Outcome Based Government

By Toby Eccles and Sarah Doyle

A few weeks back we were at a retreat for Social Impact Bond Developers on an Island on the Muskoka Lakes in Canada. It was a sensational venue (thank you to the Breuninger and BMW Foundations, and the MaRS Centre for Impact Investing) and a really interesting few days. One of the topics that a small group of us spent some time thinking about was: What does Outcome Based Government look like? Social Impact Bonds are a really interesting model for a range of opportunities, but they are still a specialist subject that will only ever affect a modest amount of overall funding. There is however a need for a much greater proportion of government spending to use some of the elements that SIBs encourage. In particular:

  • Deciding what you are trying to achieve and how you are going to measure it before you start;
  • Benefiting from the combination of outcomes data and flexible contracting to use rapid iteration and adaptation models to test, learn and improve services on a continual basis;
  • Transparency on what has been achieved;
  • Explicitly analysing interactions between the outcomes you are trying to achieve and other parts of government expenditure, and measuring their impact on each other.

These would have some fairly profound implications. Examples might be:

  • The expectation that, wherever feasible, any policy idea would be treated as a hypothesis or series of hypotheses to be tested in an experimental way, informing future decisions on the potential to expand funding or commit to a wider roll out. This would potentially allow more policy ideas to be tested, with only a selection implemented on a wider scale;
  • Government would over time learn the actual cost of its services and external service providers at producing certain outcomes, making it easier to compare;
  • There would be a much clearer understanding of what works and whether a given initiative had been successful;
  • Budgets being set including both funds and measurable outcomes (tied to specific funding streams), at a sufficient level of granularity to demonstrate success or failure. This could happen at multiple levels of government, both for departments and within departments.
  • Service providers would benefit from longer-term contracts, increased flexibility to adapt over the course of the contract with a view to delivering on outcomes, and a reduced reporting burden regarding day-to-day operations and interim outputs.
  • New partnerships would be incentivized within government, cutting across traditional silos, and outside of government, where a consortium of service providers (generally coordinated by a prime contractor) may have a better chance of delivering on target outcomes.
  • For it to work there would need to be at the least an independent entity defining, or assessing or auditing the outcomes that government is using, to ensure rigour and accountability, and avoid politicization.

This is in part about better measurement, but it is also understanding that we live in a complex world, that we can’t produce predictable outcomes simply by better planning, that instead we need to create feedback loops, gather information, and adapt accordingly. In short we need social services to have a rigorous model of learning that generates knowledge that can be built upon and improved. The path to getting there is not straightforward. It strikes me that there are at least four products that alongside the SIB can help move government along this path:

  • Support bringing outcomes into the budgeting and financial planning and management processes;
  • Help bringing outcome elements to contract renewals in such a way as to drive improved services;
  • Procurement and contracting models that build in feedback loops and an expectation that the contract will adapt over time, rather than stay the same;
  • A better model for outcome work at scale than the present large scale national or state-wide procurement process that we are seeing with the likes of the work programme or transforming justice. This would involve developing a model that allowed feedback and learning, starting experimentally in two or three areas. For example one could create a framework of sought after outcomes and maximum values that can be paid for them, a referral methodology, and an initial community of providers. Thereafter the providers can be added to, say annually, and the outcome values can also be changed according to what outcomes are generated for what value. There would be transparency in terms of what providers are doing and the outcomes they are achieving. Toby will be writing more on this soon.

Would this work? What else is needed? All thoughts welcome!

PS This is intended as a starter for discussion. There are plenty of areas of government where an outcomes approach may be inappropriate. There are also plenty of poor ways of introducing outcomes that simply become target cultures with strange perverse incentives, or the creation of meaningless numbers outside of government control. Previous attempts have tended to create top down targets as a way of managing from the centre, rather than as a way of creating feedback loops from the outside. We hope to explore some of these challenges and issues in future blogs.

Thanks to Peter Barth @ Third Sector Capital, and Caitlin Reimers @ Social Finance US for a great conversation…

 

Is Social Enterprise all it’s hyped up to be?

This is the second in a series of blogs on social enterprise, and the first of the follow-up posts to Social Enterprise and Social Change

Many people are a bit unsure of the idea of social enterprise. “Oh it’s just another name for a charity with revenues” from some, or similarly “it’s just charity rebranded to be trendy for High Net Worth Donors”. From the investor community we hear “we hear a lot about all these fantastic social enterprises, but where are they? We can’t find many interesting ones to invest in.” I’ve even heard a few from the private sector complain “government prefers social enterprises to the private sector, so we have to work harder in procurement”.

