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Transcript of 20101206 Public service delivery
MORE WITH LESS
by Ian Mulheirn and Barney Gough
Rethinking public service delivery
MORE WITH LESS
Rethinking public service delivery
by Ian Mulheirn and Barney Gough
FIRST PUBLISHED BY
The Social Market Foundation, December 2010
11 Tufton Street, London SW1P 3QB
Copyright © The Social Market Foundation, 2010
The moral right of the authors has been asserted. All
rights reserved. Without limiting the rights under
copyright reserved above, no part of this publication may
be reproduced, stored or introduced into a retrieval
system, or transmitted, in any form or by any means
(electronic, mechanical, photocopying, recording, or
otherwise), without the prior written permission of both
the copyright owner and the publisher of this book.
THE SOCIAL MARKET FOUNDATION
The Foundation’s main activity is to commission and
publish original papers by independent academic and
other experts on key topics in the economic and social
fields, with a view to stimulating public discussion on the
performance of markets and the social framework within
which they operate.
The Foundation is a registered charity and a company
limited by guarantee. It is independent of any political
party or group and is financed by the sale of publications
and by voluntary donations from individuals,
organisations and companies. The views expressed in
publications are those of the authors and do not
represent a corporate opinion of the Foundation.
CHAIR
Mary Ann Sieghart
MEMBERS OF THE BOARD
Viscount (Tom) Chandos
Gavyn Davies
Daniel Franklin
Martin Ivens
Graham Mather
Brian Pomeroy
DIRECTOR
Ian Mulheirn
CONTENTS
ACKNOWLEDGMENTS 7
ABOUT THE AUTHORS 8
EXECUTIVE SUMMARY 9
CHAPTER 1: INTRODUCTION 18
CHAPTER 2: THREE WAYS TO DELIVER PUBLIC SERVICES
23
CHAPTER 3: STARTING WITH THE CITIZEN 28
CHAPTER 4: OUTCOME-BASED COMMISSIONING 43
CHAPTER 5: WEAK OR ABSENT MARKETS 60
CONCLUSIONS 65
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ACKNOWLEDGEMENTS
The authors are grateful to our sponsor – Avail and The Learning
and Skills Council – for enabling this work to go ahead.
They would like to thank colleagues and external supporters
of SMF for their help in developing the ideas in this essay. The
authors are particularly indebted to Jeff Masters and David
Furness for their thoughts and reflections.
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ABOUT THE AUTHORS
IAN MULHEIRN
Ian Mulheirn was appointed Director of the Social Market
Foundation in October 2008. He joined the Social Market
Foundation as the Chief Economist in February 2008, after
three years as an economic advisor at HM Treasury. He has
worked in a variety of policy areas including child poverty,
savings & investment, welfare to work and higher education
funding. He has also undertaken research into the drivers of
worklessness in London and evaluation of the Working Tax
Credit and the National Minimum Wage. He has a Masters
degree in Economics from university College London and an
undergraduate degree in Philosophy Politics and Economics
from Oxford University.
BARNEY GOUGH
Barney joined the SMF as a researcher in March 2006. He co-
authored and edited a number of publications before
working on the SMF Health project and co-authoring the
final report. He became Head of the Commissioning
programme at the SMF in 2009, and led the reducing
recidivism research project. Barney now works for the youth
and community charity The Challenge network. He took his
BA in social and political sciences at Emmanuel College,
Cambridge University.
SOCIAL MARKET FOUNDATION
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EXECUTIVE SUMMARY
While public service reform has been on the agenda for years, in
the times of plenty, it has lacked the urgency or coherence that
today’s fiscal situation demands. This paper argues that a market-
based approach to public service delivery is the basis for public
service effectiveness and efficiency over the coming decade. The
fitful progress towards greater market-based provision has been
piecemeal and lacked a coherent framework to help policymakers
to think through the benefits and the pitfalls of greater
marketisation. This paper sets out such a framework to help
government think through the reasons for deploying the baffling
array of commissioning approaches in the delivery of public
services.
There are three ways to deliver public services: command
and control by central government, a trust model of devolved
power to front line professionals and putting power in the hands
of service users through choice and control.
Command and control models have been useful in
prompting significant improvement in certain aspects of public
service delivery. For example waiting times in the NHS have come
down in response to central government diktat. But poorer
patients are not well equipped to negotiate systems that are
fixated on government targets and there are information
problems too – civil servants do not necessarily know enough to
be effective.
Trust models have the advantage of securing good relations
with motivated professionals. And they remove some of the
unintended consequences of top down performance
management that can be a feature of command and control. But
trust models are vulnerable to producer capture – services
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arranged for the convenience of the people who work in them
not the people who use them.
Choice and competition gives consumers the option to take
their custom elsewhere in a real market setting as providers are
forced to respond to their needs. Markets offer strong incentives
for providers to ensure that costs are minimised where possible.
But in addition to these static efficiency gains, the pluralism of
markets offers dynamic benefits of increased service effectiveness
and innovation over time, as different providers compete to find
more effective ways to serve citizens.
What does this mean for policymakers? The first insight is that
while ensuring fairness and efficient societal outcomes are
important reasons why government must fund services – as, for
example, in the case of education – there is no such rationale for
funding to be accompanied by direct government provision. And
history shows us that centrally planned and directed systems
tend to be inefficient. Therefore the best way to deliver services
is to start with the citizen and rely on market mechanisms to
deliver efficiency gains.
That private markets often result in unequal outcomes does
not reflect a causal relationship between markets and inequality.
Rather unequal market outcomes are a reflection of the fact that
citizens typically come to the market with different levels of
resources. Under these conditions markets often exacerbate
inequality. But this situation is precisely what state funding
avoids, since publicly funded services can be allocated according
to need. Citizens come to public service markets as equals.
What does all this mean for policy in practice? It means that in
every policy area we should begin by thinking about handing the
money to the service user. Putting the service user in control of
SOCIAL MARKET FOUNDATION
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the public money spent on them should be seen but as the only
place to begin. By thinking through the reasons why such an
approach can fail, we can establish a framework for public service
delivery.
PUTTING THE SERVICE USER IN CONTROL
There are a range of different forms of this kind of market
approach, the most common of which are the vouchers, direct
payments to users or choice. In education, putting the service
user in control means allowing parents to choose a school for
their child, while giving parents cash or vouchers to pay for
childcare requirements in a way that suits their needs, has a
similar effect.
All of these approaches are vehicles for personalisation,
seeing the citizen as consumer, and promoting choice to drive
provider competition and therefore service improvement. True
personalisation of services is valuable firstly because it allows
resources to be allocated to where they’re most needed – static
efficiency. By setting it in a market context, personalisation also
stimulates providers to find better ways of doing things over
time.
In order to break the stultifying central control of public
services, policy-makers must think of the ultimate service user as
a consumer, and design delivery around them. However, despite
the evidence that starting at the individual level can improve the
efficiency and quality of some public services, it is true that the
consumer model will not work well all settings. Understanding
the reasons for the model’s failure can help policymakers to know
what tools to turn to next.
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There are a range of circumstances that may render it
inappropriate for devolution of spending control and/or choice
to the service user. Three key issues are the following:
· Problems of agency : where the chooser’s decisions
affect others - specifically taxpayers. This can occur in two
forms. First, there may be a problem of agency in terms of
what the ’consumer’ spends the money on. For example,
if personal budgets in healthcare were commonly spent
on things that had no beneficial effect on patients’ health
outcomes, the taxpayer – who might then have to foot
the bill for more effective treatment – might legitimately
feel aggrieved. The second form of agency is in the form
of the amount of the good consumed. Where the agent is
keen to consume the service, such as a motivated
jobseeker keen to receive guidance from a personal
advisor, expenditure can be rationed. But what about
situations in which the jobseeker is reluctant to engage –
where they tend to ‘underconsume’ the good of
employment support? In each of these cases of agency,
particularly where it is difficult to identify under- and
over-consumers, a pure consumer approach is
inadequate.
· Information problems: where complex or infrequent
decisions by users lead to weak competition in markets.
Effective markets operate in conditions of repeated
choices that allow consumers to learn from their mistakes
and test out different products. This leads to effective
competition between suppliers, reducing prices,
improving quality and stimulating innovation over time.
But within a given public service it is important to ask
whether these conditions hold. In acute healthcare, for
example, it would be naïve to imagine that the patient
could act unaided as a consumer of health services – both
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because they have limited experience of such choices
and because the information asymmetries involved are
too much for most patients to overcome without
assistance.
· Coordination problems: where services, by their nature,
require central co-ordination. Many public services
require that expenditure is centrally coordinated. In these
cases, fragmented individual financial control and direct
choice is clearly not viable or desirable. An obvious
example here, where devolution of choice and control to
the individual is fundamentally unworkable, is street
cleaning. Coordinated services are therefore a class of
public service for which we need to find a different
starting point than the individual level.
Where the above problems arise, we must instead look to a
level above the individual to commission effective and efficient
public services. Employing a third party to coordinate the
delivery of services can overcome problems of variability in the
levels of desired consumption on the part of service users. A third
party is also necessary to overcome coordination problems. These
examples typically mean needing moving from a situation where
providers compete for customers in markets, to one where they
compete to win contracts for markets – for example, competing
for the right to operate all criminal justice rehabilitation services
in a given area. Competition for customers where the customer
does not want to engage will fail to deliver good outcomes. But
without a consumer in charge, how can we ensure that services
are responsive to users’ needs and cost effective? One approach
is for government to commission for outcomes.
