Getting to grips with Payment by Results
Payment by results is becoming an increasingly common way of funding public services. The coalition government has moved decisively toward a payment by results (PbR) model in several contracts and has indicated that this approach is likely to grow in the coming years.
In this blog, I'll outline what PbR is, how it relates to the Compact and some of the challenges and opportunities it presents for voluntary and community organisations.
What is PbR?
Payment by results moves away from the funding models that are more familiar to voluntary and community organisations (like grants and contracts), and means that elements of payment will only be made once agreed results have been achieved.
For example, at a central government level, the Ministry of Justice has indicated its preference to commission through a PbR model in future programmes. It may also have applications in wider programmes that cut across a number of different departments – for example the Government’s social justice strategy, and elements of PbR are already being used in the Work Programme.
PbR marks a more fundamental shift in services than the way they are financed and, whilst there are financial attractions to commissioners, this is not simply a short term way to save money in the current financial climate. PbR has already been implemented in other areas, including in health programmes where there is a longer track record and many organisations in the health sector will already have had some exposure.
In some cases, PbR forms part of the funding mix for the voluntary and community sector (VCS) alongside other forms of contracts and grant funding.
PbR and the Compact – a potential clash?
Under a PbR mechanism, significant elements of the payment for the service outlined in the contract will only be made once the agreed result has been achieved.
This marks a significant shift from upfront payment, though even under a PbR model there may be potential for part payment to be made upfront and/or when the service is being delivered, with the rest paid on results.
This element of PbR is a potential challenge to the commitment to upfront funding embodied in principle three of the Compact.
Compact Voice is committed to working with our members and the wider VCS to ensure that Compact principles are being used to shape decisions and to improve the operating environment for the sector. If major changes - such as a wide scale transition to PbR - take place then it is essential that decision makers across all sectors are aware of these principles and take them seriously.
The challenges of PbR
PbR does present challenges for the VCS and its implementation can lead to anxiety - particularly where this is happening quickly and there is a lack of clear communication around it.
The challenges of a shift to PbR include:
- Capital requirements: many VCOs struggle with requirements to hold a certain level of capital to be able to bid for PbR contracts
- Cashflow management: smaller organisations, including those in the VCS, are likely to struggle to be able to manage their cashflow and to fund other operations whilst waiting for payment
- Risk: VCOs, of which many are small organisations, may struggle to handle the higher levels of risk associated with PbR contracts
- The complexity of measuring and attributing outcomes is not exclusively related to PbR, but can add to the complexity of these contracts
- Having the skills and capacity to deal with a new type of contract and funding landscape
- How to fully recover costs, a key and long standing principle of VCS funding, where a PbR model is applied. This may be further complicated in a subcontracting model.
What are the potential benefits of PbR?
Despite the challenges, a PbR approach still has many potential benefits.
Focusing on results can help to drive change and improvement in services. If PbR is accompanied by a wider shift toward commissioning by broad outcomes, rather than narrowly defined outputs, then this is likely to be supported by many in the VCS as an important means of moving toward a more flexible way of working, where the focus can be on supporting beneficiaries.
A shift to PbR is also clearly attractive in the current climate as a means of reducing expenditure on unsuccessful interventions. This principle is positive, but saving on costs in the short term should not be the primary motivation for changing funding mechanisms.
A shift to PbR should be part of a wider, strategic shift to more outcomes focused services, driving improvement and reform with the support of stakeholders, providers and service users.
Where to from here?
There are some clear challenges to Compact principles that a move toward PbR highlights.
When funders or commissioners do decide to opt for a PbR model, then it is essential that the sustainability of the organisations they wish to work with are considered.
The choice of the PbR model should not preclude an element of upfront payment to cover operating costs and, furthermore, grants are of continuing to significance to the sector. This applies particularly to projects or contracts where innovation is one of the stated goals, as an element of grant or guaranteed funding may be required to ensure that the space and capacity for innovation and experimentation exists.
It is particularly important in times of transition to communicate and engage clearly and early with the VCS. That now applies more than ever given the very challenging environment that the sector is operating in.
The Compact states that at least 12 weeks’ notice of changes to funding arrangements should be given to the sector. When a transition as major as a move to PbR is taking place, commissioners and funders should be aiming to give as much notice as possible.
Through building strong partnerships between commissioners, providers and the wider VCS, the transition to the new PbR landscape will be more manageable, and will help to ensure that this changed funding mechanism can fulfil its potential as a positive reform to public services.