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An introduction to outcome based commissioning

A basic guide to key concepts

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Chapter 1

What is outcome based commissioning?

2 mins read

Outcome based commissioning describes an approach to public service management that seeks to improve value and impact.

While there is no single definition of outcome based commissioning per se, its most frequent application is in the form of payment by results contracting, including social impact bonds. The National Audit Office defines outcome based commissioning as a way to deliver services where all or part of the payment is contingent on achieving specified outcomes.

The payment mechanism in an outcome based contract can vary, and many schemes include a proportion of upfront payment that is not contingent on the achievement of a specified outcome. Some form of upfront payment or ‘fee for service’ can make the scheme more attractive to potential providers and investors, especially those in the voluntary and community sector, by easing their cash flow and reducing the risk they take on in agreeing to the contract. 

The UK government has increasingly been using outcome based commissioning to deliver public services that address complex social challenges where traditional ways of paying for services might have proven ineffective.

Major UK payment by results programmes include:

  • Work Programme, Department for Work & Pensions
  • Troubled Families, Department for Communities and Local Government
  • Transforming Rehabilitation, Ministry of Justice
  • Payment by Results Aid Projects, Department for International Development
  • Drug and Alcohol Recovery Pilots, Department of Health 

In the public sector, PbR tends to be used to address complex social issues for which there are no straightforward solutions: for example, getting people on benefits back into work, and reducing reoffending.
National Audit Office, 2015

Note on terminology

Outcome based payment schemes in the UK public sector are often referred to as Payment by Results (PbR) contracts, but the term is inconsistently used. Some schemes are called PbR, but are not outcome based. For example, some NHS tariffs to pay hospitals for clinical procedures are called PbR, even though the payment is for outputs rather than outcomes. We use the term PbR to mean outcome based contracts only.

Some key terms

Definitions of some key terms, as understood by the UK Government, are included below and are based on the Magenta Book published by HM Treasury:

Term Definition Example
Inputs Public sector resources required to achieve the policy objectives. Resources used to deliver the policy.
Activities What is delivered on behalf of the public sector to the recipient. Provision of seminars, training events, consultations etc.
Outputs What the recipient does with the resources, advice/ training received, or intervention relevant to them. The number of completed training courses.
Outcomes The change experienced by the recipient as a result of the service/ intervention received. Move to sustained employment and improved financial stability.
Impacts Wider economic and social outcomes. Number, range and salaries of employment opportunities in a local area improve.

Chapter 2

Why commission by outcomes

1 min read

Outcome based contracting seeks to improve the productivity of public spending by paying only when specific outcomes are achieved by service provider(s). This is attractive to commissioners as it shifts to providers the responsibility for determining which inputs will lead to the desired outcomes and it transfers financial risk to providers, as they are required to put in upfront financial investment to deliver services with no, or limited, guaranteed reward if they fail to achieve outcomes. In exchange, providers are granted additional freedoms to operate.

Some of the principal rationales for using outcome based commissioning approaches include:

Uncertainty around delivery of outcomes

One of the reasons for using an outcome based approach is linked to the uncertainty around the ability of new or innovative services to deliver the desired outcomes. Where there is a lack of an evidence base for the intervention in a comparable context and/or uncertainty around service providers’ ability to deliver improved outcomes, it might be imprudent or unaffordable to risk public funding by using a fee-for-service approach, and in this case outcome based commissioning can help mitigate the risk of under-performance.

A galvanising force for change in practice

Defining a single set of outcomes for practitioners can be an important agent for change where commissioners are looking to integrate practice around a defined cohort and build the evidence base for the alternative practice. This can be particularly significant where the contract has several commissioner parties and includes the transfer of staff to the new provider. 

Lack of effective internal capacity to deliver change

A service provider brings the expertise and management capacity to deliver the changes that will underpin the improvement of outcomes.

An important problem to solve

The outcome is a key priority for commissioners, justifying the investment of time to design, procure and manage a new contract and form of service intervention.

Significant risk around delivery

Commissioners consider that there are risks associated with delivery, whether related, for example, to cost, method or ability to resource. These risks might make it preferable for the commissioner to pay for outcomes, even if it includes a premium to reflect the risk the provider takes on. 

Chapter 3

When is it suitable to use outcome based commissioning?

1 min read

Outcome based commissioning is not suited to all public services, and commissioners should carefully consider all their options and be able to justify their selection of an outcome based approach over alternative service provision mechanisms. 

While the feasibility of an outcome based approach should be assessed on a case by case basis, broadly speaking outcome based commissioning is appropriate when:

  • There is a well-defined collective outcome relevant to a defined cohort of service users.
  • Payment is made either wholly or in significant part on the basis of results achieved and the results being paid for can be clearly attributed to the impact of the service.
  • The value of the payment, adjusted for performance, is sufficient to reward the provider and investors for the cost and risk of providing the service/intervention to the whole cohort of service users.
  • The value of the outcome to the commissioner is equal to or greater than the cost of the payment to the provider or intermediary or generates some alternative qualitative benefit (e.g. community benefit or research and learning).
  • It is appropriate to give service providers the freedom to deliver the service in accordance with the provider’s own methods (because they are taking the primary risk on performance).
  • Any risk of the payment scheme creating perverse incentives for the provider e.g. opportunities to unfairly select service users or otherwise to game the system, can be managed or designed out.
  • The service can be contracted to a external party without breaching statutory public sector obligations.
  • The service delivered through outcomes based contracting provides better value and impact than alternative fee for service models.

To read more about the difference between payment by results and social impact bonds, and when it might be suitable to commission a social impact bond please see our Social impact bonds (SIBs): the basics guide. Detailed guidance about assessing the feasibility of an outcome based project is available here.

Outcome based commissioning: top tips from a local commissioner