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COMMISSIONING FOR OUTCOMES
By only paying providers for getting results, and freeing them up
to think creatively about how to achieve them, outcome
commissioning offers the possibility of combining central
accountability and front line flexibility. There is a great deal of
potential for outcome based commissioning to deliver real
improvements across a range of services.
Perhaps the most common objection to paying for outcomes
is that it can lead to ‘cream-skimming’. This is the situation where
service providers choose to focus on easier-to-help (and
therefore cheaper) service users and ignore the more expensive
ones. However, it is important to note that cream-skimming
behaviour is no less common in publicly-delivered services than
it is under privately-delivered ones. In the private sector, the
problem of cream-skimming behaviour is one that stems from the
payment structure offered to contractors.
In welfare-to-work services, for example, when contracts offer
the same outcome payment for successfully moving any
jobseeker into work, providers inevitably concentrate on the
easiest cases. The payment structure is designed to achieve the
most job outcomes for least cost. But this is something that
publicly-delivered employment services are also encouraged to
achieve. Indeed, the Jobseekers Allowance conditionality regime
is explicitly designed to minimise expenditure, with the
consequence that those jobseekers with the biggest problems
have to wait a year before getting intensive support. Crucially,
cream-skimming behaviour it is not intrinsic to the outcome
payment approach and can easily be avoided if it is deemed to
be undesirable by policymakers.
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There are reasons why paying for outcomes, in particular, can
fail. The three common ones are as follows.
· Measuring success: where simple, measurable metrics of
success do not exist it is difficult to tie payments to good
outcomes.
· Accountability : where there are too many external
influences to reliably link provider interventions to
successful outcomes, accountability can be too weak to
allow payment by results.
· Time-frames: when outcomes lie too far in the future for
private investors to fund delivery, the approach will not
be viable.
Despite the potential of more market-based delivery to drive
public service productivity over the coming decade, there are
many types of public services that diverge significantly from the
perfectly competitive ideal. The consumer approach and
outcome-based commissioning are not appropriate delivery
mechanisms in all cases. Policymakers should be wary of
structures that may superficially resemble markets but do not
provide the pluralistic and competitive environment that is
needed to deliver improvements.
WEAK OR ABSENT MARKETS
Where markets are weak or absent from public service delivery
for reasons such as those outlined above, it becomes necessary
to re-consider the other two means of public service delivery:
command and control, and trust models.
Central command and control may be seen as the ‘least bad’
option where market-based delivery is not viable. As the last
government began to outline in its lat year of power, it may be
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possible to complement top-down targets with universal service
rights and entitlements to augment user ‘voice’. One example of
this is the ‘September Guarantee’ for 16 and 17 year-old school
leavers, which entitles them to a guaranteed place in education
or training. In an era of cuts, such entitlements may be effective
in safeguarding minimum standards, thus reducing the variability
of performance if nothing else.
Trust in professional delivery, on the other hand, reinforces
the ‘gift’ model of public services, where the service user has
services delivered to him or her almost as if they are a gift.
Putting decisions in the hands of producers in this way, however
well-intentioned, is unlikely to enhance the responsiveness and
innovation of public services.
One form of the ‘trust’ approach is the mutual model. This has
some advantages over both command-and-control and
contacted-out delivery models. In situations where services are so
complex that either users or commissioners are unable to be able
to specify exactly what services they need, professionals are
arguably in a better position to determine the allocation of
resources at the front line than are distant public sector
managers. One area in which mutuals could be effective is in
healthcare where information asymmetries are common.
Their mission-driven nature may, in some circumstances, also
be better than trying to specify nebulous delivery requirements
in contractual for as might be more important under contracted-
out provision. However, the mutual model may prove unstable in
practice. While it is often the case that those closest to service
users understand their needs, that does not mean that providers
are unstintingly pursue those needs.
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There are numerous forms that a market-based to public
service reform can take. But the starting point must be the
individual service user, in the form of individual budgets and
choice. A policy framework that starts with the user would
represent a revolution in thinking from the Beveridgean model
that has continued to dominate service delivery despite the
reforms of the past two decades.
But where the consumer model breaks down, as it does in
many public services, it is important to understand the nature of
the public service, and why choice fails, to inform our
understanding of which tool to reach for next.
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CHAPTER 1: INTRODUCTION
A HOLE IN THE PUBLIC FINANCES
Developed nations are emerging from the effects of a severe
global recession. In Britain the recession has ripped a deep hole
in the public finances, being concentrated in areas of the
economy on whose activity the exchequer relied for a substantial
portion of its revenue. The economy might be starting to rally,
but the impact of the recession on the UK public finances will be
felt for years to come. With the 2009-10 deficit coming in at £156
billion, the Chancellor has set out plans to cut £83bn out of
public spending by 2014-15, with further fiscal tightening
planned thereafter.1 A decade’s downward pressure on public
spending will have severe implications for public services.
In addition to the problems created by the fiscal crisis, long-
term trends are also putting pressure on the delivery of public
services. Demographic changes, such as an ageing population,
coupled with increasing public expectations, mean that demand
for high quality public services is changing and growing. On top
of this, global trends such as climate change, migration and
security threats are throwing up new and complicated challenges
for public service delivery.
While these trends drive increasing demands on public
services, the impending and unprecedented fiscal squeeze means
that the country faces a challenge to sustain public services over
the next decade, let alone improve them. Unless the government
can work out how to achieve ‘more for less’, we face a bleak
decade.
1 HM Treasury, Budget 2010 (London : HMSO, 2010) , 15.
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One approach to dealing with the hole in the public finances
is to attempt to continue delivering the same services via the
same structures, only more cheaply. This might be achieved by
driving down unit costs in the procurement process, by reducing
up-front investment, or by making small cuts right across
departmental budgets (commonly known as ‘salami slicing’).
These strategies are tempting because they do not require
any radical new thinking and would secure initial savings. But
unless such cuts are accompanied by a sophisticated analysis of
the delivery tools that are needed to improve service
effectiveness on the front line, cutting from the centre alone is
unlikely to succeed in achieving efficiencies for two reasons.
First, blunt cuts to some services can lead to unforeseen
ballooning costs in other areas. For example, if GP access were to
be scaled back, it is likely that more patients would turn to A&E
departments instead, at greater expense to the exchequer.
Second, centrally-imposed cuts without a strategy for reform
will lead to rapid deterioration in service quality. Ultimately this
will lead either to a collapse in the service provision altogether or
a popular outcry justifying a return to renewed and unsustainable
spending without reform.
But in developing a strategy to accompany public spending
cuts, decades of experience tells us that central determination of
what to cut and what to keep is bound to fail. Whitehall is simply
incapable of possessing the necessary knowledge to maximize
the public value of public money through centralised command
and control.
But ‘public service reform’ has been a permanent part of the
public policy landscape for years, and the way in which we
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commission public services appears to be in a state of permanent
revolution. In some areas individual budgets are advocated as the
next stage of reform, while in others outcome-based
commissioning is the new buzz; an outbreak of enthusiasm for
the ‘John Lewis model’ of service delivery has been a recent
feature of the reform debate, while in other areas, an expansion
of service users’ choice is advocated. And at all times, politicians
pay at least lip service to the idea of freeing up frontline
professional to do what they do best without hindrance from
Whitehall .
What are we to make of this patchwork of ideas? How do the
different ideas about public service delivery and commissioning
relate to one another? And how should we think through which
delivery model is appropriate and which unworkable for a given
public service?
For decades, these questions have gone unanswered.
Contradictory fashions for reform in different parts of the public
services have waxed and waned, and the lessons of success or
failure of different approaches have too rarely been heeded in
other policy areas. This paper sets out to provide a framework for
policymakers to think through the options for commissioning
public services. In doing so it articulates an approach to public
service reform that can achieve often contradictory policy goals:
strengthening financial accountability at the centre, while freeing
professionals to make services effective and responsive to
citizens’ needs.
WHAT THIS PAPER ARGUES
While public service reform has been on the agenda for years, in
the times of plenty, it has lacked the urgency or coherence that
today’s fiscal situation demands. This paper argues that a market-
SOCIAL MARKET FOUNDATION
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based approach to public service delivery is the basis for public
service effectiveness and efficiency over the coming decade. It
sets out a framework by which policymakers can think through
the reasons for using different approaches to commissioning the
delivery of public services.
Chapter 2 outlines the three fundamental ways to arrange the
delivery of public service: from government through command
and control; through professionals in a trust model of delivery; or
by handing power to individuals or organisations procuring
measurable outcomes on their behalf. While a combination of
each of the three approaches is usually necessary, it is helpful to
think about service delivery in terms of which of them should be
the principal delivery mechanism. We argue that market
mechanisms, thoughtfully deployed, offer the theoretical and
empirical basis for effective reform. Markets are a powerful force
for change, but inappropriately or partially deployed, they can
lead to perverse and unintended outcomes.
Chapter 3 establishes the starting point for a market-based
approach: the individual service user. Starting with putting power
in the hands of the service user is an approach that can be
powerful in driving joined-up and effective services, under the
right conditions. This chapter elaborates on the potential and the
limits of such an approach, arguing that giving power to the
individual should always be the analytical starting point for
policymakers. Policy areas that appear to be good candidates for
more of a choice and control approach include skills policy,
chronic health care, housing provision and schools. In practice,
many public services are inappropriate for the simple consumer
model of delivery alone, but a careful analysis of the reasons why
can point the way to an alternative commissioning approach.
