Memorandum from nef
INTRODUCTION
nef (the new economics foundation) is
an independent think-tank that undertakes innovative research
and thinking on economic, environmental and social issues.
Over a number of years, nef has developed
innovative thinking and practical approaches to improving the
public benefit impact of public procurement, sustainable procurement,
and monitoring and evaluation. This has provided us with the opportunity
to work closely with third sector organisations to develop their
understanding of the value and contribution they bring to public
services delivery and society as a whole. nef is currently
working with the London Borough of Camden on a three-year HM Treasury
funded Invest to Save Budget programme to develop a new model
for commissioning public services from third sector providers
that builds economic, social, and environmental outcomes into
the procurement process, and relates those outcomes to longer
term savings. The first findings from this research will be available
autumn 2007.
In this response we have addressed those aspects
of the Issues and Questions Paper where we have direct evidence
from our programmes of work.
SUMMARY
1. There is no empirical evidence to suggest
that competition and contestability are likely to improve outcomes
in public services. Competition and contestability are likely
to result in greater emphasis on cost being decisive in the awarding
of contracts, particularly given the challenging financial environment
and demand for cashable efficiency savings in the public sector,
at both local and national levels. This is likely to favour larger
organisations with lower per unit overheads and may result in
smaller community and voluntary sector organisations losing funding,
which in turn may also lead to a decline in quality of services.
2. The Government should pursue "people
centred" rather than "market-centred" public services
and encourage collaborative, partnership relationships between
commissioners, providers and service users focusing on long-term
positive outcomes as defined by users as the guide for reform.[164]
Ed Miliband has commented on the potential for statutory services
to learn from the best of third sector approaches by engaging
in innovation and learning together (through real partnerships)
rather than risk outsourcing learning and innovation whether to
private or voluntary sector agencies.
3. Using the third sector to deliver commissioned
public services poses a threat to their independence and sustainability.
It is also likely to result in a polarisation within the sector
between larger providers and smaller community and voluntary groups,
with medium-sized providers particularly threatened.
4. Innovation, a characteristic prized in
third sector delivery by stakeholders is unlikely to be cultivated
in a commissioning relationship.
5. Government needs to redefine the existing
Value for Money (VfM) criteria to take into account the wider
outcomes—economic, social and environmental—that may
be delivered by third sector providers. Commissioning, particularly
at local government level, needs to be focussed on outcomes for
communities as well as at service-level.
1. What are the benefits of contestabilty
to the users of public services?
Challenging the contestability model- refocusing
the argument:
Contestability is unlikely to create better
outcomes for users of public services for reasons detailed below.
The contestability model requires the "good"
or "service" to be defined (you have to know what you
are buying.) Rather than a focusing on what is traded in a market
sense on the basis of price (outputs), to deliver effective public
services the standard commissioning process needs to be refocused
to ensure that it is procuring public benefit (wider outcomes)
as opposed to short-term outputs.
Our procurement work with local authorities
in the commissioning of public services has revealed a general
confusion over what public benefit is being procured, particularly
when there are strong drivers within the authority to procure
at the lowest price to make budget savings. Generally there is
confusion at the commissioner level between procuring short-term
outputs (and calling these outcomes) as opposed to focusing the
procurement decision on the longer-term outcomes[165]
from the service delivery for the users of the public services.
For example, in the provision of mental health support services
focusing on procuring a day care centre that can support x number
of people per day, masks the fact that the day centre is only
one way (and perhaps not the most effective way) to delivery longer
term outcomes such as: a journey to recovery, a reduced sense
of social exclusion, and building coping mechanisms for users.
It is these longer-term outcomes that count and should be detailed
in the service specification and subsequent performance management
framework.
Cost is easier to measure than quality and consequently
is measured more often. In a public service context, quality should
be associated with long-term outcomes such as positive behavioural
change, greater independence or improved well-being. Commissioners
of services, however, are faced with a challenging financial environment
with 2.5% efficiency savings required year on year until 2008.
Even more ambitious savings targets are expected following the
2007 Comprehensive Spending Review. The Government's drive to
aggregate and scale-up local authority and other services is further
evidence of a concentration on cost reduction over and above quality
of outcomes.[166]
Our procurement research supports the assertion
that adopting a commissioning approach dominated by concerns with
contestability, without any adjustment of the commissioning process
to value the longer-term outcomes delivered by public services
in economic, social and environmental terms, will result in a
failure to deliver a public service, ie a service which has a
wider societal contribution.
