Outcome based contracts Joshua Reddaway April 2016 Introduction

Outcome based contracts Joshua Reddaway, April 2016

Introduction National Audit office

Overview – our role • The National Audit Office (NAO) scrutinises public spending for Parliament • We help to hold government departments and the bodies we audit to account for how they use public money • Our work helps public service managers to improve performance and service delivery, nationally and locally • Led by the Comptroller & Auditor General (C&AG) and independent of government

The accountability process

So far this year… Government spending with Small and Medium Enterprises My. CSP DWP Medical Health Assessments Services e. Borders Rail Franchising Use of consultants and temporary staff

Overview: Outcome based contracts are complex and need to be managed

Goods and pharmaceuticals Failure regime Incentives Competition Carter Review Crown Commercial Service NHS Commissioning (public to public contracts) Services contracted from the private sector Commercial Capability Contract Management Risk Allocation and incentives Provider Accountability

Commercial capability Evolving understanding of contract management Outcome based contracts

Findings from our work: Government’s use of Pb. R

Our work § We looked at: § § § Government’s use of Pb. R for public service delivery; Issues commissioners need to think about when deciding whether or not to use Pb. R; Challenges in designing Pb. R schemes; and How government evaluates the effectiveness of Pb. R schemes and the Pb. R mechanism. We published: § § Report on the use of Pb. R and emerging lessons for government decision-makers Analytical framework to help decisionmakers

Definitions

Why Pb. R? “You only pay for success” Cost-effective delivery (for the commissioner) Commissioner can transfer financial risks to the provider “It frees providers to innovate and improve outcomes” Providers can be more responsive to users, drawing on their experience and expertise If commissioners define outcomes, not inputs, providers can innovate to achieve them “It improves accountability” Providers are responsible for delivering outcomes and will not be paid unless those outcomes are achieved

Our conclusion § Based on our review of four main uses of Pb. R in public service delivery, we concluded: § § § Pb. R is not suited to all areas of service delivery; It’s important that commissioners can justify their choice of Pb. R over another payment mechanism; and Commissioners need to understand the risks and costs of using Pb. R so they can ensure they have the capacity to implement it effectively.

Framework contains more detail …

How does it work? Commissioner monitors progress with outcomes Commissioner Outcomes Awards Pb. R contract to provider Provider Delivers interventions to service users Achievement of outcomes triggers payments As a result of the provider’s intervention, service users achieve desired outcomes Service users

What do you need for it to work well? System Commissioner Provider Clear objectives that can translate into measurable outcomes Data available to set baseline Providers exist who are prepared to take the contract price and risk Clearly identifiable cohort or population of beneficiaries Possible to construct an appropriate counterfactual Providers are likely to respond to financial incentives Sufficient evidence exists about what works to enable providers to estimate costs of delivery Outcomes are attributable to provider interventions, rather than other activities Relatively short gap between provider intervention and evidence of outcome

Key issue: managing risk Aim Commissioners establish clear lines of oversight and accountability in Pb. R contracts and intervention mechanisms to minimise the impact of provider failure on public services. Why does it matter? Commissioners can transfer some risk to providers but retains the reputational risk and cannot truly transfer accountability for service quality and continuity if providers fail. Example questions to ask: Are you clear about which risks will be transferred to providers, and which you will retain as commissioner? As commissioner, do you have mitigating actions in place to manage the risks you retain? (e. g. reputational risks) How will you tackle prolonged underperformance or failure in one or more providers? • Are there mechanisms to ensure service continuity is not disrupted by provider underperformance?

Where will providers focus their effort?

Key issue: setting incentives Aim Commissioners identify challenging but achievable outcomes on which to base payments, which in turn provide effective incentives for providers Why does it matter? Payments have to be sufficient to ensure: Example questions to ask: Do you understand who will be involved in delivering services to users? • Providers are interested in competing for the contract • The contract is financially sustainable for providers • Providers are motivated to achieve ‘optimal’ outcomes How might providers try to ‘game’ the system? Are providers likely to avoid working with harder to help groups unless those groups attract a higher payment? Do you understand the likely whole-life costs to providers of achieving outcomes? Are there outcomes that are more expensive for providers to achieve? Do you know at what level you need to set payment in order to provide an incentive that positively influences behaviour?

Commercial capability Evolving understanding of contract management Outcome based contracts

Goods and pharmaceuticals Failure regime Incentives Competition Carter Review Crown Commercial Service NHS Commissioning (public to public contracts) Services contracted from the private sector Commercial Capability Contract Management Risk Allocation and incentives Provider Accountability

Findings from our work: Government’s commercial capability

G 4 S faces criminal probe after overcharging taxpayer millions for electronic tags Chris Grayling, the Justice Secretary asked the Serious Fraud Office to launch a probe after it emerged G 4 S and rival security firm, Serco, overcharged the government by tens of millions of pounds. . Daily Telegraph, 11 July 2013

The government reviews found substantial weaknesses in the way contracts are managed

Deep rooted, cultural, systemic problems with government’s contract management The role of contract management Senior attention to contract management Information about contracts ing sform Tran ment’s rn gove ct a contr ement g mana 014) t 2 (Sep Contracting capability

Organisational capability “The Cabinet Office … should report back …by the end of 2015 on the progress made in implementing reforms across government. ” Committee of Public Accounts Transforming contract Management 23 rd Report 2014– 15

Government commercial function Government’s commercial landscape Departmental governance Visibility Ownership Starting to see changes

Government commercial function Recruitment and retention Pace and consistency Departmental governance Joining up systems Visibility Ownership Cultural barriers … but huge challenges

Findings from our work: Evolving understanding of contracting

From contract management to managing contracts Spec Bid process Contract management: • Service level agreement • Relationship management • change control Add recent trends • • Use of political influence Demand for public transparency Use of open book Reputation management Long-term relationship and government as single customer Client leadership, focus and attention Expert responsibility/Duty of care Evolving requirements

Moving towards a new understanding of managing contracts NAO commercial relationships assessment toolkit (draft)

Commercial capability Evolving understanding of contract management Outcome based contracts

Outcome based contracts Joshua Reddaway, April 2016