The Work Programme: Providers and contracting arrangements

Written evidence submitted by St Loye’s Foundation

1. Summary

a. The changes to the Work Programme contracting procedures should have a number of positive results, but problems remain:

Ø Payment by results should align customer and provider interests;

Ø Efficient supply chains are essential – three tiers may prove be too expensive;

Ø Prime providers should be asked to report the volume of funds passed down to sub-contractors, along with the number of sub-contractors;

Ø Specialist organisations should be recruited to meet the needs of the harder-to-help – the experience of generalists delivering Pathways to Work has been less than ideal;

Ø Smaller, VCS organisations may have to accept payment net of financing and management costs, and risk premia, of just 50% of total payment – this may be too low to generate the results required; there are partial solutions to this problem, however;

Ø Differential payments for the harder-to-help are a major step forward;

Ø The EOI and PQQ procedure for sub-contractors remains an enormous burden, for very little benefit – new approaches are required.

2. The relationship between primes and sub-contractors, and DWP’s role

a. The formation of relationships between prime providers and sub-contractors (and between sub-contractors and third-tier providers) are determined largely by commercial interests. When programme payment is through regular, pre-determined fee payments, primes can take both a strategic view of sub-contracting (with which organisations do we wish to have a longer term relationship?) and a risk minimisation view of sub-contracting (with which organisations can we back-to-back sub-contract in order to ensure a certain volume of business?). In other words, the sub-contracting relationship is not necessarily established in order to maximise contract outcomes for the customer, but to suit provider interests. The task for DWP is to ensure that provider commercial interests align with customer interests.

b. In principle, the approach of payment by results over an extended period of time should achieve such an alignment. If the customer is found and kept in work, then the provider (and sub-contractor) is remunerated. Our conversations with potential prime providers in respect of the Work Programme, however, suggest that the established sub-contracting approach may be maintained in many cases. This has a number of consequences:

Ø For those prime providers who will not deliver, but act as contract managers, a three tier supply chain is likely to emerge; this is likely to involve a higher overhead cost that a two-tier supply chain, reduce front-line expenditure and lead to sub-optimal results.

Ø For primes who also deliver, back-to-back subcontracting with similar organisations will reduce the risk of not winning business across regions but, due to the necessity of each having to further sub-contract to smaller, local front-line providers, will again result in higher aggregate overheads and reduced front-line expenditure.

c. St. Loye’s Foundation believes that a two-tier delivery model between primes, whether delivering directly or not, will maximise front-line spend and bring the best results. This implies, however, the formation of networks or delivery consortia in each of the regions. This is happening only sporadically, we believe.

d. We do not believe that there are any longer major issues between primes and sub-contractors in respect of contract management, following pressure from DWP and the introduction of the Merlin Standard. The procedures which primes have adopted in order to demonstrate compliance and objectivity in the selection of sub-contractors, however, are extremely onerous for sub-contractors (see Section 6, below).

e. We do believe, however, that DWP might ask for primes to report the volumes of funds passed through to second tier and third tier providers on a quarterly basis. This is both to have a better idea of the percentage of resources being passed to the front-line and secondly to prevent primes from gaining commercial advantage by "window dressing" their technical proposals to DWP with an array of, in the main, VCS providers who are then used sparingly, if at all, to deliver.

3. The implications of the change of profile of JSA claimants arising from migration from IB/ESA

a. The bigger DWP programmes have, to date, been largely delivered by national "end-to-end" job broking organisations. This has been the case with FND 1 and Pathways to Work. We have seen, however, and in particular within the Pathways to Work programme, that such generalist providers are not always geared up to providing specialist services to harder-to-help groups. Appropriate skills are to be found, however, with many of the organisations which have previously delivered WORKSTEP and continue to deliver the DWP Residential Training programme. Both of these programmes were designed to offer services to harder-to-help customers, and specifically those with disabilities. It is too early to comment on the performance of organisations delivering Work Choice.

b. Prime providers should therefore be looking to include specialist organisations within their delivery partners. St Loye’s Foundation thinks that such organisations should provide "end-to-end" services for harder-to-help groups, rather than simply being available to the larger, generalist providers to offer occasional, call-down inputs. The size of the harder-to-help group should not be underestimated.