Public services are delivered most effectively
when they are co-produced by users of a service, and when providers
and success are determined by longer-term positive outcomes as
experienced, and defined, by users.[167]
Co-production describes a model where responsibilities
and knowledge are shared between professionals and users, and
sometimes with the user's family and neighbours. This implies
a relationship of reciprocity and partnership between commissioners,
providers and users. Whilst the Government's model of public service
reform emphasises the role of users shaping services "from
below", the commissioner/provider segregation required by
the contestability model can run counter to this co-production
approach by excluding the vital input of users' voice, skills
and experience from the equation.[168]
Contestability, or opening up markets, and the
appearance of greater "user choice" through the market
mechanism, not only focuses commissioners on short-term outputs
from service provision as opposed to longer term outcome for service
users, it also reduces the greater involvement of service users
in the design and delivery of those services.[169]
Jake Chapman, author of "Why Systems Fail"
noted that "You can deliver pizza but you can't deliver public
services". In other words, market logic cannot be applied
to all human transactions. Effective doctors know they cannot
"deliver" healthcare to patients, effective teachers
know they cannot "deliver" learning to students. Both
are relationships where both parties play a part in the desired
outcome. This is also true of effective police forces who know
they cannot "deliver" community safety without resident
participation.
Public services are best delivered through
a partnership approach to ensure wider public benefit.
Many services, for example social care and mental
health services, demand the development of mutually beneficial
and often long term partnerships between users and providers,
be they statutory, voluntary or from the private sector. People
with mental health problems, children in care, the long term unemployed,
elderly people, prisoners and other marginalised groups require
long-term (years rather than months) and consistent support, involving
the creation of positive and trusting relationships to improve
their well-being. Evidence shows that people who use public services
do not think of themselves as customers or consumers. People want
high quality services and relationships with the professionals
within them based on values such as "respect" and "partnership".[170]
The over emphasis in the contestability model
of greater choice, fails to recognise the overriding need to develop
a relationship based on trust in this delivery partnership.
The (unintended) consequences of contestability
and commissioning.
If the Government continues with this drive
towards contestability and competition it must recognise the impact
of the wider financial climate and efficiency agenda, and take
steps to ensure that the potential negative consequences (summarised
below) are prevented.
1. The undermining of a partnership approach
between statutory agencies, providers (whether they are public,
third sector or private) and users. Our research with third sector
providers suggests that they value the development of a partnership
approach to delivery with commissioners of services where they
have equal status in striving towards positive outcomes for services
users, involving ongoing dialogue and the review of service outcomes.
2. A shift towards cost-driven commissioning
where short-term criteria, such as the unit-cost of a service,
takes on greater importance than longer-term outcomes for users
which, whilst they are more difficult to measure and compare may
result in greater savings for commissioners in the longer-term.
3. Less incentive for public service professionals
and commissioners to develop and create networks of support, including
peer support networks, for individuals or communities.
4. Less incentive for collaboration between
providers, including in the third sector, in an environment where
incentives and performance management stress individual organisational
performance and financial balance over creating long term positive
outcomes. As knowledge and innovation become key to winning contracts
so third sector organisations will protect or copyright their
learning. This is likely to exclude commissioners and services
users, and reduce the possibility of replication of best practice.
A competitive model of commissioning will result in competitive
behaviour.
5. Public service professionals become less
engaged with, and less accountable to users for the success or
delivery of services as they contract out the service provision.
6. Outsourced learning that does not contribute
to broader understanding and evolution within the commissioning
agency. Currently there is very little discussion about how local
authorities will develop learning mechanisms and performance management
systems to understand the outcomes emerging from the service delivered.
Effective data collection and contract management does not necessarily
result in learning that could challenge and refocus a delivery
approach to ensure longer term outcomes will be achieved.
7. Increased risk aversion which will constrain
innovation as commissioners outsource risk to third sector providers.
Creating an increasingly risk averse sector as commissioners are
not willing to share risk.
2. Is the third sector more likely to provide
better public services than the state or the private sector?
In addressing this question it is essential
to remember the complexity that exists within the third sector.
Additionally current third sector performance in the context of
a distinct and separate sector does not in any way reflect how
they may or may not perform in delivering a service within the
constraints of a standard commissioning relationship.
Innovation, a characteristic frequently cited
in our research by stakeholders as a major strength of the third
sector in the delivery of services, has developed outside of the
contestability model, and is likely to be severely reduced in
a traditional commissioning relationship with the State sector.
Third sector organisations have been heralded
by Government as more innovative than public sector providers.