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In the many cases where treating the service user as
consumer breaks down, it can be necessary to move to a
commissioning model that puts a third party to coordinate and
join-up services, making them responsive to users’ needs. But to
achieve central financial accountability at the same time as
liberating the front line to use their knowledge of the situation to
provide appropriate services is a continuing conundrum. Chapter
4 therefore discusses the potential of outcome-based
commissioning to achieve these two goals, in a range of new
areas - including offender management, employment services
and skills provision - while also exploring the limitations of the
approach.
Finally, Chapter 5 considers what options policymakers have
for the delivery of services in which markets are inherently weak
or absent. In such cases contracted-out service provision suffers
from being able only to exert weak competitive pressure on
providers and in some cases it may be that delivering services
either by central control or frontline professionals may be more
effective. The answer will depend on the nature of the service.
In establishing a framework, this paper aims to go further
than simply describing the feasible range of approaches to
service commissioning. Instead this framework provides a tool for
policymakers to analyse the essential nature of a range of public
services, and think about the appropriate market instrument to
improve their delivery.
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CHAPTER 2: THREE WAYS TO DELIVER PUBLIC SERVICES
Over the past twenty years, a wide range of different models for
the delivery of public services has emerged. The Thatcher and
Major governments rapidly expanded the range of services
delivered by private contractors, introduced purchaser-provider
splits within the health service and elsewhere, and tried to
expand choice in schools. The 1997 Labour government initially
looked to improve service delivery through Whitehall-determined
targets across a range of services, before returning to hone many
of the market-based approaches developed in the 1990s. In
recent years, the last government advocated a range of new
mechanisms - including individual budgets for service users,
payment-by-results for contractors, and most recently mutuals -
as a way to energise public service delivery.
Despite the fact that across different public services very
different delivery models are deployed, little consideration is
given to how policymakers arrive at one model rather than
another in any given service. The absence of any theoretical
framework to govern this decision arguably means that effective
strategies are slow to migrate from one service area to another.
Meanwhile, we are slow to learn the lessons of approaches that
have been less successful. So what are we to make of this blizzard
of delivery models? In the fiscally straightened times ahead it will
be important to develop a way to analyse public service delivery
across the board if we are to identify how to get more from less.
Public service delivery, unlike the private economy, involves
three kinds of actor: the citizen user of the service, the producer
of the service and the government. These three stakeholders
provide the framework for thinking about how effective and
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efficient services can be delivered. While all three must, to some
extent, be involved in the methods of delivery of any service, how
primary decision-making power is allocated across the three
actors defines the model of service delivery.
· Retaining power primarily with government to steer service
delivery through targets and centrally determined
strategies, delivered by public sector providers, represents
the command and control model of delivery.
· Devolving power to front line professionals who are then
left to shape the service according to their perception of
need, is referred to as the trust model.
· Putting power in the hands of service users through choice
and control .
COMMAND AND CONTROL
The command and control approach is potentially effective at
addressing specific problems in service delivery, such as long
wait times for patients in A&E. It also has the advantage of
establishing a clear line of accountability from democratically
elected politicians to service users. But as Liam Byrne has argued,
the welfare state is the “site of capture by the middle class.”
Inevitably those who are more articulate or who know how
systems work are better able to lay claim to public resources
available, whether that be in health education or elsewhere. For
this reason, centralised, bureaucratically delivered services have
led to deeply unequal outcomes and public services have failed
the people for whom they were primarily intended: the poor. In
the coming decade of fiscal austerity, this inefficiency is
something that no government, of whatever hue, can either
afford or allow to persist.
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Moreover, the centralised approach suffers from endemic
information problems: those furthest away from the front line –
civil servants and ministers – try to direct the operational side of
things with little understanding of the needs of service users or
the knock-on effects of their targets. At the same time, those
actually involved in service delivery have little autonomy to
respond effectively to service users’ needs.
TRUST
These well-worn criticisms of centralisation therefore lead many
to advocate that greater professional autonomy and trusting the
professionals as a better route to effective service delivery.
Indeed, it is often the case that the complexity of services means
that professionals have the greatest claim to service control on
information grounds.
Nevertheless, ‘trusting the professional’ clearly carries
significant risks. Whether well-intentioned or not, unaccountable
control of service delivery by professionals tends to encourage a
system primarily built around the needs and desires of those
professionals, rather than those of the citizens for whom the
services are intended. Such producer capture has been evident in
the fact that huge numbers of GPs chose to opt-out of delivering
out-of-hours services to patient under the Quality Assurance
Framework.
CHOICE AND COMPETITION IN MARKETS
The shortcomings of both central and professional control of
public service delivery therefore lead us to consider putting
power in the hands of service users through choice and control.
Creating markets for the delivery of public services and
empowering citizens as consumers has often been advocated as
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a route to more responsive, efficient and effective public services
for three reasons. Since consumers have the option to take their
custom elsewhere in a real market setting, providers are forced to
respond to their needs. Second, markets offer strong incentives
for providers to ensure that costs are minimised where possible.
But third, and in addition to these static efficiency gains, markets
offer dynamic benefits of increased service effectiveness and
innovation over time as different providers compete to find more
effective ways to serve citizens. In short, where applicable,
markets drive better, cheaper and more responsive public
services than either of the two other models. The challenge, then,
is to work out where and how to apply them.
While the theoretical benefits of market-based public services
are clear, the reality of service delivery is complicated. But a clear
understanding of the justification for putting power in the hands
of the citizen points the way to a starting point for policymakers
in analysing public service delivery. In developing the framework
this essay suggests a range of policy areas where the delivery or
commissioning approach might benefit from reform in order to
produce better services with less money.
The remainder of this essay provides a practical and
applicable framework for policymakers to think through the
appropriate vehicles for the delivery of public services, and what
that means for commissioning and procurement in practice. To
derive that framework, we must begin by defining the essential
role of the state in public services. Isolating the essential nature
of public services then provides a starting point for thinking
about commissioning that service provision.
Taking the first step in setting out the framework, the next
chapter considers in more detail the rationale for starting with
the individual service user. It then goes on to look at why the
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consumer approach can break down in some policy areas, making
it inadequate as the basis for shaping delivery in every case.
Understanding the limitations of the consumer model in various
settings points the way to the next stage in the framework.
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CHAPTER 3: STARTING WITH THE CITIZEN
The public service reform agenda of the past twenty years has
been characterised by perpetual revolution in the delivery and
commissioning of services. But this has proceeded without any
apparent systematic attempt to think through what the nature of
a given service means for how it should be delivered or
commissioned. In order to consider whether services might be
better arranged, it is important to begin by re-articulating the
fundamental goals of public services. Why do we have them and
what are their aims?
There are two reasons for the existence of public services. The
first is one of efficiency: services need to be coordinated by the
state where the free market economy would not otherwise
provide. This is the case for public goods in the traditional
economic sense (such as street lighting) or the correction of
externalities or market failures (such as the benefit to wider
society of educating a citizen). Private funding of such services
(at least without state backing) is beset by risks of free-riding of
non-paying users of the service, leading to under-provision of
them compared to the social optimum.
The second justification for public services is one of fairness:
we are concerned not to leave the provision of some services to
the free market. Why? Because we recognise that the distribution
of wealth and income is such that consumption of essential
services would be deeply unfair without government
intervention. Hence healthcare, education, social care, childcare,
employment support and many other government services are
publicly funded on the grounds of fairness. In most cases, the
fairness and efficiency arguments cohere in the same service, as
for example in health and education.
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But while these justifications outline the theoretical rationale
for public services, they say nothing about the nature of service
delivery. While it is the case that public services are intrinsically
different to privately consumed goods, that difference derives
from the nature of their funding, not the method of their
delivery. That taxation funds public services does not mean that
government must provide them. In order to get from establishing
the need for public funding of public services to a view on their
appropriate delivery, we need an additional theoretical
framework.
As a starting point for the delivery of public services, the
assumption that public funding implies state delivery should
strike us as very odd. Indeed, as many have noted in the past,
top-down allocation of public services, while it promises equality
of provision, does nothing of the sort.2
People of different political persuasions can disagree on the
appropriate level and scope of public services. But, insofar as
services are delivered at all, all sides should agree that equality and
efficiency goals remain their aim. In all this, state or top-down
delivery has confounded the fundamental goals of public
services.
But if the state should not determine who gets what services,
then who else should shape them but individual citizens? In all
other areas of life individuals determine the shape of the
provision of goods and services through their own choices and
preferences. Standard economic theory, and a century-long
experiment with state socialism, suggests that, as a rule, this
approach is generally superior to any other method of allocating
resources. The left has often reacted against the application of
such approaches to public service delivery because of a visceral
2 Jul ian Le G rand, The other inv i s ib le hand (Pr inceton Univers i ty Press , 2007) , 33.
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sense that when individuals are allowed to exercise their own
preferences - i.e. market mechanisms - the market throws up
unequal outcomes for citizens. They rightly argue that such
disparity of outcomes would be unacceptable for public services,
particularly those which are primarily justified on the grounds of
fairness (such as healthcare).
But that private markets often result in unequal outcomes
does not reflect a causal relationship between markets and
inequality. Rather unequal market outcomes are a reflection of
the fact that citizens typically come to the market with different
resource endowments. Under these conditions markets often
exacerbate inequality. But this situation is precisely what state
funding avoids, since endowments for publicly funded services
can be allocated according to need. Citizens come to public
service markets as equals.
