As the world reels from the economic crisis that began last autumn, the public sector sometimes seems like a safe shelter. Here, at least, employment is reasonably protected. Here, at least, money continues to flow. Here, at least, the squeeze now being felt by practically every private sector company is mercifully absent.
So goes the conventional wisdom. But don't you believe it. In the short term, public money may be flowing, but longer term, a menacing public sector deficit is going to have to be tackled. There is just one way to fill the black hole: to bring about major productivity improvements in the public sector. So November's pre-Budget report announced that the government's already ambitious targets for efficiency savings were to be further increased by £5bn a year. Since the report, the government's forecasts look optimistic and more cuts will be needed. Forget cosy images of bowlerhatted bureaucrats. Economies will be required.
A brighter future
As ever, restraint in public spending will not be easy. But the public sector, for all the improvements of recent years, can still be made to perform better. Public service reform, previously thought of as a wholly Blairite policy, will be central to any government trying to find a way out of present problems.
We need to seize chances now to put public services on a sounder footing for the future. More important still, it will save the services that the public still wants and values - albeit not always in their traditional forms.
Improvements can be made, and if something good can come out of the lean years ahead, it should be that the taxpayer gets a bigger bang for their reduced number of bucks. There is no single answer. But one tool for improvement which still has huge potential is smarter commissioning.
The Social Market Foundation has long argued about the potential for markets to improve our lives in general and public services in particular. Contestability and competition can improve efficiency. They stimulate innovation. They cut costs.
Since 1997, the Labour government has made significant progress in many areas of public policy. However, trying to drive increased productivity while the floodgates of public spending were open was always going to be a challenge. It was too easy to choose the soft option, so that the money flowed into unjustified pay increases or into keeping traditional models of public management afloat. The consequences for services were disguised, as the rising tide lifted even those boats with cracks in their hulls. The public spending squeeze makes smarter commissioning all the more urgent and unavoidable. Efficiency gains from reform will set the stage for the more productive use of public money on the economic upswing - whenever it comes.
Questions of market design
To procure good public services, one of the first challenges for policymakers is to understand the kind of market they need to create. Is the right approach to empower users to make their own choices in consumer-led markets? Or is a collective procurement-led approach appropriate? Too often, market-based reforms of public services have failed to appreciate the unique characteristics of the relevant market. When such mistakes lead to failure, they understandably arouse suspicion among citizens about the wider application of market mechanisms.
So what determines the right commissioning approach? The starting point must always be to ask how services can best be built around the user. That often means empowering the service user to choose between a range of competing service providers as with any consumer goods. Choice in public services can work well under two key conditions: that consumers are able to make informed choices; and that their choices do not create unintended consequences for other parties.
An example here is direct payments to certain social care clients. Under an Individual Budget pilot scheme, which ended in December 2007, individuals requiring care were given cash to buy the services they most value instead of being supplied with services they were deemed to need. This empowers the budget holder. It enables them to use each pound to best effect, as judged by themselves. It reduces bureaucracy by cutting out the need for a central body to aggregate and allocate the type and amount of services required.
Direct payments in social care have been a qualified success, particularly in improving outcomes among young people with physical disabilities and people with mental health problems.
Problems with consumer choice
However, it's less clear that ideas for individual budgets in welfare to work, for example, are a good way to achieve efficient employment services. Presumably, long-term unemployed people have not found it easy to get work. Whether they are best placed to design an effective back-to-work strategy is therefore doubtful. Furthermore, the consequences of their making a poor choice - for example, in attending a training course that does little to enhance their employability - rebound not only on the individual who fails to find work but on the taxpayer picking up the bill for ongoing support. In this kind of situation a procurement-led model is usually more appropriate for public service reform.
Outcome-based commissioning
The 'central planner turned central procurer' need not stifle the innovation and efficiency. Rather than negotiating with contractors about the minute detail of service provision, government can in many areas specify the ultimate goal of the service and pay contractors according to how well they achieve those goals. Measurable progress towards the intended ends means more money; failure means less.
The co-ordination between organisations that is necessary to deliver complicated services is notoriously difficult to achieve, as each organisation has a different focus and set of priorities. Through payment by results, the profit motive offers a viable way to align the incentives of all those in the 'supply chain' to deliver a joined-up service. This approach is particularly well-suited to areas where services to the citizen overlap.
