Investment Appraisal Framework

Transcription

1 Investment Appraisal Framework Version 6 Revised: August 2017 Review date: July

2 1 Introduction 1.1. NHS foundation trusts (FTs) were created as new legal entities in the form of public benefit corporations established pursuant to section 30 of, and Schedule 7 to, the 2006 NHS Act, as amended by the 2012 Act. The legislation gave FTs new freedoms, with trust boards having more autonomy to make financial and strategic decisions. In this regime, FT boards are ultimately and collectively responsible for the financial performance and quality of healthcare delivery of their Trust This freedom needs to be exercised in keeping with the provisions of the Act, the Single Oversight Framework (September 2016) the Capital regime, investment and property business case approval guidance for NHS providers (November 2016) and the FT provider licence. Accordingly, this document sets out governance processes for all investments undertaken by the Trust This framework also reflects the Guidance on Transactions for NHS FTs, which remains a key document to assist the Board of Directors of FTs not in financial distress to responsibly use its freedom to invest This framework will be reviewed on an annual basis, or sooner if required by legislative, regulatory, or other changes. 2 Objectives and Scope of the Framework 2.1 The key objective of this framework is to provide an appropriate financial governance framework for the making of investment decisions and in particular to ensure that they are: Within the terms of the Trust s provider licence Consistent with the strategy, vision and values of the Trust Subject to a scrutiny process which includes an appropriate financial evaluation, including: o Impacts on Trust Cash reserves o The assessment on the Trust s Use of Resources rating o Adherence to other restrictions imposed by Trust Regulators. Consistent with the Trust s current risk appetite Compliant with the requirements to report major investment proposals to the Trusts regulators 2.2 This framework will apply to all material investment and disinvestment including capital expenditure, acquisitions, joint ventures, equity stakes, major property transactions, mergers and alliances. It does not apply to revenue expenditure made by budget managers as part of normal business operations in line with Standing Financial Instructions, nor does it relate to adhoc commissioner investments that may be made with the Trust as part of the contract variation process For clarity, the framework is concerned with investments in developing the business; it is not concerned with cash investments, which are covered separately by the Trust s Treasury Management policy. This can be located on the SHARON intranet site within the Finance and Contracting page. 2

3 3 Financial Strategy and Investment Principles 3.1 The Trusts Financial Strategy is built on the following principles: To meet all quality and performance requirements To meet all financial governance and quality governance requirements To achieve a recurrent sustainable financial balance position To manage cost pressures and deliver efficiency targets To create financial headroom in order to deliver the Clinical Strategy and associated Estates requirements To grow the future business with sufficient returns for recurrent investment To provide a fund for contingency and any unforeseen problems that may arise in year To aim to achieve a Use of Resources rating of All investment decisions need to be in alignment with these principles. 3.3 Each investment proposal will be appraised on a number of quantitative and qualitative criteria. This ensures that investment decisions are based on an objective evaluation rather than optimism bias or a pure pursuit of growth. 4 Business Process and Decision Rights 4.1 The Trusts Business Planning and Investment process provides a hierarchy for authorising all investment decisions whether the investment is capital or revenue expenditure or the agreement to proceed with a tender opportunity. 4.2 The key responsibility of each group within the hierarchy process is summarised below. The complete process is summarised in Appendix A. Group Operational Capital Investment Team (OCIT) Key Responsibilities The Operational Capital Investment Team (OCIT) manages all aspects of the Trusts capital investment. Key areas of responsibility include: Approval of capital investment up to 0.3m Management of schemes in the current capital programme Provide seals of approval for larger Trust developments including capital builds Management of Trust wide Estate utilisation. If, following confirmation/revision to speciifcations, capital scheme costs increse over planned values by either: 20% or 30k (whichever is the lower) Or over 300k (even if increase is less than criteria above) Then review of the scheme will be escalated to SDT for challenge and confirmation of requirements PRIOR to any commitments to build being made. Accurate scheme estimates and plans will result in minimal escalation to SDT and enable OCIT to effectively manage capital schemes.. 3