So while it will always be government’s role to determine the
principles on which public resources are apportioned to citizens,
the state should aim, as far as possible, to leave the shaping of
services in the hands of individuals. As an approach to public
service delivery, and under the right conditions, markets offer the
most powerful method of matching needs with resources, and
therefore of getting more for less in public services as a whole.
What does all this mean for policy in practice? It means that in
every policy area we should begin by thinking about handing the
money to the service user.
THE USER AT THE CENTRE: VOUCHERS, CHOICE AND DIRECT
PAYMENTS
The above analysis makes giving citizens their money to spend
the natural starting point for all public service delivery. Putting
the service user in control of the public money spent on them
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should be seen, not as one among a suite of options for service
delivery, but as the only place to begin. The onus should be on
policymakers to provide a compelling case for not handing the
money directly to the service user. In effect there are a range of
different forms of this kind of market approach, the most
common of which are the following.
· Vouchers: individuals are given virtual money to spend with
approved providers. Childcare vouchers are an obvious
example here.
· Direct payments: service users are allocated resources and
allowed to choose the service that best suits their needs.
The social care individual budget pilots that concluded in
2008 are a good example of this approach.
· Choice: citizens are provided with a range of service
providers to choose from. The new coalition government’s
plans to expand school provision are aimed at facilitating
parent choice here.
All of these are vehicles for personalisation, seeing the citizen as
consumer and promoting choice to drive competition and
therefore service improvement. There are differences between
these approaches in that choice and vouchers are rather like
picking a set menu, while direct payments are more akin to
choosing a la carte . The differences between them tend to
consist in the constraints on the uses to which the money is put.
But these differences are less important for the purposes of this
essay: in all cases the funding level is determined by government
and the money follows the service user’s decisions, which can be
more or less constrained.
The idea of personalisation has been claimed by advocates on
both the right and left of the political spectrum. Fernandez et al.
argue that this is because “Conservative commentators can
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applaud its market-like characteristics, while for New Labour the
policy resonates neatly with the broader thrust of the choice in
public services campaign.”3 Such a degree of consensus should
really be unremarkable, since the argument for personalisation is
built around improvements in both equity and efficiency. If the
theory is borne out by the facts then one might expect politicians
from all sides to welcome it as a rare opportunity for
unambiguous improvement in government policy.
True personalisation of services is valuable firstly because it
creates a market in the provision of public services, allowing
resources to be allocated to where they’re most needed and
stimulating actors to find better ways of doing things over time.
The first of these characteristics means that citizens get to shape
the services they use but also face a clear limit to the value of the
services they can consume – thus encouraging them to achieve
the best value for money. The second characteristic offers the
potential for the bottom-up approach to stimulate innovation,
and in doing so raise the quality and lower the price of the
services that are provided.
So what does the evidence say about the money-saving
potential of putting purchasing power or choice in the hands of
individuals? The extension of budgetary control to social care
users and health service users is a phenomenon that is in its
infancy. This means that conclusions about the effectiveness of
the approach can draw on a relatively limited evidence base.
Many researchers have concluded that, compared with top-
down approaches, social care costs are reduced by devolving
more control to the individual. For example, Hasler, reporting on
direct payments to social care service users in West Sussex,
3 Fernandez , J .L . , Kendal l , J . , Davey , V . e t a l ‘Di rect payments in England: factors l inked to var iat i ons in
local provs ion ’ , Journal of Soc ia l Pol ic y, vol . 36 , no. 1 . 97-121
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concludes that, for the small group of people involved, saving of
some £2,000 per person were made.4 Many of the studies
commonly cited in support of the cost-saving effects of
individual budgets are often criticised on the grounds of
methodology.
The most rigorous and systematic evaluation of the
deployment of individual budgets was the 2008 evaluation of the
Individual Budgets Pilot Programme in the UK.5 The authors
conclude that, overall, there was no statistically significant
difference in the cost of care packages between randomised
groups of individual budget holders and a comparison group.
However, they do conclude that for several specific groups -
people with mental health problems, younger disabled people
and, perhaps, those with learning difficulties - individual budgets
do appear to be more cost-effective.
Self-directed support has been tested for people managing
mental health conditions in a range of US states. Evidence from
Florida suggests that service users are more likely to direct
spending away from crisis support and towards employment
support and preventative measures.6 However, since service users
were self-selecting it is very difficult to draw firm conclusions
about the causal effect of self-directed support.
Choice in schools has been an element of education policy
since the 1988 Education Act, and successive governments of
both parties have tried to improve the choice mechanism. And
4 Frances Has le r , “L iv ing i s about more than bed and breakfast ” , Heal th Matte rs ( 1997) vol . 32, 12-13
5 Carol ine Glendinn ing et a l , Evaluat ion of the Individual Budgets P i lot Programme: F inal Report (York :
Un ivers i ty of York Soc ia l Pol icy Research Un i t , 2008) .
6 Vidya A lakeson , “ In te rnat ional developments in sel f -d i rected care” , I s sues in In te rnat ional Heal th
Pol i cy (London : Commonwealth Fund, Februa ry 2010) .
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there is some evidence on the effectiveness of choice in schools
in driving up standards.7
But the scope for the market to drive up quality depends
heavily on the context in which choice operates. For example, the
success of choice in the Swedish school system was hampered by
the fact that there is no mechanism by which poorly performing
schools can ‘go bust’. Choice, in other words, does not
necessarily equate to a market environment and is therefore no
magic bullet on its own. For this reason, the success of the
Conservative party’s plans to expand choice further in the UK will
only lead to improved performance if they can find a way to
allow a market – with all that entails for failing schools – to
operate more fully. Current plans rely on parents taking over
failing schools, but it is an open question whether this will occur
in practice.
So putting the power in the hands of the end-user can have
advantages in terms of efficiency, responsiveness and innovation:
the instrumental justification for markets. But it can also be
argued that markets bring wider benefits on the libertarian
grounds that giving people choice is intrinsically better than not
doing so. By this way of thinking, the same service provided by
the state would have more value had they been chosen by the
ultimate user. User control over services turns on its head the
paternalist notion that public services are a ‘gift’ from
professionals or the state, rather than a citizen’s entitlement.
AN EXPANSION OF CHOICE
There is a wide range of public service delivery areas in which
choice and control could be more commonly devolved to the
individual, allowing them to prioritise their needs and exert
7 Jonathan Wi l l iams and Ann Ross i ter , Choice : the ev idence (London : SMF, 2004) .
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pressure on providers. Some possible areas for reform include the
following.
· Skills policy . The Brown Government’s gradual roll-out of
skills accounts represented a movement in the right
direction, giving individuals much more control over how
money is spent on their behalf. The Conservative party
has outlined its concept of life-long learning accounts for
individuals to build on skills accounts. Combined with
guidance and advice, greater personalisation of skills
funding offers significant real efficiency savings, by
cutting out bulk-bought courses that may be a poor fit for
both employee and employer.
· Housing provision . In the face of ballooning Housing
Benefit bill, the Local Housing Allowance was introduced
by the government in 2008 to encourage recipients to
shop-around for a good deal on their rent. However, as
the public finances have tightened, the temptation to
withdraw any excess money that recipients might
otherwise keep under the scheme has precipitated a
return to something more like the old system. The market
principles of LHA remain, however, an area where
empowering recipients to choose could produce better
outcomes and save the exchequer money in the long-run.
· Schools. As discussed above, liberalisation of school
supply, as planned by the coalition, offers the possibility
of a better market in education. The question of how to
deal with failing schools, however, remains an area that
lacks clear answers.
· Long-term healthcare . The partial success of the
individual budget pilots both here and abroad presents
the possibility that, particularly when budgets are likely to
be cut, putting control in the hands of the user can
improve outcomes and reduce costs.
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THE LIMITS OF CONSUMERISM
In order to break the stultifying central control of public services,
policy-makers must, therefore, think of the ultimate service user
as consumer, and design delivery around them. However, despite
the evidence that starting at the individual level can improve the
efficiency and quality of some public services, it is intuitively
obvious that the consumer model will not work well all settings.
For example, individual budgets in the provision of roads would
decentralise the provision of that public good so much as to
make co-ordinated decision-making all but impossible. Choice for
offenders in the provision of prisons, if allocated to offenders,
would clearly be absurd. So what is the nature of those public
services that cannot be devolved to the individual?
Until we have a clear understanding of the theoretical
limitations of leaving the individual to commission, policy-makers
will find it difficult to know how to commission at some other
level, while simultaneously achieving value for money and
stimulating innovation. Deconstructing what it is about services
that makes them inappropriate for a consumer-centred approach
enables us, first, to understand how to make choice work better.
But secondly it allows a better understanding of the situations in
which choice may be a bad thing.
There are a range of circumstances, specific to each type of
public service, that may render it inappropriate for devolution of
spending control and/or choice to the service user. Three key
issues are the following:
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· Problems of agency : where the chooser’s decisions
affect others.
· Information problems: where complex or infrequent
decisions by users lead to weak competition in markets.
· Coordination problems: where services, by their nature,
require central co-ordination.
Each of these throws up a set of questions that policymakers
must ask themselves in designing the commissioning of a given
public service.
1. Is there a problem of agency?
The problem of agency is captured in the question: is someone
other than the actual service user affected by the decisions and
outcomes of the service user? If so, it will be inappropriate to
allow unlimited choice for the service user in circumstances
where their interests are not directly aligned with those of others.
