements.outcomes and benefits, plusthe key considerations.This could then be This report summarises key aspects of the extensive sethelpful for other Colleges of outputs and level of detail around the steps towardsconsidering outsourcing, outsourcing of back-office functions that were produced inand support an aim of the Phases 1 and 2. The project has not progressed to Phase 3Collaboration and Shared and key reasons for this - resourcing, governance, and theServices Grant Fund in method for sharing savings - are included in Section 8.providing lessons for otherColleges wishing to makesimilar arrangements. 3
  4. 4. Developing the Proposed Operating ModelProject Daedalus put significant effort into developing a more efficient operating model for back-officefunctions. It was seen as providing the foundation for the business case as the work examined howback-office services can be provided in the future, by whom, and the performance standards thatwould govern their operation.The baseline position for developing the model was that all of the Colleges operated as separateentities. This meant that all activities and associated processes were managed and executed separatelywithin each College.The work covered 16 main functions and, using staff directly from a number of different Colleges,showed that a standard process could be adopted for the processes assessed. This was fundamentalfor underpinning the achievement of key project objectives as once the standard process had beencreated work could be more easily undertaken to improve the efficiency and effectiveness of theprocess and its outputs.Business Case and Key ConsiderationsThe outsourcing envisaged by this project represented a major step change in the way Colleges runtheir back-office functions and manage their businesses. This work aimed to give a balanced viewof the opportunities and challenges. The idea was not to recommend that Colleges continue throughto implementation of the project – this properly being a local decision – but to recommend how theproject would be transacted for those that wish to implement.As generating savings was a core aim of the project, the business case received closed attention andthe following high-level summary was underpinned by a detailed financial model that assessedsavings at an overall and individual College level.The project identified that if sufficient Colleges commit to a process that leads to the appointment ofan outsourcing partner the potential benefits include:    On average across the Colleges, post-tax annual savings of 27% - 33% are achievable (for the back- office areas covered), including the costs of restructuring, and new investment in systems and processes.    An increase in business continuity and organisational resilience.    Improved and real-time business intelligence to help more effectively manage Colleges.    The ability to capitalise on strong market interest in Daedalus to shape market investments in FE systems around our needs.    Improved learner experience through better follow up, less data duplication, and quicker response times.The proposed operational model was developed in consultation with key service managers, however,it should be noted that there were very significant variations in the modelled savings per Collegebased on the charging principles used.The significant variance in expected savings per College was seen as partly due to the savingsapportionment methodology (using transactional volumes), but may also reflect concerns as to dataintegrity on baseline costs and volumes - the data provided by Colleges did not appear consistent,particularly in the treatment of non-pay costs. 4
  5. 5. A number of additional considerations – governance, staffing, procurement and commercialconsiderations, and implementation readiness – have been highlighted as areas to be addressed by anyorganisation looking to implement a shared services solution.Staffing implications in particular are important. Project benefits are dependent upon reducingCollege headcount, and implementing a shared services solution is a major business change that willaffect staff beyond just the functions in scope. How Colleges deal with their staff will be the criticaldeterminant of whether this type of project is successful.Implementation readiness, from a process and cultural change perspective, was assessed for theprocesses under consideration. Most areas had no major issues and process issues were generallylimited, however, cultural issues were identified as potentially significant in three sub-processes.The Supply MarketMarket testing showed that a strong potential market was there if the project progressed. There was alarge potential market capable of responding and the organisations included in the initial marketingcampaign expressed strong interest in the opportunity.Scale, consistency of requirement and governance, and flexibility around how the solution is deliveredwere noted as key to building and sustaining competitive tension. The feedback suggested eight-tenColleges would need to complete the Daedalus transformation programme to make the amortisationof fixed costs affordable, with higher numbers improving the market interest and the business case.ConclusionsProject Daedalus showed that while delivering some processes via a shared service arrangementmight be complex and require careful planning, no legal, technical or other reasons became evidentthat would prevent the transfer of the processes in scope.A project like Daedalus does come with some considerable challenges in making sure the approachwill work in delivering the benefits of lower costs and improved processes. It is a major changeprogramme and therefore this means managing the impact of a lot of people exiting the organisationand on those staying in the organisation. This includes the need to invest to change behaviours to getthe most out of the new service and ensuring continuity of service throughout to maintain studentsatisfaction during transition.If the challenges can be overcome this report shows that the potential benefits perceived by ProjectDaedalus through a shared service solution could be significant. 5
  6. 6. 2. Introduction to Project Daedalus2.1 Background and Project SummaryProject Daedalus was a proposal examining the potential for support services outsourcing to achievesignificant savings in FE; improve the quality and timeliness of business intelligence; strengthenorganisational resilience; and enable Colleges to focus energy and resources on core business.The Colleges involved in the Daedalus project comprised of 11 members of London Capital Collegesand one other FE College operating within Greater London. The project was awarded a grant of£1.785m through the Collaboration and Shared Services Grant Fund (the largest from the fund), ofwhich £0.6m was used for the first two phases that this report is based on.The project assessed the potential for structural solutions to achieve a step change in performance andcost in the short term across London Colleges, and considered the role of back-office transformation asa key stage in achieving both objectives.The project had a three-phase design to provide a logical examination and progression of theopportunity: Phase 1 - Business Case: confirmation of project scope, development of operating model, financial appraisal and market review. Phase 2 - Procurement Readiness: design of procurement process and development of associated documentation including legal review, output specification and key commercial principles. Phase 3 - Procurement Process: Undertaking the tendering and contract award for the agreed requirements.This report covers the initial two phases of the project to help share the experience, approach andlearning for other organisations considering the outsourcing of back-office services.The project scope covered back-office functions around the administration and reporting of FE activity(including Finance, HR, Registry and Management Information). It built upon a study funded by theAoC Efficiency & Innovation Fund, conducted between December 2010 and June 2011. This originalstudy had indicated the potential for FE Colleges to run their back-office processes to a commonspecification and the potential to drive material financial savings were they to do so. Key areas fromthis original study were revisited and developed as part of the extensive work under Project Daedalus. 6
  7. 7. An outsourcing model best satisfied the key evaluation criteria for use within FE, when tested againstthe realistic alternative models. This is summarised in the following table: Main Potential ModelsEvaluation criteria for sharing services Bench- Informal FE Shared Outsourcing marking Collaboration ServicesEnhance, not detract from learner Low Low Medium HighexperienceFacilitate wider curriculumcollaboration, where this benefits Low Low Medium MediumlearnersAchieve material savings quickly tocreate space for the curriculum to Low Low Medium Highrespond to emerging opportunities andchallengesBe sustainable No Low Medium HighBe scaleable, allowing benefits across No No Medium Highthe sectorAchieve a step change in the reliability,timeliness and accuracy of Business Low Low High HighIntelligenceCap the investments required to deliver N/A N/A No YeschangeAchieve appropriate risk transfer N/A No No YesBe deliverable within a firm timeline N/A Low Medium HighHave the skills to manage successful N/A N/A Low HighimplementationThe outsourcing envisaged by this project represents a major step change in the way Colleges runtheir back-office functions and manage their businesses, and any decision to proceed requires carefulconsideration by executive teams and their governing bodies. Phase 1 developed the potentialoperating model to help shape the project and develop the business case. The aim of Phase 2 wasto recommend how the project is transacted for those that wish to continue - not to recommend thatColleges continue with this project, this properly being a local decision. 7