4 Operational Delivery Team (ODT) Strategic Delivery Team (SDT) The Operational Delivery Team has no authority to approve investment. key areas of responsibility include: Reviews all cases for investment Ensuring all Seals of approval are completed. The Strategic Delivery Team (SDT) : Reviews proposed investment decisions and authorise them (within the financial limits referenced in section 4.4 below). 4.3 Terms of reference and membership details of the approving bodies can be found on the Trust intranet site. 4.4 The delegated authorisation limits are reflected in the Trusts Standing Financial Instructions and are summarised in the table below. TABLE 1 DECISION RIGHTS Approving body Capital Investments Revenue investments Operational Capital Investment Team (OCIT) Operational Delivery Team (ODT) Strategic WITHOUT ET Delivery Attendance Team WITH ET (SDT) attendance Trust Board Council of Governors NHS Improvement Estates Capital < 0.3m IM&T Capital < 0.1m None (applies Seals of approval) Estates Capital > 0.3m < 0.5m IM&T Capital > 0.1m < 0.5m Estates Capital > 0.5m < 1.0m IM&T Capital > 0.5m < 1.0m None < 0.5m / 1.5m over the life of contract < 1.0m / 1.5m over the life of contract > 1.0m / 1.5M over life of contract Any significant investment as defined by regulatory Guidance (or over 25m) In line with the Single Oversight Framework 4.5 Framework waiver process In situations where an immediate business opportunity or tender proposal presents itself but timeframes for submission do not allow for the full appraisal process to be completed a waiver process will be completed ensuring there is sufficient scrutiny to enable submission. The process is: Waiver Stage 1 Requirements Proposals will need to be authorised by all of the following: The Chair of the Strategic Delivery Team (SDT) Director (or Deputy) of Finance The divisional manager the service will operate under and 1 other members of the Strategic Delivery Team (SDT) as confirmed by the chair of SDT. Board / Committee approval as required (dependent on value) this can be via extraordinary sessions as agreed. 4

5 Virtual authorisation via or extra ordinary Board/ committee sessions is sufficient 2 Following the submission, the complete process (see Appendix A) will be followed retrospectively with the ability to cease the investment prior to any Trust financial commitment. 5 Trust Business case formats 5.1 All investments for additional trust or external funding will need to be proposed using a business case form explaining the case of need, financial implications and risk. The business case form required is dependent upon the investment level. 5.2 Best practice is to scrutinise investments in proportion to financial risk. On that basis the framework proposes a tiered structure of business cases as shown in table 2. TABLE 2 BUSINESS CASE REQUIREMENTS Revenue Capital investment Tenders Investment All values (Tenders only) Tender Approval Form (TAF) Case of Needs form 0-50k Standard Business (CN1) Business case based around case (SBC) Tender submission Standard Business 50k - 1m documents. case (SBC) Strategic Outline case (SOC) Relevant financial analysis 1m + Outline Business case (OBC) will be applied Full Business Case (FBC) 5.3 The table below details the key requirements of each business case: Capital Investment < 50k Case Key Requirements Case of Need form (CN1) The CN1 form will be used for all capital spend up to 0.05m and will include: Full details of required work (used to ascertain if capital or revenue) Capital & associated revenue cost estimates Current risk assessment of situation. 5

6 0-1m investment (ALL revenue & capital > 50k) Standard Business Case (SBC) SBC s will be used for investments up to 1m and will include financial and risk analysis relevant to the level of investment. Examples where an SBC will be used include: Request for additional funding for new posts New Service investment Investment in IM&T Capital investment over 50k (including all associated revenue costs 1m + Investment SOC s outline the strategic case to Board for investment s over 1m. Strategic Outline Case (SOC) The business case will include: Current market position Demand analysis Stakeholder analysis High level estimated financial analysis Broad project timeframes. Examples where the SOC/OBC/FBC cases will be required include: Significant investment in new services (inpatient units etc.) Large IM&T investments Outline Business Case (OBC) Full Business Case (FBC) OBC s build on the information in the SOC and provide further information for the Board to agree progression to an FBC. Key additional information added to an OBC include: More detailed financial costs (costed staffing structures etc.) Increased level of financial appraisal (payback etc.) Details of commissioner commitment to investment Detailed timelines of project progression FBC is the final business case that when approved enables the investment to progress. Key additional information added to an FBC includes: Full finance costs (actual costs of procurement from quotes etc.) Reassessment of financial analysis using the actual values. Commissioner sign up to investment 5.4 The overarching principle followed from a Case of Need to a full business case is the requirement to collate all the appropriate information required to perform the necessary risk analysis. A pragmatic approach can be taken for example a pure capital investment of 60k will probably still only require a CN1 form rather than a Standard Business Case. A Standard business case template (SBC) will be required for any capital scheme that will also have an associated revenue cost implication other than depreciation/public 6

