February 5th 2015
Three ways to ensure payment by results contracts work
Often in the run-up to elections, the focus of political news is on the government’s record in terms of outcomes for people: how waiting times, employment or food bank use have gone up or down is the stuff election trails are made of. The plumbing behind the services that achieve these outcomes – the government’s ‘how’ rather than ‘what’ – is regularly sidelined in favour of more newsworthy stories.
Speaking in London yesterday Iain Duncan Smith deviated from this tradition and spent quite some portion of his speech emphasising the huge change from the increased use of payment by results. He described the coalition’s ‘pioneering use of payment by results’ as no less than a ‘revolution in this Parliament’.
His comments come in a week in which another large payment by results (PbR) contract, within the offender rehabilitation sector, has been launched. IDS’s pithy summary of this form of commissioning is accurate: ‘providers compete to deliver services, bearing the risk and upfront cost, taking the burden off the taxpayer’.
By passing risk from the government to providers, PbR changes
the relationship between these organisations and the state
As an organisation with a long history of successfully delivering PbR contracts, as well as engaging with the social finance policy behind these schemes, Community Links has a good understanding of what this ‘revolution’ can mean to small voluntary sector providers. Our experience working with PbR has taught us several key lessons, which we set out in a policy briefing published last week.
Our involvement began in 2001 with the New Deal employment support programme, in which 60% of payments were dependent on achieving certain results – and increased significantly in 2006 when we were awarded prime contractor status, which continued until the end of the New Deal programme in 2011. Today our £5.4m PbR portfolio includes eight different contracts which range from 50% to 85% payment on results. Our largest PbR programme is the work programme.
Alongside our delivery experience, Community Links has for many years been involved in the thinking behind social impact bonds (SIBs). As part of Community Links’ work running the prime minister’s Council on Social Action in 2008 we proposed SIBs as a means of providing finance for voluntary sector organisations to deliver PbR contracts. This idea has taken off somewhat and Iain Duncan Smith described the UK as ‘a world leader in putting these principles into practice – with 24 social impact bonds up and running’.
PbR as a means of commissioning has several attractive features. In our experience, PbR can work particularly well when the contracts are small scale (resulting in a closer link between providers and the commissioner) and when the outcomes are simple, for example when only one outcome is required. When PbR works, it should enable us to deliver our services innovatively, drawing on our local knowledge and experience.
But PbR also brings certain challenges, and is definitely not without controversy. Prison reform campaigners have warned that the introduction of PbR into rehabilitation work will be a ‘disaster’. Certainly, by passing risk from the government to private or voluntary sector providers, these contracts change the relationship between these organisations and the state. We think three main issues need to be addressed in order to ensure that PbR contracts work well:
- Contract financing needs to be carefully addressed. A blended funding model, with some ‘up-front’ or grant-based elements is useful; and PbR should not be the default way of contracting. This is particularly the case when working with people whose situations are most complex.
- The size and structure of PbR contracts can determine the role that different organisations play. Smaller PbR contracts would increase the number of small voluntary sector organisations able to become prime contractors. Supply chain issues – such as the extent to which risk is passed down from prime to sub-contractors – should also be addressed.
- PbR contracts risk forcing providers to focus on a narrow range of outcomes rather than working holistically. A greater proportion of up-front payments can enable providers to work more holistically. For groups that have the most complex issues, PbR contracts should be designed to incentivise the achievement of intermediate steps and ‘soft outcomes’.
Whatever the result of the election in May, payment by results is now a fixture in the public service funding landscape. How providers engage with the model is more than simply a tough contract negotiation. Organisations, particularly in the voluntary sector, should ensure that their work with individual clients and their organisational values don’t become compromised in the excited rush to find a new source of funding.
Excellent article, Liam. PbR mechanisms, such as social impact bonds, are valuable precisely because they track narrow results. We can’t manage what we can’t measure. The danger, of course (as with school testing) comes when the primary focus shifts from the holistic results the program is intended to achieve, to the metrics.
I’m writing a new guide called RESILIENT PROSPERITY: How Adaptive Renewal Is Creating Secure, Inclusive, Green Economies. It’s for local governments, businesses, universities, and foundations.
Among other things, it addresses this challenge of integrating holistic missions with rigorous metrics. If you’d like to see it, you can download the latest draft here: http://bit.ly/1toNF4D
Your comments on it while in draft form would be greatly appreciated, especially any that would help me make it more relevant to the UK (it’s rather US/Canada-centric at the moment). Cheers! – Storm
Hi Liam
I welcome your contribution to the debate on PbR as it is a subject that needs more discussion but I can’t agree with your conclusions. I think your article and your associated publication has some fundamental misunderstandings about the nature of PbR, as illustrated particularly by your belief that it works best on small contracts.
Most forms of PbR can only work on contracts that have large numbers. Obviously I use the word “work” loosely. PbR mechanisms rely on statistical analysis of risks. Estimating risk in small contracts is not possible, too much variation for any reliability. My favourite piece on PbR is by Ian Mulheirn from Social Market Foundation, Paying for Results, an analysis of the proposed PbR mechanism for Transforming Rehabilitation (http://www.smf.co.uk/publications/paying-for-results-rethinking-probation-reform/). This does a detailed analysis of why the PbR mechanism chosen will end up rewarding mediocrity.
It seems to me that what you are arguing is that keeping some money back is likely to incentivise small groups to focus on the targets that the main contractor wants to meet. I think this is possibly true but rather brutal, likely to lead to some unintended consequences and game playing, and not really in a spirit of collaboration that might lead to risk-taking, innovation and results that really matter to the clients (which may or not be the ones set out in the tender).
What I would like to see is some kind of reward for success which is I guess what you’d like to see as well. This might be money but could be many other things, starting with getting re-contracted.
Hi Nigel,
I agree with your first point about not being able to have contracts that are too small to make a statistical estimate of risk. I think the point I’m making is that currently, a lot of PbR contracts are going the other way and being too big, meaning that only huge, often private sector, organisations are able to deliver them. Work Programme ‘contract package areas’, for example are so large that local, voluntary sector organisations simply can’t become primes without fundamentally changing their nature. Previous New Deal employment programmes were still large enough to enable estimation of risk, but small enough that a much wider range of organisations could be contracted.
On your second point, I wouldn’t say I’m arguing *for* keeping money back in order to incentivise organisational behaviour. The starting point for me with this piece was the thought that PbR is likely to be here for some time (eg IDS speech), so how can we make it work as best possible. In fact one of the things that would help the most is to hold *less* of the money back, making more up-front that is the case in many PbR schemes at present.