Personally, I think the idea is important and that provided we get the environment around them more enabling, they could be a significant force in the UK in the future. I’ve set out below the four reasons and trends that I think support this view and, as ever, would be interested in other people’s thoughts and ideas on the subject.

Need for social innovation and change

We are living in a time of consistent and widespread change, economic uncertainty, climate change, globalisation, migration, technological advancement to name but a few.

Some of these are frightening, some are exciting but they all have social consequences. They have consequences for the people living in our societies who are typically powerless to manage them. It is not just the people in the ground who feel powerless. Politicians are also living with the consequences of looking like passengers on the bus, unable to conduct it or steer its direction. Many would argue this is at least in part behind our present delusion with them.

So who do we have to deal with these consequences? And how well do we gear them up to do so? An entrepreneurial social economy is vital to provide the level of adaptation required.

Changing social economy

For want of better terminology, I have used the term social economy to cover organisations providing social services and services to our communities.

So an enterprising social economy, able to adapt to this changing environment, able to support the needy and provide those on the edge with routes back into society is essential.

Partly in response to these challenges we are living in times of extraordinary change for the social economy itself. The idea of the public sector providing and responding to need as a monolithic institution is being eroded. The roles of the private and charitable sectors are intended to grow as we define a more mixed environment. But there is a problem. The private sector can feel, well a bit private sector. Shareholder value’s time in the sun may be receding, but it has left a suspicion that private enterprise will put short term profit before customers, and certainly before service users, if they are not the ones paying for the service.

Charity, in the meantime, can feel well a bit charity. Management can seem under-resourced, systems may not be in place. The organisation may be unable or unwilling to cope with scale and may give a slight sense of indiscipline. This, like the charge of not caring placed at the door of the private sector, is often unfair. But it is a view that is there and that sticks in the mind of commissioners.

The idea of social enterprise therefore, mission driven but
with business discipline, is deeply attractive to many in government sitting there wanting to buy social services, rather than delivering them all themselves.

Rise of social entrepreneurship

There is no question that more people want to be social entrepreneurs. It fits the spirit of the age and allows people to bring together their head and their heart in whatever they choose to do. If we create a functioning environment, all the ingredients in the primordial soup are ready to go.

The need for more socially authentic business models

A number of business sectors have lost trust with their consumer base, or left some consumers to the side in search of profit. Financial services, particularly consumer financial services, is a particularly strong example. Whether it is extended warranties, payment protection insurance, asset management fees, dodgy but lucrative tax “mitigation” structures… It doesn’t look good. To my mind the market is crying out for lower cost, transparent, authentically marketed products that it can trust. A huge social enterprise opportunity.

So in summary, the idea of social enterprise has enormous potential and real appeal. The interesting question is therefore, what’s holding it back? I start on that soon, but next up – is the government’s definition of social enterprise fit for purpose?

Social Impact Bonds – why so slow?

Could Social Impact Bonds be happening more quickly? There seems to be a great deal of interest in the structure and the potential for bringing innovative services to bear on difficult social issues at lower risk to government. But they seem to take a long time to develop. In this blog post I explore why.

Firstly, I don’t buy the theory that this is just how long it takes. The idea is that government is not used to developing outcome based models, service providers are not used to working to them, investors are not used to taking outcome risk so it just takes a long time. All true, but our experience is that each of these can be broken down by effective intermediation and support, in other words, a third party that guides the others through the process to reach a deal. So the real question is – where are the intermediaries and why are they not making more SIBs happen?

Here are some possible answers:

a)      The role of the intermediary is poorly understood. What do they actually do?

b)      Who pays for it? When nobody is sure a deal can be reached, who should pay for its preparation, particularly as early deals are going to feel expensive as everyone is learning by doing.

c)       How does this fit with procurement? Government procurement puts a wall down the middle of the process making consensus based co-development very difficult.

d)      Distrust of those outside government by those inside. A sense that an organisation is focused on its commercial interest so cannot be asked for support.

All of these have some truth to them but in a certain sense they all hinge on a) the role being poorly understood. So why is that the case?

Governments generally don’t quite get intermediation, seeing it as an expense in the middle that is possibly unnecessary. I discussed this with Gary Sturgess, adviser to the New South Wales Government, and former State Cabinet Secretary. His theory was that government doesn’t “see” certain types of organisation and intermediaries are certainly one. Government understands service providers: they do services; and investors: they provide money. But intermediaries? In a certain sense their role is more obviously invading the space normally taken up by government itself.

