By Richard Johnstone | 23 January 2014
A government focus on payment-by-results contracts is hindering the ability of charities and social enterprises to win public service outsourcing deals, even as ministers pledge to open up procurement practices, a report has found.
An analysis by Collaborate and the Institute for Government found that PbR – which has been used in schemes such as the Work Programme and which Prime Minister David Cameron has said will expand – favour large outsourcing firms.
While the government has acknowledged that social sector organisations can often deliver better outcomes for users of complex services, such as drug and alcohol rehabilitation, they are more vulnerable to financial risk compared to larger providers, the Beyond big contracts report stated. Such firms also often lack the necessary commercial and contract management skills to succeed within a PbR framework, where providers are paid based on their performance.
Following interviews with organisations involved in delivering services such as adult social care, mental health drug and alcohol rehabilitation, and special educational needs, the report found they are confident in their ability to deliver.
However, more than 80% of the 122 providers polled reported concerns about financial risk from PbR, with most worried about cost recovery in contracts and access to working capital. In one case study, a provider said that they had waited up to nine months for payment.
Those questioned added that commissioners have also been transferring more financial risk onto providers, which could exacerbate the problem. They called for a co-production model for services to be introduced to help smaller providers win contracts.
IfG research director Tom Gash said the government had argued that PbR would spur innovation in service delivery.
However, the research showed many providers were unwilling to risk new approaches in the current fiscal climate.
‘This is particularly true for smaller organisations, which risk bankruptcy if they fail to meet targets,’ he added.
‘Commissioners need a much better understanding of how providers – and particularly smaller ones – are likely to respond to financial risks.
Collaborate director Henry Kippin said there was a need to ‘redress the balance in public service reform’ towards greater collaboration and a focus on strong local relationships.
‘The challenge for government is to create the right conditions to make this happen,’ he added.
Among the report’s recommendations was a call for public sector commissioners to invest time in involving users in defining desired outcomes for services. They should also understand the types of risk-taking required to innovate and improve outcomes, and ensure these are incentivised through the contract system.
