Abstract
Governments across Europe are looking for innovative ways to deliver employment programmes which deliver value for money for the taxpayer. The current UK Government has committed to the concept of Payment by Results (PbR). In the UK’s PbR model, the financial risks of delivering back-to-work services are transferred to lead contractors who are directly responsible for services and for managing the payment and performance of their supply chain. This article briefly highlights the economic and social need for exploring alternative mechanisms for public services delivery before moving on to describe the core elements of PbR, using the UK’s Work Programme as an illustration.
Keywords
Introduction
The recent economic crisis has no precedent in our generation. The steady gains in economic growth and job creation witnessed over the last decade have been wiped out and 23 million people – or 10% of our active population – are now unemployed … Our public finances have been severely affected. (European Commission, 2011: 5)
One of the main challenges facing European welfare states in the aftermath of the financial crisis is tackling cyclical unemployment as well as pre-recession structural unemployment, in the context of fiscal retrenchment, to meet EU2020 targets around smart, sustainable and inclusive growth. In an era of tighter public sector spending there is a need for increased transparency and accountability around the effectiveness of government spending on moving unemployed people from welfare to sustainable employment. These are economic questions with broader social ramifications owing to the relationships between periods of unemployment and experiences of poverty and inequality. In this context government ministers across Europe are looking for innovative ways to deliver future employment programmes which focus more explicitly on delivering value for money to the taxpayer.
One of the innovations being pioneered by the UK Coalition Government is a commitment to the concept of Payment by Results (hereafter PbR) which ‘is an advanced form of performance management where the providers of services are paid based on the delivery of outputs or outcomes rather than processes… some proportion of providers’ revenue depends on their achieving outcomes, giving providers a financial incentive to perform’ (Sultan, 2011: 10). Whilst PbR is being explored across a range of social policy areas it is most developed in the delivery of the UK Government’s flagship back-to-work initiative – the Work Programme – which aims to aid the transition of long-term unemployed people (and other ‘hard-to-help’ groups such as those with health conditions) into sustainable employment. The PbR model transfers the financial risk of delivering effective provision for these groups from the public sector to Prime Providers 1 and their partner networks from the public, private and voluntary sectors. These organisations are paid in full once they achieve the desired outcome (defined by the public sector commissioning body) of placing an unemployed person into sustainable employment for up to two years (the period depends on the employment barriers faced by the group). PbR injects a focus on accountability around the outcomes achieved ensuring greater value for money for the taxpayer.
PbR represents a re-imagining of the role of the State away from being a direct provider of some key services and towards a commissioning and managerial role in the delivery of these services. The UK Public Employment Service (PES) – JobCentre Plus – remains at the centre of employment support for unemployed people. However, increasingly the role of the PES is complemented by a strong network of specialist providers – including private and voluntary sector organisations – which deliver innovative and personalised services to those individuals deemed ‘hardest to help’ and requiring more intensive support. Whilst a PbR approach has previously formed the basis of local employment programmes in countries such as the Netherlands, Denmark and Switzerland, the UK is the first European country to use this performance management model on a national scale. This Viewpoint article will briefly highlight the economic and social need for exploring alternative mechanisms for public service delivery before moving on to highlight some of the core elements of PbR, which will be of interest to policymakers in the UK and other European countries, using the lens of the UK Work Programme.
(Un)Sustainable welfare models? The social and economic legacy of the financial crisis
The crisis has left a legacy of nearly bankrupt governments. A quick return to solvency is required … These actions were extraordinary and have left challenges in their wake. The biggest of these challenges comes from the deterioration in public finances of unprecedented scale and geographical reach. (Trichet, 2011)
In the aftermath of the recession EU Member States are facing up to new economic, political and social realities as the financial resources dedicated to addressing the financial crisis have ushered in a new era of fiscal austerity. This has been made all the more critical by the current crisis in the Eurozone which has seen the IMF recently revise growth figures downwards with EU-17 countries expected to experience negative cumulative growth in 2012 of −0.5% (from +1.6% predicted growth in September 2011). 2 Average government budget deficits (measured as net borrowing as a % of GDP) across EU-27 have increased from pre-recession levels with an average deficit level of 6.6% in 2010 up from 2.4% in 2008 and 0.9% in 2007. 3 General gross government debt levels as a percentage of GDP have also increased dramatically from pre-recession levels. The average debt level to GDP across EU-27 countries was 80.1% in 2010; an increase from 62.5% in 2008. 4 These statistics are important as they represent key indicators of the current state of European economies.