Since public services are, by definition, publicly funded, the
decisions of any citizen to consume them inevitably has an effect
on others who also paid for them. Hence, agency is a
fundamental problem for public services. But there are two
versions of the agency problem: one relates to whether the level
of use of services by one citizen is in the interests of other
citizens; the other relates to the ends to which those resources
are put.
a) Agency in what is the money spent on
A good example of the former type of agency problem is in
the commissioning of employment services. The justification for
public funding of employment services stems primarily from the
cost to taxpayers of not providing such assistance to jobseekers.
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So both jobseeker and taxpayer have an interest in what kind
of services the public money is spent on: the former might
prioritise getting a certain type of job, while the taxpayer might
prefer to get the person into the nearest available employment
to reduce the benefit bill. Hence, leaving budgetary control
entirely in the hands of the individual jobseeker is unlikely to be
cost-effective for government.
A similar agency problem is evident in skills provision. The
justification for public funding of skills acquisition rests on the
idea that its value to wider society is greater than that to either
the individual or the employer on their own. But that means that
employee, employer and future employer all have a legitimate
interest in how public money is spent. Leaving that control
entirely in the hands of any one of those possible ‘agents’ to
direct the investment is unlikely to result in the best social
outcome for all. Where agency problems imply a divergence of
aims between interested stakeholders, devolution of budgetary
control entirely to one of them will not be cost-effective.
b) Agency in the amount consumed: do users tend to under-consume or over-consume the service
When the actions of the service user affect others, there is a
role for government in working out how to ensure that the ‘right
amount’ of the service is used. Where the danger is that people
want unaffordable amounts of a good thing (perhaps in social
care) the solution is reasonably simple: a limit on expenditure is
set and within that limit the individual can still be free to choose.
In such cases individual budgetary control is highly appropriate.
A gatekeeper of some kind is necessary to allocate resources
according to need – to set an individual’s budget constraint – but
the user is free to decide how to maximise the value of those
resources by shaping the services used themselves.
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But where the danger is that users tend to under-consume a
public service, this raises the problem that they may need to be
‘nudged’ or forced to use more of the service, rather than having
the consumption decision left to them as an individual budget or
choice mechanism would imply. In these situations the agency
problem stems from the fact that the primary ‘service user’ is not
the only, or even perhaps the main, person set to benefit from
their engagement with the service. The most obvious example of
such a situation is in the incarceration of prisoners who, given
the choice, would obviously choose not to be locked-up. In such
cases it is clearly necessary for the service to be enforced by
someone other than the ultimate user, and individual choice or
budgetary control are, by definition, inappropriate.
More interesting than examples of uniformly over- or under-
consumed public services, however, are cases where the level of
desired consumption varies massively from person to person
within the same service. For example, while some people are in
danger of monopolising their GP’s time with minor ailments that
do not need attention, a problem at least as large is that high-risk
groups never visit their GP until their health condition becomes
more serious and hence more expensive to treat. Here, the
challenge for the provider is to act as a gate-keeper for those
who ‘over-consume’ but to be proactive in getting under-
consumers to engage. The difficulty, of course, is in identifying
which people are under-consumers and which over-consumers.
Similar variations in consumption are clear in such things as
school education and welfare-to-work, where some pupils or
jobseekers will want as much assistance as they can get while
others will not engage. In these types of public service, a cost-
effective service depends on the extent to which users can be
made to engage positively with the process. Neither learning nor
job-search can happen without effort on the part of the service
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user. Such services are often described as being co-produced: the
delivery of effective public services through the contribution of
the citizen as well as that of the provider.
In these cases of ‘co-production’ – where the engagement of
the service user with the professional is integral to service
effectiveness - the difficulties of variable levels of engagement by
service users means that commissioning at the individual level is
much more problematic. To create value from the public service,
delivery involves an assessment of an individual’s desired level of
consumption, combined with encouragement, incentives or
sanctions if that desired level is too low from a societal
perspective. But this co-production challenge is problematic, not
least because differentiating between service users who are and
aren’t engaged requires a fine level of detail in the hands of
whoever allocates resources. The information asymmetry
between service provider and user means that devolving
decisions to the front line – both in terms of allocating resources
and the approach to service delivery - is essential for cost-
effective outcomes. But front-line flexibility gives rise to
questions about central accountability. Tackling this tension is
the focus of the next section.
2. Is the choice too complicated or infrequent for the market to work effectively?
In many public services it is the case that individual users might
be well placed to make decisions about the service they would
like to receive, but for the nature of the choice they face.
Effective markets operate in conditions of repeated choices that
allow consumers to learn from their mistakes and test out
different products. This leads to effective competition between
suppliers, reducing prices, improving quality and stimulating
innovation over time. But within a given public service it is
important to ask whether these conditions hold. Is the choice too
complicated for the non-specialist to understand? Are decisions
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made so infrequently that the would-be consumer has no
opportunity to learn from past attempts? These information
problems can render individual budgets and choice ineffective
for achieving value for money in public services.
Patient choice in acute healthcare provision, for example,
could not, in most cases, be operated meaningfully or effectively
without the close support and advice of a qualified professional.
Where choices are complicated or infrequent for the user,
guidance from professionals – along the lines of the Patient Care
Advisors used in NHS choice pilots - is essential if cost-
effectiveness is to be improved.
Personal management of chronic conditions, by contrast, is
much more conducive to individual choice and control since
there is plenty of opportunity for repeated choice and learning.
Here, training such as that offered by the NHS Expert Patient
Programme can help to ensure that service users are empowered
to get maximum value for public money in the services they use.
3. Is there an identifiable service user?
Many public services require that expenditure is centrally
coordinated. In these cases, fragmented individual financial
control and direct choice is clearly not viable or desirable. An
obvious example here, where devolution of choice and control to
the individual is fundamentally unworkable, is street cleaning.
Coordinated services are therefore a class of public service for
which we need to find a different starting point than the
individual level.
The above three characteristics of public services can render
them inappropriate for a consumer-based approach. But even
where choice is deemed viable on these dimensions, the
policymaker’s work is not necessarily over.
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· Demand needs to be sufficiently high to achieve the
necessary economies of scale if cost-effective services are
to be available. Hence the large increases in financial
support for childcare since 1997 have made putting
control in the hands of parents more viable than when
funding was lower.
· Similarly, sufficient supply-side capacity and flexibility is
necessary if choice is to be effective. Here the
Government’s extension of the right to choose the
hospital in which you are treated has opened up private
hospital capacity to NHS patients to enable choice to
work effectively.8 Conservative plans to liberalise school
provision are in a similar vein.
WHAT CAN POLICY MAKERS DO IN THE FACE OF THESE
DANGERS?
Where the above problems of agency, infrequent or complex
choice, or coordinated services arise, we must instead look to a
level above the individual to commission effective and efficient
public services. This typically means moving from a situation
where providers compete in markets, to one where they compete
for markets. But without a consumer in charge, how can we
ensure that services are responsive to users’ needs and cost
effective? One approach is for government to commission for
outcomes.
8 Zach Cooper , et a l , “Does hospi ta l compet i t ion improve ef f ic iency? An analys i s of the recent market-
based reforms to the Engl i sh NHS’ , CEP Discuss ion Paper No 988 (London : LSE , 2010) .
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CHAPTER 4: OUTCOME-BASED COMMISSIONING
As the above chapter makes clear, market-based service
provision, in the form of genuine user choice and control, should
be the first port of call for policymakers for both instrumental and
libertarian reasons. But, where it breaks down, we must instead
look to a level above the individual to commission effective and
efficient public services.
COMPETITION FOR MARKETS
When services are commissioned on an individual’s behalf, that
offers the possibility that all three of the shortcomings of the
choice model can be overcome. The commissioner can:
· be instructed by government to take account of the
interests of other citizens in delivering services to the
primary use;
· be expected to have the expertise and scale to overcome
information problems; and
· operate on a scale necessary to coordinate decision-
making.
Further, while the consumer model sometimes fails, leading back
to a form of top-down provision, market disciplines can remain.
Instead we simply move from services characterised (primarily if
not exclusively) by competition within markets, where providers
seek to provide the best service in order to attract ‘customers’, to
service provision characterised by competition for markets.
This approach has been evident across all areas of public
policy in recent years. Government has put out to tender fixed-
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term contracts to operate everything from prisons and railways,
to employment programmes and government office buildings.
The theory behind these developments is that by opening up
provision to a wide range of possible providers, such
contestability will result in reduced service operation costs
and/or increase quality. Even where there are relatively few
providers in a given market, it is argued, the threat of market
entry by competitors keeps service providers on their toes,
encourages good performance and keeps costs low.
However, there are at least two general problems that recur
when government runs contracting rounds for public service
provision. These problems go to the heart of the theoretical
benefits of a market-based approach to public service delivery.
· First, there is significant tension between the benefits of
competition for markets and the need for investment by
delivery partners. If contract durations are short,
contractors will be understandably reluctant to invest in
developing their service in expectation of a future return.
Long contracts are therefore needed to encourage high-
quality provision in services that require large amounts of
investment. But long contracts deny the static efficiency
benefits offered by markets that conform to economists’
perfect competition world. If providers are secure in their
contracts for, say, ten years, the competitive threat to
their business is some way in the future, which blunts
market incentives to minimise cost and improve quality –
at least until the next contracting round looms.
· Secondly, the complexity of service delivery in most areas
of public policy is such that the contractual approach on
its own tends to have to stipulate highly detailed input
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and/or process requirements for delivery partners. By
focusing on securing the detail of process, government
removes the flexibility of providers to innovate. This
destroys the dynamic efficiency benefits of markets to try
new approaches and learn more effective ways to do
things.
