Memorandum from the Audit Commission
INTRODUCTION
1. The Audit Commission welcomes the Committee's
focus on commissioning public services from the third sector and
is pleased to submit evidence to this inquiry.
2. The Commission audits and inspects a
wide range of public sector organisations, including local authorities;
fire and civil defence authorities; national park authorities;
passenger transport authorities; probation boards; strategic health
authorities; primary care trusts; and NHS trusts.
3. Many of these public sector organisations
now procure services from the voluntary and community sector,
and particularly from the larger charities.
4. The Commission's mission is to be a driving
force for improvement in public services. Therefore, we have a
strong interest in how well local authorities commission services
from the voluntary sector. The basis of the Audit Commission's
response to this inquiry is our experience of the audit and inspection
of public sector organisations, and our studies of public service
delivery. Our current comprehensive performance assessments (CPA)
test whether local authorities understand and meet the needs of
their diverse communities and provide value for money to users
and taxpayers through the effective use of resources.
5. We are currently undertaking research
into commissioning from the voluntary sector. The term "third
sector" encompasses a much broader range of organisations
than our current work, which focuses on voluntary and community
organisations and excludes housing associations, leisure trusts
and social enterprises. Therefore, we refer to the "voluntary
sector" and to "voluntary and community organisations"
throughout our evidence.
6. We hope to publish our report on the
voluntary and community sector and its role in the delivery of
local public services in summer 2007. We would be happy to discuss
emerging findings in more detail with the Committee or its officials,
if that would be helpful.
7. In this submission, we make specific
reference to our findings from a number of other studies as well:
Choosing Well: Analysing the Costs and Benefits of Choice in
Public Services, which was published in May 2006; Innovation
in Local Government, Use of Information and Contestability and
Competition, which are in progress and have not yet been published.
The latter two will also touch on issues related to the Committee's
concerns including the place of competitive neutrality in commissioning
public services and the conditions that encourage innovation by
public service providers from all sectors.
Detailed response
8. The voluntary sector is diverse rather
than homogeneous; failure to recognise this may result in failure
to secure the potential benefits of engaging the voluntary sector
in the delivery of public services.
9. The diversity of the sector is evident
in the various sizes of voluntary and community organisations,
their different sources of income and their governance arrangements.
We consider it helpful to think of the sector as having three
separate groupings or tiers, each of which has a different perspective
on common issues and a different capacity to deliver services:
— The first tier comprises the small,
volunteer-only, community-based groups that are providing specific
services on a modest scale under grant funding arrangements. They
have neither the capacity nor sometimes the desire to compete
for service contracts.
— The second tier comprises small to
medium sized voluntary and community organisations that are often
struggling to find their position in relation to public service
delivery. These organisations are delivering services but sometimes
find it difficult to compete in the market because they lack the
skills and experience to formulate successful bids for contracts.
— The third tier comprises large national
or regional voluntary organisations that are already delivering
services under contract and have the capacity and willingness
to compete.
10. The objective of getting value for money
by using the voluntary sector in service delivery appears simple,
but is not well understood by all parties. We found some commissioners
assessing value for money in terms of the outputs achieved for
public money. This is a reasonable basis for assessment, but one
that may conceal the full cost of service provision where a provider
is contributing funds of its own or levering them in from elsewhere.
Some voluntary sector service providers see value for money as
a broader concept encompassing their wider contribution to the
community.
11. The long-running public debate about
the value for money provided by the voluntary sector has therefore
been conducted without using consistently understood terms. Moreover,
there is no sound evidence base for assessing the value for money
delivered by voluntary sector service provision, nor would it
be easy to create one. None of the parties who contributed to
our study could provide sound quantitative evidence to support
their stance. Given the keen interest in the voluntary sector's
contribution to public services in government and elsewhere, it
is important that an objective basis for rational decision-making
is developed in the future.
12. There is very little existing research
on whether services delivered by the voluntary sector deliver
better value, however defined, than other services. Indeed, seeking
to make any such assessment at a local level is simpler than seeking
to do so at a national level, because the data is more likely
to be available to local commissioners. It will probably also
be more useful, because the findings of such an assessment are
more likely to influence future commissioning decisions. There
was a consensus among those who contributed to our study that
it was more useful still to concentrate on how, and to what extent,
the Government's objectives[72]
in using the voluntary sector in public service delivery had been
achieved or could be achieved.