  8. 8. 2.2 Objectives and OutputsThe project looked to provide a balanced view of opportunities and challenges, and had the followingstated aims:    To improve the quality and timeliness of the data and business intelligence available to Colleges, staff and learners through more consistent processes, and better and more integrated IT systems    To deliver material cost savings through improved process efficiency    Improve organisational resilience for many back-office functions which are often carried out by only a handful of people at each College    Increase investment in IT systems for a lower overall cost for the individual Colleges, for both self-service and back-office functions, which in turn will drive further efficiency savings    An ability to focus on the core activities of each College – improved curriculum delivery    To create a Shared Services Centre (SSC) which can be extended to support more Colleges and drive further savings.Phase 1 (Business Case) Outputs:The Phase 1 Business Case aimed to present the evidence base for the Colleges involved to furtherexplore the potential for outsourcing back-office functions. Outputs covered:    Creation of a standardised, simplified and aggregated operating model for how back-office functions would be delivered, and by whom, under an outsourced scenario    Acceptance of this specification by the Colleges as the basis for taking the project forward    Examination of the potential to mitigate the VAT charge that would otherwise be levied on shared or outsourced services    Evidence of market demand from key outsourcing suppliers, and    Commitment and buy-in from the participating Colleges to explore this commercial proposition in further detail in a second, pre-procurement, phase of the project.Phase 2 (Procurement Readiness) Outputs:The objective of the second phase was to create an evidence base that would support Colleges in theirdecision over whether to participate in a formal procurement process to select an outsourced deliverypartner. The key areas addressed were:    What functions will be retained in Colleges; what will transfer; and how these work together    What the economics look like on a College-by-College basis, as well as in aggregate    How more Colleges can join over time; and    The key commercial and service principles that would underpin any procurement process, and form the basis on which bids would be evaluated and the service contracts awarded. 8
  9. 9. 2.3 Structure of Report ExplainedThe aim of this report is to provide a summary that shows the approach used, why that approach wastaken, the potential outcomes and benefits, plus the key considerations. This could then be helpful forother Colleges considering outsourcing, and support an aim of the Collaboration and Shared ServicesGrant Fund in providing lessons for other Colleges wishing to make similar arrangements.Significant effort went into Project Daedalus to produce an extensive set of outputs and a levelof detail around the steps towards outsourcing of back-office functions. Clearly the volume ofoutputs produced by a project cannot be taken as a measure of value of those outputs, however, byunderstanding the quantity of documentation produced it helps to explain the reason for a summaryreport.Overall the project contained over 200 documents as part of developing the initial two phases of theproject. The main output report for Phase 1 contained ten documents and 291 pages. The main outputreport for Phase 2, including appendices, was 362 pages. These totals exclude supporting detail workto help create these outputs – for example the Finance, Procurement and Payroll Process, and Hand-Off Mapping covered over 100 pages in detailing key aspects of these areas that were developed withthe Colleges through the project work.This document therefore looks to summarise key areas that may be useful to other organisations byfocusing on the more generic findings (e.g. the progressive steps taken in developing the approachand business case), rather than focusing on the areas that may be more specific and/or sensitive to anindividual College involved in the Daedalus project (e.g. headcount impacts for specific Colleges).2.4 Overview of SectionsSection 3. Working Practices and Principles – looks at how the project was managed.Section 4. Developing the Target Operating Model – summarises key areas of the significant amountof work undertaken to develop and assess a new operating model for back-office activities. Thisincludes high-level process structures and diagrams showing the targeted processes for a sharedservices centre.Section 5. Business Case and Project Benefits – covers the financial and performance benefitsidentified in the detailed project work while noting key factors that could impact the business case.Section 6. Additional Considerations – highlights four important areas that are recommended to beaddressed by any organisation looking to implement a shared service solution, and also summarisesfindings from two reports into wider public sector experience of shared services.Section 7. Market Demand – review of activities to identify the potential supply base, and understandthe level of interest and views from suppliers.Section 8. Overall Conclusions – includes general conclusions alongside sub-sections on the need forsenior level direction and challenging the current approach.This report contains more on the approach and important considerations than on the benefits. It wasfelt that the benefits can be summarised fairly quickly, while the financial model details were based onspecific information from participating Colleges and therefore were less applicable to a wider audiencewhile also being sensitive. The approach is to support the report objective of covering methods andinformation that will be useful for other organisations considering their own shared services. 9
  10. 10. 3. Working Practices and Principles3.1 Management of ProjectBoth Phase 1 and Phase 2 of the project were delivered on time and within budget. Management ofthe project was principally at two levels – the Project Board and the Steering Group. External adviserswere appointed to support the project.Project BoardThe project was governed by a Project Board comprising 12 Principals from the partnership Colleges,each of whom signed a Memorandum of Understanding setting out their rights and responsibilities.The Association of Colleges (AoC) had an observer seat on the Project Board and the AoC InnovationsCommittee monitored the Project.The operational management of the Project was delegated by the Project Board to a Steering Group,comprising of the senior financial representatives of the Colleges involved in the Daedalus project,under the leadership of the Director of Finance at Westminster Kingsway College (WKC).Of the Colleges involved, 11 were shareholders of London Capital Colleges (LCC) and there was anadditional smaller London College to help test and ensure the outsourced procurement solutionacquired meets the needs of smaller Colleges in the sector.Steering GroupOperating at a detailed level the Steering Group managed the initiating stages of the project whilerepresenting the interests of stakeholders.The Steering Group in Phase 1 was comprised of six Financial Directors with a ‘buddy’ system inplace that kept the peer group informed. However as Phase 2 of the project looked at key commercialissues that would affect individual Colleges as well as the collective, membership was extended to allCollege Financial Directors/Vice Principals Resources.The Steering Group met fortnightly to review progress of the programme and critically evaluatescenarios, proposals, options and recommendations by the advisers on the key deliverables of thePhase 2 workstreams.Appointment of AdvisersThe Steering Group made three appointments to support and advise on the main areas of theproject. A major consultancy firm was appointed to advise on the refinement of the shared servicessolution and provide commercial and financial advice; a legal firm was appointed for legal adviceon procurement, TUPE and pensions; and a project resource was appointed to support the ProjectDirector.Risk ManagementThe risks associated with the initial stages of the project have all been managed. As with alltransformation projects, however, there are considerable risks associated with running a procurementexercise and managing the subsequent implementation. These key risks are summarised in Annex 1 –Strategic Risk Register for Procurement and Implementation of Contract. 10