The tension between short-term contracts offering highly
competitive tendering, and longer-term ones providing strong
investment incentives is almost certainly an insurmountable
trade-off, since the contractual security required for investment is
inherently anti-competitive. The announcement earlier this year
by Lord Adonis, until recently the Secretary of State for Transport,
that rail franchises would be extended to run for 10 years is an
admission that the last round of contracts placed too much
emphasis on competition and not enough on investment
incentives.9
However, the focus on defining processes does not simply
restrict the scope and remove the incentives for providers to
innovate. It also leaves decisions about what constitutes an
effective public service to those furthest away from service users:
policymakers. Nevertheless, despite the information problems
associated with this approach, the reasons for the re-imposition
of Whitehall control in this way are clear. Accountability for
public money necessitates that the centre should dictate what
happens with the money. Or does it?
OUTCOME-BASED COMMISSIONING
Outcome-based commissioning is characterised as a shift from
government paying delivery partners for the processes they
complete (regardless of whether they constitute a good use of
9 Pickard , J . and Pl immer, G. ‘Adonis t r ies to l ock in t ra in operato rs ’ F inanc ia l T imes , 20 January 2010
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public money), to one where it pays for the achievement of
desired outcomes. An area of policy in which this approach is
increasingly being deployed across the world is that of welfare
reform. Under outcome-based employment services, providers
are paid by the state for getting people into work and keeping
them there. This represents a radical shift from previous systems,
which often paid contractors for delivering processes, such as
basic skills training classes for jobseekers.
Where providers are paid for achieving good outcomes, this
approach has two key benefits. First, when combined with
payment by results, it offers a mechanism to leverage private
investment into public services, on the promise that investors will
see a return if outcomes improve – paid for by reduced public
spending in the area. Public spending cuts over the coming
decade will make ‘spend to save’ reforms impossible to fund
unless they draw on private investment in this way. There is
consequently huge potential to use this approach to enable
private finance to step in as the public sector retrenches.
Second, it removes the need for Whitehall policymakers to try
to learn solutions to increasingly difficult problems through
analytical work, such as what interventions are successful at
getting people into employment. Instead, that job and the risks
that go with it can be handed to market participants to find out
what works on the ground.
In recent times, government has increasingly recognised that
outcomes for users can be improved when contractors are able
to innovate in achieving defined goals. In 2007 the Treasury
noted that a good procuring authority should consider using an
outcome based specification, to give suppliers, who know more
about their business than potential buyers, more scope to
provide “innovative solutions to solve the underlying problem
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the procurement is designed to deal with, rather than deciding
what the precise solution should be at the outset.”
By only paying providers for getting results, and freeing them
up to think creatively about how to achieve them, outcome
commissioning offers the possibility of the central financial
accountability and front line flexibility. In making that shift,
outcome commissioning offers three benefits over standard
contracting, which directly address the three ways in which the
consumer approach breaks down.
Agency problems
Since, under payment by results, government pays a third party
for the achievement of socially desirable results, there is no
longer any concern that the individual will use resources in a way
that does not benefit other stakeholders. Hence the agency
problems associated with the consumer model are overcome.
Second, providers are free to use their understanding from
engagement with users to tailor services more closely to
individual need. This is not simply a question of allocating
spending effectively. Strong incentives to achieve results,
combined with process flexibility, encourages front-line staff to
maximise the engagement of service users in achieving the
desired outcome. In services where co-production is the key to
good results, far from displacing service user engagement, outcome
commissioning provides an environment in which it can be fostered.
In addition to addressing the agency problems that can
frustrate the consumer approach, outcome commissioning can
also solve another agency problem: that of government. By
requiring government clearly to stipulate the results it seeks for a
given public service, outcome commissioning can drive a much
clearer democratic discussion about public services than is
possible under either a bureaucratic delivery model or a
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contractor model in which processes are agreed but outcomes
ignored.
This has particularly been evident in the debate over ’cream-
skimming’ of easier clients and ‘parking’ or ignoring of harder-to-
help people in employment services. Recent evidence of this
behaviour by private contractors on the Pathways to Work
programme has caused concern.10 In reality, the transparency that
contracting has brought has revealed a problem that has long
existed under state-delivered employment services – that
policymakers continue to direct resources towards those who can
be found work with the least money. That transparency of
outcome commissioning has stimulated a useful debate around
whether that is a desirable or cost-effective thing.
Information problems
Under the consumer model, the infrequency or complexity of the
choices being made by citizens sometimes mean that they have
insufficient information about what kinds of services represent
good value for money. For example, an unemployed person may
never or only rarely have experienced unemployment before and
hence be unsure either of the best way to find work, or of where
to find the services they need. Such information problems can
prevent a market from functioning effectively.
Under an outcome commissioning model, service users can
be guided by commissioners acting to bring together the
necessary services and advise jobseekers of effective strategies
for finding work. Commissioners’ relentless focus on what works
to get people into employment aggregates the experiences of
many jobseekers allowing others to benefit from that
information, in a way they could not on their own.
10 Maria Hudson , et a l , “The in f luence of outcome-based contract ing on provider- led pathways to
work” , Research Report No 638 (London : DWP, 2010) .
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Co-ordination problems
The final stumbling block for the consumer model, identified in
Chapter 3, was that of co-ordination problems. Related to the
information solution described above, outcome commissioning
allows for the necessary level of service coordination without
compromising the service-user focus of delivery.
DOES IT WORK?
Although measuring outcomes is still a fairly new phenomenon
across much of public service delivery, there are some areas in
which it has been attempted as a way to improve accountability.
On example is in children’s services.
Outcomes-based accountability to improve the well-being of children
An outcomes-based approach to improving children’s well-being
- known in the sector as Outcomes-Based Accountability (OBA) -
has been introduced in over 40 states in the US and in Australia,
Holland, Ireland, Norway and Chile. With the publication of Every
Child Matters: Change for Children in 2004 the focus of service
planning for children and families in England has also shifted to
achieving outcomes as opposed to service outputs.
Put simply, outcomes based accountability in the children’s
sector is about clearly setting out the overall outcomes being
strived for, and determining what quantifiable improvements in
children’s welfare and well-being would be required to achieve
these improvements. It is about moving away from process
measures and delivery targets, and thinking instead about results.
Outcome-based accountability uses clear language and is based
around three common sense performance measures: “How much
did we do? How well did we do it? And is anyone better off?”
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A study commissioned by the Improvement and Development
Agency for Local Government (IDeA) examined the early impact
of outcome-based accountability and the extent to which it has
contributed to changes in culture, planning and accountability.11
The study selected five organisations (Cheshire County Council,
North Lincolnshire Council, Portsmouth City Council, the borough
of Telford and Wrekin, and NCH – The Children’s Charity) all of
which were in the process of applying the ideas of OBA.
The study found that the introduction of OBA improved
partnership working as different agencies began to work to a
common purpose - improving selected outcomes for children,
families and communities. The clarity of the language used and
logical process involved in OBA, coupled with the focus on
achieving measurable outcomes, led to a greater sense of shared
responsibilities. A cultural shift occurred with the development of
a sense of shared ownership of problems and a willingness to
pool resources.
The study also found that the introduction of OBA improved
accountability and clarity, as the goal of delivering improved
outcomes meant that every intervention had to be shown to be
effective. The study revealed that all of the respondents had a
“remarkably clear understanding of the importance of gathering
data to underpin decision making”. While the five organisations
were at different stages in their implementation of OBA the study
commented that all of the organisations were “moving towards
better and more systemic ways of working as well as developing
more accurate awareness of whether services are making a
difference to the lives of children, families and communities”.
Outcome-based payment in welfare-to-work
11 Col lete McAuley and Dan iel C leaver , Improv ing serv ice de l i ve ry – in troducing outcomes-based
accountabi l i ty (London : IDeA , 2006) .
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Coupling outcomes with a system of payment by results and
competitive tendering is an even more powerful way of ensuring
accountability. Outcome-based payments have been successfully
used in a number of countries to improve the way unemployed
people are helped back into work. In 1998 the Australian
government set up ‘Job Network’, one of the first comprehensive
attempts to apply market mechanisms to the provision of
subsidised employment services. Under this system private sector
organisations were free to bid to provide Job Network services
and were rewarded for the employment outcomes they achieved
for jobseekers. For example, a provider received outcome
payments of over $6,600 if it successfully found a job that lasted
at least 26 weeks for a job seeker who had been unemployed for
3 years or more.
An assessment of the scheme by the Productivity Commission
found that the outcome orientation ensured that the objectives
were clear, that there were strong incentives for finding better
ways of achieving job outcomes, and that cost efficiency was
encouraged. The Commission concluded that in Job Network’s
first year, the job outcome performance was similar to the
previous state-run model. However, with the flexibility to tailor
their help to jobseekers, contractors delivered the same rate of
job outcomes at significantly lower cost while also achieving
greater satisfaction levels from jobseekers and employers.12 In
particular, the Intensive Assistance programme specifically
targeted at harder-to-help jobseekers was estimated to have
lowered the cost per employment outcome dramatically: it fell
from AUS$12,100 in 1995-96 to AUS$5,440 in 2000-01 – a real-
terms fall of 58.9%.13 The Commission also predicted that
12 Organ isat ion for Cooperat ion and Development , “ Innovat ions in labour market pol ic ies : The
Austra l ian way” (Par i s : OECD, 2001) , 20. Product iv i ty Commiss ion , “ Independent rev iew of the job
network (Melbourne : Commonwealth of Austra l ia , 2002) .
