New Collaborate/IfG report: Beyond Big Contracts

Beyond big contracts: payment by results harming social sector’s ability to help most vulnerable, new report says

High profile problems with large outsourcing providers have led to government pledges to involve more SMEs and voluntary sector providers in delivering its Open Public Services agenda.

But a new study has found that commissioners and providers may not succeed in the current contracting environment, which some argue is more suited to larger providers and doesn’t necessarily help those most in need.

While it is acknowledged that social sector organisations can often deliver high quality outcomes for users of complex services, such as drug and alcohol rehabilitation, their size makes them more vulnerable to financial risk compared to larger providers. Furthermore, they often lack the necessary commercial and contract management skills to succeed when operating in a ‘payment by results’ (PbR) framework, which can also impair their ability to create the collaborative partnerships required to meet the most complex needs.

The report, ‘Beyond big contracts: commissioning public services for better outcomes’ is a joint project between Collaborate and the Institute for Government, supported by the Calouste Gulbenkian Foundation.

It aims to convey the experience of those organisations and workers most closely involved in delivering complex services, such as adult social care, mental health drug and alcohol rehabilitation and special educational needs.

Research involved a series of in-depth interviews, expert workshops and roundtables with commissioners, policy professionals, providers and practitioners of complex services.

Two separate surveys asked participants about how ready organisations were to respond to the government’s public service reform agenda, and how well set up they were for an increasingly complex commissioning environment.

Key findings include:

-    Commissioners are confident in the ability of smaller, specialist providers to deliver complex services.

-    However, contracting mechanisms such as PbR do not play to the strengths of social sector, smaller providers, which are unlikely to possess commercial/contract skills or significant financial reserves to manage cashflow.

-    Commissioners and providers felt that a co-produced and more collaborative model of service delivery, with user need at the forefront rather contracting convenience, could lead to better outcomes.

-    Blanket application of PbR could undermine this goal if insufficient attention is paid to the service differences or commissioning and provider capabilities.

-    Over 80 per cent of providers surveyed reported concerns about financial risk from PbR, with most worried about cost recovery in contracts (80 per cent), and access to upfront/working capital (78 per cent). Commissioners are transferring more financial risk onto providers. This can mean that organisations with specialist skills in helping challenging users are disincentivised from innovating because they are more concerned about their bottom line.   

-    In the last year, 60 per cent of providers reported a change in their contracting relationships with public sector organisations. Sub-contracting (as seen in the Work Programme) inevitably means that some social sector organisations’ existence  is based on winning work from the large private sector providers, creating an uneasy relationship between the two and further distancing public sector commissioners from those organisations with specialist skills required to help those often referred to as ‘hard to reach’.

In July 2013 the Institute published Making Public Service Markets Work, which provided recommendations for how the government can professionalise its approach to commissioning and public service markets, including better transparency. Our joint research with Collaborate has identified a number of challenges that will need to be addressed to ensure the government’s Open Public Services agenda can deliver the best outcomes for users:

Commissioners should:
1. Invest time in defining desired outcomes, with users and communities at the heart of service design and accountability structures.
2. Understand the types of risk-taking required to innovate and improve outcomes, and ensure they are correctly incentivised.
3. Recognise that it takes time to build trust and truly collaborative relationships and create necessary policy conditions and governance models to underpin them.

Institute for Government Director of Research, Tom Gash, said: “The government has argued that new contracting approaches such as ‘payment by results’ will spur innovation in service delivery. However, our research shows many providers are 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. Commissioners need a much better understanding of how providers – and particularly smaller ones – are likely to respond to financial risks. The current approach may deliver cost reductions but is likely to exclude smaller players, reduce levels of competition, contributing to inadequate provision for service users with complex needs.”

Dr Henry Kippin, Director of Collaborate, said: “This report shows that we need to re-dress the balance in public service reform – towards greater collaboration, co-production and a focus on strong local relationships.  The challenge for government is to create the right conditions to make this happen.  This should be a priority for whoever is in power from 2015 onwards.”

Lord Victor Adebowale, CBE, Chief Executive of Turning Point and Chair of Collaborate, said: “We need a step change in commissioning practice to be ready for the future.  Greater co-production and co-creation are essential. As this report argues, the public, private and social sectors all have a part to play getting the maximum benefit from limited finances; driving accountability and hold providers to account; and creating space for the sort of risk-taking and innovation needed to improve social outcomes.”

Sir Stuart Etherington, Chief Executive of the National Council for Voluntary Organisations, said: “Charities run high-quality and efficient public services, but they don’t have the deep pockets of the big outsourcing companies. Problems or delays in payment by results that wouldn’t concern a big company can be very hazardous for a small, specialist charity. It’s clear that while use of PbR is growing rapidly, knowledge about how to design PbR contracts that work well for smaller organisations is not keeping pace.

“Collaborate and the Institute for Government are right to say that that better understanding of the relationship between financial risk and innovation is necessary. Many charities have told us they have faced poorly designed PbR contracts which not only place unsustainable financial pressure on them, but also don’t enable the innovation necessary for them to make real improvements for their service users. Some good practice is emerging in a few areas, however, and I hope commissioners will share knowledge where things work well.”

Michael Coughlin, Local Government Association Executive Director, said: “As prevention, early intervention and demand management come to the fore, helping public agencies navigate through the complexities and challenges of commissioning becomes ever more critical. This report does just that.”