This is the second in a short series of posts by Richard Butler and his colleague Holger Westphely from Aylesbury Partnerships on managing risk in payment by results contracts.
Managing PbR contract risk
In our last post our focus was the importance of getting to grips with risk, here we start to look at what organisations need to do to effectively manage PbR risk.
The risks we focus on are those affecting the financial health of delivery organisations.
PbR commissioning introduces a series of such business risks, requiring changes in the way organisations manage their contracts.
We are well aware that there are other risks introduced as a consequence of more general changes proposed by the government. They may affect the intervention and the individuals involved, and are therefore of great importance to the debate. For the purpose of this blog series, we will only treat them insofar as they affect the financial viability of delivery organisations, as that is our expertise.
Analyse
Take your time to understand the dynamics of the contract. It is not uncommon for delivery organisations, especially those subcontracting, to see no revenue at all from a PbR contract. Successful organisations assess these scenarios and develop strategies to mitigate or prevent them.
A good financial model is fundamental to understanding PbR contracts because it enables organisations to look at a variety of scenarios and quantify the impact.
It is not enough to create scenarios by arbitrarily scaling up and down the assumptions. Only careful consideration of each scenario and an estimate of its probability of occurrence will allow you to appraise the contract as an investment.
The process of analysis itself, as well as the results, will help you gain a much deeper understanding. It can also highlight flaws in the contract, such as potential for “cherry picking”, which should be addressed by the commissioner.
Negotiate
When you are confident that you have understood what you need to understand about your PbR contract, you can conduct effective negotiations with your partners and the commissioner.
You should never agree to take on risks that you don’t understand or that your organisation cannot afford or manage.
Your revenues should be linked to risks that you have control over (such as intervention performance or marketing) but often there are partner risks and external risks that also affect you.
It is important for you to understand the impact on your organisation if your partner under- or outperforms.
There is also a question of incentive – do you benefit when your partner does or is there a conflict of interest?
Contract negotiations can be great opportunities for risk management.
Measure
Revenue from a PbR programme depends on your organisation’s delivery performance.
To manage this effectively, organisations must be able to track progression in a timely and accurate manner.
Especially in PbR contracts where outcomes are not likely to materialise during the first year of delivery, monitoring intermediate measures of success is the only way to alert project managers when targets are being missed.
If identified over a year into the contract, performance problems are often irreversible.
The value of the data you have (or could have) collected on past contracts often becomes apparent when bidding for PbR contracts.
This is a good opportunity to produce a wish-list of evidence that you would like to have at your disposal the next time you bid for a similar contract and that you can obtain by monitoring your own activities more closely.
Of course it is not simple to record detailed information without affecting the relationship with your users, increasing the admin burden for your staff and investing in IT infrastructure.
Tools and processes for data collection often require careful and creative thought. However, a strategic data policy can:
- Help you understand your intervention better, which can lead to better performance management and continuous improvements to intervention design
- Improve your bid performance by providing concrete evidence of your success
- Improve your ability to attract investors, who tend to focus on well-documented and quantified business cases
- Help you measure and document your social impact, which in turn appeals to philanthropic funders
We will suggest a few ways to improve data collection in a later post in this series.
Consult
Analysis is no substitute for experience.
Consult with those who have witnessed the mistakes and their consequences to make sure you have considered all the risk factors and mitigation strategies that have worked in the past.
… and Measure again
PbR is an iterative process both at a strategic and commissioning level as well as at the delivery organisation and intervention level.
At the strategic level, the way in which it is employed will be developed over the next decade or so.
At the intervention level, success is dependent on continuing evolution.
The better the quality of the initial analysis the more useful the measurement will be in detecting issues early and enhancing the outcomes of the current and future contracts.
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