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Developing resources to help providers manage risk in payment by results contracts

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This is the third 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.

What needs to happen at the sector level to ensure that SMEs, Social Enterprises and Charities are able to deal with PbR risk?

PbR is here to stay and SMEs and Social Organisations are well practised at versatility will therefore develop and adapt to new ways of working.

However there are already things happening at the Public Service Delivery sector level and further steps that could be taken to support that change ensuring that skills are not lost and valuable services are not interrupted through organisational failure.

The biggest factors that will help organisations deal with the risks that are raised by the increased use of PbR in commissioning are fairly straight-forward. It’s about building experience, a common language and developing a less polarized debate about its pros and cons.

 There are a number of initiatives driven by central government to improve the Social sector’s ability to access public sector contracts, such as the Investment and Contract Readiness Fund, Results Fund and Public Services (Social Value) Act but less action on supporting the wider Delivery sector in dealing with the changes. We feel that the following additional resources need to be developed in response to this:

 Shared resource platforms

The Cabinet Office is leading efforts within Government to research and disseminate knowledge about PbR commissioning and Social Impact Bonds (SIBs). While the resources created are publicly available and very useful to potential bidders as well, they do focus on the commissioning perspective. There are resources available from the delivery perspective, but a more concerted dissemination of best-practice would help delivery organisations avoid the most common pitfalls.

There are a number of great online resources filling this role; obviously Russell Webster’s but also NCVO, Cabinet Office and Social Finance. We would be grateful if you could let us know if you are aware of any others – we will publish the results on this web-site.

Commissioners’ role

Much of the risk in PbR is generic to all providers and therefore makes sense to be done at the commissioning level. We would like to see risk packs being issued as part of the commissioning process which would assist bidders in identifying and quantifying risks in the modelling process.

By having this as a rolling log it might also prompt commissioners to consider all of the risks in the assessment and structuring process. These should not only point out risks but give a sense of the magnitude from the commissioner’s perspective.

Support to PbR investors

Social investment structures such as social impact bonds are seen as a promising mechanism allowing voluntary sector to play an active role in PbR delivery. Whilst these are exciting developments and bring a lot of welcome interest, so far they are fairly niche and expensive structures and are not bringing capital to SMEs who face the many of the same issues as charities and social enterprises.

One of the commonly cited benefits is the involvement of “intelligent investors”, who can add commercial rigour to a contract delivery partnership.

While there is some evidence of this in the early social impact bonds, there is still little incentive for investors to develop the specialist knowledge to play in this market and so far mainly philanthropic investors are using it as an alternative to grant giving.

To broaden the spectrum of investors and investees, better analytical tools are needed to inform them of the risk-return characteristics of PbR investments.


Risk bullfight


Scalable solutions

Structuring a PbR contract appropriately can be expensive and require substantial analysis and involvement by investors, intermediaries and delivery organisations.

This inflates service costs or eliminates investment returns.

Developing a common language, finding effective, low-cost contracting models, building scalable infrastructure systems and replicating all these across different sectors and geographies will help keep the cost of additional analytical and monitoring requirements down.

Pooled data resources

Many of the factors driving intervention outcomes are poorly understood.

This is one of the reasons PbR is seen as a way to stimulate innovation and improve standards. To accelerate this process of learning by trial and error, more data should be captured and shared between delivery organisations to enable research and improve interventions.

This is an area of significant change that is fundamental to PbR and therefore something that we spend a lot of our energy focusing on and will write more on.


It is no news that organisations have to work in partnership to be able to access larger government contracts. One of the strengths of many organisations is that they have experience of working in consortia or supply chains and strong relationships with fellow delivery partners.

This is also highly relevant to PbR contracts, as sharing risk and resources can make a group of organisations much more attractive to commissioners and investors. Perhaps the many umbrella and support organisations could pool their efforts and build on the work the Cabinet Office is doing to create a resource for delivery organisations.

Final word

In order for PbR to work there needs to be the greatest level of transparency on the risks involved in each contract allowing each party to accept the risk that they understand best or have the greatest ability to control whether that be the commissioner, the delivery organisation or the investor.

Any tools, platforms and education that contribute to greater transparency will drive down cost and increase organisational resilience.


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Payment by Results
Complexity and transparency: Thoughts on the MoJ Straw Man Payment Mechanism

It’s great to be able to engage in the development of the MoJ’s proposed payment mechanism. However, the first thing that struck me was its complexity. Clearly a great effort has been made to design a mechanism that creates the right incentives to develop innovative ways to reduce reoffending. Will it be sufficiently transparent to stimulate the wide range of providers needed achieve real innovation or does it favour those with the deepest pockets, who can afford to do the detailed analysis necessary to truly understand the risks inherent in such rehabilitation contracts?

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