This is generally thought to be because they have often grown
out of, or are embedded in, the communities they serve. Or that
they are staffed by people with direct experience of the challenges
they are tackling. The insights and knowledge they have of how
to meet people's needs are generated over the course of many years
of informal learning and interaction with people, often in a community
context. To use Government terminology, they are "closer
to users". Innovation in the third sector is not driven by
competing with other providers for services, but rather by commitment
and values of the providers.
The danger of forcing competition and contestability
into the public services market is that cost will come to dominate
decision-making, innovation will be under-valued and overall service
quality will decline as a result. Recent Audit Commission research
suggests that local authorities heavily emphasise unit cost assessments
to monitor and compare service provision.[171]
Rather than focusing on the business model,
the public service should focus on the mission of the organisation.
The question appears to assume that particular
business models or organisational structures are inherently more
capable of delivering better outcomes for users than others. Rather
than focusing on the structure of an organisation it would be
more pertinent to focus on the mission of the organisation. Organisations
that are driven by social, economic and environmental goals and
have an intimate knowledge of the people they are working with
will be in a better position to deliver these wider outcomes than
organisations primarily driven by profit. It is also important
that providers are flexible in their approach to delivery and
have sustainable funding models. In many cases, there is a strong
argument that such outcomes are best achieved through state provision
ie the state has a duty to maintain a level of core capacity and
expertise to provide such services, and be held accountable for
them (as with education and health). Decisions should be taken
on a case-by-case basis, again with the close involvement of service
users, the local community and a wide range of other stakeholders.
3. Does commissioning benefit the third sector?
Scale matters. Third sector organisations
often thrive where there is little bureaucracy and a light touch
approach, ironically this is often the case as services provided
are niche and high risk, and therefore vulnerable. Commissioning
favours larger organisations for reasons of administrative efficiency
and perceived "contract risk". It is as yet unclear
how commissioning will support the diversity of the third sector,
as opposed to reducing it to a few large charities operating in
any one sector.
The third sector encompasses an enormous range
of organisations, from very small community-based groups to multi-million
pound charities and profitable social enterprises. A move to commissioning
will affect different organisations in very different ways.
Distinct from an ever professionalising "voluntary"
sector is the "community sector". Made up of micro-charities,
community sector organisations are often the real experts when
it comes to knowing how best to respond to the needs of some of
the most vulnerable people in a locality. Due in part to necessity
(restricted size and limited access to resources) they are often
most able to "co-produce" services with users. This
means that they are able to play a significant and substantial
role in recognising and engaging the skills, talents and resources
available within their local environment.
The uniqueness of these micro-charities—the
very qualities which make them different from larger, corporate
charitable enterprises and more able to be the caring face of
our communities—also makes them less able to respond to
the opportunities to take part in the current public service revolution.
The emphasis of the new funding regime on the delivery of core
public services, is largely to the detriment of the more informal
but equally vital, broad ranging, services provided by smaller
groups. Recent research undertaken by nef with the Joseph
Rowntree Foundation (2006) Hidden Work; co-production by people
outside paid employment has shown that current models of service
delivery often fail to recognise the existing resources and assets
within communities and can create a culture of helplessness and
dependency amongst users of public services.
Evidence, from our work on timebanking, shows
that asset-based approaches that recognise and exchange the skills
and resources available locally are common to many successful
micro-charities. However, these very different ways of working
can actually make it even harder to move examples of best practice
to the mainstream, precisely where these fresh new approaches
are most needed.
The recent survey by the Charity Commission—Stand
and deliver: the future for charities providing public services—is
the most comprehensive review of the impact of commissioning on
the third sector. It suggests that commissioning threatens the
third sector's sustainability—with only 12% of charities
delivering public services achieving full cost recovery all of
the time—and independence. Consistent under-funding will
clearly threaten innovation, staff morale and quality of services
and, ultimately, the sustainability of the organisation. The study
suggests medium sized organisations are particularly at risk and
that public service market could become polarised between smaller
organisations still attracting grant funding and "supercharities"
mainly funded by public service contracts.[172]
The third sector will be best able to maintain
its positive contribution to public service delivery, including
its role as an independent voice, in a mixed-funding environment,
rather than being reliant on commissions.
If the move to commissioning is accompanied
by cuts to other forms of funding, in particular grants, the danger
is that some smaller third sector organisations will suffer. There
seems to be perception that many local authorities are moving
towards increasing "contractualisation" of grant funding,
even where they are not moving to full competitive commissioning.
The reason small to medium third sector organisations are currently
able to respond to local need, fill gaps that that the public
sector is not geared up for, innovate and take risks is because
their funding arrangements allow them greater flexibility. In
a recent report, HM Treasury pointed to the important role of
small community and voluntary groups play in regeneration and
creating social capital.[173]
The great danger is that contracting to the sector comes to be
seen as a way to do more for less money by public sector organisations.
