Five tips for managing payment by results contracts

Liam Crosby is policy and public affairs officer at Community Links. He covers a range of policy areas and focuses on social security. Prior to this he worked for two years at Save the Children’s Policy and Advocacy division; and as a researcher at the London School of Hygiene and Tropical Medicine.

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This month saw the launch of the government’s Transforming Rehabilitation programme, under which prisoners will receive rehabilitation services for 12 months after their release. Transforming Rehabilitation is the latest, and possibly most controversial, payment by results (PbR) scheme introduced by the coalition government: contracting out services away from the national probation service and towards private, public and voluntary sector contractors.

The controversy surrounding the Transforming Rehabilitation contract is partly due to the particular payment mechanism – a blend of fee-for-service and payment-by-results which many organisations criticized when it was originally proposed. But, many more general issues also exist.

In a week in which Iain Duncan Smith has described these contracts as “revolutionary” and “pioneering”, it’s clear that PbR will remain a feature of public sector commissioning for some time. We have to understand the risks and opportunities these contracts present, and how best to manage them.

At Community Links we have been taking stock of what we’ve learned from our experience with PbR contracts, which we’ve delivered since 2001 when we began providing the New Deal programme. Today our PbR portfolio is worth £5.4m and incudes eight different contracts which vary in their size (from just £87,000 up to almost £3m) and in the proportion of payment made for results (which ranges from 50% to 85%).

It’s clear that PbR contracts are not without financial, reputational or operational risk. Our experience has shown us the importance of assessing each PbR contract on a case-by-case basis. Contracts need to be:

• practicable to deliver
• fit within your organisation’s values
• deliverable within your organisation’s approach.

What we have learned about PbR

Develop a strong relationship with the commissioner

Commissioners are also often responsible for making referrals. We had a direct contractual relationship with the Department for Work and Pensions during the New Deal, whereas more recently in the Work Programme a prime contractor acts as an intermediary.

Without a direct relationship it’s harder to manage referral volumes and iron out any emerging issues. It’s therefore important to develop a strong contract management relationship with commissioners: directly or through mechanisms such as trade bodies, local providers’ groups or operational forums.

When bidding to be a sub-contractor, careful consideration of potential prime contractors – including their reputation, ethos, track record, any past contract relationships – should help indicate how they will be to work with.

Make sure your cashflow is up to the challenge

PbR programmes present a challenge in terms of cashflow, particularly for voluntary organisations whose small reserves can make it difficult to fund services until outcomes are achieved and payments received. This can be especially challenging when referral volumes differ from those originally expected: referrals to the Work Programme have been consistently lower than originally forecast, for example. Strong management information systems, including regular re-profiling of caseloads and expected payments, can help with this. Also, it is useful to deliver a range of programmes, so that we can move staff on to other services when referral volumes fall.

PbR has the potential to direct services towards narrow outcomes, which may conflict with voluntary organisations’ values of holistic, person-centred working. To overcome this we seek blended funding where possible – grants alongside PbR contracts can enable us to work in a more wrap-around way. It’s also important to ensure service-users’ views inform negotiations with commissioners and the design of contract terms.

Simple outcomes are better

PbR works best when contracts pay for simple outcomes, ie when the service is aimed towards one clearly defined end-point, and where that outcome doesn’t rely on other goals being achieved.

IDS recognised this point explicitly in his recent speech. For example, we find the Work Programme structure works best for people without complex barriers to employment: when people have multiple other needs, the payment structure doesn’t enable us to work with them in the necessary holistic way.  Our experience also shows the benefits of small-scale contracting. This allows local providers to deliver services in a way that’s tailored to their local context

Now what?

There are many policy changes that could facilitate voluntary sector providers’ participation in these schemes. In addition, sharing learning across the sector could help our engagement in these services. When PbR works, it should enable us to deliver our services innovatively, drawing on our local knowledge and experience.