13 Sal ly Cowl ing and Wi l l iam F . Mi tchel l , “ Fa lse p romise or fa lse p remise? Evaluat ing the job network” ,
Austra l ian Journal o f Labour Economics 6 : 2 ( 2003) .
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outcomes would be likely to improve over time as poorer
performing Job Network providers exited and as providers
learned what works best.
In the UK the 2007 Freud Review14 noted the success of
programmes that have used outcome-based targets: the
Pathways to Work pilots supported those on Incapacity Benefits
through ongoing mandatory contact with highly skilled
providers, who were able to provide quality employment, health
and financial support. Compared to non-Pathways areas, these
pilots led to an eight percentage point increase in the rate at
which people left Incapacity Benefit.
Likewise Employment Zones (EZ), where the long-term
unemployed are referred to private providers for 30 weeks, paid
contractors according to how many people found work. Providers
were paid more the quicker they got people into jobs.
Evaluations show that the EZ areas outperformed New Deal
comparison areas in term of job-starts, although satisfaction with
the jobs found and subsequent job retention was lower in the EZ
areas.15
These examples highlight the power outcome-based
commissioning to achieve the specified goals. Ongoing debates
around exactly what outcomes should be required – particularly
over the definition of sustained employment - demonstrate the
policy clarity that the approach can bring, as well as the
complexities of defining the desirable results of a public service.
14 David Freud, “Reducing dependency, increas ing opportun i ty : opt ions for the futu re of wel fa re to
work . An independent rev iew to the Department for Work and Pens ions” , (London : HMSO, 2007) .
15 Jon Hales et a l , “Evalua t ion of employment zones” , (London : Nat ional Centre for Soc ia l Research ,
2003) .
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AVOIDING THE PITFALLS
Perhaps the most common objection to paying for outcomes is
that it can lead to ‘cream-skimming’. This is the situation where
service providers choose to focus on easier-to-help (and
therefore cheaper) service users and ignore the more expensive
ones. Where a uniform level of outcome payment is offered,
private contractors would not be acting in their shareholders’
interests to do anything else. It is important to note, however,
that this is not a phenomenon that is absent in the state sector.
Indeed the present welfare-to-work regime in the UK is entirely
designed to minimising costs by encouraging the easier clients
to move back to work quickly and leaving the hardest-to-help
jobseekers without support until later in their claim. Pressure to
minimise the costs of the system and reduce the numbers
claiming Jobseeker’s Allowance make this approach inevitable.
Nevertheless, in the private sector, the problem of cream-
skimming behaviour is one that stems from the payment
structure offered to contractors. However, it is not intrinsic to the
outcome payment approach and can easily be avoided if it is
deemed to be undesirable by policymakers.
One alternative to fixed uniform payments for outcomes is for
government departments to undertake statistical profiling of
service user in order to assess how costs vary with user
characteristics. This information can then be used to guide the
outcome payments offered. However, statistical profiling runs the
risk of simply hiding rather than eradicating the tendency to pick
easier clients and ignore harder ones. Observable characteristics
used in profiling, such as education level or age, are only partially
predictive of how easy someone will be to stop re-offending or
find work. Other unobservable characteristics, such as the
motivation of the service user, are at least as important in
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determining the costs associated with the person when co-
production is an important element of service provision. Where
contractors are able to assess clients at first hand, the
information asymmetry with commissioners in government
departments can mean that parking remains but slips under the
radar.
A more effective alternative to uniform payments involves
deploying a graduated payment structure, sometimes known as
an escalator payment. This offers an increasing payment per
outcome as providers help a higher and higher proportion of
their clients to achieve the success outcome. Establishing a
payment schedule that saves the exchequer money, while
enabling providers to help more people, is a complicated
problem. It requires solid data and rigorous data analysis, but is
feasible in most cases.
EXPANDING PAYMENT FOR OUTCOMES
Given the potential for outcome-based commissioning to cut
costs and sharpen the focus of contractors on achieving the
desired outcome, what areas of public service delivery might
benefit from such an approach?
· Reducing re-offending . As the SMF argued in a recent
paper on this subject payments for reducing recidivism
among low-tariff offenders has the potential to join up
complicated and disparate service delivery strands.16 The
challenge here will be to ensure that contractors have
sufficient control over the pre- and post-release
environments of prisoners to be willing to assume the
risks of payment by results. The coalition government
16 Ian Mulhei rn , et a l , Pr i son break (London : Soc ia l Market Foundat ion , 2010) .
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plans similar reforms for post-release services as part of
it’s planned ‘rehabilitation revolution’.
· Skills. It has long been argued that the focus on outputs
in this policy area – such as the number of people with a
Level 2 qualification - has led to a rapid increase in the
number of people winning qualifications with little
apparent impact on the outcomes that policy might seek
to achieve, such as higher-skilled employment,
progression in work or retention of employment. This
could be changed by deploying a payment by results
framework where FE colleges and other providers are paid
for delivering measurable improvements in a student’s
subsequent productivity. The challenge here is to
establish a viable proxy, such as pay and progression. The
danger, however, is that these outcomes can be ‘gamed’
to make progression appear to have occurred.
· Welfare to work . The SMF has consistently argued for
expansion of payment by results to include all jobseekers
from the first day of their unemployment benefit claim.17
Doing so would release the full benefits of access of
frontline providers to information about jobseekers,
rather than requiring them to go through a rigid, centrally
determined system.
THE LIMITS TO OUTCOME-BASED COMMISSIONING
Despite the potential of outcome commissioning to drive
cheaper, more responsive and more effective public services, this
approach, as with the consumer model, is no panacea. There are
reasons why paying for outcomes, in particular can fail. The three
common ones are as follows.
17 Ian Mulhei rn et a l , Vicious cycles (London : Soc ia l Market Foundat ion , 2009) .
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· Measuring success: where simple, measurable metrics of
success do not exist it is difficult to tie payments to good
outcomes.
· Accountability : where there are too many external
influences to reliably link provider interventions to
successful outcomes, accountability can be too weak to
allow payment by results.
· Time-frames: when outcomes lie too far in the future for
private investors to fund delivery, the approach will not
be viable.
1. Measuring success
One of the most pressing limitations to government paying
providers for outcomes is that of measurement. Some service
outcomes, such as stopping re-offending or finding work, are
more conducive to clear binary measures than others. Success in
other services is often more nebulous. For example, it would be
difficult to commission school provision on a simple payment-by-
results basis since ‘good’ school outcomes are often hard to
define and widely agreed to be much broader than simply exam
success. Developing good measures of ‘soft’ or more subjective
data is difficult and expensive, if accuracy and reliability are to be
achieved.
At a more subtle level, even where there are binary measures
of success, it is not always easy to capture them. For example, it
is impossible for the state to observe someone’s actual re-
offending rate: it must instead rely on their reconviction rate to
judge success.
Finally, when paying for results, there are often risks for
government around defining what constitutes success. The
starting point for government is to establish a baseline
counterfactual: what would have happened in the absence of the
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contractor’s efforts? In many cases this is no small undertaking
and requires careful analysis, as explained above. But once the
counterfactual has been established, performance above or
below the benchmark may not constitute success of failure for
two reasons: first, external changes to the environment might
alter the counterfactual, for example a recession reducing the
rate at which people can find work; second, changing case mix
can make it either easier or harder for providers to hit their
targets.
2. Accountability
Clear accountability is essential if outcome commissioning is
effective. This means that unless providers are sufficiently in
control of the processes that lead to good or bad results, they
cannot reasonably be rewarded or penalised for failing to attain
them. Ultimately this means that paying for outcomes can only
be viable for broad policy outcomes and where contractors have
sufficient control of the environment that generates good or bad
outcomes. For example, a basic skills training provider cannot be
effectively paid by results when their clients find employment,
since there are too many other contributory factors in achieving
employment over which the trainer has no control. In areas of
policy where a focus on simple and broad outcomes is
inappropriate, outcome commissioning is likely to be
unworkable.
3. Time-frames
The final category of problems for outcome commissioning in
which providers are paid by results relates to the time-frame for
payment. Since the approach relies on leveraging private finance
into public service delivery, the length of time until results are
seen, and hence payments made, determines whether the
approach is viable. This means that paying for good adult
outcomes, on whatever measure, for children in care (for
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example) would involve a very long wait until pay-day for
investors in the care system.
WHAT CAN POLICYMAKERS DO IN THE FACE OF THESE
FAILURES?
Proxies for success
There are a number of ways in which the measurement and
timeframe problems can be tackled. However, the ever-present
risk is that the apparent solution represents payment for partial
outcomes, or a return to paying for the achievement of process
targets, rather than real, desirable and comprehensive outcomes.
For example, in healthcare, patient-reported outcome
measures (PROMS) are collected to help inform patients’ choices
regarding acute services. Patient perceptions of their own
experience are one part of a successful health outcome. But were
they to form the basis of financial reward for providers, they
would likely skew the focus of health services away from a clinical
definition of a good outcome – perhaps nebulous and vague –
and presumably resulting in poorer clinical outcomes. Outcome
proxies must therefore be carefully considered if they are to
avoid perverse results.
Interim process targets, such as the ‘distance travelled’
towards employment, are often proposed as viable outcome
proxies. By this approach providers are rewarded for helping
people, even if the ultimate outcome goal is not met. However,
policymakers should be wary of such solutions. By removing the
focus from outcomes, such proxies slip back to paying for the
achievement of process targets, such as the completion of a basic
skills course, instead of that of entering work. This is unlikely to
lead to more cost-effective service provision overall because it
removes the scope for innovation and the incentives for
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achieving what really matters: good outcomes. Moreover, interim
targets should be unnecessary since providers who are good at
moving people towards employment should, in aggregate, also
prove effective at getting their clients into work.
