Buying Quality Performance

The Department for Work & Pensions (DWP) have just commenced buying the new Work and Health Programme. This will replace the existing Work Programme, which has run since the coalition government came to power. It will be the layer of services, contracted out mainly to private sector ‘welfare to work’ providers, that is intended to assist long-term unemployed people who have been signing on for two years with Jobcentre Plus and still cannot find work, plus a few with ‘health conditions or disabilities’. Unfortunately, it will be an almost total waste of its £550 million; and of thousands of lives.

Ten years ago, DWP spent about £1 billion, per annum, on outsourced ‘welfare to work’ services for people on Jobseekers Allowance. Maybe £1 billion more was spent helping people on Incapacity Benefits. In comparison, the Work and Health Programme will cost £550 million over four years, i.e. just £137 million per annum, and must cover all categories of unemployed people.

It will be a waste of this money, and these lives, for the same reasons the Troubled Families £400 million initiative failed (evaluated, in a government report, as having had “no discernible impact”) (http://www.bbc.co.uk/news/uk-politics-37010486). The outsourcing of probation services, with contracts worth around £3.75 billion, will fail to deliver in the same way (https://www.ft.com/content/c2fde9ba-8c71-11e6-8aa5-f79f5696c731).

The failure is not a failure of outsourcing. It does not prove that contracting things out cannot deliver cost-efficiency and more effective services. It certainly does not show, as DWP appear to be arguing now, that paying providers on the basis of outcomes is a bad idea. Nor does it demonstrate that it is impossible to extend assistance to those most in need of help and to turn round their lives.

What it proves is that there are some simple, fundamental rules to effective contracting of public services, particularly when targeting those in trouble. If these rules are ignored, then it is inevitable that the service will fail.

First of all, an outcome-based contract – ‘payment by results’ – is by far the best model. It cannot be applied everywhere, but if the outcome can be clearly defined and measured, and attributable to the intervention, then outcome-based contracts can powerfully align the incentives of the service provider and the purchaser. After all, they only get paid if they give you what you want.

The mistakes really started to be made when the old Work Progamme was contracted, back in 2011. This is when two basic truths were ignored:

One: Competing contracts on price ultimately drives service quality to the cheapest bottom.

You create a ‘winner’s curse’, with the winning organisation doing so because they have undercut everyone else, probably cynically. Far better to fix a unit price, then give the contract to the organisation which can demonstrate how they will deliver the most units – compete on performance not price. This is particularly true for the outcome-based contracts, in which you surely want to incentivise the contractor to take risks, to innovate and to spend more, pursuing profit through ever better performance. If they have competed on price, their incentive is to mitigate risk, and chase profit through cost cutting.

Two: There is a relationship between what you put in and what you get out.

Behind the price the organisation agree to deliver for, there is an operating model that defines things, such as caseload sizes and frequency of contact with service users. The less money, the bigger the caseload, the less the contact, ergo, the lower the level of assistance. If the prison is cheaper, the costs will have been stripped out of somewhere, whether that’s books in the library, hours spent outside cells, or the salaries paid to the guards.

Operational reality also means that if you take a large sum of money and spread it over a large population, it becomes a very small sum per person. The Troubled Families initiative failed because all that money spread over all those households becomes no more than the price of a sticking plaster per family.

If the Work Programme ignored these basic truths, the new Work and Health Programme is rudely mocking them. It is going to mean a small concentration of services in large urban areas, with nothing in smaller towns or rural areas. Specialist services will be nonexistent. The mental and physical health of the ‘hardest to help’ individuals and communities will simply be allowed to deteriorate, their social exclusion a spiralling social (and fiscal) cost.

Unfortunately, a number of contractors will go to the wall in the inevitable consolidation of the market – two or three of the large private sector players will be left. Though they only really have themselves to blame since they were complicit in the gung ho price competition of the Work Programme. They said nothing when DWP stopped reporting on programme performance. They quietly redrew their operating models so they could focus, cheaply, on the easiest people to help and actively ignore anyone remotely complex. They made their bed, and now must lie in it. It is just a shame that so many of the people they were supposed to be helping will be left out in the cold.