National Audit Office – UK Government Outcome-Based Payment Schemes (part 2)

Westminster tubeIn part 1, we wrote here about the recent National Audit Office report into Payment by Results (PbR). As well as the findings that we discussed briefly in our last article, NAO has included a framework for PbR schemes, which does a great job of summarising on one page the key points to consider before entering into such a scheme, and provides guidance towards getting it right if you do go down that route. As we said in part 1, this is pretty much just as applicable if you are looking at PbR contracts in the private sector environment as it is in government, with a few small differences of emphasis perhaps.

The NAO framework covers four key questions, with the “aim” and a description of good practice given for each. Here is a sample, with the NAO comments around the first of those four.

Key Question

Overall fit: should you use PbR to deliver this service?

Aim for commissioners

Commissioners only use PbR to deliver public services when it is the model that offers best value.

What does good look like?

Commissioners’ decisions to use PbR are well-informed and based on:

  • clearly defined programme objectives
  • a good understanding of the circumstances in which PbR has worked best in the past (and, conversely, when it has been difficult to use successfully)
  • clarity about the benefits PbR is intended to bring to the programme at hand
  • knowledge of the whole-life costs and risks associated with using PbR, and the extent to which the scheme design will be able to mitigate these

The other “key questions” in the NAO framework are:

Design: how can you design an effective PbR scheme?

Implementation: what do you need to have in place to implement your PbR scheme effectively?

Evaluation: how can you evaluate the effectiveness of a PbR scheme?

There is a lot of stress on both setting expectations and defining appropriate PbR mechanisms up front, and then measuring and monitoring properly what has happened once the contract is live. “Good performance data systems” are needed, and independently verified reported performance –that reduces delays in paying suppliers, minimises risks and of course makes sure suppliers are genuinely being paid for real performance, not apparent or reported (see MoJ tagging contracts for further thoughts on that!)

There is also a 20-page “analytical framework for decision makers” published by NAO, which goes into all these areas in a lot more detail. This looks like an excellent resource for real hands-on practitioners who are putting such contracts and arrangements in place.

It is very unlike Spend Matters, but we find it hard to criticise anything the NAO says here or indeed to add much of value! In the high-level framework, we might stress the need to model not just likely scenarios but also the more extreme; PbR can come unstuck when suppliers perform way below expectations or indeed way above. NAO does correctly mention modelling, but ensuring that does not just cover the most likely outcomes is our tip.

However, as we say, this is a very thoughtful and practically useful guide for anyone looking to include elements of payment by results in their contracting toolbox. You can download or read the executive summary here; and the full report plus other related material such as the analytical framework is available here.

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