The government is moving fast to introduce payment-by-results systems into many of our public services. Stuart Watson reports on a round table at which civil servants shared their experiences – and discussed the challenges

 The coalition government came to power trumpeting several big ideas for transforming public administration, including localism, the Big Society, and payment-by-results (PBR). The first two concepts have benefited from lots of media work and have a fairly high profile – though both are received sceptically in some quarters. But the third, while lower-profile, is comparatively uncontroversial and has just as much potential to transform the way in which the civil service operates.

Under the last government, civil servants were often asked to improve public services through a top-down, controlling network of targets, specifications, reporting systems and set procedures: central government tried to bolster and guarantee local services by specifying exactly how they should be delivered, and service-provision contracts were designed to purchase volumes of activity (‘outputs’). But the coalition has very different ideas about service improvement. From the PM down, ministers believe that local communities and service providers should be free to deliver services in the way that best suits local needs and conditions; what matters is results. Meanwhile, chancellor George Osborne is leading a drive towards PBR, under which service providers are rewarded on the basis of their success in achieving desired ‘outcomes’ rather than paid to perform a specified set of activities.

This is a big shift for the civil service – both for the managers of service-delivery operations, and for those contracting services from the private and voluntary sectors. It’s not a new agenda: the Department for Work and Pensions’ Work Programme is based on strong departmental experience of PBR, for example, and the Ministry of Justice is running a set of innovative pilots designed to reduce crime and reoffending rates. But many parts of the civil service have little experience in the field – and they’re being asked to get to grips with this agenda quickly.

At July’s Civil Service Live, a group of civil servants gathered for a Civil Service World round table – sponsored by technology and outsourcing firm Accenture – to discuss how managers can move to PBR-based delivery models. Several of those present have been involved in setting up PBR regimes in their departments, and brought valuable experience of the process to share with their colleagues (see list below).

While all present agreed that the agenda presents complex challenges, there was also a clear sense of excitement at the opportunities that a focus on outcomes could generate for more efficient and dynamic administration.

Better, cheaper results
Asked to say a few words to open the discussion, Accenture’s Robert Gibbs summed up the context: “In times of scarce capital, any organisation needs to be prepared to say: ‘Our remuneration depends on us delivering results’,” he argued.

David Clarke of the National Audit Office said he has examined the Work Programme’s PBR regime, and summarised the perceived advantages of the scheme: “If you can define what outcome you want and what you want to pay for it, then in theory you can leave the provider to get on and deliver it in the way they think best, which gives them the ability to innovate and
react quickly to changing circumstances. The idea is that this delivers a better, cheaper, more effective result.” He added that the theory is supported by Australian research into PBR-based welfare-to-work programmes.

Asked by facilitator Robin Hutchinson whether civil servants are prepared for the cultural change involved in a move to outcomes-based delivery, the National Offender Management Service’s Michael Wheatley said that he has found them to be surprisingly comfortable with the idea – an opinion backed by the rest of the group. “They know money is tight, so we have to do things differently. They have embraced the concept and see it as the future for making the books balance,” he said.

Getting the right outcome
The participants agreed that to be successful, PBR schemes must intelligently define the desired outcomes. Jonathan Simons, who leads the Cabinet Office’s public sector reform team, said that much of the reform in the health sector has so far amounted to “payment by activity” rather than true payment by results – so that, for example, the outcome is defined as carrying out the operation, rather than the improvement in health that it produces.

“Payment by activity is not really where you want to be unless you can’t work out your output, or price it properly, or unless your activity is a very good proxy for your output [so that they amount to the same thing],” he said.

The NAO’s Clarke argued that outcomes must be carefully defined if they are not to have unintended consequences: “Defining outcomes means defining the choice you want to make about different groups. You have to think, for example, about whether you mind very much if a disabled person gets back into work at the expense of a young person. If so, you can’t just say your outcome is someone getting back into work,” he said.

The Central Office of Information’s Catherine Hunt suggested that measuring whether outcomes have been achieved, and who is to be credited with achieving them, is particularly difficult in areas such as communications, where the results may be intangible. “What do you even set as a target? What’s your outcome?” she asked. “How do you quantify the effect of communication? For someone like me who thinks about how you prove these things, it’s extremely exciting because it starts to bend your mind, but on another level you’re faced with the time and effort required to do it well.”

