26 January 2011

The government needs to create a market for provision if it is going to hand over delivery of public services to independent providers through outcome based payments.

The Government will soon publish a white paper that will set out its direction on delivery of public services.

The Institute published a short introduction to some of the difficult problems faced in the design of new commissioning arrangements in December. On 20 January, the 2020 Public Services Trust held an event to launch their toolkit for commissioners.

New markets could be used as an opportunity to give providers scope to join together contracts where similar services are being provided to similar users with similar needs.

Commissioning, done smartly, could end the need for separate silo based contracting in health, employment, reoffending and skills. It provides an opportunity for commissioning to succeed where the machinery of Whitehall often fails – to allow single providers to offer services to support a range of departmental outcomes to individual users.

By agreeing on common approaches across Whitehall, there is the potential for services that are more user friendly and better value for money.

Better commissioning

To take advantage of this opportunity, Whitehall needs to become a better commissioner. It should look carefully at:

  • New skills. This is a complex task that requires understanding of the needs of end users, the capacity of the market and contract management. Whitehall should identify the specific skills it requires in commissioning and build teams to focus solely on this task;
  • Co-ordination. Whitehall departments should, as far as is possible, agree to have a common level for commissioning and a common approach to contracting, tendering and payment schedules. The easier it is for bidders to weave together contracts, the broader the scope and the lower the transaction costs in developing markets; and
  • Transparency. This is a learning process. To make sure that success can be tracked, independent providers should be obliged to provide data and information to create adequate opportunity to evaluate and ensure value for money. A light touch, minimum data set should be agreed across Whitehall to allow comparisons to be made between different providers.

If Whitehall gets this right, it should deal with one of the consistent complaints from providers dealing with central Government – that the cost of bidding is too high and the procurement approach is too complex. Managing down the cost of the process to a minimum should be a critical focus for Whitehall in designing commissioning structures.

Financing providers

Finance will undoubtedly be a problem for new providers in the market. They will be raising finance against future revenue streams that are at best uncertain. Paying for outcomes when they are achieved may hamper investment in, say, early years work, where the pay off on outcomes may not be measurable for a long period of time.

This problem will be particularly acute for small providers or voluntary sector organisations that have traditionally worked on a contract or grant based relationship with government. These are organisations characterised by high labour costs and lack the assets against which to secure finance.

So if new providers are to come forward to seize the opportunities opened up by better commissioning, the government may have to look at options including:

  • staging payments to create certainty in the market before outcomes are delivered
  • creating capacity by transfer of public services into the private or voluntary sector
  • generating financial support for small organisations wishing to gear up services.

That financial support might not necessarily come from the taxpayer, and there is a healthy debate about the potential for new financial mechanisms, including the Social Impact Bond pilot. The regulatory and incentive framework around such investment will no doubt be part of that debate.

Conclusion

The government is trying to create markets at a time of dynamic change in Local Government services, housing and education provision, welfare support and health reform.

This will be a learning exercise. To succeed, the commissioning process will need to be open to amendment whilst markets develop. Over time, a better understanding of prices and costs in the market and the success of different types of intervention can help refine the process.

One thing is clear - a sensible approach for all sides will be needed to ensure a great deal of flexibility is built into early commissioning contracts.

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