The Work Programme – great procurement, but it could still fail

Supply Management has an interview with David Smith and John Michalski of the Department of Work and Pensions in the current issue. The feature - very clear and well put together, I should say, but with a slightly scary picture of the two  -  is all around their 'Work Programme' contracting exercise, which has put in place the supply chain of organisations who are going to get the UK's unemployed – particualrly the most difficult to handle – back into jobs. As Rebecca Ellinor says,

The Work Programme, which went live in June, is a £3.3 billion deal that replaces 13 older schemes and covers the whole range of client groups. There are eight categories of client and the Work Programme is for all of them, including those who are hardest to help.

We have mentioned this programme before – it's arguably the most important “procurement” that we'll see in this parliament, as the future of the UK economy and the budgetary position depends to quite a scary extent on the country's ability to get more people into productive employment.

The Supply Management article describes the procurement as a great success – and I wouldn't argue against that for a moment. It is innovative, although the last Labour government first introduced the idea of success payments for providers in this area – the coalition has strengthened the risk / reward concept, basing payments on more sustained work outcomes, but it's not really "their" idea.

And the DWP procurement and policy team has done a brilliant job putting all this in place, within tight timescales, and without any subsequent legal challenges from disappointed suppliers. I would have given them good odds against that!

But.. (you knew there would be a “but”..)

The problem with heavily incentivised, success based contracts is that they're fine if providers meet expectations. If suppliers over achieve, there can be embarrassment for the client organisation in terms of how much they have to pay out - but in this case, the compensation for the taxpayer will be lower benefits payment, so everyone should be happy. That is the beauty of the commercial model here.

But if providers under achieve, there won't be a negative effect necessarily on the public purse, but there could be on the relationship with providers and indeed on their financial models. Could that happen here, where providers have to invest up front and only get rewarded fully once they've got people into jobs for at least 26 weeks?

The latest UK employment figures last week will ring some alarm bells. Not only is job creation slowing, and unemployment numbers rising, but most of the new jobs in the UK are being taken by foreign-born individuals, some UK citizens but mainly immigrants from eastern Europe.

To really succeeed, the Work Programme needs organisations to take on people who have been unemployed for some time; people with disabilities; and those perhaps who have just grown comfortable with a life on benefits. Now if those firms look at this population, and say “we'd rather take on this attractive, intelligent, hard working young Pole or Latvian”, then I’m afraid the Programme could be in trouble. If the prime contractors – large private sector organisations in the main – see their business plans falter, the pain will inevitably be passed on down the supply chain to smaller charities who form part of the overall delivery mechanism.

How likely, or serious, this might be is hard to gauge. I've been told that providers' business models are pretty robust and can stand some pressure on income - but we'll have to see, if and when the worst case comes to pass.

I should say that we totally support Ian Duncan Smith's aims here – but it is a long term project. And the only way of guaranteeing success is to stop or greatly reduce EU immigration, which doesn't seem likely.  If this does cause problems, (and I sincerely hope it doesn't), there's not a lot DWP procurement could have done about it, and it doesn't mean it wasn't a very good piece of procurement work.

So if economic weakness and Polish "labour preference" continues, leading to problems with the Work Programme, don't be too surprised – but don't blame procurement!

Voices (2)

  1. Final Furlong:

    Having said all this, here’s an alternative view that’s worth reading….

    http://www.guardian.co.uk/society/patrick-butler-cuts-blog/2011/sep/05/work-programme-charities-fear-going-bust

  2. Final Furlong:

    I’m delighted that you brought this particular procurement to our attention Peter. David and his team have delivered a genuine ‘break-through’ procurement. (Take note Mr Collington.)

    Every innovative procurement has a prime catalyst and you may have missed this – it was implied within the text of the article: “So if suppliers don’t get people into work, they don’t get paid, and when they do, it’s out of the benefit money that’s been saved.” Traditionally, payments to suppliers were generated out Direct Expense Limit(s) budgets (Operating Budgets) and therefore there were limitations in the way in which suppliers could be ‘reimbursed’ over time. However, David Freud (if I understood what he once told me) must have been successful in convincing Treasury to finally overturn one of its core Policies in order to adopt Freud’s strategy of ‘outcome-based financing’ – paying suppliers not out of DEL but out of AME (Annual Managed Expenditure) – the budgets which pay for benefits. One must remember that the DWP’s operating budget is circa £7-8 billion per annum whereas its AME budget is another circa £110 billion on top of that! In terms of cost reduction, which budget would generate the largest savings if suppliers were incentivised to reduce a percentage of it?

    If Lord Freud has been successful, and David certainly seems to have successfully exploited this change in Treasury policy (as any good innovator would), then this does represent a ‘break-through’ in many ways.

    I imagine it took a little longer than 12 months though….

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