  11. 11. 3.2 Working PrinciplesThe Steering Group agreed the following principles, endorsed through an open workshop withcolleagues, to help steer the project and solution development:Process    Standardisation – FE Colleges are required to report common data in a common format to their funding bodies. Standardised processes should be optimised with minimal scope for ‘customisation’.    Maintaining brand and identity – Colleges must be able to maintain their unique branding and identity but not to the detriment of standardisation.    The Shared Services Centre should deliver a core set of standardised processes with a further menu of additional services available.Technology    Automation – exploit technology to deliver efficient, effective and learner/customer-focused services.    Self‐service – optimising the level of self‐service for learners and staff in the processes.Data    Timely and accurate data – electronic data captured at source, entered once, used many times.    Ownership – Colleges must be able to access the underlying data.People    Flexible resourcing –use flexible management and resourcing structures that enable staff to be appropriately deployed to meet changing needs and seasonal variations within the organisation.    Creating professional teams – use dedicated teams for specialist, common corporate services, and develop administration and business support as a profession with career structures and job roles that harness the skills, aspirations and enthusiasm of administration and business support staff.    Learner focused – putting the learner and prospective learner at the heart of our processes to secure sustainable financial viability through attracting and retaining learners.Participating Colleges provided source data on volumes of student and financial data handled, andthe resources (staffing and spend levels) needed to process these. These data sets were reconfirmed orupdated by each of the Colleges as part of this business case. 11
  12. 12. 4. Developing the Target Operating Model4.1 OverviewProject Daedalus put significant effort into developing a Target Operating Model (TOM). It was seenas providing the foundation for the business case as the work examined how back-office servicescan be provided in the future, by whom, and the performance standards that would govern theiroperation.The Steering Group appointed external advisers to support the development of the Target OperatingModel. The model described how the services required to deliver a FE College’s back-office functionswould work, and where responsibility for these would lie. This series of flow charts set out all thekey processes and tasks that constitute each component of service delivery, and details regardingresponsibility.A Target Operating Model is effectively a way of illustrating the processes by which data is generated,captured, analysed and reported. The work then looked at where these processes would be handledin an outsourced scenario. Some would be generated through self‐service (staff and students); some bythe staff retained within the Colleges; and some by an outsourced service provider.The work progressed to three levels of detail. The most detailed work (Level 3) assessed 16 processesto cover aspects such as where responsibility lies; the key assumptions; benefits of the approach;associated risks and issues; key performance indicators; and behavioural and cultural impacts.The work concluded by converting the Target Operating Model into a 34-page, high-level outputspecification. This document could then be used in a formal procurement to set out, for each businessprocess, the specific service requirements; performance indicators; constraints; and volumetric.Responses from bidders could then be assessed to see the extent to which bidders’ proposals met theColleges’ requirements.The Potential for StandardisationThe baseline position for developing the model was that all the Colleges involved in the projectoperated as separate entities. This meant all activities and associated processes were managed andexecuted separately within each College. Many of the activities carried out by each of them were thesame, for example learner applications and enrolments, processing of bills and invoices, and payroll.The premise was that if the processes supporting those activities could be standardised they could beshared across the Colleges, allowing for economies of scale and implementation of best practice acrossall of them.It was recognised that some activities will always need to be carried out by the individual Collegesthemselves. Core curriculum delivery, i.e. teaching, Information, Advice and Guidance (IAG), andpastoral support, will always be conducted by individual Colleges. Project Daedalus was concernedwith whether the generic business support functions, such as HR and Finance, and learneradministration and registry processes such as application, enrolment and student record management,could be shared by the Colleges in order to deliver benefits to the Colleges and their learners.As a result, the Colleges were looking to reduce the amount of back-office support and administrationtasks that took place in each individual College and move that activity to a shared delivery vehiclein order to realise their core objectives of improved data and business intelligence, reduced costsand increased organisational resilience. In turn it was anticipated that this would reduce theadministrative burden on College staff so they could focus on delivering the value-added activities ofproviding excellent learning delivery for their respective learners. 12
  13. 13. 4.2 Approach SummaryThe operating model is the representation of how an organisation operates across all of its dimensionsin order to deliver value. Recognising that any organisation is a complex system consisting of severaldifferent interlinked logical components, the operating model therefore looked to break this complexmachinery down into its logical components. This included showing how functions interacted,what the underlying model was for delivery of those functions, and then designing ways for eachcomponent to deliver better value.The work assessed where the process should be undertaken (in-house or outsourced, centrally co-ordinated or devolved through the organisation) and assessed processes to three levels:    Level 1: Function - A high-level description of the functions (e.g. Finance, HR, Registry and Management Information) and their location within the new arrangements    Level 2: Process - A more detailed description of the individual processes within each function (e.g. learner applications, leavers, payroll) and where and how they would take place within the new arrangements    Level 3: Activity - A detailed list of activities that would be conducted within each of the functions and processes listed above (e.g. application screening, raising an invoice). At this level we used three core locations for where activities were to be carried out: self-service (both for learners and staff), retained in College, and a Shared Services Centre.The project went into significant detail, with the above areas being covered in a 106-page report.Further granularity of the activities was produced through detailed process and hand-off mappingdocuments that covered process schematics and hand-off tables. For example, on key Finance,Procurement, and Payroll processes this saw a further 122 pages of detail to help understand theoperational level, and the potential for standardisation and improvement of processes.Functions in Scope:• Student applications • Student credit control• Student assessments • Accounts receivable and payable• Student enrolments • Staff records and payroll• Student attendance • Enquiries• Leavers • Procurement• Transfers • HR• Completers • Financial management• Exam administration • Business intelligenceIt was important to ensure that the development of the Target Operating Model was a collaborativeexercise with the Colleges to help enable them to gain the required understanding and buy-in for asolution that was suitable for all interested parties. Therefore at key stages in the project, outputs andoptions were presented to the Steering Group for agreement on behalf of the Colleges, including alarge workshop to discuss and agree the straw-man of the Level 3 model. 13
  14. 14. 4.3 Baseline Operating ModelThe baseline position for the project was that all the Colleges operated as separate entities. This meantall processes were managed separately within each College. This is shown in the below diagram:The above illustrates, at the highest level, the functional areas forming part of the baseline operatingmodel. Within the baseline model there are two ‘delivery channels’ – ‘self-service’ and ‘College’. Inthis model each individual College is responsible for operating both of these channels.Self-Service: Each College provides different levels of self-service functionality depending on howmuch each organisation has invested in this. Functional activity which occurs in self-service istypically split into learner (also potential learner) and staff self-service, and includes activities suchas applications, learner record management, billing and receiving payments, HR self-service ande-procurement. The amount of self-service provided by each organisation is different across differentColleges. The pooling of College resources could facilitate a single, shared self-service channel,delivered across all of the Colleges, which would deliver a much richer self-service channel for a lowerlevel of individual investment. This investment would be repaid with reduced burdens on the back-office of individual Colleges.College: the ‘College’ delivery channel is the more traditional way of delivering services. In thebaseline operating model the Colleges deliver a number of functional areas:    Curriculum Delivery: includes delivery of teaching, IAG, curriculum development etc. It was proposed that each College would continue to deliver these services individually and therefore curriculum delivery was outside the scope of Project Daedalus. 14
