Work Programme: providers and contracting arrangements - Work and Pensions Committee Contents

3  The tendering process

29.  In June 2010, DWP advertised the Work Programme and invited organisations to bid to be part of a framework (the Framework for the Provision of Employment Related Support Services (ERSS)) of prime contractors across 11 regions (called lots).[31] The ERSS is designed to be an umbrella agreement between DWP and service providers who will in effect be pre-approved to bid for Work Programme and other welfare to work contracts in the future.[32] Bidders for prime contracts were encouraged to include private, public and voluntary sector organisations as sub-contractors for the delivery of employment services locally.[33]

30.  On 25 November 2010, DWP announced the organisations that had successfully bid to join the ERSS framework. The framework included 35 prime contractors across the 11 regional lots, and between nine and 17 prime contractors were chosen for each regional lot.[34]

The prime contractor model

31.  Prime contractors chosen for the ERSS needed "to have the financial capacity to deliver large scale contracts which require a significant amount of cash-flow due to outcome funding"[35] and an annual turnover of at least £20 million per annum.[36] The rationale for having large prime contractors is that they would be able to bear the financial risk of operating on a largely results-based payment model. The financial model assumes that risk will not be passed down from prime contractors to smaller, often voluntary sector, subcontractors. We discuss the nature of Work Programme supply chains in more detail in chapter 6.

32.  Some witnesses were concerned that the financial model for the Work Programme would exclude many voluntary sector organisations from the ERSS. We were interested in exploring this issue, since voluntary sector organisations have the potential to bring significant experience, expertise and innovation to employment programmes. Barnardo's argued that many such organisations would be unable to manage such large and complex contracts.[37] Community Links felt that the size of the contracts had effectively eliminated organisations such as theirs from a prime contracting role which they had shown themselves capable of fulfilling under the New Deal. [38] The Scottish Association for Mental Health shared a similar view:

Many organisations with crucial expertise and experience will be too small to tender as prime contractors, creating a risk that they will be effectively 'frozen out' of the Work Programme by larger organisations or collaborations. This loss of expertise would not be in the interests of service users and would greatly hinder the success of the Work Programme.[39]

33.  The Prince's Trust was more positive about the prime contractor model, highlighting its potential positive effects for a voluntary organisation such as theirs:

For us it potentially offers real security. The alternative for us is bidding for smaller contracts, which have more of a tendency to finish and to turn over. With this we are seeing quite long contract value, potentially of quite significant sizes and, for us, that could offer real security, so we welcome it.[40]

34.  Professor Dan Finn and Dave Simmonds of Inclusion agreed that it would be difficult for small voluntary sector organisations to secure the necessary finance to operate as prime contractors on a largely outcome-based model.[41] It was, however, possible for some voluntary sector organisations to gain a place on the ERSS:

[...] being a prime is loaded against many non-profits, but we should remember that there are some non-profit organisations as primes, so it is possible and feasible to do it. Those organisations have a long track record, and have built up high levels of delivery and volume in different parts of the country [...][42]

Dave Simmonds observed that it had been assumed from the outset that smaller, specialist organisations would have an important role to play as subcontractors delivering services locally.[43]

35.  DWP told us that:

Positive steps were taken to encourage organisations of all sizes from the public, private and voluntary sectors to consider getting involved and to encourage voluntary sector organisations and potential prime contractors to work together.[44]

The Minister confirmed that it had not been the Government's intention to exclude voluntary sector organisations from the ERSS, and indicated that consortia had been encouraged to include a mix of private and voluntary sector involvement:

We were always aware that there was a legal difficulty for some voluntary sector organisations to raise capital for commercial purposes to take a risk. One of the things that we sought to do very early on was to encourage investors to form partnerships with voluntary sector organisations so that they could combine financial and delivery skills together in the same group.[45]

He told us that the bids for the ERSS reflected a good mix of participation and 12 of the 35 consortia that were chosen included voluntary sector organisations.[46]