7 dividened charges (for example new staff to run the new build, maintenance charges etc). Where there are differing opinions on the most suitable business case format for an investment the Deputy Director of Strategy will make the final decision. 5.5 A proforma template for each business case is available on the Trust intranet. These are intended to guide the user into capturing the relevant information that will facilitate approval or otherwise by the authorising body. 5.6 Capital schemes are initially assessed by the Operational Capital Investment Team (OCIT). Detailed procedure notes are available on the Trust intranet Estates page regarding obtaining capital costings and estate guidance in managing and procuring a capital scheme. 6 Business Case review and approval 6.1 It is important that all business cases are reviewed and discussed in appropriate detail in order to ensure approved by the required group or committee. The level of review and approval will vary dependent on the investment value. The tables below provide a summary of the review required: Capital Investment < 50k Capital investment < 50k Operational Capital Investment Team (OCIT) Case of Need (CN1) 0-1m investment (ALL revenue & capital > 50k) Investment upto 1m 0-500k 500k - 1m Standard Business case (SBC) Operational Capital Investment Team (OCIT) (investments with capital requirements) (investments with capital requirements) Operational Delivery Teams (ODT) Strategic Delivery Team (SDT) Strategic Delivery Team with Exec Team (SDT) > 1m Investment Investment over 1m Strategic Outline Case (SOC) Outline Business Case (OBC) Full Business Case (FBC) (Seals of (Seals of Operational Delivery Team (ODT) approval) approval) Strategic Delivery Team (SDT) Executive Team (ET) 7

8 (for review only prior to commencing through process) Strategic Change Committee (SCC) Finance and Performance Committee (F&P) Trust Board Council of Governors (if > 25m) 7 Seals of Approval 7.1 Seals of Approval form a key part of all business cases and need completion before progressing through the authorisation channels under sections 4 & 5 of this framework. 7.2 The lead officer for the scheme will need to ensure all Seals have been appropriately signed off by a relevant senior officer. 7.3 The Operational Delivery Team will not review a business case unless all the seals of approval are completed. 7.4 The Seals of approval recorded on all business cases are: Seal of Approval Operational Delivery HR (OCIT) Estates Finance Informatics / IM&T Compliance Impact Assessments Areas reviewed Is the proposal deliverable / realistic? Have all aspects been reviewed (TUPE, redundancy etc?) Have estates implications been reviewed and addressed? Are all costs included, accurate and appraised (ensuring a sensitivity / options appraisal and impact on UoRR)? (see sections 8 and 9 below) Are all information governance, informatics and IM&T aspects included Have compliance issues been reviewed? The 3 Impact Assessments include: Privacy Has the privacy of data and service users been addressed Equality Are all equality impacts assessed? Quality have impacts on quality been reviewed? 8 Tenders 8.1 Any opportunities to submit tenders for new or existing services will be identified by Divisions or the Business Development department, who will submit expressions of interest and tenders on behalf of the Trust. 8.2 The Business Development department will follow the Trust s Tender response guidance, (available on the Trust intranet site) ensuring that tenders are fully assessed 8

9 before bids completed. The 5 phase approach within the guidance will be followed to ensure that tenders are appropriately risk assessed and aligned to Trust strategies. 8.3 A Tender Assessment Form will be completed for each opportunity. The results of the assessment will dictate whether an opportunity is pursued. 9 Approach to financial costings within Business Cases. 9.1 Prudence should be used wherever assumptions are required to complete a financial costing. 9.2 The following principles will be applied to costs initially included within business cases: Pay costs: Where known, actual costs should be included within business cases. These can be based on current Trust costs or TUPE information etc. If actuals are not known new posts will be included at midpoint. All WTE s are to be inflated by 23% as a minimum to cover annual leave and sickness. Non-pay costs: Where known, actual costs should be included (building leases etc.) If actuals are not known costs should be based on realistic comparators and adjusted where required. Capital costs: Capital costs will be based on known costs that will be used for calculating depreciation etc. Trust Overheads: All investment proposals should aim to recover overheads at a rate of 15% of the direct costs of service. This proposed rate will be applied to all business cases unless revisions are approved as per 8.3 below. Trust Margin: All investment proposals should aim to deliver a net margin of at least 7% - to ensure the Trust EBITDA position is not diluted. 7% margin will be applied to all business cases unless revisions are approved as per 8.3 below. Inflation: Inflationary pressures will be built into business cases where possible using the standard levels proposed by regulators. Such costs include anticipated Agenda for Change pay awards, increases in employee National insurance contributions etc. Set up Costs and Exit Strategy: Funding requirements need to be identified for the entire life of any proposal. Sufficient revenue and capital resources (for example dilapidation costs) need to be identified and secured for entering the market as well as those involved in withdrawing from it. 9.3 The assumptions above will be applied to all business cases. Following reviews by the Operational and Strategic Delivery Teams it may be proposed that the assumptions such as overheads or margin may be reduced or removed to ensure a competitive investment is submitted. For investments over 1m ultimately the Board of Directors alone has the authority to waive the assumptions where it can be demonstrated that there are wider benefits to 9

