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Payment-by-results contracts are 'stifling innovation', says report

Tom Gash, director of research at the Institute for Government, says many providers are unwilling to risk new approaches in the poor financial climate

Tom Gash
Tom Gash

Payment-by-results contracts are stifling the social sector’s ability to innovate, according to new research published today by the think tank the Institute for Government.

The report, Beyond Big Contracts: commissioning public services for better outcomes, published today, also says that more than 80 per cent of providers surveyed are concerned about the financial risk involved with PBR contracts.

Carried out by Collaborate, an organisation that promotes collaboration between the public, private and social sectors to improve public services, and the IfG, the research is based on in-depth interviews, expert workshops and round tables with commissioners, providers, policy professionals and practitioners of complex services. It was supported by funding from the Calouste Gulbenkian Foundation.

Two surveys, garnering a total of 162 responses, asked participants about the commissioning environment and how ready organisations were to respond to the government’s intention of diversifying public service delivery.

The report says that commissioners are transferring more financial risk onto providers, which can mean that organisations with specialist skills in helping challenging users are disincentivised from innovating, because they are more concerned about their bottom line.

The report says that commissioners are confident in the ability of smaller, specialist providers to deliver complex services, but that contracting methods such as PBR do not play to the strengths of smaller, voluntary sector providers, which are unlikely to have the financial reserves to manage cash flow.

A senior leader from a private sector provider said: "Cash flow is the main risk for PBR. Social sector providers can wait up to nine months for payment."

Eighty per cent of those providers that said they were concerned about the financial risk involved said they were worried about cost recovery in contracts, and 78 per cent of them expressed concern about access to up-front or working capital.

One public service provider, who is not named, told researchers: "Government is seeking higher performance for lower payments."

The report concludes that commissioners need to understand the types of risk-taking required to innovate and improve outcomes, and ensure they are incentivised.

Tom Gash, director of research at the IfG, said: "The government has argued that new contracting approaches such as payment by results will spur innovation in service delivery.

"However, our research shows that many providers are unwilling to risk new approaches in the current fiscal climate. This is particularly true for smaller organisations, which risk bankruptcy if they fail to meet targets.

"Commissioners need a much better understanding of how providers – and particularly smaller ones – are likely to respond to financial risks. The current approach may deliver cost reductions but is likely to exclude smaller players and reduce levels of competition, contributing to inadequate provision for service users with complex needs."

Helen Stephenson, director of the Office for Civil Society and co-director of the Government Innovation Group, will be speaking at a panel discussion on the future of commissioning to coincide with the launch of the report this evening.

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