The announcement of preferred bidders

36.  On 1 April 2011, DWP announced the 18 organisations who are the preferred bidders for each contract.[47] Overall, 40 contracts will be awarded, with at least two in each region. The preferred bidders include 15 private sector organisations, two voluntary sector organisations and one public sector organisation. Out of the 40 regional contracts, the overwhelming majority—35 contracts (88%)—were awarded to private sector organisations. Three contracts (8%) were awarded to voluntary sector organisations and two contracts (5%) were awarded to Newcastle College Group, a public sector organisation.[48]

37.  Inclusion noted that 24% of the preferred bidders were new entrants to the employment services market, having not previously been a provider of the Flexible New Deal or Pathways to Work.[49]

38.  A DWP news release accompanying the announcement of the preferred bidders highlighted the role of voluntary sector organisations in the delivery of the Work Programme, quoting the Minister as saying "For the first time those charities and voluntary sector organisations across the country with the know-how to help people with real difficulties in their communities get back to work are being given the chance to do just that."[50] It is worth placing this comment in context. Voluntary and community sector organisations were already closely involved in the delivery of previous employment programmes, including the Flexible New Deal, other New Deals, the Future Jobs Fund and a range of other employment related services. Their involvement as subcontractors in the Work Programme builds on previous programmes and does not represent a significant departure from them.

39.  The announcement of the preferred bidders also states that "Voluntary sector organisations make up a substantial proportion of prime contractors' supply chains, in some cases over 50%, representing an investment of £95 million in the voluntary and community sector".[51] The DWP news release indicated that, over the course of the seven-year contracts, the total value is likely to be between £3 and £5 billion.[52] As the contracts were let after we had finished taking evidence, we have not been able to assess the voluntary sector's share of the overall Work Programme contracts.

Prime contractors' relationship with voluntary organisations

40.  Witnesses were concerned that voluntary sector organisations could be used to "window dress" bids to make them appeal to DWP at the tendering stage but would then be used sparingly, if at all, in the actual contract delivery.[53] Caroline Taunt of The Prince's Trust told us that the term "bid candy" was being used to describe this inappropriate use of voluntary sector organisations to make bids from prime contractors more attractive in the contract process.[54]

41.  We asked the Minister whether a prime contractor that was found to have used a voluntary organisation as part of their bid in the tendering process but then failed to use that organisation in actual delivery would be in breach of contract. He was unequivocal in his reply: "if it was a blatant example like that, we would just remove the prime contractor from their contract. I am not having that."[55]

42.  We welcome the establishment of the Framework for the Provision of Employment Related Services (ERSS) and the intention to create a mix of private and voluntary sector involvement in ERSS consortia. Without the involvement of voluntary sector organisations the programme would risk losing a wealth of innovation and specialist knowledge.

43.  It is important that the voluntary sector's involvement in the Work Programme is meaningful and that organisations are not simply used to make prime contractors' bids more attractive. We welcome the Minister's assurance that any prime contractor which included a voluntary sector organisation in their bid at the tendering stage but was subsequently found not to be using that voluntary sector organisation in service delivery will have their contract cancelled. DWP must monitor this and act accordingly once the programme is underway.

44.  There may be subcontractors who have formed bids with framework providers who have been unsuccessful in gaining preferred bidder status. These organisations may hold significant expertise and could face a lack of involvement in the Work Programme through no deficiency of their own. We expect the procurement process to be sufficiently flexible to enable Work Programme prime contractors to engage these organisations where appropriate.

Effectiveness of the procurement process

45.  The full Invitation to Tender for specific Work Programme contract package areas was issued on 22 December 2010. Prime contractors chosen for the ERSS were invited to bid for specific contracts in 18 contract package areas (Wales and Scotland each count as one contract package area, and the other nine regional lots are divided into either two or three contract package areas). Thirty of the 35 prime contractors named on the ERSS tendered bids for Work Programme contracts, and the remaining five decided not to submit a bid.[56]

46.  The tenders were assessed by DWP in terms of both their quality and price. The quality element included supply chain management, service delivery, resources, stakeholder engagement, and implementation. This formed the basis for the minimum service standard against which prime contractors would be measured during the programme delivery. The price element allowed prime contractors to bid to supply services for less than the maximum outcome fee or to allow that fee to be reduced more quickly (for a description of the fees available to prime contractors, see chapter 4).[57] The scores from these two assessments were brought together into one overall score out of 120: up to 60 marks for quality and up to 60 for value for money.[58]

Concerns highlighted by previous tendering processes: Pathways to Work

47.  Pathways to Work, an employment programme for claimants of Incapacity Benefits (including Employment and Support Allowance, from October 2008), was first piloted in 2003-04 and was the previous Government's attempt to reduce the number of people claiming incapacity benefits by one million by 2015.