13. The Government has sought to use two
levers to achieve its objectives: capacity building programmes
and the commissioning process. Capacity building programmes have
only been partly successful to date in raising the capacity of
voluntary sector organisations to deliver. Compacts have had some
benefits in developing funding arrangements and commissioning
processes, but commissioners and providers have told us that the
development of a Compact has not always been a priority where
resources are scarce. The Change Up programme, designed to build
infrastructure and capacity, has proved administratively complex
and resources have not filtered through to front line voluntary
sector organisations delivering services. The Futurebuilders England
investment fund has proved unable to help many smaller organisations,
who are often unwilling to take on debt obligations. Even those
who are willing have been unable to secure evidence of long term
funding that would enable them to take advantage of the facility.
Commissioning is the more directly influential mechanism.
14. Commissioners of services find themselves
under considerable pressure from government expectations. Some
commissioners see tensions between responding to the efficiency
agenda and taking specific steps to encourage the voluntary sector
to compete for service contracts. However, these tensions are
similar to the more general tensions that commissioners often
face. For example, awarding a single contract at a low price may
deliver short term value for money gains at the expense of being
able to run a competition next time round if there are no other
available providers by then. Similarly, letting aggregated contracts
to larger providers may deliver economies of scale in both service
delivery (for the provider) and contract management (for the commissioner).
But it might prevent many organisations, including smaller or
local ones, from bidding for the work, weakening competitive pressure
and potentially excluding providers with something to offer. Commissioners
need to assess their priorities and strike a balance appropriate
to their circumstances.
15. We believe that the key to getting the
best out of the voluntary and community sector is intelligent
commissioning practice. By this we mean thinking carefully about:
— the nature and variety of services
that a commissioner wants to procure for a range of service users;
— the sort of organisations likely
to be able to deliver them at an affordable price; and
— how best to construct a tendering
process that will ensure that a variety of delivery organisations
have the opportunity to bid.
Intelligent commissioning is the best way to
secure good value for money for an authority. The benefits of
intelligent procurement probably outweigh the impact of capacity
building initiatives, valuable as these are. However, some smaller
organisations feared that even intelligent commissioning practice
would leave them unable to contribute to public service delivery
because they lacked the ability or capacity to compete successfully
for contracts with public, private, and larger voluntary sector
providers.
16. Effective commissioning is a complex
challenge, and we have found many authorities that have struggled
with it. But we have also found examples of good commissioning
practice. For example, some authorities have broken up large contracts
to enable small providers with particular competencies[73]
to compete and to maintain a competitive environment for future
contract rounds, or to provide opportunities for smaller voluntary
organisations to sub-contract or form consortia to bid for contracts.
Others have invested in capacity building by providing training
and advice.
QUESTIONS
Q1 What are the benefits of contestability
to the users of public services?
(a) Have services which have been transferred
to third sector organisations shown improvements in quality?
(b) Is loss of accountability a threat of
commissioning services? If so, how can this best be managed?
17. Service commissioners are accountable
to citizens and taxpayers for securing the highest possible quality
of service at the lowest price they can achieve, regardless of
whether the service is outsourced or delivered in-house.
18. There is some evidence that third sector
social care providers are more likely to meet national minimum
standards.[74]
19. We are not aware of any evidence that
services transferred to third sector organisations show distinct
improvements in quality following the transfer. Nor are we aware
of any evidence that services transferred to the voluntary sector
improve to a greater extent than services transferred to the private
sector.
20. Local authorities often outsource services
that they see as failing, and therefore the initial transfer is
likely to produce some level of improvement from a poor baseline.
This makes it very difficult to assess whether any improvement
is attributable to inherent advantages brought by the external
provider. However, emerging qualitative evidence from our study
on competition and contestability suggests that simply transferring
poorly performing services to another provider will not lead to
marked improvements in quality. Commissioners need to work with
providers before and after outsourcing to re-design failing services.
21. Local authorities need to establish
the framework for accountability as part of the way they commission
services. They need to develop a clear specification for the services
required and an effective mechanism for monitoring performance.