10 proceed. The reasons for this should be clearly articulated in the record of the decision to progress with the project. 10 Financial Appraisal of Business cases 10.1 Prudence should be applied wherever assumptions are appraised as part of the financial appraisal Sensitivity Analysis: Sensitivity analysis should be included to understand the potential impact of downside scenarios including the combined effect of multiple risks Financial Assessments: Detailed financial assessments will be required for each investment proposal. The level of assessment will vary dependent on the individual business case. Appendix B provides a detailed list of the financial assessments required for each business case structure. These assessments ensure all relevant areas of revenue, capital and cashflow impact are suitability identified for each proposal across the life of the investment. Financial assessments range from basic impacts on the Trust s financial position including the Trusts cash position and Use of Resources Rating (UoRR) to full detailed payback calculations and cashflow analysis Use of Resources Rating: Investment proposals should not impact adversely on the Trusts planned Use of Resources rating. The UoRR rating incorporates the following 5 measures of financial robustness and efficiency: For more details on the Single Oversight Framework in general please click HERE 10.5 National Guidance/Frameworks: Operating/financial targets and ceilings are often in place from the Department of Health/NHS Improvement around such areas as Procurement, Estates, consultancy, agency spend and staffing levels. These may be mandatory as well as advisory and the impact of any investment proposal on compliance should be considered. 10

11 11 Post Implementation/Submission Lessons Learned Review 11.1 An evaluation should be undertaken for all major transactions/investments especially where significant risks were identified as part of the investment proposal. This should be within a maximum of 6 months post implementation/contract sign off. The chair of ODT will be responsible for ensuring the reviews are completed as required The evaluation should include a full financial appraisal (refer to Appendix B) of the original forecast position versus actual and any continuing risks, for example reputational and clinical risks, impact on management capacity etc. Depending on the size of the investment or risk independent external input to this review may be required Any lessons learned as a result of the business case/bidding process as well as service implementation and integration into Trust business should all be captured as part of the review. These lessons learned should be shared with stakeholders through the relevant business planning groups (Appendix A) to ensure there is continuous improvement in the investment process and any dilution of the Trusts financial position is avoided Any unsuccessful tender bids should also be subject to a post submission evaluation / lessons learned through the relevant business planning groups (Appendix A). 12 Considerations for All Investments 12.1 As part of any major investment, the Trust should ensure that the following factors are considered as part of the business case. These considerations are consistent with those recommended to the Trust by Deloittes following a comprenhensive review of the Trusts investment activties: 12.2 Risk transfer: any transaction will entail the transfer of assets and risks, actual and potential, between a vendor and a purchaser. The potential adverse impact of any transfer of risks on a purchaser and its current operations needs to be fully understood assessed and, where possible, mitigated prior to progressing with a transaction, and then regularly reassessed Warranties and indemnities: in any transaction, warranties and indemnities from the vendor can play an important part in helping to mitigate material risks which are either identified through due diligence or cannot be quantified with an acceptable degree of certainty or within an acceptable timescale. Warranties and indemnities will be agreed at an early stage to minimise the potential risks of the transaction Security of revenue streams: where a purchaser is entering into an agreement to provide future services, and those services are not subject to a legally binding contract (either their value or service level), then the additional risk this may present needs to be considered and where appropriate mitigation included within an acquisition agreement. 11

