Outcomes-based contracting ‘a really powerful mechanism’

29 June 2017

Making sure you have the right objectives is crucial when using outcomes-based commissioning (OBC), buyers have been told.

Andrew Levitt, partner and head of social impact bonds at fund manager Bridges, said his first act of due diligence when looking at an OBC contract was to ask if the objectives were genuinely the right thing to do. 

Speaking at the Public Sector Show in London this week, Levitt said: “Payment by results is a really powerful mechanism, and if you set it up wrong it can actually make things worse. So the first thing we do is just look at the contract and say, ‘Is this going to incentivise everyone delivering it to deliver the right outcomes in the right way?’”

Unlike traditional contracts where providers are paid for delivering services, in OBC payment is only made on meeting pre-determined goals. The contracting method, also called payment by results, is not a new concept and has had mixed success in the past. Public sector contractors can potentially make large savings, but the National Audit Office has said that contracts need to be well-structured and managed.

The government has been using this commissioning model as a way to finance improvements to public services. Through a system called Social Impact Bonds, investors put forward the money to pay for a novel or improved service and are reimbursed by the commissioner, usually a government department or local authority, when it can demonstrate progress on outcomes.

This type of contracting allows providers more flexibility within the contract to maximise outcomes, which in practice might mean spending more money on marketing or, in one example given by Levitt, hiring an additional youth worker that wasn’t included in the original specification. “We’ve got the freedom to pay for that and add to it because we think it will deliver better outcomes,” he said. This requires an entrepreneurial provider that can make the most of the flexibility and is willing to adapt, said Levitt.

Joanne Hay, CEO of Teens and Toddlers, a charity that helps young people who are struggling at school, was positive about OBC but warned it put more weight on providers to measure and evidence their work. “These sorts of contracts, they’re not as comfortable as traditional grant models, there’s a very heavy data burden,” she said.

“I think getting those governance arrangements working well is really important because it’s a different way of working for everybody,” she added. “We had to get used to providing a lot more information. For the intermediary and investors, they might have to deal with operational issues that they’re not used to dealing with.”

Mara Airoldi, director at the Government Outcomes Lab at Oxford University, said there was some evidence that OBC led to better managed contracts, but it was too early to say for sure. “This active contract management seems to be very effective, but it’s still a question of whether it’s due to the Social Impact Bond’s structure, or if very good active management in a traditional fee-for-service [contract] could do equally well,” she said.

“We don’t have evidence for that.”

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