48.  The National Audit Office criticised the procurement process for Pathways to Work in its 2010 report. Tenders submitted by contractors and agreed by the Department were found to be unrealistic in terms of forecast performance:

Contractors have consistently underperformed on their employment targets, even allowing for the recession, raising concerns about the level of critical review of Pathways bids by the Department, particularly given the extent to which these exceeded performance benchmarks in tender documentation.[59]

49.  Given the criticism of the Pathways to Work tendering process, we asked witnesses if they thought that DWP had learned lessons from the experience and would now be able to evaluate bids for the Work Programme effectively. Witnesses broadly agreed that DWP appeared to be adopting the right approach. Dave Simmonds told us that the information requested from bidders appeared to have the right balance and was a lot more detailed than in previous programmes but he still had some doubts about DWP's ability to evaluate bids.[60]

50.  Professor Finn argued that DWP could call on up to 15 years' experience of contracting out welfare to work services and that they were subjecting bidders to "some pretty rigorous tests around their financial viability and in the mini-competition about what they actually propose to deliver".[61] Dr Maria Hudson of the Policy Studies Institute at the University of Westminster pointed out that evaluation of bids would be difficult due to uncertainty about the costs involved in providing for the "new and sizable tranche of customers" which former Incapacity Benefit claimants would represent. [62]

51.  The Minister told us that the Department had worked hard to get the process right this time and had called on the expertise of private sector organisations such as KPMG, Powergen and UBS to test the model both in terms of its financial viability for prime contractors and its cost-effectiveness for the Government:

We went through this all very systematically and came up with a model. [...] All the external advice we had suggested we got it about right. The fact we had five organisations drop out because they said it was too tough, but 30 who bid and have submitted 180 bids across the whole of the country, suggests to me—touch wood—we got it about right.[63]

The prime contractors' view of the tendering process

52.  ERSA expressed their broad satisfaction with the tendering process, particularly the clarity of the requirements and the relatively few changes to scope and technical details during the process, but they noted that the timescales were very challenging. They also highlighted the fact that an eighth customer group (Incapacity Benefit claimants in England yet to have undergone the Work Capability Assessment) had been added very late in the process, which gave bidders little time to adjust their bids:

The Invitation to Tender came out prior to Christmas, and the Government is moving very, very rapidly in relation to this. There has been some movement, most of it in a positive direction, reflecting what they are hearing from the primes, the subcontractors and the representative body. However, the eighth customer group is something quite new, and has come a bit out of the blue [...].[64]

In terms of the criteria for evaluation of bids, potential prime contractors felt DWP's approach was correct. Sean Williams from G4S Welfare To Work told us that DWP's evaluation criteria were "enormously sensible".[65]

53.  However, some witnesses highlighted the administrative burdens placed on subcontractors by prime contractors when establishing their supply chains through Expression of Interest (EOI) and Pre-Qualification Questionnaire (PQQ) forms. St. Loye's Foundation told us that prime contractors had adopted a "hugely complicated" selection process which they felt was unnecessary: "There is great scepticism within the sub-contractor community that prime contractors do, in fact, read and carry out an objective selection based on evidence presented [...] This being so, the formal EOI/PQQ stage should be much less onerous".[66] ERSA also noted the burdens placed on subcontractors, in particular that some small voluntary organisations had been asked to prepare over 50 separate expressions of interest for a large range of different prime contractors.[67]

54.  DWP seem to have learned lessons from previous procurement exercises in setting the bid evaluation criteria for the Work Programme. Its approach to the tendering process appears to have run relatively smoothly despite the very ambitious timescales set for it, and the Department deserves credit for this.