Unemployment has also increased as a result of the recession. EU-27 unemployment levels stand at 9.8% for the period up to November 2011 (up from 6.7% in the pre-recession first quarter of 2008). 5 In a comparative perspective this is similar to the US (8.6% – although levels are currently diverging) but higher than countries such as Japan (4.5%). Levels of youth unemployment (15–24 year olds) show similar patterns with an average of 22.3% of young people unemployed across the EU-27 countries compared to 16.8% in the US and 9.1% in Japan 6 for the period up to November 2011. Rising unemployment means an increased benefits bill whilst the impact of unemployment on individuals, households and communities can have lasting and far reaching social and economic ‘scarring’ effects. From a purely economic perspective unemployment exerts a triple drain on public finances: (1) the cost of unemployment benefits and other publically provided activation measures; (2) the loss of potential tax and national insurance revenues stemming from an economically able individual being inactive; and (3) the wider exported costs of unemployment given that unemployed people are more likely to access other government services – such as health services – than employed people.
It is clear therefore that there are increasing budgetary pressures to reduce spending and increase the accountability of existing spending across social policy areas. As John Martin (2010: 11), OECD Director for Employment, Labour and Social Affairs notes: the pressure to cut large fiscal deficits is mounting rapidly in many countries and with that the need to make hard choices on how to allocate now scarcer public resources across different pressing areas of public policy … it becomes essential to focus on cost-effective programmes and to target the most disadvantaged groups at risk of losing contact with the labour market.
In the context of a tighter financial environment and the social and economic importance of tackling rising cyclical and stubbornly high structural unemployment rates there is a need for public services to deliver more with less (and to do it differently). In addition, government departments must ensure they are achieving the desired social policy outcomes whilst also getting value for money for the taxpayer. The PbR model being rolled out in the UK is a means of delivering high quality and cost-effective services based on the five key principles of choice, decentralisation, diversity, fairness, and accountability (Cabinet Office, 2012).
PbR in the UK: Delivering high quality outcome-focused services
Payment by results is not a difficult concept to grasp … reward success and people will be more likely to deliver success. Invite organisations to compete to deliver the success which brings that reward and success is even more likely. (Lilley, 2008: 7)
In the UK, there has been growing momentum across the political divide around the use of PbR as a performance management tool in various social policy areas. Iain Duncan Smith, the Secretary of State for Work and Pensions, recently referred to PbR as one of ‘the watchwords for every government department, local authority and private or voluntary sector provider in the coming years’ (DWP, 2012: 1). There is always a need by government to ensure it is getting the optimum return on investment when it comes to the delivery of frontline services. The current financial issues experienced by government departments in the UK and Europe merely sharpens the focus around ensuring the State gets the best possible outcomes for the money it spends. The use of PbR has resulted in a re-imagining of the role of the State from a focus on how to deliver effective services to one where its main role is to define what outcomes it wants to achieve. Under this model the primary focus of the State shifts away from direct delivery and towards commissioning services from a range of diverse providers and monitoring their performance. This purchaser/provider split enables the Government to buy the outcomes it wants to achieve rather than paying for the inputs and outputs which may lead to a desired outcome. For example, on the Work Programme the outcome the Department for Work and Pensions (DWP) is buying is the sustained employment of previously unemployed people rather than for the intervention provided, for example CV guidance (input) or the tangible product of that intervention, e.g. a CV (output). DWP is the commissioning body which devolves the responsibility for achieving the sustainable employment outcome to the Prime Providers, each of which has a significant ecosystem of partners from the public, private and voluntary sector.
Whilst previous welfare-to-work programmes in the UK have included performance outcomes and elements of top-down prescription from government in terms of what services must be included as part of frontline delivery, the Work Programme is arguably a purer form of PbR which utilises a ‘black box’ approach. ‘Black box’ means that whilst the outcomes are tightly defined by the purchaser the means of achieving those outcomes are at the discretion of the provider. It is they, not the purchaser, who are the experts around how to deliver the outcome. PbR therefore balances autonomy over service delivery with the accountability of a robust performance measurement system (Sturgess and Cumming, 2011). The black box approach is important for driving the success of PbR because it enables both: (1) the effective transfer of risk and rewards in the system; and (2) more freedom to innovate in service design and delivery. These two elements help to explain the current political drive in the UK towards injecting PbR into frontline service provision across a variety of social policy areas. It is a means of encouraging improved service delivery and greater accountability in the money being spent on public services.