This is also related to the broader risk that
where they are contracted to deliver public services, third sector
organisations risk losing their independence. The charity commission's
report suggests that 50% of charities delivering public services
cannot agree that their activities are determined by the charity's
mission, rather than by funding priorities. nef would share
the Chair of the Charity Commission's concern that "contribution
of the sector to social progress arises from its independence"
and it cannot be taken for granted that such independence will
remain as more third sector organisations gain their primary income
from delivering public services. A recent academic study suggested
that innovative capacity has fallen in the voluntary and community
sector over the past decade as a direct result of increasing emphasis
on service delivery in Government fund practice.[174]
The third sector will benefit from a mixed economy
of funding, including:
— using commissioning (we welcome the
Government's initiative to make three-year funding the norm in
such contracts to give providers adequate time for longer term
strategic planning) but with the caveat that the current "value
for money" criteria is too narrow in scope, and the commissioning
process needs to be reformulated around a partnership approach
to delivery focused on understanding the outcomes for users of
those services;
— grants with Service Level Agreements
which are again outcome focused; and
— small grants with only the standard
conditions of grant aid.
Local Authorities, working in partnership with
local stakeholders and service users, should be free to decide
on the best approach to funding third sector organisations. Whether
or not competitive tendering is appropriate should be carefully
considered and debated across the stakeholder group.
Commissioners should also consider carefully
the wider benefits certain kinds of providers, for example smaller
community and voluntary groups, bring to their communities. A
notion of "community value" needs to be developed, derived
perhaps from local authorities' sustainable community strategies
or local area agreements, and addressed whenever decisions over
shifting from grants to competitive tendering is considered. This
should be built into "best value" commissioning criteria.
5. What are the financial implications of
providing services through the third sector compared with directly
provided state services?
There is evidence to suggest that third sector
organisations deliver multiple services and multiple outcomes
in excess of those "contracted" for in their agreements
with the public sector. This reflects their client-focused values
in delivery. Any consideration of cost should therefore be a benefit-cost
assessment across all outcomes achieved rather than restricting
it to the outputs described in the contract. If this is taken
into consideration then there are greater grounds to argue that
their unit cost across the full outcome framework is "cheaper".
The commissioning process itself should be revised
to enable providers to describe, and then capture the economic,
social and environmental outcomes that their delivery approach
brings to the sector. That is, to express the full value their
organisation can bring to a service and to the wider community.
This does not however preclude, where appropriate, making financial
arrangements available to support a diverse range of potential
providers to bid for the work.
The current conceptualisation of efficiency,
derived from "Value for Money" (VfM) criteria used by
procurement officers in making decisions on which service provider
to choose, is too narrowly defined. It focuses heavily on cost-effectiveness
and neglects wider social, economic and environmental impacts
that providers, in particular third sector providers, can bring
to contracts. VfM does emphasise the importance of whole life
cost over lowest cost, but there is very little evidence of local
authorities actually taking whole life costs into account in contracts,
particularly in the service sector. Recent Audit Commission research
has found that service commissioners viewed the efficiency agenda
as being in direct conflict with expanding the voluntary and community
sector's involvement in public service delivery.[175]
Third sector providers create many of these
neglected outcomes in the way that they deliver services. They
are more commonly known as "added value". Hence a social
firm which employs and provides training to people with learning
disabilities in its print production process might lose its bid
to print council stationary because it has higher unit costs than
a larger private sector provider. There is no opportunity in the
standard commissioning process for the social firm to demonstrate
the added value and potential savings for the council and wider
public sector that may accrue from employing people with learning
disabilities.
Similarly, the value of a locally-based provider
is not necessarily captured in the current commissioning process,
both in terms of the social (such as ease of access for users),
and environmental impacts (such as reduction in traffic and emissions).
There are also potential local economic benefits if a provider
is embedded within an area experiencing economic disadvantage
and employs local people with associated local economic multiplier
effects.[176]
There are some good examples of local authorities paying greater
attention to the sustainability of local decisions that affect
the environment. Hertfordshire is using its annually produced
quality of life report, which contains indicators measuring economic,
social and environmental progress and performance, to assess progress
in key activity areas.
Value for Money needs to be redefined around
broader economic, social, and environmental outcomes to enable
commissioners to improve their understanding of the relative cost-effectiveness
of services delivered by third sector organisations.[177]
This will be the most effective means of "levelling the playing
field" for potential providers of public services.