12 12.5 Completion mechanism: completion mechanisms are used to mitigate the risk of value leakage from actions taken by previous management or through the requirements of the vendor between exchange of legally binding contracts and formal completion. Where there is no completion mechanism, alternative forms of protection may need to be considered Procurement: procurement processes to be followed to identify a preferred bidder or bidders Consultations: consultation requirements should be determined and agreed at an early stage in the process, and where necessary factored into the transaction timetable Transaction costs: an acquisition is an expensive process, both in terms of professional advisory fees and the opportunity cost of diversion of activity and focus by the senior team of the purchaser. FTs should ensure that adequate resources are made available to successfully complete the transaction Due diligence: purchasers can only rely on external advisers to a limited extent when undertaking due diligence. The Trust needs to have taken appropriate and adequate advice, but also to have satisfied itself that the transaction, and related risks, are understood and mitigated to the extent necessary. There should be evidence that key risks have been recorded where relevant to the nature of the transaction: clinical due diligence financial due diligence legal due diligence operational due diligence, including HR, IT and estates matters commercial due diligence understanding stakeholder perspectives Leadership and Delivery: where an acquisition is envisaged, planning needs to be undertaken at an early stage to ensure that following completion there are in place members of the Board and senior management with the necessary skills to lead and deliver anticipated and ongoing benefits from the combined entity Integration plans: Detailed integration plans should be developed at an early stage and will continue to evolve during the process. Effective monitoring of post-completion integration is key to the realisation of the anticipated benefits. 13 Investment Risk 13.1 For any major investment a financial appraisal should be supplemented with a comprehensive risk assessment Categories of Investment Risk to be considered include the following: Strategic: Risks associated with a particular strategy, for instance, overcapacity, product or service line obsolescence, competitor reactions. Financial: Risks associated with the financial structure of a business, the financial transactions made by the business, and the financial systems which are in place, for instance, interest rate risk and credit risk. 12

13 Operational: Risks associated with the operational and administrative procedures of a business, such as, clinical operations, supply chain management, IT systems, recruitment, labour management and post-merger integration process. Project Management: Risks associated with the delivery of the project in terms of project management capacity and skills, contractor risk, impact upon existing services, and exit cost. Commissioning and Contract: Risks associated with the funding of the service and investment, the contract terms, and the relationship with commissioners. Regulatory and political: Risks posed by potential changes in the regulatory and political environment, such as tariff changes, policy changes and changes in healthcare targets. Reputation: Risks to the perceived quality or brand of an institution, for instance, through bad press resulting from association with a failed joint venture. Contingent: Risks that will only come into existence if a certain contingent event takes place, for instance, guarantees of a joint venture that are only payable if it defaults Risk management refers to the collective set of processes, working practices and tools used to minimise the probability and impact of adverse outcomes. Any risks identified should be assessed, rated and captured on a risk register so that their proposed mitigation is clearly highlighted in the business case. 14 Risk Appetite 14.1 Risk appetite can be defined as the amount of risk an organisation is willing to take in pursuit of the Trust s strategic objectives. A range of factors will influence the level of appetite to accept and manage risk and so a framework is useful to help identify risk appetite The Trust Board has chosen the model developed by the Good Governance Institute in partnership with the board of Southwark Pathfinder CCG and Southwark BSU. This model enables the key elements of: Finance/Value For Money (VFM), Compliance/Regulation, Innovation/Quality Outcomes and Reputation to be assessed against a six point level of risk scale ranging from Avoid to Mature. Each of the levels for each element has a descriptor against which to assess the appetite for risk. Please refer to Appendix C for further detail The Board s overall risk appetite will be articulated within this matrix and will be reviewed on a regular basis. However, risk appetite will vary for each initiative or individual area of the Trust s business and it is important to assess each item of business on an individual basis. 13