  15. 15.    Enquiry Handling: including course, assessment and eligibility enquires. Many of these processes are similar and a consolidated contact centre could potentially provide cost savings, while allowing retention of the individual character of each of the Colleges.    Learner Administration and Registry: including management of student applications, assessments, enrolment, timetabling, examinations, management of leavers and completers, attendance, learner information, and business intelligence and data.    Corporate Core: the strategic direction setting and managerial functions of the Colleges. These functions are intrinsic to the governance and identity of each College and set the core objectives for each one. It was therefore proposed that this would remain within each organisation.    Business Support Functions: Functional areas, such as HR, Finance and Procurement, could be shared across the Colleges and indeed these functions are well tried and tested in the shared service market place, so this could be achieved rapidly, with the benefit of both reduced operating costs, and improved capability and capacity.4.4 Developing the Target Operating Model – High LevelThe first stage of developing the Target Operating Model was to agree a set of design principles(as shown in section 3.2). These principles provided an anchor around which all design effort wascentred and were used as a guide when making decisions about potential options for designing thenew operating model. It is important that these are underpinned by the key drivers for change and anunderstanding of the elements of the existing arrangements that need to be improved.For the Colleges involved, a number of key issues with existing arrangements were identified forconsideration in developing the operating model:    An inconsistency of key common processes across the Colleges    A need for more timely and more accurate data, and more effective business intelligence    Varied levels of use of technology to improve accuracy, speed and quality of service and learner experience, and a lack of available investment funds    A desire to deliver a better learner experience, leading to improved conversion and retention rates of learners, but a lack of business process engineering capabilities within Colleges to ensure the most effective learner journeys    Difficulties in recruiting specialist staff and expense of training them    A desire to create more rewarding career paths and opportunities for non-teaching staffThe approach agreed by the Steering Group for detailed development included significant elementsof both back-office functions, many of which are transactional in nature, and more directly learner-related activities, such as enquiry handling and learner administration and registry. This secondtype includes activities such as enrolment, managing the interface with awarding bodies and learner-specific finance activities.Key features of the approach were:    Curriculum delivery, IAG, strategic governance and some learner administration activity were retained in the Colleges.    Expansion of self-service activities was possible as learner administration and registry activities were moved into a Shared Services Centre, making it possible to provide extra functionality from a learner self-service perspective. 15
  16. 16.    All transactional activities associated with operational support (e.g. HR, Finance and Procurement) would be part of the Shared Services Centre.    A small number of support staff would be retained within the College where they would be required to interface with the Shared Services Centre.The functions included as part of the Shared Services Centre are summarised in the diagram belowand explained in the subsequent bullet points ( 1 relates to the number bullet below). 16
  17. 17. Self-service channel - increasing the amount of activity carried out via self-service mechanismsenables the Target Operating Model to be more efficient as it reduces the amount of information thatneeds to be provided / entered more than once, speeds up access to that information, and reducesthe amount of activity that some back-office staff have to undertake. The proposed operating modelincludes two self-service lines:1. Learner Self-Service – as learner data will be moved into the Shared Services Centre they will have greater freedom to view their records, e.g. monitor their attendance records, view personal learner records, make payments through the use of a self-service portal which will provide increased interaction between the learner, potential learner and Colleges, and help to improve the quality of curriculum delivery and the overall experience for the learners.2. Staff Self-Service – there are two dimensions to the staff self-service portal. Firstly it will provide functionality to College staff to view and update their own personal information, pay slips etc. Perhaps more importantly it will also enable staff to update and manage learner records, access business intelligence dashboards and manage key processes electronically, such a transfer requests and electronic attendance registers.Shared Services Centre – a single entity would be responsible for providing a wide range of back-office and learner administration and registry functions for all of the Colleges. It would be ableto achieve economies of scale making significant investment in technology solutions possible, anddelivering a more consistent and improved quality of service to the Colleges and learners.3. Learner Administration and Registry - this includes activities such as processing applications, enrolment activities, ILR returns, and learner scheduling activities such as appointments. It would also include registers, follow-up of leavers and awarding body administration. Some of this activity will be retained within the Colleges when it is important to retain brand differentiation or a personal touch, for example interviews or enrolment in cases where anticipated grades haven’t been achieved.4. Enquiry Handling - the majority of enquiries will be handled by the Shared Services Centre, with only specialist and more complex enquiries retained within the College. This includes activities such as financial assessment for overseas learners, specialist advice and career guidance.5. Business Support Functions - largely transactional business support activity delivered via the Shared Services Centre.6. Business Intelligence and Data Management - moving both business support, and learner administration and registry into the Shared Services Centre will help to ensure that the two key reporting data sets are in one place resulting in more accurate and up-to-date data. More importantly perhaps it will enable this data (both around learners and business processes) to be analysed to become business intelligence – insight into how each College is performing across a range of areas – that can then be used to help Colleges plan their future activities and strategies, and benchmarking their performance against each other to drive continual improvement.[Annex 2 contains a specific section on Business Intelligence.] 17
  18. 18. 4.5 SWOT Analysis of Proposed Target Operating ModelThe project produced the following table to help summarise key points on the approach:Strengths Weaknessesƒƒ Greater absolute levels of efficiency ƒƒ Trying to move all non-learning delivery to an Shared Services Centre could be costly,ƒƒ All administration and support will be complex and difficult to implement within the Shared Services Centre allowing greater focus on core activities ƒƒ Will require strong contract management in order to ensure service standards areƒƒ Potential to leverage current investments in maintained IT and standardise the systems landscape ƒƒ Issues around TUPE may make theƒƒ Improved business intelligence capability proposition less attractive to third partyƒƒ Standardised and improved learner suppliers administration processes delivered by self- ƒƒ Immaturity of the market in supporting service functionality learner admin and registry functionsƒƒ Potential improvement in service quality and learner learning experience - a single source of learner data in resulting in effective management and availability of learner dataƒƒ Increased organisational resilience through larger workforces and greater opportunities for multi- skilling of the workforceOpportunities Threatsƒƒ Opportunity to adopt standardised best ƒƒ Perception of loss of control may deter practice processes across all Colleges for Colleges learner administration, HR, Procurement and ƒƒ Concerns over ability to retain distinct brand Finance and identify for individual Collegesƒƒ Potential to standardise the use of systems ƒƒ The processes may not be adopted in the mostƒƒ Opportunity to outsource the Shared Services appropriate manner leading to inefficiencies Centre ƒƒ Too much ‘picking and choosing’ may lead toƒƒ Potential to outsource expert functions to a reduction in standardisation external providers 18
  19. 19. 4.6 Developing the Target Operating Model - Level 2Level 2 - Target Operating ModelThe Level 2 activities provided a further detail and refinement of the Target Operating Model. Thefollowing breakdown was agreed by the Daedalus Steering Group (note: some processes will occur inmore than one channel and the split of activities within each of these processes is described later aspart of the Level 3 Target Operating Model).Level 2 - Target Operating ModelThe Target Operating Model presents the full picture of those processes that will be carried out, notjust those that are being considered for inclusion in the Shared Services Centre. At Level 2 the TargetOperating Model, as agreed by the Steering Group, provides more detail as to where within the three‘delivery channels’ of self-service, College and shared service, the key processes are expected to takeplace in the new model. 19