They should then put sound contract management arrangements in
place, in order to assure the quality of service delivered. This
requirement is the same regardless of whether the service is ultimately
delivered in house, or by a private sector or a voluntary sector
organisation.
22. Some local authorities interviewed in
the course of our studies on competition and contestability and
working with the voluntary sector were reluctant to outsource
certain services, fearing that this might lead to an unacceptable
loss of control and accountability. This concern related particularly
to services they deemed sensitive, such as child protection.
23. We found some specific examples of poor
accountability that occurred because the service delivery arrangements
between the local authorities and the voluntary sector were relatively
informal. But we did not find widespread evidence of loss or lack
of accountability as a result of contracting out services.
24. Many authorities recognised a need to
improve accountability in their outsourced relationships, including
those with the voluntary sector. Some told us that they were converting
their grant-funding arrangements with the voluntary sector into
service level agreements or formal contracts in order to address
this issue.
Q2 Is the third sector more likely to provide
better public services than the state or the private sector?
(a) Is there evidence that where services
are provided by the third sector, that they are popular with those
that use them?
(b) Is there evidence of demand for more services
to be provided by the third sector? If so, who from?
(c) Do public services provided by the third
sector more accurately reflect the changing needs of those that
use them?
(d) Is there evidence that contracting to
the third sector leads to greater scope for innovation in public
service delivery?
25. None of our studies sought evidence
on the comparative popularity of services delivered by different
providers. Our research on choice in public services found that
what matters most to users is the quality of the service they
receive, rather than who provides that service. Citizens do not
always know who provides their services—sometimes they have
no idea whether it is the local authority, the health service,
or another public or private organisation. What matters to users
is having choice in how the service is delivered, and it is particularly
important for them to have choice in personal social services.
26. We did not seek evidence of demand for
the voluntary sector to provide more public services, nor did
we seek evidence that voluntary sector provision is any more responsive
to changing needs than other provision. However, a diverse supply
base potentially offers commissioners a better chance of meeting
the diverse needs in their local communities, which could be expected
to lead to higher levels of satisfaction among service users.
27. Our study on innovation in local government,
which is currently in progress and has not yet been published,
shows that no sector or delivery mechanism has a monopoly on innovation.
Innovation tends to come from those who are closest to the users
of a service, and often emerges in partnerships. We found evidence
of innovation among providers of all kinds, but no particular
evidence of greater innovation in the voluntary sector, compared
with other service providers.
28. During our voluntary sector study we
found some unease among providers that they might find it more
difficult to add value if they were to become more risk averse
and less innovative; some felt that this risk was greater where
commissioners were making more use of contractual arrangements.
29. A recent academic study[75]
suggests that innovative capacity has fallen in the voluntary
and community sector over the past decade, as a direct result
of commissioning practice increasing the emphasis on service delivery
and not explicitly seeking innovation.
30. However, we found that contractual arrangements
do not necessarily stifle flexibility and innovative practice.
Intelligent commissioning can create the conditions that encourage
innovation. Public bodies can design competitive tendering processes
to encourage smaller providers to compete. Service specifications
can encourage flexibility and responsiveness to user preferences
in areas such as social services, where responsiveness of service
delivery matters greatly.
Q3 Does commissioning benefit the third sector?
(a) Will contractual relationships with the
state improve stability within the third sector?
(b) Will close involvement with service provision
prevent third sector organisations retaining the ability to be
critical of government?
(c) Is there a risk that service providers
will become increasingly bureaucratic?
(d) Is there a risk that third sector organisations
will lose their independence, their identity, or their distinctive
ethos?
(e) Might the third sector become polarized
between large, service-providing organisations and more radical
groups? If so, would this matter?
31. Some voluntary sector organisations
perceived a shift in local authority funding from grants to contracts
in recent years, but it was not possible to substantiate any marked
shift from the available data. We saw no evidence that overall
grant levels had fallen in recent years. However, there was evidence
that the use of arrangements similar to contracting was increasing
and that local authorities were making use of more contract-like
arrangements (such as Service Level Agreements) as conditions
of grant funding.
32. Commissioners told us that service contracts
gave authorities control over the services they bought and gave
providers clarity on what the commissioning organisation required
from them. Contracts also provided a better way of holding providers
to account, regardless of whether the services are provided in
house or by the private or voluntary sectors.
