Contracting – a game of high risk

Earlier this month, National Council for Voluntary Organisations published its 2015 almanac, reviewing 2012/2013 data on the state of the voluntary sector and its 160,000 organisations.

When I commented last year on the previous almanac, I noted that contracts had now dwarfed grants as the main source of government funding in the sector (a turnaround from the mid-2000s, when grants were still slightly larger). This continues to be the case in the new figures – of £13.3bn earned from public bodies, 83 per cent was from contracts or fees. This demonstrates how the rise of the “contract culture” has been over a decade in the making, and although it has fallen back in the last year, the trend is clear and likely to continue.

It is not just the prevalence of contracts that has changed, though – their terms and conditions have too. This was highlighted by another recent report from the National Audit Office, which shone much-needed light on the scale and trends in payment-by-results contracts. This fascinating report paints a damning picture of how commissioners have rolled out the usage of PbR without due foresight and expertise (I’m sure hardly a surprise to frontline organisations).

The report identified 52 PbR schemes across central government, representing £15bn worth of public services in total. They include large programmes such as the Work Programme and Transforming Rehabilitation, and smaller ones like Troubled Families, the Peterborough and Doncaster Impact Bond pilots and international development projects. The balance between payments made on service and at risk varies scheme to scheme, with the majority putting 60 and 80 per cent at risk.

What’s particularly interesting is that the NAO report flatly dispels two myths that have been used to promote PbR: that risks are passed from taxpayers to providers and that they encourage innovation.

While they do pass risk, the report also shows they add cost and risk to commissioners, as they are complex and require additional staff time to set up. And while commissioners argue that PbR encourages innovation by freeing providers to choose interventions that generate desired outcomes, this has not happened in practice. The report finds that unless PbR is designed and used appropriately, these schemes rarely encourage service innovation. Peterborough is a notable exception.

I hear similar stories on the ground from sector organisations. Recently, one of our charity clients was tendering for a fairly small employment support contract designed on a PbR basis. The commissioner was seeking better outcomes for less money than they did the year before – only to be expected, you might say – but at the same time was highly prescriptive about the service approach, which prevented the provider from exploring how best to deliver the outcomes. No innovation there.

New behaviours in commissioning are therefore required if PbR is to be used well. Remarkably, the Department for Work and Pensions did not even have a business case for PbR when it initiated the £3bn Work Programme. But, unfortunately, this kind of change won’t happen overnight and is dependent on a body of commissioners who themselves are faced with uncertainty and change. In the meantime, the sector will need to get on with it and learn fast how to manage the risks associated with public service markets.

The picture painted by the NCVO and NAO underlines just how much the environment for service delivery charities has changed. There are ways to mitigate these risks, of course – modelling financial implications, building performance management systems to capture data which will trigger payments, and seeking stronger delivery partnerships. But charities involved in the contracting market are now part of a high-stakes game of risks and rewards. They should approach it with eyes wide open.

Richard Litchfield is chief executive at Eastside Primetimers