  20. 20. The delivery channels identified at Level 1 were further refined during Level 2 work. The followingsummarises these and the potential benefits from the approach:1. Self-Service: there are two types of self-service that are envisaged. One is for learners (existing and potential), the other for College staff (teaching and non-teaching). This function will provide both the learners and staff with the increased ability to view, update and monitor their personal records, as well as allowing them to access information pertinent to their learning and delivery of learning respectively. In the case of some staff members, this relates to monitoring and managing the performance of the learners and staff they manage. It will also create a channel for staff, primarily teaching staff, to manage electronically key processes at the interface between curriculum delivery and learner administration, such as updating learner information, processing learner requests (e.g. for course transfers), and managing attendance registers. It will also provide them with access to improved relevant business intelligence. The desired result is to simplify and standardise processes, and create efficiencies in the way of working by encouraging users to become self-reliant through providing them with access to relevant information, minimising the need for human interaction and increasing automation for carrying out simple tasks. This will help to improve the overall learning experience by giving the learners enough information and the necessary tools to enable them to take more responsibility for their learning, e.g. learners will have the ability to view their student records, make transfer requests, make enquiries etc. The self-service may also be made available, as appropriate, to other stakeholders, such as parents and employers.2. College: From a staff perspective, there is also a shift in focus to remove the burden of carrying out a large number of administration related tasks by pushing them to be carried out by the Shared Services Centre, and through the self- service channel outlined above reducing the efforts involved in the remaining administrative tasks they are required to conduct. This will allow teaching staff to focus more of their time and effort on value added activities i.e. delivering excellent learning. Irrespective of how the activities and responsibilities are split, the Colleges will need to maintain some specialist learner-facing and back-office processes (e.g. IAG, corporate strategy) and also a level of residual support for processes that have been moved to the Shared Services Centre. This is to ensure effective liaison with, and management of, the Shared Services Centre and ensure that adequate skills are retained to conduct all the various activities.3. Shared Services Centre: The Shared Services Centre, in whatever structural and commercial form it takes, will look to deliver the majority of the administration related, high-volume activities that can sensibly be delivered in a standardised and consolidated manner.4.7 Target Operating Model Level 3 and Detailed Process WorkThe Level 3 Target Operating Model describes in detail the split of process activities that will need tobe delivered through each of the three delivery channels, self-service, College and the Shared ServicesCentre. This model was developed through direct working with representatives from the Colleges.As such it is believed that this created a good level of buy-in to the proposed model and distribution ofactivities.At this stage the Level 3 analysis has been limited to the processes outlined earlier. At a future datethe Colleges may wish to consider other processes that could be carried out using a self-servicechannel and/or a shared service approach – for example legal services or facilities managementservices, including catering, security and cleaning etc. 20
  21. 21. Although there are processes not included in the analysis, most of those relate to those activitiesthat are largely the core activities of an FE College, e.g. direct and supporting curriculum delivery– teaching, advice and guidance, timetabling, curriculum development etc, and strategic corporatefunctions, e.g. governance, business strategy, policy.It is important to recognise that Colleges should continue to conduct these processes shown to ensurethat where there are interactions with the Shared Services Centre, and/or self-serve channels, theseinteractions are clearly understood.The diagram on the following page sets out the Target Operating Model for each of the processes inscope, outlining where the activities that are part of those processes are expected to take place. Theprocesses and activities within the red boxes are those which were in scope for Project Daedalus.Those outside of the boxes, as mentioned above, were not in scope, but are key activities for theColleges.Detailed Target Operating Models for each of the in-scope processes were produced. For eachprocess there was a description of how they envisaged the split of activities across the three deliverychannels and an assessment of some of the key assumptions, benefits, risks and mitigating activities,performance metrics, and links to data and systems. 21
  22. 22. 22
  23. 23. The above diagram showing Levels 2 and 3 provided a useful high-level view of the Target Operating Model. However, in developing standardised processes a much greater level of detail was needed to ensure that, at a working level, a standard approach could be agreed. As evidence to the type of significant detail of a low- level sub-process produced by the team, the diagram on this page shows the Invoice/Credit Matching Process as part of the Invoice and Payment Processing functions under Purchase to Pay. The table covers the handover points to the Shared Services Centre (SSC). This23 level of detailed was replicated across a wide range of sub- Handover to SSC processes. Process Input by Input Manual/ Output by Output Manual/ automated automated A Non- SSC Request to College Automated College Decision on Manual matchedinvoice to approve invoice whether to approval approve B Invoice not College Invoice not Manual SSC Invoice Manual approved approved retrrned to supplier C Invoice College Invoice approved Manual SSC Payment Manual approved processed D Confirmation SSC Request to Colleeg Automated College Good/ Manual of receipt of to confirm whether service goods/service goods/service have receipt been received confirm
  24. 24. 4.8 Retained OrganisationThe retained organisation is what would be left after staff and activities have transitioned across to theprovider. By quantifying the size of the retained organisation, it was possible to understand the cost ofthe retained function and therefore the potential saving available to the Colleges. As such the retainedorganisation design was a key input to the overarching business case for Project Daedalus.Both the level of resource recommended to perform the retained functions – on average and atCollege level – and the relative readiness of Colleges to make this transition were assessed.The calculation of the retained size for each College was based on the volume of activity (primarilylearner numbers) managed by the most efficient Colleges, extrapolated across each College, and thensense checked against data gathered in workshops with the Colleges.Reduction in staff levels (initial versus retained organisation) for the areas proposed varied from 35%to 77%. Across the 12 Colleges where data was collected the average reduction was 62%. This analysisis used in the following section to show the overall benefits from the proposed changes.4.9 Section ConclusionHaving staff directly from a number of different Colleges showed that a standard process could beadopted for the processes assessed. This was fundamental for underpinning the achievement ofkey project objectives as once the standard process had been created then work can be more easilyundertaken to improve the efficiency and effectiveness of the process and its outputs.The work on the Target Operating Model contained a lot of information. However, further workshould be undertaken to produce a more complete model. Proposed next steps would includeproducing the following:    ICT Target Operating Model – a mapping of the systems that will support each of the processes and how they should interact    Data Target Operating Model – a mapping of the information and data requirements that will underpin the processes and where that data will be recorded, stored and reported. 24
