National Audit Office – UK Government Outcome-based Payment Schemes

Westminster blue nightIt is of course always easier to criticise the work of others than do the work yourself. Seen from that point of view, it could be argued that the National Audit Office has it easy; they can go in and poke around to review what government organisations are up to, and then offer their advice without having to get their own hands dirty.

With that caveat, it is worth congratulating the organisation for another in a series of very perceptive and useful reports covering issues that broadly fit into the procurement, supply chain and contract management world. Their latest is “Outcome based payment schemes: government’s use of payment by results,” published last week - here is the summary. In it, NAO draws on findings from some of their previous reports, plus new research on several important examples of payment by results (PbR) schemes such as MoJ’s rehabilitation pilots. NAO has also come up with its own “framework” for PbR schemes.

This is not a “name and shame” type report, and it is light on that sort of investigatory material, but rather looks to pull together and develop a sense of best practice in this tricky area. The success of the report is such that we would recommend the document not just to public sector folk, but also to procurement executives in any sector who are involved in contracts of a complex nature.

Whilst the report uses the language of government (with much talk of “commissioners”), complex private sector contacts will increasingly have at least an element of payment by results; perhaps a bonus payment to the supplier for hitting certain targets (or indeed penalties if they fail), or perhaps a share of savings if the supplier comes up with innovative ideas. The key issues underpinning PbR are common in all cases, across all sectors, we would suggest, making this a worthwhile read for many practitioners and strategists in our sector.

NAO explain that PbR is not suited to all public services – “it is most likely to succeed if the operating environment has certain features, for example results that can be measured and attributed to providers’ interventions.” Clearly, if we are paying for results, we want to know that the supplier actually did contribute significantly to those results. Given that, commissioners (buyers) “should justify their selection of PbR over other alternative delivery mechanisms.”

Another note of warning – this is a “technically challenging form of contracting, and has attendant costs and risks that government has often underestimated”. And whilst PbR does transfer some risk to the provider, but the buyer almost always retains risk too. “In the rush to implement, government has launched some PbR schemes without making best use of pilots to test the planned approach.”

Setting the right levels for the payment is often tough too. “Commissioners should aim to define attainable but stretching performance expectations for providers that are above the non-intervention rate (the level of performance that would occur without intervention)."

There is a hint that buyers are not always doing this, although it is often difficult to know what “good performance should look like, or what the “counterfactual” might look like if the PbR scheme was not in place. Only a few schemes such as example MoJ’s offender rehabilitation pilot in Peterborough and DFID’s Girls’ Education Challenge Foreign Aid have managed to assess against a counterfactual.

DFID’s international aid programme is one of the areas that NAO has looked at in some detail in the past, and this provides particular challenges. “Commissioners need good data on baseline performance, and to carry out robust modelling of likely future performance and sensitivity testing of any assumptions underpinning estimates. Where the commissioner is using PbR for a new service, such as international aid, the lack of historic, comparable data can make this especially challenging ...”

As we say, a useful and interesting report, and we will have more on the NAO framework in part 2.

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