Posted 26 Sep 2017, 10 a.m.
The spectre of PFI continues to loom large and concerns are amplified by the mismatch between traditional methods for procuring and managing contracts and the necessity of a more complex and fluid commercial relationship. Definitions of fiduciary duty like Best Value and Social Value, or economic evaluation methods like cost-benefit analysis can be lacking in scope and nuance especially around value that cannot be quantitatively measured.
So what is the problem?
Outcome contracts require that outcomes are measured and in most cases that is linked to a payment mechanism that pays for results. This simplicity is what makes outcome commissioning a means of creating better standards of public accountability for public sector decision-making. However, it may not be quite so simple.
Because payment by results contracts are primarily concerned with the act of payment, what is measured is the same as what gets paid for, without ambiguity. The longer it takes to achieve an outcome and more uncertain it is that outcomes will be achieved, the more expensive the outcome payments are likely to be for the public sector (because of risk and cost of capital). In practice, measures and payment terms become a balancing act where outcomes, understood to be the ultimate objective (e.g. sustained, secure employment outcomes) are mixed with quicker to achieve outputs or intermediate outcomes to reduce the value of the outcome payment.
Working out whether the service contributed to the impact and the scale of value delivered is a much broader question and it is important that this is evaluated by parties without an interest in the commercial terms. Value is determined by a variety of questions including the quality of attribution that a service makes to the cost and impact to different commissioners and what aspects of the service delivered the impact. Good outcome commissioning, we argue, must be underpinned by excellent evaluation to determine the quality of value delivered and make that knowledge reliable for wider use.
In our discussions with the various parties involved in outcome commissioning, we have heard a variety of perspectives on the problems of determining value that we think need wider consideration to enable outcome commissioning to thrive.
1. Understanding the real cost and negative impact of problems
Commissioners work to annual budget cycles defined by the ambit of their responsibility. Complex issues tend to affect more than a single commissioners, and more often many commissioners, and require investment over several years to effect change. Understanding cost and impact requires that commissioners collaborate and share data to build a shared case for change and be prepared to pay more to solve that problem than is currently spent. Many projects founder on this fundamental point that Authorities are unable or unwilling to pay more in unit costs, even if the payment is made on outcomes where savings have been made. Having a clear eyed understanding of the real cost of not investing is an essential pre-cursor to judging the quality of value of an alternative and understanding how problems impact on different commissioning budgets.
2. A shared endeavour
In traditional service contracting a commissioner is buying a well-specified service for a price with limited scope for variation to the provision of service or amount paid. In outcome contracting, the starting premise in many projects (services with highly defined “fidelity” models are the exception) is that the method of delivery is a form of hypothesis or a theory of change with variations in the quality of evidence in support. The critical test in procurement is choosing an organisation with the right skills and capabilities, and, perhaps more critically, with a shared mission to do something better for the service users. This means the quality of the relationship and trust between the parties is at least as important as the financial and commercial terms and both the process of procuring that relationship and expressing those qualities in the commercial agreement is a challenge.
The notion of a new philosophy of public sector management based on trust is the subject of the Government Commission for Trust-Based Public Management set up by the Swedish government in 2016. Head of Research for the commission, Louise Bringselius, sets out the premise of a relationship based on trust in a recent conference paper.
Quoting the work of Mayer et al. in 1995, she proposes that trust is dependent on:
“Ability: The abilities and character traits that makes a person or party influential in a specific area. Different abilities are important in different contexts. This also includes financial and organisational capabilities, meaning that unless there is sufficient funding for operations, people will be less likely to trust the under- funded party.
Integrity: A position in relation to a set of key principles and values accepted by the other party. This requires consistency over time and also congruence between claimed principles and actual behaviours (compare to de-coupling).
Benevolence: The willingness to help and support the trustor, even if this means that this will come at a cost in terms of personal interests and agendas and even if there is no reward connected to this.”
Gary Sturgess, in his recent paper for the Business Services Association – Just Another Paperclip – Re-thinking the market for complex public services, argues that we are at a point of crisis in public sector contracting because of a loss of trust between providers and commissioners.
"Trust is a form of social capital – in commercial relations, it provides ‘order for free’ (or at least at a substantial discount). When trust is lost, customers and suppliers must invest more in systems and processes that can serve as substitutes: survey respondents reported that negotiations are now more often dominated by lawyers and compliance experts, rather than people concerned with operations."
The imperative to transfer risk and hold providers to account for prescribed deliverables, runs counter to the need for experimentation and innovation in tackling complex problems. Trust in a commercial relationship depends on both creating the conditions that enable people and organisations to deliver on their commitments and individuals and organisations on both sides having the integrity to do the right thing even where there are other pressures.
3. Trust and agility versus contractual and legal certainty
If outcome contracts are truly a shared endeavour where there is an acceptance that the service will adapt in response to the evidence of what is working, the legal framework underpinning the relationship needs to accommodate and indeed encourage change. It is simply not efficient and therefore, not good value, to entangle those trying to find new and better ways of delivering services into legal and commercial constructs that constrain agility and flexibility. However, contracts need to be meaningful at the point that they are agreed and having an open ended arrangement where the terms can be continually flexed can lead to an inappropriate softening of terms and a change in the symmetry of risk transfer/holding over time. Traditional forms of contracts simply aren’t well-designed for major and unforeseen change and there is a real design challenge around the adequacy of legal and commercial agreements for outcome commissioning.
4. The value of legacy
A key source of value in outcome commissioning generally and in social impact bonds in particular, is securing better insight and knowledge of “what works” to deliver better outcomes. Knowledge is part of the value equation and can be the rationale for paying a premium for a service delivered under a Social Impact Bond, for example, where there are major unknowns that create unacceptable risks for mainstream public funds. One example of a project where new knowledge is being created is Ways to Wellness, the social prescribing service in Newcastle being funded through a Social Impact Bond. Ways to Wellness is testing the impact of Link Workers by creating a bridge between GP services and more intensive interventions to reduce the impact on secondary care in a given population. Other examples are around edge of care services for young people, where there is uncertainty around the impact of a service on reducing the need for residential care. Arguably, the SIB should be a one-off investment to generate the quality of insight that reduces risk to the use of mainstream budgets in the future. However, this aspect of value is rarely formally codified into the formal terms of the relationship. The nub of the issue is who owns the knowhow and how this knowhow is generated through the contract with the specific intent of being used by another party at the end. This is a different paradigm around ownership and how intellectual property and commercial confidentiality is understood and one where openness should be the default position in the interests of sharing knowledge on what works in tackling complex social issues.
So, how should we frame value in the context of outcome contracting?
We would like to test whether others share a view that the definition and application of value needs to be re-framed for complex public service commissioning. Please let us know what you think.
The sort of questions uppermost in our mind are:
Jo Blundell is the former Deputy Director of the GO Lab. She has worked in and around public services in the UK and overseas for over 30 years, and is the founder and Director of Future Public.