Six reasons why the DWP’s Payment by Results model constrains innovation

By Chris Sherwood, Co-founder of Guerilla Policy and Director of Policy and Research, Relate

The jury is still out whether the Work Programme is actually working and the Department for Work and Pensions is pushing the sector to deliver a step change in performance so that the policy is proven to be successful. Taking into account the wider economic context, innovation is central to improving performance, yet the current approach to Payment by Results (PBR) constrains this for two reasons:

– Firstly, it’s financial terms are too aggressive which reduces appetite for risk and experimentation; – Secondly, it highlights tensions between two competing agendas – i) efficiency and performance and ii) innovation.

Alongside the constraints resulting from PBR, welfare to work has a number of in-built rigidities that also inhibit innovation from being adopted and scaled.

The Open Public Services White Paper sets out the Coalition’s commitment to expand the use of Payment by Results (PBR) across different areas of public sector commissioning from welfare to work, rehabilitation of offenders, troubled families through to adult skills.  PBR is part of a wider shift in the way public services are delivered to introduce more competition.  It is hoped that outsourcing to the private and voluntary sector will lead to improved efficiency, performance and greater levels of innovation. The Economist magazine has predicted that £58 billion of public services will be outsourced by 2015, on top of the £82 billion already outsourced (according to Oxford Economics).

The Work Programme is by far the largest initiative using a PBR approach to date. It is a £5 billion programme that has been heralded as the most radical attempt by the UK Government to address long-term worklessness.  It is based on the principle that government will get out of the way and will financially reward providers who perform.

Alan Cave, the former Contracted Customer Services Director at the Department for Work and Pensions and one of the architects of PBR, argued at this year’s Welfare to Work Convention that the way the Work Programme has been commissioned was designed to deliver a ‘step change’ in performance.  He reminded delegates that the Department had offered providers:

• long contracts
• freedom and flexibility in delivery (blackbox)
• rewards for outcomes rather than process
• incentives to work with harder groups to deliver this step change by improving efficiency, performance and innovation.

A picture of the performance of the Work Programme is slowly emerging, and while the initial data releases aren’t too promising, it is still too early draw conclusions about the effectiveness of the programme.  The National Audit Office, in a report earlier this year, argued that the Government’s assumptions about the expected performance of the Work Programme were over ambitious, and that only 26% of job seekers would secure work (a similar figure to Flexible New Deal which has been much derided by then Employment Minister Chris Grayling) compared with the Department’s target of 40%.

Cave argued that the welfare to work sector should look to the likes of Tesco, Nuclear Energy and Apple to see what a step change in performance looks like. He noted that the key ingredients were transformational leadership, an appetite for challenge, relentless focus on continuous review and improvement and excellence in supplier relationships – sharing knowledge between and within organisations.

How does Cave’s challenge to the sector stack up against the experience of innovation within this PBR model? The PBR approach adopted in the Work Programme has created a number of rigidities that inhibit the adoption and scaling of innovation within welfare to work.  A study by Su Maddock at the Manchester Business School’s Institute for Innovation Research identifies significant tensions between the different policy aims within the Work Programme e.g. drive efficiency through a top down supply chain model and the relationships between prime contractors and their supply chain, including specialist organisations where service innovation could be fostered.

PBR based on price impacts on quality and innovation

A review into choice and competition in public services by the Office for Fair Trading found that competition based on price alone is likely to lead to a deterioration of quality.  Price is still king in the commissioning of public services and will continue to be so as cuts are expected to continue until 2017.  Discounting and under-bidding has been encouraged in the Work Programme and the slim financial margins that providers can expect could increase risk adversity.  Jo Casebourne of NESTA has argued that the “focus in the Work Programme on cutting costs and driving performance may be crowding out the ability to try new things and to learn from those that do not work…”

Financial considerations took precedence over the innovation capabilities of prime providers when decisions were made on whom to award Work Programme contracts to.  Su Maddock has argued: “outsourcing to large companies or any company on the basis of financial assets alone is a poor lever for personalised service innovation’.

The Work Programme was also designed for a far more positive economic climate than we find ourselves in – 2.6% economic growth rather than the 0.8% growth that is now forecast by the Office for Budget Responsibility.  This coupled with DWP’s estimates of the number of customers in receipt of Employment Support Allowance who would be referred onto the programme in the Invitation to Tender, has increased pressure on the balance sheets of providers as they wait for outcome payments to come through, which could reduce their appetite for innovation.

