Getting together
April 2008
Stephen Lloyd provides guidance on successful collaborative working arrangements...
‘Partnership’ is a word the sector is hearing rather often these days, but the legal significance of the term must not be overlooked. A partnership which is not established as a limited liability partnership means that the partners are together and separately (or jointly and severally) liable for all the partnerships’ debts. You can set up a partnership unwittingly and, once established (even if you do not know about it and have no legal document) you could suddenly find that you are liable for the debts of the partnership.
Because of this risk, I prefer to talk about collaboration or collaborative working and there are three types I want to look at in this article:
- collaborations between charities to deliver charitable activities;
- collaborations between charities to achieve savings; and
- collaborations with commercial partners.
Collaborations between charities
At their best, collaborations can bring many benefits. They can be a means whereby charities can share knowledge and get the benefits of their activities out faster. This can be a way of stopping organisations having to reinvent the wheel through replicating success. Collaboration can put charities at a competitive advantage. This is becoming increasingly significant as more and more commercial operators seek to enter areas which have hitherto been seen as the preserve of the third sector. A recent experience of charities failing to successfully tender for work from the DWP is a stark reminder of this.
As with all potential benefits collaboration brings potential risks. If the collaboration goes badly the charity may find itself sucked into a black hole which absorbs time, energy, money and opportunity costs for little benefit. The outcomes might not be achieved. The charity’s reputation might be damaged and its brand value diluted.
In my experience, the key obstacles that get in the way of charities successfully collaborating are principally cultural. It is vital that the collaborating organisations have similar cultures in terms of the way in which they operate, what they expect of their staff, etc. Never underestimate the impact of personalities. It is all too easy to draw up legal agreements and visualise partnerships by boxes on a diagram but, in reality, partnerships are delivered through people and if they do not get on well together then the partnership is bound to fail. So making sure that you feel comfortable with the people you are going to collaborate with is vital. Preparatory team work around personality issues, such as through some form of team building or ‘getting to know you’ sessions is a key success factor because jealousy and competitiveness can sap a collaboration.
The key elements in helping overcome challenges to a successful collaboration include:
- Careful planning;
- A focus on the big picture;
- Clear and agreed mutual benefits;
- Leadership and vision; and,
- Written agreements.
It is vital that the collaboration is understood by all parties and clearly written down. This then raises the first question – What is the agreement called? – and collaborative working arrangements come under a number of different names:
- Memorandum of Understanding (MoU);
- Service Level Agreement (SLA);
- Contract;
- Joint Venture Agreement (JVA); and
- Partnership Agreements.
In theory an MoU should be used for an informal relationship, short of a binding contract but, in reality, the phrase is often used to create a binding contract.
Although trust is an important part in relationships between organisations, it is not sufficient in itself. A written agreement can help avoid misunderstandings. It provides a common reference point useful to guide the collaboration on a daily basis in addition to occasions when confusion arises. To develop a decent collaborative arrangement requires some time and thought. It is vital that the organisations concerned ‘own’ the process of developing the agreement and it is important for the ‘partners’ to get together and agree a skeleton or bullet point summary of the key elements that they want to cover in the agreement. These are:
- Understanding what the shared purpose is and what are the specific objectives to be achieved. How long will the collaboration last? What activities does it cover? When and how will it be reviewed?
- Expectations – It is vital that each partner takes responsibility for certain activities. It is equally vital that you agree what quality standards are going to apply to the services that each partner is going to deliver.
- How will decisions be made? Do you want to establish a committee to manage the collaboration? And, if so, does that committee have any power to bind all the partners to commitments? If so, what are the limits to that right? Should there be an individual nominated by each organisation to act as its representative on the management committee? And, if so, and the other partners find that an individual is impossible to work with, is there a mechanism for asking for a new person to be appointed?
- In some cases it will be necessary to have an accountable body, for example one partner who takes specific responsibility for the operation of the contract and who handles the receipt and disbursement of funds. This is a more onerous obligation than the other partners will have. That partner will want to be indemnified by the other partners in respect of any liabilities that it, as the accountable body, incurs as a result of occupying that role. Obviously that indemnity will not extend to the liabilities incurred as a result of the accountable body’s negligence.
- If staff are being employed, are they being employed by each of the partner organisations or by one of them? And, if so, what is the position in terms of liabilities to those staff?
- You need to consider what happens if assets are purchased or premises leased, etc. Who will own those assets? Will they be jointly owned or separately owned by different parties to the partnership? Equally important is who has copyright or any other intellectual property rights in materials or know- how created as a result of the collaboration?
- When it comes to the funding of the work, there are a number of key issues that need to be resolved. How will management costs be determined and divided? If there is an accountable body, what management charge can it render? If income is earned how will that be divided? If funds are under spent, how will they be dealt with?
- Obviously, all the partners should agree to keep appropriate records for monitoring purposes; provide information at set times and in a set format and respond to additional requests for information. It is also equally vital that the partners participate in evaluating both the joint work and any audits.
- It is always vital to have an exit strategy in any partnership arrangement. How will that work? How much notice can each partner give? What happens to the other partners if one partner drops out? Should everyone agree to stay in the partnership for a minimum period, eg. tied to a particular contract? In the event of the termination of the partnership, what will happen to staff? How will assets and liabilities be divided and how will you handle any costs associated with termination?
- It is always wise to have an appropriate dispute resolution clause and I always recommend that these types of arrangements specify that wherever possible disputes are dealt with through mediation rather than going to the courts or arbitration.