Evidence from Australia on the money-saving potential of this approach to improving efficiency in welfare-to-work services is strong. Even in the early days of their new commissioning process, the costs associated with helping the toughest clients into work was shown to have fallen by more than one third, while maintaining the pre-existing rates of successful job placement. In the UK, a cross-party consensus now exists on payment by results in welfare-to-work. About time too, many will say; but equally, better late than never.
Problems of market design don't end once the decision to pay by results is made. Some of the problems associated with the Australian system have been avoided in the Department for Work and Pensions' commissioning strategy. But if the government and opposition parties want real value for money and fairness for service users, they need to think harder still about the perverse incentives that can occur in payment-by -results systems, and design them out.
There remain many other areas of public service delivery where outcomes can be sufficiently clearly specified to pay by results, but where this tool is currently not deployed. Offender management is one such example. Reoffending behaviour had been estimated to cost the taxpayer between £11bn and £15bn per year. But the complexities associated with joining up the necessary services to reduce reoffending are great. Outcome-based commissioning here has a clear potential to deliver innovative and cost-effective solutions. Reoffending will be reduced. The taxpayer saves substantial sums of money. And society has fewer active criminals.
When choice fails
Perhaps where it is most difficult for the government to get better value for money through market mechanisms is in areas that do not lend themselves to consumer choice and where good outcomes are simultaneously nebulous.
Take education. Citizens will have different views of the outcomes they want from schooling depending on their personal and political perspectives. Even where there is agreement, successful outcomes are difficult to define and even harder to measure. For example, ministers worry about the incentives created for schools by targets such as those regarding the proportion of pupils attaining five GCSE grades A* to C. Schools are effectively encouraged to focus their resources on pushing a student from a D to a C to get them over the A* to C line, rather than focusing on helping the best pupils excel or the worst improve. In short, commissioning on outcomes in environments where the desired outcome is hazy is problematic.
Choice is fraught with difficulty, too. Evidence from the UK about the impact of school choice on pupil outcomes is mixed. There is some evidence of polarisation of higher and lower-achieving students between schools in areas where school concentration is high and competition therefore strong.
In the end, the advantages of market mechanisms can, in some cases, be outweighed by other important considerations, such as equity. It may be that in these circumstances, incremental service quality improvement is the best we can hope for.
So in some cases the answer may be a model that is not very different from the traditional model. In other cases, smart commissioning can do the job. In other cases still, choice will be the solution. In the real world too, mixes of policies can be effective, which is why wise politicians and administrators avoid yes or no answers.
Interesting times
"May you live in interesting times," says the much-quoted Chinese proverb. The private sector already knows what a curse these interesting times can be. Similarly, in the public sector the process of change in general, and the advance of commissioning in particular, is going to make times interesting. It is not too much to hope, however, that the eventual outcome will be better services for users at less cost to taxpayers.
Lord Lipsey is Chairman and Ian Mulheirn is Director of the Social market Foundation. They are guest editors of this issue of Ethos.
CASE STUDY: INDIVIDUAL BUDGETS
Individual budgets (IBs) are part of the government's drive to personalise adult social care services (along with direct payments and personal budgets).
Thirteen pilot schemes run by councils across the country began in March 2005. Recently evaluated by a team from the Personal Social Services Research Unit, York University's Social Policy Research Unit and King's College London's Social Care Workforce research unit, the key findings were:
- There is little difference in the average costs of IBs and conventional social care support. However, national implementation of IBs would require substantial investment.
- People using IBs were more likely to feel in control of their lives than those receiving social care support.
- Satisfaction was highest among mental health service users and people with disabilities and lowest among older people.
- A substantial proportion of older people felt that taking control of their support was a 'burden'.
- Staff encountered barriers to integrating funding streams.
However, Department of Health officials pointed out that since the evaluation period ended in December 2007, things have improved in the pilot areas. In particular, the concerns of older people about IBs have abated and take-up has improved.
While IBs have traditionally been associated with the Department of Health, two other government departments have recently moved into this territory. In October 2008, the Department for Children, Schools and Families confirmed it would run pilots to provide IBs for children with disabilities and their families from 2009 until 2011.
Meanwhile, the government's new Welfare Reform Bill, introduced in January 2009, includes the right for people with disabilities to control much of the funding spent on them by government.