PbR requires the effective transfer of risk and responsibility from the commissioning body purchasing the outcomes to the provider delivering the service. Service delivery success or failure drives performance as providers are paid a proportion of their fee once they achieve the outcomes defined by the purchaser. However, for PbR to be attractive to potential providers and deliver the outcomes demanded by the purchaser the level of risk transfer has to be right for both parties. Risk is determined by:
The level of control the provider has over the outcome (i.e. does the provider have sufficient control that they can be held to account for poor performance. If not then PbR mechanisms may not be suitable) and the outcome is clearly definable, measurable and attributable to the intervention by the provider; How defined the links are between input, output and outcome (i.e. what evidence do we already have for what works). If precisely what works is known then the risks are too low and the purchaser may specify the inputs. If there is little certainty about what works the risks are too high; The balance of the payment model, i.e. what percentage of the payment received is dependent upon achieving the outcome the purchaser is buying. The higher this is the higher the risk being transferred to the provider and the more important it is to strike the right balance of the other two factors.
On the Work Programme the balance of risk represents a performance stretch for the welfare-to-work industry as the vast majority of the outcome payment is dependent upon achieving the sustained employment outcome. 7 In addition, the combination of inputs and outputs resulting in the successful transition of an unemployed person to sustainable employment are not entirely clear. Furthermore, the macro-economic factors dictating the level of jobs growth in the economy are, of course, out with the control of providers. Whilst there will still be jobs in the economy the competition for these jobs is fierce, particularly as higher skilled labour ‘bumps down’ as a result. To cater for changes in macro-economic factors some future proofing in PbR programmes is required to align them to national and local labour market conditions as they impact upon the total outcomes achievable. In order to optimally balance risk and reward PbR should represent a performance and expectation stretch for providers but must also remain financially viable. This means that flexibility must be built into any future system so that it is responsive to significant changes in labour market conditions over the course of the contract.
It is particularly important to strike this balance on the Work Programme where providers have invested their own working capital to fund up-front delivery with the aim of recouping their investment through attaining sustainable employment outcomes over the course of the five-year contract. If the risk is too low there is less value for money for the taxpayer whilst if it is too high it will be too risky for the provider to invest upfront. An appropriate balance ensures that the interests of government (achieving social policy outcomes); the taxpayer (value for money); unemployed people (receiving high quality support to move them into sustainable employment); and providers (being fairly rewarded for delivering economically and socially beneficial outcomes) are aligned as all share in the benefits of achieving the outcome.
The second key element driving the current political interest in PbR is that it enables more freedom to innovate the service design and delivery. With its explicit focus on performance, PbR helps to drive two main mutually inclusive forms of innovation: (1) solutions focussed personalised service design; and (2) flexible delivery through co-ordinated partnerships. First, PbR enables a solutions-focused approach to service delivery which encourages new ways of working; an explicit focus on identifying what works; and a personalised approach to service delivery, enabling choice through the co-production of service design. The success of the Work Programme is dependent on providing interventions which effectively help unemployed people move into sustainable employment. This enables flexibility in service design and delivery to allow providers to respond to the needs of local individuals, communities and employers.
Freedom to innovate in service design and delivery is also driven through a partnership approach involving coordinated and sophisticated supply chains of specialist local providers. For large-scale contracts it is recognised that the optimum delivery of the Work Programme will be achieved through integrating the very best of the public, private and voluntary sector into a locally flexible delivery model. Effective partnership working and the integration of local specialist providers with in-depth local knowledge into a coherent delivery model enables the delivery of flexible and holistic services across the client journey. The use of a diverse and wide ranging partner network which is created and managed by the Prime Provider offers a broader ‘tool box’ of support from which the client can choose to move towards the desired outcome. On the Work Programme the service delivery model can be personalised to address the specific combination of needs an individual may have to smooth their transition into sustainable employment as part of a structured client journey.