Currently, however, public sector service commissioners
usually specify outputs rather than outcomes when procuring services.
Defining the right outcome measures is challenging, particularly
in social services where outcomes are qualitative changes in peoples
well-being. However, there are excellent examples of such tools
in the field, including those developed by the London Homeless
Association and Alcohol Concern.[178]
The next step is then to develop an understanding of the financial
impacts of these outcomes for the council and wider public sector.
FULL COST
RECOVERY
There is still significant evidence that third
sector organisations are disadvantaged in tender contracts in
comparison with private and public sector organisations on the
basis of full cost recovery. Below is an example taken from the
Local Area Agreement of a London Borough:
Dear applicant,
Re: 2007-08 Local Area Agreement (LAA) Commissioning—Stage
2/Full Proposal Document
Question 3.1
All voluntary and community sector (VCS) organisations
should be working on the basis of recovering the full cost of
the service from the London Borough of Xxx
Non-VCS organisations may choose to absorb some of
these costs and are not in any way obliged to pass on the full
cost of the service to the London Borough of Xxx
If the organisation is working on the basis of
full cost recovery from the London Borough of Xxx, their management
costs as a guide should not exceed 10% of the whole cost of the
service and their central overheads are clearly itemised with
a method of apportionment stated.
Committing third sector organisations to "compulsory"
full cost recovery clearly puts them at a disadvantage against
private or statutory bidders who are "allowed" to absorb
some of the full costs and therefore could offer seemingly less
expensive services. In addition, the "compulsory" full
cost recovery for third sector organisations is then "restricted"
(ie not really "full" at all) by limiting it to no more
then 10% of service cost in terms of overheads. This seems an
arbitrary approach and may be a significant problem for third
sector organisations based, for example, in central London where
costs of rent and transport can push overheads above 10%.
We would suggest that the Government needs to
lay out clear guidelines for funders around full-cost-recovery
beyond what is stated in the Treasury's recent publication "Improving
financial relationships with the third sector", to ensure
a level playing field.
March 2007
164 More detailed recommendations on the use of co-production
in public services and using outcomes can be found in nef's
previous PASC response: nef response to the Public Administration
Select Committee's Issues and Questions Paper, Public services:
putting people first? Back
165
Outputs are direct and tangible products from the activity eg
number of people trained. Outcomes are changes that take place
in stakeholders as a result of the activity eg increased income
or improved stability in life. Back
166
Strong and Prosperous Communities: The Local Government White
Paper, Department of Communities and Local Government, October
2006, p 143. Back
167
In a previous PASC response we have demonstrated the importance
of measuring outcomes over and above outputs or activities to
prevent the development of perverse incentives: nef response
to the Public Administration Select Committee's Issues and Questions
Paper, Public services: putting people first? Back
168
The UK Government's Approach to Public Service Reform-A Discussion
Paper, Strategy Unit, 2006; The Local Government's Commissioning
role and the third sector, presentation to London Community Recycling
Network's Procuring Social Enterprise Launch, 25 January 2007
http://www.lcrn.org.uk/images/1905.pdf Back
169
In doing so contestabiity fails to deliver what Government policy
recognises as a desirable outcome-greater user involvement in
public service design and delivery. Back
170
See research by John Clarke, http://www.open.ac.uk/socialsciences/citizenconsumers/
and also Demos Back
171
Working effectively with the Voluntary and Community Sector,
(forthcoming), Audit Commission 2007. Back
172
Stand and deliver: the future for charities providing public
services, Charity Commission, February 2007. Back
173
The Future role of the third sector in social and economic regeneration:
interim report, December 2006, HM Treasury & Cabinet Office
http://www.hm-treasury.gov.uk/media/53E/94/pbr06_3rd_sector_428.pdf Back
174
Osborne, S [2006]: Is money the mother of innovation?
http://www.publicservices.ac.uk/our_research/Innovative_Capacity_of_Voluntary.asp Back
175
Working effectively with the Voluntary and Community Sector,
(forthcoming), Audit Commission 2007. Back
176
One way of measuring such local economic impacts is to use nef's
Local Multiplier 3 tool which measures how an organisation spends
and re-spends money over three rounds of spending, and calculates
how much of this money is retained within a defined "local"
area.
http://www.neweconomics.org/gen/tools_lm3.aspx Back
177
ondon Borough of Camden is working with nef on an Invest
to Save Budget programme to capture such wider outcomes and build
these in to the commissioning process. Back
178
http://www.homelessoutcomes.org.uk;
http://www.alcoholconcern.org.uk Back
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