Public bodies seem to be pursuing the use of payment by results with the vigour of a drunk in search of the next bottle of alcohol. Disaster looms unless there's some sober consideration of where and when such an approach can work
Public policy and public sector practice are prone to being dominated by the latest fashion or, as these often seem in hindsight to have been, ‘fads’. The current obsession with contracts based on a simplistic and absolute purist form of ‘payment by results’ may prove in the end to have been such a fad.
The publication of the government’s flagship Work Programme performance last week raised many questions about the efficacy of contracting on the basis of payment by results. Of course, there is a range of reasons for the abysmal results from the Work Programme, not least of which has been the failure of the economy to grow and create sufficient employment opportunities. However, most observers would cite the contracting model, including its prime/sub-contractor division and payment by results approach, as being the core critical factors that have led to the disappointing numbers of long-term unemployed people being placed in sustainable jobs.
Payment by results is attractive at first sight. After all, who would wish to pay for failure? Payment by results seeks to shift risk to the provider given that the procuring body only pays out when there is a result or outcome (although it is the public sector which, in effect, has to pay benefits to those people for whom the Work Programme has not found jobs). And as a procurement and contracting methodology, it should encourage innovation and enable providers to focus on outcomes rather than detailed process specifications. All this has to be positive.
I meet and speak to many commissioners, procurement officials and leaders across the public sector, who enthuse about payment by results. The trouble is many of them tend to be absolutists, believing that the process can be applied to almost any and every service contract and 100% of the provider’s payment can be put at risk.
Actually, given the right conditions for some services and in pursuit of certain outcomes, contracts with elements of a provider’s payment and reward being based on a payment by results approach can undoubtedly be beneficial. That said, it would be more effective and a better incentive if a proportion of the payment and reward is based on the achievement of specified outcomes – perhaps the provider’s profit margin or this plus a small additional element, but not the entire payment.
Public bodies need to be cautious and selective before they embark on universal payment by results contracting. This system assumes the commissioning and procuring authority knows what outcomes it wants achieved; is able to measure these; and can trace how a particular provider has contributed to these measurable outcomes. In some services (for example, refuse collection) this may be relatively easy, but in complex activities – where there are several organisations contributing to the realisation of the outcome – it is not so simple.
Many contemporary social goals such as reducing long-term worklessness or addressing the challenges of troubled families or improving community safety crime require multi-agency contributions and collaboration over several years. External influences here can derail performance all too easily. The economic recession has had precisely such an impact on the Work Programme.
Providers may understandably be less keen to bid for contracts through which a substantial part of their reward (and even the revenue required to cover costs) is at risk from factors beyond their direct control. And, even if they do, they will wish to negotiate a diminution of the outcomes that the public body is seeking and/or will have no option but to charge a premium price to offset the risks as best they can. This makes commercial sense.
If payments are not going to be made for a long time (such as in children’s services, the management of long-term illness or the reduction in exclusion from the labour market), it is obvious that only those providers with large, robust balance sheets will be able to raise the necessary capital to fund their cash-flow requirements.
Unless they are able to access low-cost social finance, this will almost certainly exclude most social and voluntary and community sector organisations from bidding for public contracts. And even if they can borrow the capital, prudence suggests that they will be nervous about the high risks involved in securing the outcomes necessary in order to be paid. This, of course, runs completely contrary to stated government policy to open up more public service provision to the social and third sectors.
The same logic will often apply to small and medium-sized enterprises – another government target group.
The public sector has to have the confidence that it has the skills and capacity too, so that it can
- talk to and understand what providers – business, third, social and public sector trading companies – can tolerate, and what would incentivise them best and ensure their sustainability
- negotiate contracts required to make payment by results contracting effective
- avoid provider ‘gaming’, ensure that prime providers and ‘service integrators’ do not simply pass their risks onto smaller organisations less able to bear them in their supply chains
- prevent provider bankruptcies
- and, above all, deliver the desired outcomes at affordable prices
Providers, in turn, need to have the necessary commercial acumen, especially with regard to risk management, and contract negotiation skills. Unfortunately, there have been too many examples of third sector organisations signing up to contracts based on payments by results when they have either not understood the risks and costs (for example cash flow costs) adequately or have felt that they had no choice if they were going to continue to deliver services. This is a bad place in which to find ourselves.
The government, wider public sector and providers, together with sector experts, urgently need to review the experience of payment by results in this country and internationally before pursuing the policy further seemingly with the vigour of a drunkard in search of the next bottle of alcohol. In this context, one thinks of the government’s proposals for the probation service, but there are many other examples.
Over the next few years, the public sector and public services are going to be under unprecedented financial pressures. There will increased temptation for public bodies to turn to payment by results contracting as a means of delivering better outcomes for less money. I fear a looming disaster. There has to be a sober consideration about the implications of this policy and a realism about what can be achieved and what might be at risk from such an approach.
Regardless of what happens, there is no merit in simply pursuing any form of contracting and payment system for reasons of ideology or fashion.