14 14.4 The use of a risk appetite matrix within a business case will enable the Board to see at a glance where any proposals vary from their overall stated risk appetite position. An example of the matrix included in Trust Board papers is below: Risk Appetite Risk assessment Completed below / Not applicable (delete as appropriate) Risk Level Avoid Minimal Cautious Open Seek Mature Key Elements Financial / VFM: G Compliance/ Regulatory: G Innovation/ Quality: G Reputation: G APPETITE NONE LOW MODERATE HIGH SIGNIFICANT Explanation of variance from general (G) risk appetite The level of risk against each element should be indicated. Where more than one option is available the level of risk of each option against each element should be indicated by numbering each option and showing numbers in the boxes. 15 Regulatory / Reportable Transactions 15.1 As an FT the organisation must involve its regulator, in its major investment decisions. There are strict requirements regarding the assessment of a potential investment or venture Key requirements are covered in this section however the full detail around thresholds and reporting requirements for statutory and other transactions is outlined within the transactions guidance (web links included below) Transactions_guidance_2015_FINAL.pdf nnex_13_final_v2.pdf 15.3 Regardless of their size NHS Improvement has a key role in approving statutory transactions which include: Mergers of NHS FTs Acquisitions of an NHS Trust or another FT Separations of FTs Dissolutions of FTs Trusts undertaking these transactions are required under the 2006 Act, as amended by the 2012 Act, to make a formal application to NHS Improvement to proceed. This will involve completing a number of statutory requirements - for example, receiving the approval of a majority of Governors. 14

15 15.5 Mergers and acquisitions will require the Trust to work closely with the NHS Improvement to navigate the relevant regulatory rules (including any implications of competition rules) by engaging at several points as a transaction develops. This is to ensure the proposals work in the best interests of patients, from both good governance and competition perspectives In addition to assessing statutory transactions NHS Improvement, will assess other transactions to determine whether they are likely to represent a risk to a Trusts UoRR or Single Oversight Framework rating. Other transactions include: projects funded through private finance initiatives (PFIs) contracts to provide services material capital investments other mergers, acquisitions, investments or divestments joint ventures changes in indemnity arrangements other organisational forms initially developed as new care models. For these transactions the Trust should report to NHS Improvement if it meets any one of the criteria in Table 4 below. These are called reportable transactions. TABLE 4 REPORTING REQUIREMENTS Ratio Description Non-healthcare/ international Assets The gross assets* subject to the transaction, divided by the gross assets of the foundation trust UK Healthcare >5% >10% Income Consideration to total Foundation trust capital The income attributable to The assets or contract associated with the transaction, divided by income The gross capital** or consideration associated with the transaction divided by the total capital*** of the foundation trust following completion or the effects on the total capital of the foundation trust resulting from a transaction >5% >10% >5% >10% * Gross assets are the total of fixed assets and current assets. ** Gross capital equals the market value of the target s shares and debt securities, plus the excess of current liabilities over current assets. *** Total capital of the foundation trust equals taxpayers equity All potential investments or transactions whether they are classified as statutory or other will be classed as small, material or significant and the level of scrutiny will depend on these classifications Once a transaction has been reported NHS Improvement will seek to understand more about the risks associated with the transaction to determine its regulatory approach. Potential risks will include: 15

16 the relative size of the transaction compared to the FT the leverage expected in the enlarged organisation following the transaction the degree of experience in the acquiring organisation of the services provided by the target (where relevant), or of any change in services following the investment the existing level of financial risk and quality risk in the target (where relevant) the existing level of financial risk and quality risk in the FT risks identified as part of early engagement, for instance, poor options appraisal or a lack of strategic rationale. 16 Business Models 16.1 For each investment the potential for delivery of service through a new business model should be considered. Potential benefits of setting up a new business model are as follows 16.2 Focus: A separate management team can provide drive and focus as loyalty is not divided. Key staff can be incentivised to meet goals and a separate profit and loss account, can drive increased profit and guide other investment decisions 16.3 Employment models: New staff can be employed under competitive terms to reduce recurrent costs. Premiums can be used for attracting specialised staff through more competitive packages Pooling of Resources: Business partners can be engaged to reduce costs and share specialist knowledge to improve quality and increase efficiency Market Access: Ventures can open up access to third party commercial and financial skills as well as new commercial markets and technologies 16.5 Flexibility and Efficiency: New ventures will generally have more freedoms than FTs in terms of ability to borrow and raise equity. Use of certain business models can bring tax advantages. There is the potential to sell the entity in future as an exit strategy New business models come with an increased risk profile and additional specific factors need to be considered when assessing business delivery models: Taxation- VAT, corporation tax, stamp duty Reputation - Potential business failure and consideration of exit strategy Potential negative perception from patients and the wider community on patient choice Potential impact on existing trust brand and reputation Managing growth Voting and business decisions consider how made Entitlement to dividends and tax consequences Potential deadlock with shareholder agreements where may one party may not be able to sell or exit without the agreement of the other party Intellectual property and how to protect ownership Insurance Back office support to be delivered through partners or procured on the open market by the new venture. If the former how will costs be recharged (including management fees and VAT) Conflict resolution between parties 16