Driving accountability through the system
Where accountability problems currently make paying on
outcomes unworkable, it is sometimes possible to re-organise
service delivery to drive better accountability. For example, the
idea of paying prison governors for reducing the recidivism rates
of inmates is problematic since they do not have control of the
huge range of other public services that we know are integral to
reducing re-offending. Instead, were contractors to be in charge
of incarceration, health, re-settlement and employment of ex-
offenders, they could be reasonably held to account for the re-
offending outcomes achieved, since they control so many of the
factors that we know influence subsequent behaviour.18
But in some cases, particularly where hard outcomes are
difficult to define, outcome based commissioning, and payment
by results in particular, are less useful. At that point policymakers
must return to consider the range of policy delivery mechanisms
that are available when markets are either weak or entirely
absent.
18 Mulhei rn et a l , P r i son Break.
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CHAPTER 5: WEAK OR ABSENT MARKETS
The last two chapters have outlined two powerful market
mechanisms for driving more cost-effective public service
delivery over the next decade. There is scope for significant
expansion of these tools over the coming decade to improve
service delivery and reduce costs. But as has been explained the
appropriateness of the consumer model or the outcome-based
commissioning model of public service delivery depend crucially
on the nature of the service in question. Where the outcome
commissioning model fails – either for measurability,
accountability or time-frame reasons – it is necessary to consider
what options remain for policymakers in environments where
only weak market mechanisms are available. This chapter
therefore concludes with a consideration of the options available
to policymakers to drive performance in environments where the
benefits of markets are difficult or impossible to realise.
WEAK MARKETS
Despite the potential of more market-based delivery to drive
public service productivity over the coming decade, there are
many types of public services that diverge significantly from the
perfectly competitive ideal. The consumer approach and
outcome-based commissioning are not appropriate delivery
mechanisms in all cases. Policymakers should be wary of
structures that may superficially resemble markets but do not
provide the pluralistic and competitive environment that is
needed to deliver static and dynamic efficiency improvements.
Where a given service diverges so much from resembling a
market, neither the ultimate service user, nor the government
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acting on users’ behalves, has the power to enforce competitive
market conditions on producers.
This can occur where high levels of up-front investment are
required, as with public utilities. This makes it difficult for
government to maintain competitive pressure on providers
through re-tendering while still making the contracts sufficiently
long in duration to be attractive to investors.
It can also occur when the individual consumer model fails,
for the reasons outlined in Chapter 2, and where outcomes are
too nebulous or far off in the future to deliver through a payment
by results framework. One example of such a service might be
children’s care services. Here, individual choice is clearly
unworkable, but ‘good outcomes’ are both multifaceted and,
even when measurable, are only evident after many years.
Where markets are weak or absent from public service
delivery for reasons such as these, it becomes necessary to re-
consider the other two means of public service delivery:
command and control, and trust models. New thinking in both
areas has led to some interesting policy ideas in each delivery
approach. How do these compare to market approaches and
when might policymakers use them?
CENTRAL CONTROL AND THE ROLE OF ENTITLEMENTS
The absence of effective market mechanisms creates problems
for driving responsiveness, and therefore cost-effectiveness, in
public services. Trust in professional delivery reinforces the gift
model of public services. Putting decisions in the hands of
producers, however well-intentioned, is unlikely to enhance the
responsiveness and innovation of public services.
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Performance management and centrally-imposed targets will
remain an essential part of public service delivery in some areas
where markets are absent. However, the top-down nature of
these approaches makes them particularly blunt tools for
improving service responsiveness. Nevertheless, some innovative
recent thinking has sought to explore the possibility of
augmenting targets, set and monitored in Whitehall, with forms
of bottom-up monitoring by service users.
Liam Byrne, until recently the minister in charge of public
service reform, recently declared that the Government is
“developing a strategy that takes public services away from a
target culture” instead “giving people rights and entitlement to
core public services." It is argued that, where possible, rights will
replace targets.
The recent Cabinet Office paper Putting the Frontline First set
out citizen entitlements such as the right to be treated within 18
weeks, and seen within two weeks, for urgent cancer referrals.19 In
education policy, the September Guarantee for 16 and 17 year-
old school leavers entitles them to a guaranteed place in
education or training. All of these measures aim to clarify what
citizens can expect from their public services and hence
strengthen their voice in dealing with providers from either the
public, private or third sectors.
It remains to be seen how effective the entitlements agenda
will be in increasing responsiveness and public service efficiency,
and indeed whether the new government will pursue this
approach at all. But the principle of bottom-up enforcement of
service guarantees may be a promising way to augment central
control where real market mechanisms are absent or weak. In an
era of public spending cuts, such entitlements may be effective
19 HM Government , Putt ing the f ront l ine f i r s t : smarte r government (London : HMSO, 2010) .
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in safeguarding minimum standards, reducing the variability of
performance, if nothing else.
TRUST AND MUTUALS
Recently the two main parties have both explored the idea of
empowering producers and consumers of public services by
setting up cooperatives. The Conservative party has advocated
the idea of giving professional groupings the opportunity to
deploy their frontline knowledge and assume responsibility for
service delivery. On the face of it, at least, the mutuals idea is
essentially a trust model, in which power is handed to the front
line professionals who are deemed to know best how to use
scarce resources.
The mutual model has some advantages over both command-
and-control and contacted-out delivery models. In situations
where services are so complex that either users or commissioners
are unable to be able to specify exactly what services they need,
professionals are arguably in a better position to determine the
allocation of resources at the front line than are distant public
sector managers.
Compared to a contracting out model, mutuals might have
the advantage of being mission rather than profit driven,
reducing the risk that providers will simply work to the letter
rather than the spirit of the contract with commissioners.
However, the mutual model may prove unstable in practice.
While it is often the case that those closest to service users
understand their needs, that does not mean that providers are
unstintingly pursue those needs, for the same reasons outlined in
Chapter 2. Where the interests of providers to not coincide with
those of service users, and without a choice framework in place,
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dissatisfaction with services will inevitably default to
democratically accountable ministers. The result is likely to be a
return to centralised control.
Where mutuals do underperform, central government has
another alternative to taking service delivery back in house: it
could put the contract out to tender. Indeed, opponents of the
Conservatives’ plans for mutuals have argued that mutualisation
will be a Trojan horse for further contracting out. Insofar as
mutuals can be made to be more responsive to users’ needs
through the threat of putting their contracts out to tender, this is
a good idea.
So while the mutuals approach appears at first as a trust
model of delivery, mutual providers seems likely to come under
pressure from either the threat of competitive tender or a return
to in-house control by public providers.
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CONCLUSIONS
Over the next decade we are likely to see a radical public service
reform agenda develop. As this essay has argued, the approach of
policymakers should be a sceptically pro-market one in which the
primary tool for delivery is choice and competition. Markets offer
improvements in the cost-effectiveness of public services, as they
force providers to respond to the needs of users. Competition
boosts the chances of new innovations to further improve service
quality and cost-effectiveness over time.
There are numerous forms that public service reform can take.
But the starting point must be the individual service user,
through vehicles such as individual budgets and choice. A policy
framework that starts with the user would represent a revolution
in thinking from the Beveridgean model that has continued to
dominate service delivery despite the reforms of the past two
decades.
Where the consumer model breaks down, as it does in many
public services, establishing and contracting for outcomes
presents a good second best market solution to commissioning
in a range of public services. Thus far the approach has only been
deployed in welfare reform, and even here only to a limited
degree. The approach should be extended, and other policy areas
can learn much from government’s recent experience to widen
the application of this commissioning approach.
Where individual control is inappropriate and commissioning
for outcomes is difficult, policymakers following the market
approach are left with the option of weaker market mechanisms
of contracted out provision. In these settings information
asymmetries and the need for high levels of investment in some
services further curtail competitive pressures that are the
desirable characteristics of any reform. At this point policymakers
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must compare the three delivery routes: would producer-led
service delivery, or command and control be more effective than
contracted out provision? Where competitive pressures are very
weak, there is no a priori reason to imagine that private sector
provision is superior to public or third sector delivery. The
decision must rest on the nature of the service and where the
information asymmetries are least severe.
Radical thinking will be required to get more for less from
public services over the coming decade. But the ad hoc way in
which market-based reforms have occurred in the past must be
replaced by a systematic rethink of how services are delivered
across the board. Different areas of government have much to
learn from each other, but they will only be able to do so once
they think about service delivery in the same way. This essay has
set out a framework to allow just that.
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Copyright © The Social Market Foundation, 2010
Social Market Foundation
11 Tufton Street | Westminster | London SW1P 3QB
Phone: 020 7222 7060 | Fax: 020 7222 0310
www.smf.co.uk
Public service reform has been on the agenda for years. But in the
times of plenty, it has lacked the urgency or coherence that today’s
fiscal situation demands. This paper argues that a market-based
approach to public service delivery is the basis for public service
effectiveness and efficiency over the coming decade. The fitful
progress towards greater market-based provision has been
piecemeal and lacked a coherent framework to help policymakers to
think through the benefits and the pitfalls of different approaches.
This paper sets out such a framework to help policymakers navigate
the baffling array of commissioning approaches in the delivery of
public services to achieve more for less in the lean times ahead.