Once you have built up the key terms of the agreement, legal advice should be sought. It is highly dangerous to try and cobble together a partnership agreement by taking different documents from the internet and trying to marry them altogether. Quite often some rather nasty holes can appear. Once you have got final agreement, it must be approved by your trustees.
As soon as the agreement has been signed off it is important that an individual in each organisation is charged with responsibility for monitoring the contract – in other words being the contract officer. I am often amazed at how many charities spend a large amount of time, energy and money in sorting out contracts but once a contract has been signed it is forgotten, metaphorically put at the bottom of the draw to gather dust. A collaboration agreement is a living tool. Each organisation needs to have a responsible officer who is monitoring the performance, both of its own organisation and others under the agreement, on a regular basis and is aware of deadlines for the submission of information; payment of money; monitoring of performance, etc. and that those dates are in diaries and are adhered to.
Many of the issues outlined above apply if charities decide to set up a new organisation in order to operate a collaborative arrangement. But, in this case, in establishing a new entity the constitutional arrangements will need to be worked through to ensure that the different partners are appropriately represented on the board. Whether it is appropriate to set up a collaboration through a separate legal entity or to rely on an agreement is going to be dictated by the particular circumstances, but the key reason for setting up a new organisation is often the desire to isolate financial or liability risks in a new entity. It may also be the case that the partners wish to isolate or separate the collaborative working element from their separate continuing activities.
Collaborations between charities to achieve savings
A number of charities have collaborated in order to share back office services so as to try and improve their organisations’ effectiveness by making better use of resources. Again, this can be done either through joint working or through setting up a new organisation. Organisations that have done this have found that there are savings to be made through economies of scale, greater bargaining power with suppliers when buying in bulk and a smaller workforce.
A good example of collaboration in this area is CharITyshare, a company which manages the IT services of NSPCC and The Children Society. Through this the organisations are sharing most of their IT functions, helpdesk, training, purchase, technical infrastructure and national and local technical support and achieving significant savings. Obviously confidential databases remain separate.
Collaborations with Commercial Organisations
Many charities have products or ideas that have the potential for commercial development or may run trading companies which need investment for further development. What is the scope for charities or their trading companies to collaborate with commercial partners in order to generate greater resources for the charity? Getting into bed with commercial partners is something that charities often view with some concern. Many are fearful that they may find themselves taken to the cleaners by canny, commercial operators. However, a number of charities have been notably successful in developing good relations with commercial partners in order to generate unrestricted income. One of the best examples is Age Concern England with its variety of insurance products offered under the Age Concern insurance brand which has operated for some 20 years in partnership with a number of leading insurance companies. Age Concern Insurance Services has negotiated different supplier deals with different insurance companies over the years. The crucial element in this – in allowing the charity to migrate from one commercial partner to another – is ownership of its database of customers. This is an absolutely vital point which any charity dealing with commercial partners needs to bear in mind. It is frequently a fatal flaw for charities wanting to change suppliers in connection with credit card affinity arrangements as they are frequently drafted so that the bank owns the database and the charity has no right to it, rendering it unable to negotiate with another potential supplier.
Collaborations with commercial partners
One example of collaboration between a charity and commercial partners is CaSE – Charity and Social Enterprise Insurance Management LLP. This is a collaboration between Charities Aid Foundation, a specialist provider of insurance broking services, registered with the Financial Services Authority, aQmen Limited, ABG Insurance Services, an organisation that specialises in establishing insurance arrangements and the partners of Bates Wells & Braithwaite London LLP. This illustrates a new way in which charities can collaborate with business partners in a highly tax efficient manner. What is particularly relevant for charities in looking at the CaSE example is the way in which it has been structured because the limited liability partnership (LLP) route is very advantageous for a joint venture between a charity and non-charity partners.
Where a charity wholly owns a trading company, HMRC accepts that the trading company can give away its profits tax free under Gift Aid to the charity. HMRC does not treat the gift of the profits as a ‘distribution’ If it did then this would have a major tax disadvantage as distributions of profit are made after Corporation Tax has been paid on those profits. On the other hand a Gift Aid payment is made pre-tax. As Corporation Tax varies between 20% and 30% this is a major saving.
However, if a company is owned by both a charity and non-charities then any distribution of profits by the company is treated by HMRC as a distribution and must be made post-tax. The company cannot make a donation to the charity under Gift Aid and then distribute the rest of the profits to the shareholders.
However, if an LLP is used this tax trap can be avoided. The key element here is that the charity’s trading company, in the case of CaSE, CAF Marketing Services Limited, becomes a member of the LLP. LLPs are transparent for tax purposes. This means that where an LLP makes a profit, the LLP itself does not pay tax on the profits. Instead the profits are distributed to the individual members and they each pay tax at the appropriate rate on the profits they have received. Consequently, in the case of CaSE the profits will be paid to CAF Marketing Services Limited. This is wholly owned by CAF. Consequently, it can then give the profits under Gift Aid to CAF and avoid corporation tax. If, on the other hand, CaSE had been set up as a limited liability company, as is the normal mechanism for a joint venture, there would have been a tax disadvantage.
Conclusion
Charities need to approach partnerships or collaboration arrangements carefully. However, if appropriate steps are taken to ensure that they are comfortable with the people they are dealing with; the culture of the organisations they are collaborating with and they have put in place robust and appropriate legal structures or agreements to regulate their relationships then collaborations of many different types offer real and tangible advantages for the sector.
Author: Stephen Lloyd
Stephen Lloyd is senior partner of Bates Wells & Braithwaite London LLP and in his spare time is chair of the Centre for Innovation in Voluntary Action; vice-chair of Global Cool Foundation and serves on three other charities.
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