  25. 25. 5. Business Case and Project Benefits5.1 IntroductionAs generating savings was a core aim of the project, the business case received close attention and thefollowing high-level summary was underpinned by a detailed financial model that assessed savingsat an overall and individual College level. However, the benefits from the project were expected to bemore than just direct cash savings.The outsourcing envisaged by this project represents a major step change in the way Colleges runtheir back-office functions and manage their businesses, and any decision to proceed requires carefulconsideration by executive teams and their governing bodies.The aim of the work was not to recommend that Colleges continue through to implementation of theproject – this properly being a local decision – but to recommend how the project is transacted forthose that wish to implement.This work aimed to give a balanced view of the opportunities and challenges of continuing with thisproject. The business case was therefore created for information purposes rather than as a sales pitchfor a shared service solution.Note that savings levels and benefits for individual Colleges are not shown due to confidentiality andbecause of the bespoke nature of these savings makes this low level of detail less applicable to a wideraudience.The significant amount of detail produced through developing the Target Operating Model and thestandardised sub-processes enabled work on the business case to be more than a simple top-downestimate. This meant that for the headcount savings a bottom-up consideration of what could beexpected, looking at the retained organisation size and learner volumes, could be produced.5.2 Summary of Key BenefitsIf sufficient Colleges commit to a process that leads to the appointment of an outsourcing partner thework has shown that potential benefits include the following:    On average across the Colleges, post-tax annual savings of 27% - 33% are achievable (for the back-office areas covered), including the costs of restructuring and new investment in systems and processes. [It should be noted that there were significant variations in savings per College based on the charging principles used in the model.]    A more efficient operating model that has the potential to improve data quality and business intelligence; improve the learner experience; and release savings.    An increase in business continuity and organisational resilience.    Improved and real-time business intelligence to help more effectively manage Colleges.    The ability to capitalise on strong market interest in Daedalus to shape market investments in FE systems around our needs.    Improved learner experience through better follow up, less data duplication, and quicker response times. 25
  26. 26. The operational benefits of the Target Operating Model were set out in an earlier section and aresummarised below:Benefit DescriptionNon‐cashable financial savings    Increased investment in IT systems for a lower overall cost for(potential to become cashable the individual Colleges for both self-service and back-officeover time) functions. This in turn will drive further efficiency savings    Creation of a Shared Services Centre which can be extended to support more Colleges and drive further savings    Reduction in space requirements – either cashable or can be released back to front line curriculum deliveryLearner benefits    An ability to focus on the core activities of each College – improved learner delivery    A smoother learner journey achieved through better follow up, less data duplication, quicker response times    Improved quality and timeliness of information available to learners and staff through more consistent processes and IT systemsOperational benefits    Catalyse wider cultural change programmesManagement benefits    Business Intelligence – the right information at the right time in the right format, leading to better business decisions    Organisational resilience for back-office functions where expertise lies in a handful of people at each organisationOutsourcing the common specification offers the potential to deliver post-tax, steady state annualsavings. Taking into account the initial investment in underlying systems this could equate to anestimated £42m - £70m efficiency gain over a ten year period for redirecting into front line curriculumdelivery in London.5.3 Project EconomicsThe financial model was created to help illustrate the potential financial benefits in aggregate and atindividual College level. The cost of the retained organisation was modelled in some detail throughthe interactive workshops. The outsourcing cost assumptions were developed by the external adviserswith reference to other transactions on which they had worked, and sense tested with three businessprocess outsourcing companies. It should be noted that the financial analysis remains indicative andactual cost savings can only be established through a competitive procurement process culminating inservice offers that are capable of contractual acceptance. 26
  27. 27. A view on Daedalus was that the understanding of staff/payroll costs was generally good, but theunderstanding and capturing of non-payroll costs wasn’t. It is important that Colleges review andvalidate their data to ensure that the “as is” staffing levels are accurate; there is no double counting;and that all relevant staff and costs involved in delivering the in-scope functions are captured,especially the full non-payroll costs (e.g. full accommodation costs, and systems costs such asdata storage and software licences). The view was that non-payroll costs are likely to have beenunderstated as they are harder to identify. However, it is important to ensure that these types of costscould actually be reduced, e.g. can reduced accommodation /space requirements be realised intocashable savings.On the base case assumptions there was a very significant variance in expected savings per College.This is partly down to the savings apportionment methodology used (using transactional volumes),but may also reflect concerns as to data integrity on baseline costs and volumes. It was, however,clear that the analysis supported the proposition that there are material savings to be achieved fromthe approach. Again, for illustrative purposes only, if the modelled benefit was split equally perCollege in cash terms, the steady state, business-as-usual annual saving would be around £900k perCollege; and if the modelled benefit was split equally per College in percentage terms, the steady state,business-as-usual annual saving would be around 29% below baseline costs per College.Key input assumptions were subjected to sensitivity testing, indicating that the modelling has areasonable level of resilience against the potential for overstating savings and understating costs.5.4 Key UncertaintiesWhile the Steering Group considered that significant progress had been made in Phase 2 to translatethe high-level aggregated assumptions modelled in Phase 1 to more granular, bottom up costings,there remained a number of key uncertainties at the end of Phase 2:    A procurement process would flush out detailed pricing proposals, but must be predicated on a common set of shared principles. At this stage the project could not be certain how the market would price the project and its approach may vary widely from that modelled in Phase 2.    The data provided by Colleges did not appear consistent, particularly in the treatment of non-pay costs. Reliable baseline data is required to make meaningful judgements on value for money, and Colleges continuing to Phase 3 would need to ensure they have fully validated their own data.    The relationship between fixed and variable costs was indicative, as was the level of investment required to upgrade systems and processes. At this stage the model provided weak evidence around the economies of scale needed for this project to be viable, although market testing in Phase 1 suggested eight-ten Colleges would need to complete the Daedalus transformation programme to make the amortisation of fixed costs affordable.    The model assumed that Colleges would accept the size of the retained organisation recommended. The key operational challenge was to agree on a substantially standardised solution as opposed to a modularised model. Compromise and commercial pragmatism would be required to constrain investment costs and achieve economies of scale.    There were important staffing and Trade Union considerations, supported by full and open communication once the Colleges made the decision to proceed to Phase 3. The financial base case assumed that continued local employment will not be a key driver, and that Fair Deal would not apply.    Irrecoverable VAT was deemed payable (at an effective rate of c15%). 27
  28. 28. 5.5 ConclusionsThe financial analysis suggested that on average the Colleges could make cash savings of around 27%– 33% on the in-scope areas, with significant variations between Colleges depending on the way inwhich benefits are allocated / how the charging method operates.Additionally significant non-cashable benefits were identified that could help to improve performanceand lead to further cashable savings over time. The value of these benefits were clearly moresubjective and therefore likely to rely more heavily on the strategic view of individual Colleges.The proposed operational model went into a significant level of detail to test the potential forstandardisation and help provide better information for the business case. The model was developedin consultation with key service managers, and the savings were based on key inputs and assumptionsincluded in the model that needed validation and acceptance from Colleges. However, there werea number of uncertainties - including potentially inconsistent data around costs – and the abilityto capture savings would be clearly dependent upon being offered that potential by the successfulsupplier in a competitive procurement process.Before progressing to procurement, participating Colleges would need to ensure they understoodand accepted the basis on which the financial business case was made, that the key considerationsraised above were covered, and that they accepted the proposals for how costs would be shared andapportioned. 28