55.  It is important that prime contractors do not place an unnecessarily onerous administrative burden on subcontractors when establishing their supply chains. The Department has a role to play in this and should work with prime contractors and representative bodies within the industry to promote the use of a single simplified Expression of Interest form for subcontractors.

Competition within contract package areas

56.  DWP has stated that it will encourage competition between prime contractors in each contract package area (CPA) "by shifting market share to those who perform most strongly and shifting from those who perform the least well to maximise job outcomes". The benchmark for a shift of market share will be a 3% or greater difference in performance between prime contractors within the specific customer groups. The first point at which the shift in market share will apply will be at 31 March 2013. It will be applied at 12 month intervals thereafter.[68]

57.  The Invitation to Tender set out further terms and parameters under which a shift of market share will occur, including:

  • only new customers will be referred to the higher performing provider. Existing customers will remain with their original provider;
  • the relatively poorly performing provider will lose 5% of their market share for that customer group in new referral levels at each review point;
  • if there are three prime contractors in a CPA, the shift will be from the lowest to the highest performing provider; and
  • at regular points, prime contractors will be made aware of how they are performing against their competitor.[69]

The Minister told us that the shift in market share will operate alongside and in addition to the minimum performance standards which prime contractors will also be bound by (discussed in chapter 5):

If we are dissatisfied by the performance of a provider, we can shift market share away from them. If they have performed very badly, they will be in breach of contract. Within the mix, we have set minimum performance standards, so that effectively they cannot just sink down and cruise along at a very low level. They will be in breach of contract then and we will remove them.[70]

58.  From this it seems that DWP will have some discretion in applying the market share switch if it is "dissatisfied" with a provider's performance. However, it appears from the full Invitation to Tender document that the shift in market share will occur whenever there is a 3% difference in performance between prime contractors in any customer group; the Invitation to Tender does not suggest that there will be any discretion applied by DWP.[71]

59.  Alan Cave explained DWP's thinking behind having more than one prime contractor operating in each contract package area:

[...] we just believe that the potential value-for-money loss of having duplicate infrastructure will be more than outweighed by the competitive tension involved in having primes always competing for business, always needing to do better than the organisation alongside them.[72]

Some witnesses were unsure how effectively having two, or in some cases three, prime contractors in each CPA would drive up performance through competition. Laurie Russell from the Wise Group argued that in some cases a single provider in a CPA would be better. He referred to his experience in Scotland:

I do not think it creates competition. I do not think it is the way to improve quality. I think there are other ways that you can improve the quality of prime contractors. I do not think there is any evidence from Flexible New Deal, certainly in the region that we work in, which is south Scotland, that having two providers creates a competition to improve quality.[73]

60.  Richard Johnson of Serco also felt that a single prime contractor per CPA had the potential to be more effective and that the number of prime contractors operating in a CPA was less important than the number of different subcontractors delivering services locally. He gave the example of Serco operating the Flexible New Deal in Manchester as a single prime contractor coordinating local provision through a network of 40 different sub-contractors: "I think the simplicity and the strength of that single contractor, as long as you have some distance between that contractor and the provision, and a diversity of provision, is the right way to go." [74] Another issue arises in isolated rural areas where there may only be one subcontractor who will have to deal with two or more prime contractors.

61.  Sean Williams of G4S took a different view of competition: it could work to drive up standards as long as there was transparent performance information.[75] Dave Simmonds suggested that "only time will tell" but that a comparative evaluation of the performance levels between CPAs with two and three prime contractors might be possible.[76] During our visit to the USA, we met Professor Michael Wiseman, who commented favourably on the approach of including competition between providers in the design as this would be likely to encourage enhanced performance. He also supported the maintenance and publication of comparative performance data.

62.  The ability of DWP to shift market share could theoretically lead to one provider becoming dominant in a particular region. The Association of Learning Providers was concerned about the implications of the prime provider and competition model for consumer choice, and warned against:   

[...] the dangers of a drift into monopoly situations, whereby "mega-providers" monopolise welfare-to-work supply in any given contractual area. We believe this may lead to the limitation of choice by the customer and indeed DWP itself as it seeks to provide innovative and (primarily) effective provision across the piece.[77]

63.  The competition mechanisms in the Work Programme may have unintended consequences. For example, it is possible that a provider could be performing at a high level by national comparison, and yet automatically lose 5% of their market share of new referrals in a particular customer group if their competitor is performing at a level just 3% higher. The intention is that this threat of losing market share will incentivise prime contractors to outperform each other, therefore improving the experience for clients. However, the performance challenge for prime contractors is very demanding (see chapter 5), and the loss of market share could have implications for the financial viability of a prime and its subcontractors.