4. The implications for providers of "payment by results"

a. As already mentioned, payment by results should, in principle, have the effect of aligning commercial and customer interests. From that point of view it is positive. The payment system does, of course, increase provider risk (risk is effectively transferred from DWP to the provider) and put pressure on cash flows. Each of these implications has a cost to the prime provider and, to the extent that risk and cash flow pressures are passed down the line, to sub-contractors. Providers in general will, therefore, be looking for higher percentage margins to offset these costs. Moreover, even if primes remove outcome risk and cover cash flow for sub-contractors, this will come at a price.

b. We have not yet received specific offers from prime providers. However, I do not expect to see cash flow cover to be passed down to sub-contractors at the interest rate at which it is borrowed by the prime. If not applied to the Work Programme, capital may be applied elsewhere and primes will be looking to charge the opportunity cost of capital, which could be as high as 20%.

c. The size of the risk premium requested of sub-contractors for assured payments is yet to be seen, but will certainly be in double figures. If sub-contractors are obliged by a weak balance sheet to accept assured payments from the prime provider, and accept cash flow cover, then, after bona fide management costs of, say, 15-20%, I would expect sub-contractors to have to accept an overall charge of around 50% of gross payments from DWP to the prime provider. This risks insufficient resource being passed to the front line, customers not receiving the service they need, and job outcomes not being generated as expected.

d. The above implies that government may receive higher benefits from reduced unemployment by reducing the cash flow hit on prime providers. This may be done in two principal ways, without compromising the payment by results principle.

Ø Provide "advances" against a percentage of expected outcomes, to be re-couped upon eventual provider proof of employment and invoice;

Ø Provide pro-rata payments after, say, 6 months of employment and at six-monthly intervals thereafter, rather than waiting for a record of 24 months’ employment.

e. The impact on the voluntary and social enterprise sector. Much of the sector comprises small organisations, which are not in a position to offer region-wide sub-contracting services. Many are, therefore, obliged to accept the offer from primes of providing occasional, specialist inputs on a call-down basis. Moreover, the Work Programme, combined with Work Choice, the majority of which is being delivered by one large charity (Shaw Trust), will comprise the majority of welfare to work funding by DWP in the coming parliament. This means that many voluntary and social enterprise bodies will see a reduction in their welfare to work income, and will have to diversify or merge to survive.

f. The sector should not be immune from commercial pressure, of course, and it may be that the merger route is a sensible one for many organisations. The risk is that merger will remove the community connections of smaller organisations, many of which have a high, local reputation.

g. The second potential impact on the sector results from a lack of full understanding of the commercial drivers within the Work Programme. It is likely that either:

Ø Organisations will accept a job broker role but will over-estimate their ability to deliver job outcomes. They will feel obliged to accept prime provider offers, however, as the Work Programme is perceived as the "only game in town".

Ø Organisations will accept a specialist, call-down role, but find that their services are not called upon to the extent expected as prime providers and larger, job broking sub-contractors wish to maximise their own turnover.

5. The effectiveness of differential payments on support to the harder-to-help

a. I expect differential payments according to the complexity of the customer situation to be overwhelmingly positive. There will always be issues of where, exactly, to pitch the payment, but any differentiation will be an improvement. Similarly, there will always be a range of customer profiles within any one customer group, and there may still, therefore, be an element of "cream and park" within customer groups. The extent of this should be much less under a differential payment scenario than previously, however.

6. Other issues

a. St Loye’s Foundation would like to comment on the approach of prime providers to the selection of sub-contractors. With a handful of honourable exceptions, most prime providers have adopted a hugely complicated process of selecting sub-contractors. Some have adopted both an EOI and a PQQ stage, and some EOI run to well over 30 pages before responses are inserted and evidence is attached! There is great scepticism within the sub-contractor community that prime providers do, in fact, read and carry out an objective selection based on evidence presented. Rather, it is felt that the process is one to which to refer should there be any appeal by a non-selected sub-contractor under the Merlin Standard. In fact, the prime provider should not be tied to written submissions and should be able to use commercial discretion to select partners, as the intangible is often as important as the tangible. This being so, the formal EOI/PQQ stage should be much less onerous.

b. The effect of using the current EOI and PQQ approach, however, is that sub-contractors have a huge, pre-tender work load, 80-90% of which will prove to have been unnecessary because primes do not reach the tender stage or do not retain the sub-contractor. In our own case, we have completed as of November 18th 2010, 38 EOI and 3 PQQ. I estimate the staff cost of this exercise to be around £10,000.

c. DWP, to its credit, has proposed a standard EOI form to minimise sub-contractor work load, but very few prime providers have adopted it. Further thought and direction is required!