  29. 29. 6. Additional ConsiderationsThe previous sections have highlighted a number of areas for consideration in progressing a potentialshared services solution, with points that are specific to the operating model or business case beingnoted in the relevant sections.This section includes a number of additional areas that should be covered in the assessment anddevelopment of a similar shared services project. They are:6.1 Governance6.2 Staffing6.3 Procurement and Commercial6.4 Implementation Readiness6.5 Wider Public Sector Experience of Shared Services6.1 GovernanceGovernance is a key issue during the development, procurement and implementation phases of aproject. Different governance arrangements are likely to be required during the different phases tomake sure appropriate management and decision-making can take place.Before a shared service is procured two key questions will need to have been resolved - who will ownthe contract(s) and who will manage the contract(s). This section briefly looks at the role of contractingauthority and intelligent customer.The Contracting Authority and Intelligent CustomerSignificant work was undertaken to assess two important governance issues – who owned thecontract; and how would its operations be managed and overseen. Under EU law a frameworkcontract must be let by a recognised Contracting Authority. Since the Colleges participating in theproject were not a collective legal entity they would have to use either an existing company, create anew Special Purpose Vehicle, or use a third party (e.g. a specialist procurement “hub”) to conduct andconsummate a procurement process.In addition to the role of awarding a framework contract, there is also a requirement to ensure that theframework operates as intended and that the individual call off contracts are optimised. Examples ofthis “intelligent customer” role would include:    promoting take-up of the framework agreement among other Colleges to increase economies of scale    policing compliance with the framework by both individual Colleges and the provider to ensure that contracted efficiencies are achieved in practice, and    negotiating cost-effective variations to the contract on behalf of all customers where changes are desired or become necessary through statutory or regulatory direction. 29
  30. 30. There are pros and cons to performing the role of contracting authority and intelligent customer “in-house” as opposed to transferring such responsibilities to a third party. The Daedalus Project Directorspoke to a number of organisations that might be considered suitable for the roles, to test the potentialmerits of different approaches. The following were considered key evaluation criteria for selecting theContracting Authority:    Control by members (e.g. participating Colleges)    Trusted to represent London Capital Colleges’ interests    Trusted to represent wider FE interests    Established networks across the sector    Core business    Have the skills to manage successful implementation    Appetite and capacity    Credibility    Value for money    Governance arrangements to protect membersDaedalus assumed that the participating Colleges would wish to control the Contracting Authority,but there remained some key questions as to whether they second or directly employ staff to run theprocurement and framework agreement, or sub-contract elements of procurement advice and contractmanagement to specialist third parties. This latter approach might enable the Colleges to combinecontrol with the expertise necessary to be a credible and effective Contracting Authority / IntelligentCustomer. The relative availability and commitment of skilled resource across the Colleges needs tobe balanced against the cost and potential dilution associated with bringing in a third party.The benefits of a single function for managing the delivery contract with the Shared Service Centreinclude a greater resource saving since each College would not need to employ such resources, a moreconsistent level of service for each College and more consistent relationship with the provider. Thebenefits of each College managing its own contract include greater control (or at least a perception ofthis), a more immediate relationship between College and provider, and a greater ability to negotiateflexibilities. Depending on the final model chosen, the Colleges would need to agree how thecontract(s) are managed.A decision on governance and resource commitments from initial participants before the procurementprocess starts is key. If a third party is selected, it should be recognised that they would need to getup to speed with the project and gain their own internal approval to participate, therefore an earlydecision is important.6.2 StaffingHeadcount reductions were identified as by far the greatest source of financial value in ProjectDaedalus. Identified savings were supported through technology investment and business processefficiencies, but without the commensurate reduction in labour that these facilitated, there would beno efficiency case to pay for new systems and processes; contractor profit; and redistribution of back-office costs to the front line.How Colleges deal with their staff is the critical determinant of whether this type of project issuccessful. Open and timely communication, alongside fair treatment of staff leaving the organisationare both best practice and a legal requirement. There are important choices to be made in respect of 30
  31. 31. “fair treatment” that will impact both the financial savings case and staff attitude to the transitionplan.Employment Issues and RecommendationsLegal advisers were appointed to consider the employment implications and their conclusions aresummarised below:Issue AdviceTUPE    Assume TUPE applies.    Determine whether all back-office staff transfer – or just those involved in the “in-scope” activities associated with data capture, processing and reporting.    Determine which employees are assigned to each part of the College as this will determine whether or not they TUPE transfer.Communication    Start early informal information/consultation as soon as the proposed outsourcing becomes public knowledge, i.e. no later than the time when the Invitation To Tender or Invitation to Participate in Dialogue is published. This informal consultation can continue during the procurement process.    Commence formal TUPE consultation (if required) once contracts have been signed with the provider. Such consultation will need to be with all affected employees. This is likely to include academic staff.    Daedalus will require a culture shift in terms of compliance with the processing of student activity. The greater emphasis on academic compliance will require particular attention in consultation with University and College Union (UCU).    Consult beyond the statutory minimum – e.g. staff briefings, information on the individual Colleges’ intranets, question and answer sessions etc.    Consider the cost versus transition benefits of offering a voluntary severance scheme to employees who do not want to TUPE transfer.Transfer process    Commence formal TUPE consultation (if required) once contracts have been signed with the provider.    Transfer all employees (other than those who opt out through voluntary severance) to the provider.    The provider would carry out redundancy consultations and make those employees it does not require redundant.    The provider would consider what changes are needed to terms and conditions, and implement those if permissible.    The Colleges are likely to need to agree to reimburse/indemnify the provider in respect of all or some of the redundancy costs associated with TUPE. An evaluation should be carried out of the likely pass through costs and those the Colleges would be prepared to meet, as well as a calculation of likely redundancy costs particularly bearing in mind the early retirement provisions under the Local Government Pension Scheme. 31
  32. 32. Issue AdvicePension    Colleges can limit pension protection for future service to a money purchase scheme under which the employer matches employee contributions of up to 6%.    Fair Deal does not apply to FE Colleges. There will be expectations – externally and potentially internally – that Colleges should be more generous, and we will need to balance the savings case against employee relations and transition planning. Fair Deal could add on costs of 20‐25% depending on the age profile of transferring staff.Employment of Retained (site dependent) StaffProject Daedalus assumed that the members of the retained organisation would continue to bedirectly employed by their own Colleges. There are a number of reasons why Colleges shouldcontinue to employ the retained staff - retaining some expertise in-house, and ensuring staff workingin the College are employed by the College and are committed to the College rather than a third party.However, there may be advantages of TUPE transferring the retained staff to the provider –particularly those involved in on-site transactional duties associated with assessments and studentcontact. The transfer of site-based transactional staff to the provider, potentially under a joint contractof employment, could potentially create a more seamless service and ensure that local staff are fullyintegrated into service delivery.The pros and cons of transferring all back-office staff to the outsourcer – both those based locallyengaged in face-to-face functions and those working remotely – are summarised below:Pros Cons    A seamless service – the same party is    Transition process is more difficult because responsible for local interfaces and remote key process champions have less job security data processes    Negation of blame factors / single    Reduced staff loyalty / allegiance accountability of provider for back-office / engagement and weaker internal communication, “them and us”    Sharing of local and specialist knowledge    Creates different interface issues - less of a “buffer” between curriculum and support functions    Local choice around staff terms and    Potential future loss of control over staffing conditions retained on-site levels and recruitment    May facilitate termination scenarios -    Potential VAT charge may be mitigated retained staff understand outsourcer through joint contracts of employment processesFor Project Daedalus the decision was seen as unlikely to be a deal-breaker, but a decision would needto be made before progressing to procurement. 32