One of the things I have always found slightly strange in SIBs is how few people ask the simple question: “How did you do it?” You would have thought that the various governments interested in doing them, or the various nascent intermediaries around the world, would have got in touch to find out the activities that were necessary to get the job done.

Holding that for a second, I’m wondering whether this is connected to another surreal debate around SIBs, that of who first thought of them. If you look at Wikipedia for example, and various other publications around the place, there is an attempt by various people to claim credit for the idea. I’ve always found this irritating didn’t want to wade into because a) it feels petty minded and b) we’re grateful to a range of people who contributed to early thinking on SIBs so didn’t want to look like we were joining in the me, me, me thing.

But there is something more fundamental going on that is worth touching on. Why is the debate about who thought of the idea, rather than who delivered it? In every other walk of life the definition of invention surely includes implementation. If you look up the invention of flight or the light bulb, the credit typically goes to those that made it work. But in this context the debate seems to be who first mentioned it in a paper or publication. Does this say something deeper about the social sector that we should all be aware of? Is implementation simply not respected in the same way as it might be in other areas?

To take a different example, when we talk of supermarkets in the UK, we talk of specific brands, of implementations – Tesco, Sainsbury’s, Asda or Morrison’s. The idea that someone could just make their own supermarket to the same standard without access to those companies internal body of knowledge is slightly absurd. Yet in the social sector or governmental context codified models that can be replicated by others are the goal or perceived norm. Imagine if the government was procuring a “social” supermarket. Would it research supermarkets carefully, run a detailed procurement process and hand it to the bidder who wrote down the best answers to its questions (as assessed by someone who had never run a supermarket) and offered the best price? Or would it use information gleaned from going to a bunch of supermarkets and talking to their customers? My guess is the former (I will expand on this idea in a later blog).

I can see the value of codified models from a research and evaluation perspective, then you can run Randomised Control Trials comparing different models. But built up know-how has value in the normal course of business and the micro-developments that individual organisations will learn and deliver should lead to better outcomes.

One of the other impacts I have noticed from this focus on ideas is that much of the commentary on SIBs is focused on the idea aspects without a focus on implementation. So one for example said  something like “the Peterborough SIB is interesting, but I prefer Ronnie Horesh’s SIBs because they can be bought and sold on a secondary market”. All very interesting, but missing the point that one of the key reasons governments may not choose to implement the policy bond model (which I’ve always liked by the way) is the ability that the counterparty has to change through buying and selling the instruments. Government likes to know who it is dealing with. In fact the only way to such a secondary market, I might suggest, is by giving government confidence in the value of the model first, and then start thinking through the implications of fungibility and whether the benefits in terms of scale of available capital outweigh the concerns of policy makers.

So is there a cultural reason why SIBs are taking time? That implementation experience and knowledge is overlooked as those looking to do things start from a focus on the theory, the idea, rather than how it happened? Do procurement processes exacerbate this problem by building the divide further and reducing the perceived value of real world experience? Is the social world obsessed with newness and innovation and ideas, at the expense of effective implementation?

Answers on a postcard please… (or a comment, or a tweet, or an email…)

I know by the way that I am meant to be doing a series on Social Enterprise more widely… And I will, this has just been mulling round my head for a while so I wanted to get it out there. I will also blog on the role of the intermediary …

PS For the avoidance of doubt quite a few people have at various times thought about outcome based contracts or outcome based commissioning, others about government paying for outcome notes that could be bought and sold (Ronnie Horesh), others about structures where there were outcome payers and investors (Arthur Wood and Guillermo Maclean), and again others who were wondering about whether government could pay for preventative work out of the cost savings from reduced acute costs (Peter Wheeler and David Robinson). Social Finance combined its own thinking with the ideas and thoughts of Arthur, Peter and David in developing the SIB and heard about the others later.

Is Chris Grayling missing the revolution?