NOMS’ Wheatley added that in his drugs PBR project, it is taking a long time to create an evaluation methodology because of the difficulty of disaggregating the programmes’ effects from those of other agencies and programmes. Indeed, few PBR schemes are easy to measure: Daniel Johns, who’s developing new approaches to flood protection at the Department for the Environment, Food and Rural Affairs, noted that he’s having to strike a balance between making the scheme over-complicated and opening the department up to the risk of overpaying for some outcomes and underpaying for others.

Creaming, parking and gaming
Simons identified two linked risks involved in moving to PBR: doing so too quickly, and without sufficient thought so that government is fleeced by its suppliers; or pricing too meanly so that suppliers are not interested in participating.

It is vital to define and price outcomes carefully, argued Clarke, to reduce the risk of providers cherry-picking the easiest work (“creaming”) or abandoning cases that are more difficult to solve (“parking”).

Meanwhile Gibbs said that the “elephant in the room” is the risk of private contractors “gaming” contracts by showing good enough results to make their profits while failing to deliver the outcomes originally intended by the commissioner. Gaming by suppliers can, he said, even produce perverse outcomes that are the opposite of those intended by the commissioner.

Defra had considered the potential impact of gaming on its flood defence scheme, said Johns, in order to close loopholes such as developers building more homes in flood plains in order to claim additional funding for taking them out of risk. He said the department undertook brainstorming sessions to identify the techniques by which its scheme could potentially be perverted. Meanwhile, Clarke suggested involving potential suppliers in these discussions and asking them what loopholes they might seek to exploit.

Simons suggested that in some circumstances gaming might be regarded as acceptable. “You could pick an area where you couldn’t do much worse, like the outcomes for children in care – some people might say – and say to your supplier: ‘We don’t really mind what you do, just get these kids better outcomes.’ Where your potential returns are high, you can almost afford a bit of gaming.”

However, Clarke countered that this approach might attract the attention of the NAO. “We need to have some idea of what reasonableness looks like in terms of returns,” he warned.

Intelligent commissioning
“Building commissioning competence is crucial,” argued Accenture’s Stuart Cotton. Some of the leading private sector organisations see commissioning as a core competence, he said, warning that the public sector will get the worst of transactions unless it treats commissioning as more than an exercise in process.

The Department of Health’s Sue Nowak, another PBR specialist, added that gaming is not just a problem in dealing with private sector organisations. She noted that she has seen something similar among acute healthcare trusts dealing with performance targets, and suggested that the only way to combat it is by more intelligent commissioning.

Clarke argued that government commissioning should be professionalised, with commissioners undergoing basic training before developing their skills by taking modules in particular areas of expertise. He praised the work of the MoJ’s Academy for Commissioning in this area, and suggested that the Cabinet Office should take on the role of promoting best practice. Simons agreed that the Cabinet Office should probably be the body to promote professionalised commissioning across PBR schemes.

Charities and the voluntary sector
One of the panel’s chief concerns about PBR was its potential impact on smaller third sector organisations. Several panellists were worried that voluntary and community groups might struggle to cope with the greater transfer of risk implied by awaiting payment until such time as they can prove that outcomes have been achieved, and in being paid on the basis of outcomes that they may ultimately fail to attain.

“I am picking up a real nervousness from small and medium-sized charities about the timing of payments and whether they will be able to participate because the level of risk is so high,” warned Caroline Cooke from the Charity Commission. She argued that commissioning departments must carefully quantify the level of risk transfer involved in each contract, and build some flexibility into contracts so that third sector organisations can continue to operate in an innovative manner under PBR.

Many smaller organisations are compensating for their lack of financial reserves by acting as subcontractors to bigger, mainly private sector suppliers. However, Clarke said that the DWP Work Programme has driven consolidation among smaller suppliers, as they have been “shafted” by private contractors with greater commercial acumen after being used by them as “bid candy” to secure government contracts. As a result, he said, the DWP has introduced a code of conduct for suppliers and their subcontractors, called the Merlin Standard.