17 16.7 Risks can be managed through agreements being put in place to regulate any potential conflict of interests for directors and officers but these needs to be addressed prior to contract commitment. 17 Form Following Function- Types of Business Model 17.1 The form of any business model should be dependent on the purpose of the new venture. Other parties to the venture may be of a more commercial nature and be part of large company and their requirements may dictate a specific entity format Single Entity Models are the most used delivery vehicles for new ventures. These take the form of Private Company Limited by Shares Private company limited by guarantee Charity incorporated Organisation Community interest company (CIC) Limited Liability Partnership 17.3 Alternatives to a single entity model may take the form of: New division of the trust. This may involve the creation of boundaries of responsibility, finance and activity, but the function remains within the trust, as do its assets, staff, risks and rewards. Partnership ( as opposed to a limited liability partnership) A contractual relationship between two or more legal entities, with a view to profit, in which each of the parties accepts total liability for their combined or individual losses and acts, who between themselves agree to share profits and losses in agreed proportions. Joint venture. A contractual arrangement between two or more parties in which the parties agree objectives and (if applicable) the basis upon which contributions and losses are shared and profits and benefits allocated. Note that the term joint venture can apply to this type of contractual agreement as well as to the corporate model. Multispecialty Community Provider (MCP). An MCP combines the delivery of primary care and community-based health and care services delivered by care hubs. Primary and Acute care systems (PACS). PACS model include the provsiison of primairy and acute care under one provider model removing any organisaitonal boundaires and operational restrictions Financial processes may be different from current practice and current Trust experience. New independent systems may be required, such as a separate accounting financial system. Adequate processes around them will need to be defined and communicated effectively As part of setting up appropriate, controlled and efficient processes the following should be considered. These are examples and are not exhaustive. Are all contracts for supplies agreed with each provider to be transferred? Are new contracts required or can the existing contracts be novated? 17

18 Are all shared premises and staff allocations and recharges agreed with the supplier? Consideration of how supplier invoices will be received, approved, processed and paid. Clear definition of new staff responsibilities, invoice and order approval levels and how documents will be evidenced of being approved. Consideration of who will be providing support services from the new partners and shareholders and amounts that will be charged. Consider if overhead recovery and margin represents a true open market cost. Could the service be provided cheaper or more efficiently from external parties? Consideration of VAT and potential irrecoverable VAT as thee may be little taxable output (sales) and Vatable cross charges could lead to significant increase in costs. 18

19 APPENDIX A BUSINESS PLANNING & INVESTMENT PROCESS 19

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21 APPENDIX B FINANCIAL REQUIREMENTS FOR BUSINESS CASES Case of Needs form (CN1) Standard Business Case (SBC) Strategic Outline Case (SOC) Outline Business Case (OBC) Full Business Case (FBC) Capital only: 0-50k - Initial capital cost (VAT inclusive) to include build costs, fixtures & fittings, equipment and IT. - VAT rate / reclaimable amount - Initial revenue costs - Recurrent and non recurrent revenue implications Capital: 50k - 1m Revenue 0-1m As per CN1 and also to include: - Sensitivity analysis / options appraisal - SLR position UoRR / control total impact - Income sources / grants applicable - Overhead apportionment - Margin attributable. - Depreciation / amortisation (capital charges) - PDC implications 1m+ As per Standard Business Case and also to include: - High level payback calculation - High level net present value calculation - High level lifecycle costs - High level affordability calculation - High level discounted cashflow - High level sensitivity analysis / options appraisal 1m+ As per Strategic Outline Case and also to include: - Detailed payback calculation - Detailed net present value calculation - Detailed lifecycle costs - Detailed affordability calculation - Discounted cashflow - Detailed sensitivity analysis / options appraisal 1m + As per Outline Business Case and also to include: - CIP achievement calculations - Payback calculation actuals - Net present value actuals - Lifecycle costs actuals - Affordability calculation actuals - Discounted cashflows - Full sensitivity analysis / options appraisal - Marginal analysis - CIP achievement estimate - Payback estimate - Net present value estimate - Lifecycle costs estimate 21

22 APPENDIX C RISK APPETITE FOR NHS ORGANISATIONS (Good Governance Institute) 22