Chris Grayling yesterday published his consultation on reforming probation, focusing more on rehabilitation and bringing in the private sector. This is double edged for us. It directly builds on our work in Peterborough, but does so very early and before there has been wide testing of PbR in criminal justice. He does on the other hand have a limited political window before the next election and it has put rehabilitation firmly on the political agenda.There is also at least some money available for short sentence offenders which is a break through. Probation is cross, understandably, and most others aren’t commenting in public as the detail isn’t out and they may be bidding. So far so good.
The story bombed out pretty quickly, but you can read about it here. Social Finance issued the statement here.
The issue that I’m interested in is what we alluded to in the paragraph:
“We encourage the Secretary of State for Justice to look beyond the Probation budget to finance this work. The criminal justice system costs the taxpayer £6.3 billion a year. At present we spend 13p in the pound on probation and rehabilitation, and 87p in the pound on locking people up. With more resources, better rehabilitation could cut crime andreduce wider criminal justice costs. The allocation of resources between these two areas should therefore be part of this consultation. This is possible as any new money would be paid on a results only basis. Without adequate resources, it will be difficult to ensure that support for rehabilitation is delivered properly and at scale.”
The probation budget of course overstates the amount going to rehabilitation, as probation does a lot of work around public safety, managing community sentences, advising the court and so on. So I think it is safe to assume 90-95p in the pound goes on processing and punishment and 5-10p max goes into rehabilitation. Now many might argue that is the role of the justice department. The clue, as they say, is in the title. It ain’t the fluffy put people back together department, it is the Ministry of Justice. I can see their point, but effective rehabilitation is in the Ministry’s interests. It cuts crime and should reduce their costs.
So my question is, why is even a discussion of the allocation of resources between punishment and rehabilitation unlikely to be on the agenda, and what can we do about it?
First let’s look at how it could be done.
Payment by results is being used in two different ways at the moment. One way, like the work programme in the UK, is to try to improve the efficiency/effectiveness of a present service area that is perceived to be providing poor results. This is done at scale and typically ratchets up the outcome focus over time, so that providers have time to improve or get taken over if they can’t sort themselves out.
The other way, like the Peterborough SIB, is to try innovation. Government would not pay for the service under normal circumstances, as it is perceived as too risky. But if you only ask them to pay for the outcomes achieved, then with a bit of luck, you can develop a contract and test out a service in a rigorous way and with the government’s blessing.
There is a potential third way(!). Outcome based models can be used to test the appropriate allocation of resources between a preventative spend and an acute one. So an outcome based contract is set up for the preventative spend. It doesn’t have to be entirely outcomes based, in fact it is probably better if it isn’t, but any spend over and above expected preventative spend would need to be on an outcomes basis, as it would be being taken from the potential spending on the acute service. In other words the additional preventative money would only be available if it had successfully shrunk demand for the acute services.
This method is potentially the most radical, as it allows service effectiveness to decide on budget allocation, an unusually rational way of doing things.
So why is this not being done? In all the conversations we have had with government insetting up SIBs of all shapes and sizes, they always have an expectation of an outcomes cap. The fear of excessive success is often significant. To my mind the reasons are as follows:
  • supply in-elasticity  for a lot of acute services, there are high fixed costs and demand has to reduce significantly before supply can be taken out of the system, before a prison can close for example.
  • backfill: many acute services are perceived to have infinite demand in comparison to supply (mental health for example), so any reduction in demand will simply be filled by other people. Or spare capacity will impact on behaviours elsewhere in the system. Judges will sentence more people to prison if prisons aren’t full, social workers might put more children into care if there are places available etc.
  • fear of poor contracting: the concern that they will somehow get legged over in the contract and suppliers will succeed in getting paid without having the wider outcomes impact that would actually reduce acute service demand.
So what can be done about this? All the problems described above are soluble over time.For example, outcome caps can be put in place, but any supplier hitting them has the cap and outcome values raised after a time delay of say a year. This would allow time for supply reduction strategies to be put in place and to ensure that backfill is managed. The detail issue would be managing whether such raises to the cap would be automatic or at the government contract holder’s discretion. The former ensures pressure is maintained in the system to implement supply reduction strategies – a pressure that is typically needed as reducing service levels is hard and unpopular with stakeholders. The latter reduces the risk if the contract was poorly formed in the first place and suppliers are reaching caps but not impacting actual demand.
I’m not sure this is sufficient unfortunately. To do this also requires different accounting rules and ways of managing public expenditure. I’m not an expert, but I imagine a department wanting to retain flexibility between two significant budget line items is not the sort of thing the Treasury likes. I do know that DWP had a significant fight on its hands when it sought to do the DEL/AME switch but succeeded eventually. I’m not sure what the response would be when looking at two departmental budgets as would be the case in Justice.

Where I am sure that Treasury would agree is that a supply reduction strategy needs to be in place alongside any demand reduction if we are to make any real difference to long term numbers and cost.

When faced with Gordian knots such as this, our experience is that a migration path is needed that allows the government to take initial steps without taking on too much risk. In this instance that is about pushing to ensure at least some of the contracts allow for either quite high levels of performance before being capped, or for the caps to be expanded. It is also vital that a range of actors engage with this debate and make relevant contributions to the consultation process.

Please get in touch if you have thoughts, feedback or want to participate in this debate.