The panel also identified an increased risk of supplier failure when paying by outcomes, and agreed that a failure regime should be in place from the beginning (see feature).

Conclusions
Some of the panel were concerned that politicians’ enthusiasm for PBR might lead to schemes being instituted before they have been properly thought through. “Don’t jump on the bandwagon,” advised the NAO’s Clarke. “The purpose of PBR is to get better value and better results. If PBR doesn’t do that, then don’t use it.”

However, the Cabinet Office’s Simons took a different approach, exhorting civil servants not to get so bogged down in details that they become unable to act. “If you’re going to do a PBR scheme, just pick some outcomes and put a price tag on them,” he said. “They are never going to be perfect first-off. It will be an iterative process. Sometimes you’ll pay too much; sometimes too little – but put it out there, and see if it works.”

Payment by results

The DWP has established a PBR regime with suppliers delivering its Work Programme and is regarded as the department with the strongest track record in this area. However, three of the civil servants at the round table provided additional examples of how their departments are setting up and operating payment-by-outcome schemes:

Sue Nowak, Department of Health
“PBR started in the DH about six years ago, purely in the acute hospital sector and in quite a small way. It wasn’t strictly linked to rewarding outcomes and was seen as an opportunity to move away from block grants to paying organisations for the work they had actually done. At the time a big driver was the government’s desire to cut down waiting lists. PBR provided a cash incentive to do that.

“About 60 per cent of acute hospital income flows through the PBR system now, but we are in a very different world [with a stronger focus on outcomes]. As we go forward, our focus is on trying to move the system to incentivising results and rewarding best practice. We are now moving into the area of mental health, which is still paid on a cost-and-volume basis, trying to embed outcomes into the work of a sector in which performance has been very varied across the country.”

Michael Wheatley, National Offender Management Service
“In the past two months we have identified four outcomes for the NOMS drugs PBR project: getting people off drugs; improving their health and well-being; making them employable; and stopping offending. We are working our way through the elements that we will measure to demonstrate these outcomes. Reducing dependency and health and wellbeing are relatively straightforward to measure. Reducing offending is incredibly complicated – reducing the severity of offending is also an outcome – and so is employment, because we have to disaggregate the effects of the DWP’s Work Programme.

“The next big challenge is the pricing because of the initial costs to our voluntary and third sector providers. They haven’t got the reserves to wait 36 months for a payment if it is a [long-term] stopping offending outcome that we have to measure. There won’t be a central tariff set, it will be down to each locality – so you could have a postcode lottery, with different payments being given to different groups engaged in the eight pilots.”

Daniel Johns, Department for Environment, Food and Rural Affairs
“Flood defence is terrific value, but no-one wants to pay for it. Over time government has taken a bigger role in funding and delivering flood defence, but that is unsustainable because of climate change and deteriorating assets. It also kills the incentive to manage flood risk locally.

“In the past two months we have moved from a block grant system to one where there are no national targets. Now the delivery agencies are paid on outcomes – and that outcome is moving households out of risk or to a lower band of risk. We focus higher payment rates on deprived areas to minimise the risk of uninsured damage.

“That creates transparency. Under the new system, where the benefits [of action] are overwhelming, the central payment rates cover the costs, but on other schemes you know where you stand. If a scheme is 90 per cent funded from government and you reduce the cost by 10 percentage points, you can deliver the scheme [without additional funding]. It also encourages people to bring in other sources of funding. Costs are starting to fall, and contributions in the millions of pounds are starting to come forward.”

Around the table

Facilitator: Robin Hutchinson, associate director, Dods
David Clarke, director of commissioning and civil society, National Audit Office
Caroline Cooke, head of policy engagement and foresight, Charity Commission
Stuart Cotton, finance and performance management lead, health and public service, Accenture
Robert Gibbs, sales lead, health and public service, Accenture
Catherine Hunt, evaluation consultant, Central Office of Information, Cabinet Office
Daniel Johns, head of flood funding insurance and outcomes, Defra
Sue Nowak, head of expanding the scope, payment by results, Department of Health
Jonathan Simons, leader, public sector reform team, Cabinet Office
Michael Wheatley, head of drugs payment-by-results project, National Offender Management Service, MoJ

Written by Stuart Watson, CSW