64.  Stephen Evans of the London Development Agency emphasised that the market share shift will require careful management by DWP as part of its wider contract-management role:

You need to be able to manage a market and understand what competition in the market looks like, how you shift that market share around, and how subcontractors and their chains are being managed as well. So I think you need more active contract management, but a different type of management from the one you needed under previous programmes.[78]

65.  Ultimately, the implications of the model remain unclear in terms of competition between prime contractors, and the financial stakes are very high. DWP will want to make sure that the model is sufficiently flexible to deal with any unintended consequences.

66.  We request that, in response to this report, the Government clarifies the extent to which discretion or flexibility may be applied when shifting market share from one prime contractor to another. We are concerned that prime contractors who are performing well relative to those in other contract package areas should not be penalised arbitrarily. The Government should also explain the rationale for setting the criterion for market share shift at 3% difference in performance level.

67.  We recommend that, within 18 months of the application of the first shift of market share between prime contractors, DWP undertake and publish a review of the impact on clients and prime contractors of the operation of this mechanism.

68.  In order to ensure that competition between prime contractors in contract package areas is effective in driving up performance, the Government must ensure that transparent performance data is publicly available. We recommend that the Government carry out and publish a comparative evaluation of the levels of performance between contract package areas with two and three prime contractors after the first year of operation of the Work Programme, and then at regular intervals.

31   HC Deb, 29 June 2010, cols 39-42WS Back

32  Back

33   HC Deb 10 June 2010, cols 37-38WS Back

34   HC Deb, 25 November 2010, cols 54-56WS Back

35 Back

36  Back

37   Ev w58 Back

38   Ev 73 Back

39   Ev w77 Back

40   Q 67  Back

41   Q 18 and Q 20 Back

42   Q 20 Back

43   Q 18-20 Back

44   Ev 68 Back

45   Q 156 Back

46   Q 156 Back

47   The full list of preferred bidders was available at: Back

48   DWP press release, 1 April 2011, "Massive boost for the Big Society as almost 300 voluntary sector organisations named as part of the Work Programme". Back

49  Back

50   DWP press release, 1 April 2011, "Massive boost for the Big Society as almost 300 voluntary sector organisations named as part of the Work Programme". Back

51   HC Deb , 1 April 2011, col 44WS. Back

52   DWP press release, 1 April 2011, "Massive boost for the Big Society as almost 300 voluntary sector organisations named as part of the Work Programme". Back

53   Ev 58 St. Loye's Foundation and Ev w39 Public and Commercial Services Union Back

54   Q 67 Back

55   Q 174 Back

56   HC Deb, 25 November 2010, cols 54-56WS. Back

57   Department for Work and Pensions, The Work Programme Invitation to Tender: Specification and Supporting Information, November 2010. Back

58   Ibid., para. 1.09. Back

59   National Audit Office, Support to incapacity benefits claimants through Pathways to Work, HC 21, 28 May 2010 Back

60   Q 9 Back

61   Q 7 Back

62   Q 9 Back

63   Q 171 Back

64   Q 108 Back

65   Q 106 Back

66   Ev 60 Back

67   Ev 78 Back

68   Department for Work and Pensions, The Work Programme Invitation to Tender: Specification and Supporting Information, November 2010, paras 3.19 - 3.20 Back

69   Ibid., para 3.21 Back

70   Q 163 Back

71   Department for Work and Pensions, The Work Programme Invitation to Tender: Specification and Supporting Information, November 2010, paras 3.19 - 3.22 Back

72   Q 157 Back

73   Q 109 Back

74   Q 109  Back

75   Q 109 Back

76   Q 11 Back

77   Ev w61 Back

78   Q 8  Back

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