33. Many voluntary organisations saw improved
stability of funding streams as an advantage of delivering services
under contract, especially where contracts ran for more than one
year. Some also told us that reporting performance against a contract
specification could give them opportunities to demonstrate their
value to a greater extent than had been possible under some previous
grant funding arrangements. Commissioners and providers alike
recognise a risk that, unless handled carefully, commissioning
may impose a bureaucratic burden on smaller organisations, many
of which have limited capacity to provide information or comply
with other requirements and have limited experience of doing so.
34. Some voluntary organisations, particularly
smaller ones, were worried about providing services under contract.
These organisations feared that a contract regime might force
them to compromise their mission and lose autonomy.
35. Most of the larger organisations we
spoke to were less concerned about a potential loss of autonomy,
and saw a clear distinction between their advocacy role and their
service delivery role. Often these separate roles are conducted
in different arms of the organisation. Some organisations did
accept that there was a potential conflict of interest in advocating
particular services where they were likely to go on to compete
for the service contract. The Charity Commission has issued helpful
guidance for charities that may be considering involvement in
public service delivery. The Association of Chief Executives of
Voluntary Organisations and the National Council of Voluntary
Organisations have also produced material to help voluntary organisations
understand what is involved.[76]
36. Representatives of some small and medium-sized
voluntary and community organisations perceived a risk of losing
out to larger, sometimes out-of-area organisations, which they
perceived as being better able to compete for contracts.
37. We have found little qualitative evidence
to suggest that commissioning practice is actually exercising
a polarising effect on the voluntary sector at present. However,
voluntary organisations are faced with the choice of whether to
participate in delivery of public services through contracting
or not. Some, perhaps some smaller ones in particular, may choose
not to do so if they feel they lack the capacity to engage with
the contracting process or to deliver the service as specified
or, as in some cases, simply do not want to deliver services under
contract. Commissioners need to recognise the diverse nature of
the sector and to be aware that small organisations may exclude
themselves from delivery, which could represent a lost opportunity
to broaden the range of delivery options, or a loss of the service
to the local community.
Q4 Does commissioning services from the third
sector have any benefits for the state?
(a) Does the state risk losing control of
service delivery in a way which might be damaging?
(b) What capacity will the state need to ensure
that it can be an intelligent customer of services?
(c) How is duplication of effort in order
to monitor and manage contracts best avoided?
(d) How good is the state at managing bidding
processes and defining contractual obligations when commissioning
services?
38. We found no evidence that commissioning
services from the voluntary sector carried any greater risk of
loss of control than any other form of commissioning.
39. Emerging findings from our competition
and contestability study suggest that commissioners need specific
skills and competencies in order to secure the best possible outcomes
from commissioning. The major skills weaknesses identified were
in risk management, contract negotiation and management, rather
than technical areas such as regulation and knowledge of contract
requirements. In particular, there is a distinction between managing
a service and managing a contract to provide a service. Several
interviewees referred to a lack of contract management skills
and attributed that, at least partly, to resistance on the part
of staff to changing from service provider to service commissioner.
Commissioners need to be open-minded and willing to consider the
full range of options available to them. There is plenty of guidance
from the OGC and others on good commissioning practice already
in existence, including specific guidance for the third sector.[77]
40. Our studies on competition and contestability
and on innovation found that many authorities doubt whether they
have the skills or the capacity to commission effectively. We
did not find evidence that the challenges of effective commissioning
(for example, retaining sufficient technical and contract management
expertise in-house to be able to manage the contract effectively)
were any different in procuring services from the voluntary sector
rather than the private sector.
41. We found examples of poor as well as
good commissioning practice during our study of the voluntary
sector. The most common complaints concerned over-complex and
bureaucratic tendering and contract management processes, and
a general sense that the procurement process focused on reducing
costs at the expense of quality. There is no evidence that this
poor practice affects third sector organisations disproportionately.
However, it is clear that where current procurement practice is
poor it does not encourage third sector organisations to enter
the market for service delivery contracts.
42. We found some authorities providing
help and advice, as well as actively seeking opportunities for
smaller third sector organisations to enter sub-contracting or
consortium arrangements.
Q5 What are the financial implications of
providing services through the third sector, compared with directly
provided state services?
(a) Are services cheaper to provide?
