Understanding Incentivisation – You Get What You Ask (and Pay) Suppliers To Do

I have a dream. A dream, that in maybe 50 years time, there will be a whole field of academic study around incentivisation. That is incentivisation in its widest sense. How does the government incentivise the citizen to give up smoking, to keep fit, to drive sensibly? How do we incentivise our children to do what we want them to do (without the old fashioned tool of beating the c**p out of them)? How do we incentivise our suppliers to meet the real goals and objectives behind the contracts we award them?

It really could be an academic subject, I believe, combining as it does elements of psychology, economics, and finance, all thrown together with a splash of creativity and management skills. The need for this is greater than ever as well, as we‘ve seen private firms for instance doing more and more work for government. When we look at many of the failed contracts around, we can trace it back actually to the wrong incentives, or poor management of incentivisation.

This is far from a purely public sector topic though. I suspect we could de-construct the BP Deepwater Horizon oil field disaster and find incentives (or lack of incentives) through the supply chain and management of sub-contractors playing a major part in that disaster.

A more recent example was provided in the Independent newspaper recently. This was HMRC – the UK tax authorities – who have outsourced a piece of work around checking whether benefits claimant really should be claiming tax credits. The “scandal” reported by the newspaper was that the firm engaged to do this, Concentrix, are basically approaching people pretty much at random and accusing them of lying about their situation and over-claiming.

Some have assumed the letters are hoaxes, and in fact HMRC even had to put out a note on Gov.uk to explain that these are genuine communications! But some folk “crack” and pay back money, which (it they are genuinely at fault) is what HMRC want. But many of the people approached are apparently blameless and are getting rather upset about this process.

But don’t blame Concentrix (although looking at their Glassdoor reviews is interesting ...) This is a classic case - how are they rewarded and incentivised? If their reward is based on a pure numbers game – how many people do you harass, how much money you recover – then you just know how the firm will approach it. Now in fact, HMRC told the Independent: “The company is not paid on the number of letters issued, but on the basis of savings to public finances arising from correcting tax credits claims that are incorrect.”

But the key to correct incentivisation here should be to balance that incentive to collect cash with some cross-checking and a penalty for incorrect pursuit of individuals; otherwise the right approach for the supplier is simply to bombard everybody and anybody with threatening letters!

So if the firm is not being incentivised in that manner, it suggests that either:

  1. HMRC are incompetent when it comes to designing incentives or
  2. They are quite happy for innocent people to be chased as long as enough money is recovered

So don’t blame the firm, and certainly don’t blame the concept of outsourcing. Blame HMRC for either an arguably over ruthless approach; or not understanding how to put together effective incentivisation mechanisms and processes.

Voices (5)

  1. B+t:

    its easier to change your own employees objectives than renegotiate a service contract.

    It’s easier to motivate your own employees to consider the big picture than a subcontractor.

  2. Ian Heptinstall:

    Incentivisation is often seen as a bolt-on extra to a contract, whereas all payment arrangements will reward particular behaviours, whether a fixed price, reimbursable rates, or some performance-linked fee.

    From what I gather HMRC failed to ask one of the basic questions for any performance-linked fee. “Does it encourage and reward behaviour that is aligned with the client organisation objectives, or misaligned?”. As you say Peter, either this missed this fairly obvious downside, or they dont give a t**s about the collateral damage. If the latter, maybe the outsourcing was actually about buying a skapegoat to defect the blame?….

    “Tell me how you pay me and I will tell you how I will behave. If you pay me in an illogical way… do not complain about my illogical behaviour.”

  3. RJ:

    Sorry b+t but the argument doesn’t follow. If you have directly employed individuals doing the same job, they also need to have objectives to work to (whether you call them “incentives” or not doesn’t really matter) and if those objectives are poorly constructed then they, too, will behave in exactly the same way. Poor incentives/objectives will drive the same performance whether you insource or outsource.

  4. Paul Wright:

    Inote that HMRC says Concentrix is ensuring people have the correct credits. Are they also rewarded if they find out people are not claiming enough? Given that estimates are that underclaiming is larger than overclaiming that should be an easier target. But I suspect that is not in their remit.

  5. Bitter and twisted:

    But: Difficult Incentivisation = Don’t Outsource it

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