This is the fifth 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.
3 Perspectives of PbR risk
In this series we have treated the new risks that arise with the trend towards PbR commissioning.
This final post will summarise the thoughts from the perspectives of the three stakeholder groups that we work with:
- Delivery organisations,
- Commissioners and
The overriding message is that successful contracting/ commissioning/ investing requires an understanding of the perspectives – not least with regards to risk – of the other parties of any delivery partnership. Transparency and effective communication during negotiation and delivery is a key success factor.
Underestimating the risks associated with traditional service contracts, let alone PbR contracts, is very easy to do.
The pressure to secure contracts can be so intense that risk assessments turn into a box ticking exercise, if they happen at all.
Here are some of the top risks to watch out for in my opinion (please share your own experience in the comments section if you have anything to add or disagree):
- Referrals: If you do not control the user numbers signing up to your programme you should have contingency plans for a wide range of referral numbers.
- Performance Uncertainty: How sensitive is your delivery plan to variations in effectiveness of your intervention in generating outcomes? What if outcomes take longer to come through?
- Contract detail: What responsibilities are you taking on beyond generating outcomes? Make sure you understand any TUPE terms included in the contract.
- Macroeconomic factors: How is your programme affected by a tanking economy or increased inflation?
Commissioners generally have a lower cost of capital than delivery organisations and therefore should think carefully before transferring any risk.
Ideally risks should only be transferred when the delivery organisation has the power to control that risk and therefore act as a driver to service improvement.
Here are a couple of pointers from a commissioning perspective:
- Transparency: Particularly smaller organisations can find it tough to breakdown and price risk and therefore the more that commissioners can make risks explicit the easier it is for delivery organisations to respond positively them.
- The trade-off between a safe pair of hands vs the innovator: the point of PbR commissioning is to stimulate innovation, but commissioning a solid, national delivery partner offers peace of mind.
While this stakeholder group is “optional” in contract delivery, investors must play an increasing part in financing service contracts if smaller organisations are to stand a chance.
So far the unproven contract structures have frightened off all but the most committed philanthropic investors who have shouldered significant financial risk to stimulate this part of the social investment market by investing in the first social impact bonds.
To attract capital from less charitable sources, financial risk has to be quantified, mitigated or shared with the commissioner. Here are some things that can be done:
- Guaranteed minimum return: The fact that investors can lose 100% of their capital on many of the structures is an immediate turn-off. A shared risk approach will attract a more diverse investor base.
- Build a proxy track record: Any delivery organisation bidding for service contracts must show experience in delivering comparable services. With a good track record in similar services backed up by the data to make statistically sound performance estimates, a reasonable investment case can be made – a key benefit of collecting data as part of service delivery.
- Wait 10 years: When sufficient contracts have been delivered, all the early mistakes have been made and a track record for PbR contracts as an asset class is beginning to emerge, more conservative investors might join the fray. This may however be too late for many small organisations who might not have been able to attract capital during that time.
We will be contributing further to this blog in the coming months with posts on topics related to PbR risk, finance and information systems.
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