  33. 33. Other Employment ConsiderationsThe potential location of the shared services centre needs consideration. There has been a trendwithin UK outsourcing to create service centres in low cost geographies. While bidders may propose avariety of service delivery models, Colleges need to be mindful that very few staff currently employedwho are eligible under TUPE to transfer to the new provider may be likely to do so.Being a major local employer was noted as an important issue for some of the Colleges. Anoutsourcing transaction is likely to reduce direct local employment, but has the potential to increaselocal jobs by diverting resources from internal, back-office functions to the core business of runningadditional skills and employability programmes. The balance between being a major local employerversus being the creator of large scale employment opportunities through education and training is amaterial factor that the Project Board was asked to consider.It is also important to recognise that changing the operating model does not guarantee success. Inorder to deliver the Target Operating Model there would be a need for some staff in each College tochange what they do in their day jobs and how they do it. Thus changes in behaviour and cultureneed to take place in order for Colleges to deliver services as part of a Shared Services Centre. Forexample course information will need to be provided and updated regularly, diaries/calendars willneed to be kept up-to-date and lecturers will need to amend relevant student details in a timelymanner.All shared services projects have material staffing consequences, the impact of which will vary byCollege. Should a project proceed to the procurement phase, there will need to be full and openconsultation with Trade Unions. Given the number of organisations involved, the need for consistencygoing forwards, and the important nature of the change it should be considered that projectcommunications and staff negotiations are co-ordinated centrally.6.3 Procurement and CommercialThe procurement process followed to select the shared service provider may be standard. However,given the breadth of requirements, the number of organisations involved, the range of commercialconsiderations, the potential timescales in which contracts could run, and the limited precedence forthis requirement, executing a successful procurement could be complex.This section covers some key points on the procurement process, and identifies a number ofcommercial issues that need to be understood and addressed. It also briefly covers VAT treatment asthis was a specific area of review in Phase 1.ProcurementLegal advisers reviewed the project and points on the general procurement approach are summarisedbelow:    Official Journal of the European Union (OJEU) procurement regulations would apply.    The objective of the procurement process is to award a framework agreement that allows the Colleges to procure the pilot project and additional Colleges to call-off services using the framework’s terms, payment mechanism and standard service specifications in the future.    A framework agreement lasting up to ten years is likely to be justifiable. This would enable call‐ off contracts of 14‐17 years to be awarded, enabling both Colleges and the market to gain value from their investment. 33
  34. 34.    The Colleges should award a framework agreement to a single supplier with the “pilot” project being the first call off under the framework. The Colleges should incorporate evaluation of the pilot project call off as part of the evaluation for the award of the framework itself.    Use of the competitive dialogue procedure is most appropriate, following suitable pre‐ procurement engagement with the market place.    The procurement should be run by a single contracting authority than can act both as the authority party and intelligent client. This could be an existing organisation or a Special Purpose Vehicle established for the purpose.Key Commercial PrinciplesThe most material of the key commercial principles were deemed to be:    How Colleges would pay for the new service, including the extent to which benefits are ring- fenced or standardised.    How initial investment costs are recovered, both from the Colleges involved in the Daedalus project and subsequent joiners.    How the consequences of exit and termination are managed.The key commercial recommendations made are summarised below: Issue AdvicePricing    Colleges should aggregate volumes to drive the lowest unit cost for the benefit of all.    The base case assumption is that Colleges will pay for the new service on the basis of transaction pricing. This is predominantly based on learner numbers and the model assumes a weighting of 80% enrolments; 10% finance transaction volumes; and 10% staff numbers.    Certain costs – e.g. the cost of the Intelligent Customer role and set up costs should be borne equally, as all benefit equally from the service provided.    The sharing of pricing risk around volumes will need to be tested through competitive dialogue.    While each College should make its own investment case, the Project Board should reserve the right to consider some element of benefit standardisation if this is in the common interest.Investments    Bidders are likely to adopt very different solutions requiring different levels of investment.    The procurement process will need to ensure that cost, timing and functionality risk is transferred to the Contractor. There may be an affordability argument for Colleges to finance the investment up‐front.    Any up‐front investment will be recovered pro‐rata from Colleges joining the framework agreement.New joiners    New joiners will be encouraged to join, and will have equal rights and responsibilities in the governance of the framework agreement.    Pricing will be on the same basis as the “founding fathers” – i.e. a transactional pricing model reflecting aggregated volume discounts.    New joiners will reimburse “founding fathers” in respect of any up‐front investment made. 34
  35. 35. Issue AdviceExit/termination    Colleges will always have the right to walk away from the deal and recover their data. The contract will require bidders to submit exit plans that will need to be refreshed annually over the call‐off contract.    Where Colleges choose to exit “for convenience” they will need to compensate the contractor (and potentially the remaining Colleges) for any adverse financial impact.    At termination, the Colleges will have the right to extend the contract; re‐tender the contract; or bring the services back in-house. The mechanics for achieving this should be tested through competitive dialogue.Given the potential contract length some aspects, such as the charging model, may need flexibilityand regular review over time to make sure they are still appropriate for the services provided. As theservices required, the approach to providing services, and the number of Colleges using the servicesall evolves it is important that the charging mechanism remains valid and doesn’t incentivise thewrong behaviours for users or the supplier - or inappropriately reward Colleges that are large and/orinefficient. If charging is based on a number of different transaction types, tests should be undertakento see if those transactions are still appropriate as the basis for total charges and are those charges stillappropriate for the service delivered/received.The above assessment of key commercial principles remains high level and would require furtherrefinement. Daedalus challenged the advisers to produce recommendations given the projectassumptions since there are so few precedent deals involving multiple autonomous clients operatingto a standard specification delivered by a single supplier. Many of these commercial principles wouldneed to be further established through competitive dialogue, and potentially in consultation withother shared services examples in the public sector that may have similar issues.VATAdvice in respect of Project Daedalus noted that outsourcing and shared services would createan irrecoverable VAT charge when the new entity invoiced the customer for these services. Thisprimarily affects staffing costs, as VAT is already borne on systems and software. During Phase 1the Government was introducing legislation that, in certain circumstances, may enable Cost SharingGroups to deliver services without charging VAT. The project sought advice from accountingspecialists to help understand the position, particularly in relation to the potential for some of theon-site staff either being transferred to the shared service provider or working under joint contracts ofemployment.HMRC’s attitude was seen to change during the project following a consultation period and, given thepotential changing nature of this area, the Steering Group recommended that VAT should be treatedas one of several commercial considerations and that opportunities for VAT mitigation continued to beexplored.6.4 Implementation ReadinessDaedalus considered processes through three increasingly detailed levels in order to test the feasibilityfurther, and to identify the specific activities that would be carried out by a Shared Services Centre orthe College under such an arrangement. 35

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