Competition isn’t driving innovation in welfare to work

Competition normally drives adoption of innovation and those who don’t innovate generally see their market share decline or are pushed out altogether.  Dave Simmonds of CESI in a blog on innovation in employment services argues that the restricted competition and a ‘closed’ market in welfare to work coupled with insufficient external challenge has inhibited innovation.

The risks associated with PBR could also skew the market in favour of a small group of very large providers who are increasingly too big to fail.  The trend to bigger is better in outsourcing of public services could constrain innovation as the market starts to mature around a small group of providers.  The government is ever more reliant on these providers who alone have the scale, infrastructure and funds to absorb the risks associated with PBR.  These providers are increasingly branching out to operate in different public sector markets be it welfare to work, community health services, troubled families or offender management.  The dominance of these providers crowds out new market entrants both at prime contractor level but also potentially in their supply chain as they coalesce around a group of preferred sub-contractors.

Lack of transparency and public scrutiny of performance inhibits innovation

Performance data on what is and isn’t working is a vital ingredient for spurring innovation.  This has been recognised by government in their Open Data White Paper which encourages the public sector to open up data to encourage innovation.  However, this has been a challenge in the welfare to work market where it has been difficult to understand how the Work Programme is performing.

Effective transparent scrutiny of what is and isn’t working in the Work Programme is difficult because (a) restrictions imposed on prime contractors and their supply chain, which prevent them from sharing performance data unless it is already in the public domain, (b) reluctance of some prime contractors to share performance data with their supply chain and (c) the blackbox approach which means providers see their way of working as commercially sensitive.

Sharing of what works and what doesn’t between providers has been constrained because of commercial sensitivities or ministerial veto.  Wider public scrutiny of the programme has also been difficult which inhibits new entrants to the market who might bring different ways of working.

Risks associated with PBR crowd out smaller, grassroots providers who are often the source of vital innovation

The barriers to innovation within large bureaucracies are well documented. A common practice in the outsourcing and technology sectors has been for large companies to swallow up small upstart businesses and scale their innovative practice within their own operations.

The way PBR has been implemented threatens to turn off a tap of vital innovation from small, grassroots organisations that can then be replicated across the sector.  A number of charities, including St Mungos, have pulled out of the Work Programme because of the financial risks associated with delivery.  This is a concern for innovation within the welfare to work market.  Others haven’t been able to compete because of downward pressure on prices, cash-flow concerns and, in some cases, a lack of referrals.

As NCVO has argued: “The Work Programme continues to pose major issues for charities particularly around managing cash flow and taking on risk and very large contracts prevent smaller and more specialist organisations from playing their full part.  More seriously it’s clear that the payment structures used continue to threaten the viability of contracts.”

Market maturity can crowd out innovation

Market disruption can foster innovation but evidence from Australia on the welfare to work industry there (which uses a similar model to the UK) points to the fact that, over a period of time, practices across providers appear to standardise.  Providers land on certain practices (but not necessarily the best ones) that they know work as a way to deliver outcomes to generate revenue.  Their appetite for trying out new things as the market starts to mature.

This issue is compounded by a resistance to try new things in the sector.  Dave Simmonds has argued that there is a ‘widespread belief in the industry that it’s all been done before’.

Service users are a valuable source of innovation whose contribution is often ignored

The welfare to work industry has generally lagged behind other sectors in involving service users in the design and delivery of services.  Service users can often be a valuable source of innovation – they bring new insights and approaches to bear on problems.  Yet their perspective is often ignored or neglected due to organisational cultures, tight timescales of a contracting round or the lack of processes to seek their contribution.  The Review of Employment and Skills report from the UK Commission on Employment and Skills published in April 2011 argued that the welfare to work industry needs to do more to involve service users in the design and delivery of services and made the case for co-producing services.

The experience of PBR in the Work Programme the highlights the real tension between policy drives to improve efficiency and performance as well as to generate more innovation.  Innovation has proved far more difficult than either providers or policy makers expected as a result of the effects of PBR.  The risks associated with PBR means that providers could be reluctant to experiment with new ways of working.  This is keenly felt by voluntary sector providers at the end of a long supply chain.

November 2012

Chris Sherwood is a member of the NCVO Payment by Results Working Group. The Group will be blogging ideas and thought as we develop a policy paper on payment by results, to be published in summer 2013. For more details contact Fiona.

See more of Chris’ writings on payment by results and other issues at Guerilla Policy. NCVO runs a Special Interest Group for all voluntary sector subcontractors working under the Work Programme.