(b) Are there "hidden costs" such
as contract oversight?
(c) Are the benefits of third sector participation
in public service provision so great that it is appropriate to
have financial rules, which encourage this, or should the aim
be to have "competitive neutrality" between public,
private and voluntary sectors?
Q6 Are the costs and benefits to the state
the same when commissioned from the third and private sectors?
43. Both central government and voluntary
sector organisations have emphasised the added value that the
voluntary sector can bring to service delivery, and the potential
for "transformation rather than transfer" of services.
Some in local government share that view. But added value is easier
to articulate than it is to enumerate or prove.
44. Commissioners and providers told us
that focusing on the cost of services alone was too narrow an
approach in assessing value for money. Service quality should
also form part of that assessment. Public bodies should commission
services from the provider that presents the best option for that
particular service in those particular circumstances.
45. However, in the absence of any incentive
to do so, local authorities do not account for contracts on a
sector-by-sector basis, so it is impossible for them to assess
the relative value for money delivered by providers from different
sectors at a local level. In order to do so, authorities would
need to change their approach and to maintain records in a way
that identified providers from different sectors, their performance
and costs, in a way that enabled comparison across sectors.
46. The emerging findings from our study
of competition and contestability suggest that information about
transaction costs, benchmarks, and wider market analysis is scarce.
Local authorities recognise that there are transaction costs associated
with competition or outsourcing, and some have taken them into
account in assessments of the potential costs and benefits of
competitively tendering or outsourcing services. But authorities'
understanding of their cost base in general, and of transaction
costs in particular, is often poor. And we have not found any
who maintain separate records of transaction costs with different
sectors in a way that would enable valid comparison.
47. Many commissioners perceived that commissioning
services from the voluntary sector incurred greater transaction
costs, simply because this often entailed letting a larger number
of smaller contracts to smaller providers. If true, this would
be an example of one of the commissioning challenges we identified
in paragraph 14, and might apply more broadly than the voluntary
sector (for example to any attempt to ensure that small and medium
enterprises are engaged in the delivery of public services). However,
no commissioners could produce any financial or other evidence
to support this view.
48. The scarcity of sound, reliable data
about service performance and cost makes it difficult for local
authorities to assess value for money. In particular, the lack
of data comparing in house and external providers makes it difficult
to choose between competing service providers. And the lack of
data on the transactional costs of outsourcing makes it difficult
to make decisions about service delivery and to assess value for
money comprehensively (which might, for example, include offsetting
additional transaction costs associated with the use of one provider
or contract structure against the added value it delivered). This
issue has implications beyond local authorities' interactions
with the voluntary sector and we will be investigating aspects
of it further in our studies on competition and contestability
and use of information.
49. The views on competitive neutrality
of those we consulted in the course of our study on working with
the voluntary sector varied. Larger voluntary organisations take
the view that, where services are properly specified, competitive
neutrality will ensure that voluntary sector providers will secure
contracts through which they are best qualified to deliver value
for money. Smaller voluntary organisations were more concerned
that they would not have the capacity to compete with larger voluntary
organisations, or with public and private sector providers. There
was therefore a risk that their potential contribution could be
lost in future without some form of special support.
50. Some commissioners faced situations
where one sector or even one provider effectively held a monopoly
position, and could see a case for some special treatment for
organisations that might not otherwise secure business without
it. We can envisage circumstances in which authorities might sensibly
depart from strict competitive neutrality in the interests of
building a broader or more diverse supply base, therefore improving
the prospects of securing better value for money in the longer
term.
March 2007
72 As described in the Committee's call for evidence. Back
73
For example, voluntary organisations may have special expertise
in dealing with people who have a specific medical condition,
or with drugs and alcohol rehabilitation. Back
74
Commission for Social Care Inspection [2007] The State of
Social Care in England 2005-06. Back
75
Osborne, S [2007]: The innovative capacity of voluntary organisations:
survey evidence from a replication study, ESRC Discussion
Paper 0701. Back
76
See for example Before Signing on the Dotted Line: all you
need to know about procuring public sector contracts by NCVO,
and Mind the Gap: a funder's guide to full cost recovery by
ACEVO. Back
77
See, for example: Department of Health [2006] Report of the
Third Sector Commissioning Task Force. Back
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