Partnership between Prime Providers and their partner network are deepened through a PbR model because the financial risks involved necessitate the partners to enter into contractual agreements and integrate delivery models in a way that works for both partners. Typically on the Work Programme, Prime Providers benefit from the specialist interventions that supply chain partners bring to the service delivery model; the specialist providers benefit from the Prime Providers sharing of management expertise and advanced technological platforms; and the unemployed person benefits from a blending of these expertise which helps to move them into sustainable employment. In a PbR environment mutually beneficial partnerships are essential if the desired economic and social outcomes are to be achieved.
However, there are also inherent challenges with any PbR system. The focus here will be on three main challenges: (1) dealing with deadweight; (2) gaming the system; and (3) orchestrating funding streams. Deadweight arises when the commissioning body pays for an outcome which would have happened in the absence of any specialist intervention. Whilst this is an issue across social policy delivery there are ways of minimising the risk at the procurement stage. On the Work Programme deadweight would be considerably higher if unemployed people were sent to a Prime Provider at Day 1 of their claim for unemployment benefit. The performance statistics for the UK PES are that by the 12-month point of a claim around 85% of unemployed people claiming Jobseeker’s Allowance (JSA) have left the unemployment register. The design of the Work Programme mitigates against any significant concerns around deadweight as clients aged between 18 and 24 are not sent to the Prime Provider until they have been on the benefit for nine months of their claim 8 rising to 12 months for clients aged 25 years and over (although those experiencing multiple disadvantage can be referred earlier to receive the necessary specialist interventions).
Gaming the system could arise in two main ways: (1) cream skimming; and (2) creaming and parking (Finn, 2011). Cream skimming occurs when providers are able to select those individuals who are eligible for a programme who they can then claim an outcome on. It is possible for gaming to occur here as providers could select the easiest to help individuals thereby guaranteeing greater rates of success. Creaming and parking can occur once an individual is on a programme where there is potential for a provider to focus their resource on the easier to help clients in order to increase outcomes (creaming) to the detriment of harder to help clients who require more resource in order to achieve the same outcome (parking). Gaming the system in this way, it is argued, can help to maximise outcome payments and minimise resource outlay.
However, these challenges can be minimised at the programme design stage. On the Work Programme cream skimming cannot occur as Prime Providers do not get to choose eligible clients. Instead, the PES randomly refers unemployed people to Prime Providers. The issue of creaming and parking has been addressed by the introduction of differential outcome payments which reflect the perceived difficulty of moving an unemployed person into sustainable employment. The rationale is that the greater the need of the individual the greater the outcome payment for moving them into sustainable employment. This differential payment structure represents an important evolution which will continue to develop in the coming years. There is still work to be done in this area to ensure the differential payments reflect the cost of achieving an outcome from the perspective of both the commissioning body and the service provider but it is a welcome step in the right direction to aligning incentives to create a more robust and fair PbR system.
The third challenge is around orchestrating funding streams through the use of PbR. We know that often an individual represents a microcosm of various social policy areas as they interact with the services provided by more than one government department. On the Work Programme a long-term unemployed person may be receiving help with regards to their health needs (Department of Health); skills needs (Department for Business, Innovation and Skills); and justice issues (Ministry of Justice) as well as support to move them into employment (DWP). We also know that for many long-term unemployed people moving into sustainable employment can have positive impacts upon their health and skills development and reduce the likelihood of re-offending (for those with past convictions). This demonstrates that more than one department (and importantly more than one funding stream) can have a vested interest in that individual achieving an employment outcome. A PbR system, therefore, has the potential to align funding streams across government departments to best meet the needs of the individual which in turn will benefit each of the sponsor departments. There is also recognition that joining up departmental funding through the PbR vehicle will facilitate the development of more innovative and holistic services as incentives are aligned across social policy spaces and specialist providers. Recognising the value in policy orchestration to deliver shared outcomes through the vehicle of PbR, government departments are exploring how they can work together to achieve mutually beneficial outcomes.
The relevance of PbR in European welfare systems
The next labour market crisis will be one of supply … we need to fully utilise the human capital we have. 9
PbR provides an interesting and viable model for the current and future delivery of frontline services in many European welfare states, particularly against a backdrop of a tighter financial environment and the need for government departments to achieve greater value for money in the delivery of outcomes. It also fits within the broader modernisation agenda being pursued by several European PES who recognise that they must deliver high quality services to a greater range of client groups. An increase in labour market activation policies to counteract the impacts of the demographic challenges around a greying Europe brings with it future challenges for the various PES in providing services for unemployed people with more specialist needs. This means a greater range of services must be provided with less money and with an increased focus on achieving the desired outcomes. Arguably nowhere is this more critical than in supporting unemployed people into sustainable employment because of the associated multifarious economic and social benefits.
