What’s it all about Ashby?

As my children grow up I console myself that I have VFM to keep me young. There’s always something new to delight and fascinate. Especially now, when politically, the VFM of the sector is in question. Nobody should be surprised about the regulator beefing up VFM.

So what just happened?

The Chairs of the largest associations (over 1,000 stock) all got a letter[1] which included a link to the HCA’s analysis of associations’ high level unit costs[2] sourced from the Global Accounts. It incorporates the findings from a re-run of HCA’s regression analysis[3] which seeks to identify and better understand the effect of justifiable cost variation across a diverse sector. For example, a baseline, vanilla, general needs, traditional association operating in an area with average wages and deprivation can expect the cost per property to rise when you factor in (in order of magnitude) supported housing, higher regional pay areas, HfOP, LSVT status and more deprivation.

According to the regression analysis, each supported housing unit, for example, is associated with costs of £10,800 above general needs (depending on the type of support this figure sits in a broad range) and there’s a £1,900 difference per unit between London and the North East thanks to regional wage differentials. Decent homes work also makes a big difference, but for most, this is in the past. You can get stuck into the detail of these variations in the technical report, although it might take a while to zone in – I’m not sure I know my Hausman test from my elbow, but it’s very clever stuff and stretches one’s thinking in the pursuit of exploring costs.

Both analyses have then been used as a platform for amplifying VFM expectations. The standard, for now, remains the same, but the volume has been cranked up – not quite to 11, but definitely up. The letter points out that:

• costs have seen a modest decline in real terms, where maintenance and improvement programmes running their course is a factor. But, in order to deliver on mission and ambition in light of the challenges facing the sector, there needs to be a ‘step-change’ in operating efficiency – an ‘intense focus’ to liberate latent resources. In other words, the current trajectory doesn’t cut the mustard given the challenge, and the HCA doesn’t want surpluses or a reduction in outcomes to solve the problem in an effortless manner. No pain no VFM gain.
• the variation in sector costs is so significant, it is suggested, that inefficiency must be a factor –there is a difference of a third between the top and bottom quartile positions
• because of all this, the approach to VFM regulation is changing and will be felt largely in how the in-depth assessment (IDA) is conducted.

The letter also acknowledges an important point – it’s about costs only. It deals with the M in VFM. Answering the questions posed by it requires providers to draw on their own benchmarking data and other performance and impact evidence to assert what they got for their money.

Walk on by?

‘Phew’ I hear many of you say, ‘we’re too little to get an IDA’. That may be the case. But, just remember that an IDA is an assurance check on what HCA expects from all associations[4] and they expect compliance with the VFM standard. Julian Ashby’s letter is useful, therefore, in terms of better understanding expectations. Just because you might be ‘below the radar’, doesn’t mean no engagement ever.

Hitherto, VFM regulation has tended to focus on the self-assessment. This is what the second half of the VFM standard is concerned with – demonstrating VFM in the interests of transparency and accountability. It’s still as important as ever (and we’ll do a separate blog about that, especially as the HCA also issued a report on their analysis of the last self-assessments[5]). But now, the first half of the standard is also being stressed – delivering VFM – and for the bigger associations, it will be reality-checked via the IDA. They will be challenging providers on their ‘approach to optimising efficiency in the achievement of their objectives’.

Finally, the letter includes the individual association’s high level social housing cost data, notably a defined headline metric, compared to sector-wide quartile values. These comparisons are complemented by a side order of contextual cost driver information as identified in the regression analysis so that boards may consider the extent to which legitimate costs, like the additional spend on supported housing etc, may be influencing their values and position relative to peers. The HCA will be drawn to those with ‘unusually’ high costs.

The HCA is making it clear that boards are still in charge of their destiny and there is no ‘right’ level of cost, or indeed balance between cost reduction and service quality or investment in social activities.

The HCA’s regression analysis model can only account for 50% of the legitimate variation in costs across the sector, which means the other 50% has to be determined by good old fashioned investigative work on the part of boards and executives. The big question is how much of the remaining 50% is being driven by inefficiency and how much by entirely legitimate strategic investment decisions, including service level and scope, achieving other outcomes or the demands of poor stock, ie facets of the V in VFM. Is it 49% legitimate cost drivers and 1% inefficiency, or is it the other way round (or something in-between)? The HCA is inviting boards to be the judge (and gain assurance in the process).

This is the point of what the HCA has done by writing to Chairs of the 1000+ associations. They have given boards an undodgeable can opener – they expect boards to have figured out the answers posed by the questions implicit in the letter and regression analysis by digging deeper to understand their cost variance from their peers by using more detailed local cost analysis, eg using benchmarking data, procurement spend analysis, etc.  And for bigger associations, they’ll be tested on this understanding during the IDA.

The vast majority of you didn’t get the letter, but you’re still expected to dig to better understand costs and then do something about it in the shape of a cunning plan which is deftly executed and the fruits of which are demonstrated via the self-assessment.

Always something there to remind me

So to make it easy on yourself, here’s a handy reminder of what the HCA is looking for:

• understand your costs: what are they, how do they compare, why do they vary from your peers? – what are your key cost drivers?
• how good are your arrangements for the delivery of a strategic approach to VFM:
  • what’s your strategic approach? Notably what are you doing to control costs? What other improvement action are you taking?
  • how do you ensure the strategy is delivered via performance management and governance arrangements, and to what extent is the strategy owned, driven and monitored by the board?
  • use of resources – to what extent are investment decisions and resource planning underpinned by a robust business case that:
    • maps to your business objectives – are you spending on the right things?
    • incorporates evidence, including costs/anticipated benefits and consideration of trade-offs and opportunity costs
    • has been subject to challenge and debate
  • how good is your understanding of assets, the resultant asset management strategy and your ability to implement it? Where’s your evidence of an active approach, eg how have your key asset decisions improved the value of assets to the business?
• demonstrating VFM – prove it – transparent self-assessment is still really important where the provision of absolute and comparative cost data is key, and yet curiously, according to the HCA’s analysis of the self-assessments, the sector seems to have taken a step backwards here (to be revisited!)

SPBM cost and performance benchmarking data, including the new unit cost metrics, will help you figure out your own answers to the questions posed by the HCA even if you didn’t get the letter.

[1]The letter https://www.gov.uk/government/publications/unit-cost-analysis-letter-to-chairs-of-all-large-registered-providers

[2] Delivering better value for money: understanding differences in unit costs – summary https://www.gov.uk/government/publications/delivering-better-value-for-money-understanding-differences-in-unit-costs

[3] Delivering better value for money: understanding differences in unit costs – technical regression report https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/527849/Unit_cost_analysis_-_Technical_Regression_Report.pdf

[4] As always, regulatory principles apply to all associations. Your execution of them needs to be proportionate, based on your size and circumstances.

[5] Delivering better value for money: review of value for money self-assessments https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/527806/Unit_Cost_analysis_-_VfM_self_assessments.pdf