05 August 2015

The possible shutdown of high profile charity Kid’s Company illustrates some of the problems government faces when it relies on third parties to provide important public services. It also provides rapid vindication of the Cabinet Office’s top civil servant’s decision to seek a ministerial direction for continued funding.

Successive governments have become reliant on external providers for services that were once the province of state provision. That has brought many benefits: innovation, better focus on users, more diversity of provision and more flexibility – as well as efficiencies and economies. But it also brings risks – in particular, that government becomes dependent on the quality of financial management of others, and dependent on them providing information on the services they provide and results they deliver.

Making objective decisions on whether to continue funding or not can become hard when the recipient organisation is well connected and can mobilise vocal political support. Charities are powerful advocates for their clients – but also often for themselves, particularly if a government decision poses a threat to their continued operation.

When I was at Defra we had an example of a charity which had lost its way, become dependent on Defra funding, and failed to adapt to a changed funding environment. But none of that was taken into account by the high profile supporters they mobilised to defend their continued funding. After a brief attempt to develop a revised business plan, we finally agreed with the trustees that the organisation could not continue in its current form as there was no one prepared to fund its activities.

In such circumstances, the path of least resistance can be to continue funding – as Cabinet Office ministers decided to do in the case of Kid’s Company – hoping that things will come right, rather than pulling the plug.

So what are the lessons we can learn from this case:

  • Transparency over finance and delivery matters. However well-intentioned the cause and well-connected the recipient organisation, government still has to ensure that what it funds offers the taxpayer value for money. That means the government needs to be satisfied that the organisation can deliver what it promises and can demonstrate results – even when making a grant to a charity. The same disciplines that should apply to contracts with private sector providers should apply to not-for-profits using taxpayer money.
  • Exits need to happen. Entrances and exits – the creative power of destruction and invention – are key to progress and improvement. One of the reasons why government itself may be less innovative is that it is not exposed to these competitive pressures. That should apply to the VCS too – but as a sector there seem to be few exits and few consolidations. There should probably be more.
  • Government needs to be ready to manage “failures”. When the government depends on external providers, it must have a Plan B for when one of those providers fails. It is often looking to organisations to deal with the most vulnerable people with complex needs who are ill-suited to central provision and for whom continuity of service is vital. So in all these cases, officials need to work out what they will do if the provider fails.

The final lesson we can take from Kids Company is that this will not be an isolated example.

The next spending round, with departments modelling 25 and 40% reductions in budgets, will mean that many good organisations doing valuable work will see their budgets reduced. Ministers and those who advise them will need to ensure that those cuts fall where organisations – public, private or VCS – are offering least value for money, and be prepared to tough out the inevitable flak that will follow.

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