The EU headline target for 2020 is to achieve a full employment rate of 75% for men and women aged 20–64 through the greater participation of youth, older workers and low-skilled workers and the better integration of legal migrants. The challenge of moving from a delivery model aimed at simply tackling unemployment towards one which also seeks to grow employment amongst a more diverse client base with specialist needs necessitates the shift towards innovation through personalisation and a focus on holistic provision through multiple specialist providers. PbR would enable the development of innovative and holistic supply chains whilst shifting the onus of outcome delivery for harder-to-help groups onto the welfare-to-work market. By balancing autonomy with accountability, a PbR approach can utilise the very best delivery from the public, private and voluntary sector.
At the same time it can achieve value for money for the taxpayer through an explicit focus on maximising economically and socially beneficial outcomes. Under this business model the agency responsible for unemployment support would remain central, but it would increasingly take on the role of orchestrator of tailored provision for harder-to-help groups from specialists both within and outside the public sector. This would enable the sharing of best practice whilst at the same time providing bespoke and individualised services to those people requiring more intensive support to achieve the desired outcomes. PbR ensures that the State has the capacity to deliver this modernisation agenda at scale whilst moving the onus of delivery and achieving greater transparency, accountability and innovation in service delivery through a partnership approach.
The emphasis here is on fostering innovative partnerships which focus on cooperation not competition. Whilst this has evolved in many European countries – for example, Denmark, France, Germany and the Netherlands – there is an opportunity to deepen and widen innovative partnerships through the vehicle of PbR. This would help to achieve better functioning labour markets in view of the New Skills and Jobs agenda as part of the broader EU2020 Strategy. Each Member State would need to explore exactly how a PbR system could work within the local political, economic and social structures. However, it provides an interesting model for the delivery of high quality and financially accountable services for long-term unemployed people, which should be explored further. Key questions include: how it could be introduced into countries with localised delivery structures (given the high costs of running multiple local commissioning structures, the managerial experience required at the commissioning stage, and the operational benefits of combining the economies of scale of large-scale contracts with locally flexible delivery models); who the lead commissioning body would be and how it would be funded; how to get the risk/reward balance right; how to define and price the outcomes; how to orchestrate funding streams and align outcomes across different government departments; and how to balance autonomy with accountability. What is clear though is that given the scale of the economic and social challenges faced in UK and European labour markets, PbR provides a means of delivering and improving social and economic policy outcomes through high quality, innovative and holistic service delivery.
Concluding comments
The aim of the article is not to question the centrality of the PES or to argue for it to have a diminished role. It is about opening up a discussion around how, in the current financial context, we can continue to provide high quality services using a performance measurement tool to deliver socially and economically beneficial outcomes at the greatest value for the taxpayer. The aim is to highlight one area of policy being rolled out in the UK which could inform the delivery of high quality and cost effective frontline services in other European countries. Nowhere is this more critical at the moment than in the delivery of support services for those at most risk of structural unemployment because of the associated social and economic costs of the scarring effects on individuals, communities and the economy as a whole. The need to tackle unemployment as well as grow employment amongst a more diverse client base as a means of addressing current and future labour market and welfare challenges necessitates us to look again at how we can simultaneously deliver high quality support for long-term unemployed people at a time when there is less money in the system. We must also ensure greater value for money through a more explicit focus on achieving, improving and rewarding outcomes.
The UK PbR example raises one interesting and viable solution, elements of which could inform debates in other European countries. PbR is certainly not a panacea for all the economic, social and political challenges but as it continues to evolve in UK welfare-to-work there will be further lessons to be learnt for its application in other UK social policy areas and in other European countries. The aim of this article has been to highlight some of the key elements of PbR using the lens of the UK Work Programme so that we may discuss and debate its broader merits in the context of fundamental structural economic and policy schisms across Europe, whilst at the same time ensuring we maintain high quality support services for long-term unemployed people. This is critical in ensuring that some of the most vulnerable and disadvantaged people in our society are able to contribute to our future economic growth and success and in doing so build better lives for themselves, their families and their communities.