Outsourcing Employment Programmes: Contract Design and Differential Prices
| Published date | 01 December 2010 |
| DOI | 10.1177/138826271001200403 |
| Author | Dan Finn |
| Date | 01 December 2010 |
| Subject Matter | Article |
PRoGRAMMes: ContRACt desIGn
And dIFFeRentIAL PRICes
Dan Finn*1
Abstract
In many countries employment services and labour market programmes, whether
delivered by public agencies or contracted providers, are found to be less effective in
meeting the needs of more disadvantaged job seekers compared to other unemployed
people. This article reviews evidence on how countries that outsource employment
programmes design outcome-based payments, contracts and differential prices to
ensure more equitable outcomes. It considers the extent to which such mechanisms
have mitigated the risks of ‘parking’ and ‘creaming’ which are commonly associated
with contracted out employment services.
Keywords: activation; creaming; differential pricing; outsourcing; parking; public
employment service
1.
INTRODUCTION
During the last two decades many governments have sought to ‘activate’ their
welfare states. Such activation has encompassed reforms which redefine the rights
and responsibilities of recipients of out of work benefits and transform the role of the
agencies delivering services to them (Eichorst et al. 2008; van Berkel and Valkenburg,
2007).
Implementation reforms have involved radical change in the bureaucracies and
institutions that deliver employment services and in unemployment and social
assistance benefits. Many national governments have decoupled agencies from central
Ministries, with policy makers now steering their systems through performance
targets and agreements, which specify outcomes to be achieved rather than budgets to
*
Professor of Social Inclusion, University of Portsmouth, SSHLS, Milldam, Burnaby Road,
Portsmouth, Hants, PO1 3AS, UK; phone: +44 (0) 2392 842192; e-mail: dan.finn@port.ac.uk.
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be spent (Nunn et al. 2009). Such ‘contractualism’ in its turn is often used to regulate
the relationship between the national agency and its regional or local offices. In
several countries national monopolies in the public employment service have been
dismantled, with the Netherlands and Australia in particular creating new quasi-
markets in the delivery of employment services and labour market programmes (Sol
and westerveld 2005).
There are differing views on the relative success of activation reforms and of the
impacts of the new service-delivery systems, with particular controversy about the
role of performance and outcome-based contracting on the experience of those who
have the greatest employment barriers. This article considers the ways in which policy
makers seek to target employment assistance and reduce the risks of ‘parking’ and
‘creaming’. It draws on detailed findings from a comparative study of four countries
– the USA, UK, Australia, and the Netherlands – which have been at the forefront
of implementing such reforms (Finn 2009). The research design for the study
combined an evidence and literature review supplemented by e-mail correspondence
and telephone interviews with experts in the four countries. The literature that was
identified and reviewed included monographs and survey, case study and evaluation
reports produced by policy institutes, academics and government departments.
2. PROCUREMENT OF EMPLOYMENT PROGRAMMES
There are wide variations in the delivery of employment programmes and welfare to
work services. In some countries they may be delivered by the Public Employment
Service (PES) itself. In others they are delivered through a more or less complex
network of public, private and third sector organisations. An OECD review found
that at least some employment and training programmes are outsourced in many
countries, with wide variation in which entity is responsible for purchasing, contract
terms and the scale of outsourcing (OECD 2007).
Traditionally the public bodies responsible for purchasing services and programmes
have specified the detailed design of the particular intervention and the criteria by
which participants are to be recruited. The public body also usually determined
the price to be paid, the terms of the contract, and the form which payment would
typically take: recurrent funding, a grant, staged payments to the provider, or fees
paid for services delivered.
The ‘performance revolution’ that gathered pace in the USA, UK and a number
of other countries in the 1980s saw the public bodies responsible for organising such
services adopting a wider range of management techniques. Clearer distinctions
were made between those who purchased and those who provided services and
conventional public service models of hierarchical planning, bureaucratic control and
budgetary allocation were reframed as market-based transactions. This often involved
management via performance agreements and contracts. Many public services were
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Intersentia
Outsourcing Employment Programmes
subject to ‘market testing’ and/or were contracted out to private providers. Such
changes enabled purchasers to shift the focus of their relationships with public sector
and external providers from ‘inputs’ and processes towards securing the specific
results that governments wanted. Greater emphasis was put on measuring and paying
for ‘outputs’ and, more recently, for the ‘outcomes’ secured.
Such changes of emphasis have been reflected in the contracts with which the
purchaser seeks to make their programmes more efficient and effective. Purchasers
are now more likely to hold contractors accountable for collecting and reporting data
on the services they deliver and to withhold payments or withdraw contracts from
providers who do not meet service standards. In a number of countries performance
payments have been made dependent on securing employment outcomes, with a
variable proportion of provider income related to success in placing, and keeping,
participants in jobs. The terms of such contracts differ widely, with varying amounts of
provider income dependent on securing agreed outcomes or performance standards.
Only in some welfare to work and employment programmes is a major part of provider
income dependent on securing sustained job outcomes.
3.
THE ADVANTAGES AND RISKS INVOLVED IN
DELIVERING EMPLOYMENT PROVISION THROUGH
PERFORMANCE AND OUTCOME BASED CONTRACTS
The transition to outcome based procurement offers potential for innovation, flexibility
and efficiency savings, and can act as a powerful tool for driving institutional and
organisational change. It also poses new challenges to policy makers who must design
contracting systems that balance the incentive effect of outcome payments with the
entitlement of service users to equitable treatment. Such challenges sometimes have
gone unmet. Poor design in outcome based incentives combined with ‘trade-offs’ in
programme objectives have been associated with risks to service access, costs, quality
and accountability (Considine 2005, Heinrich and Choi 2007, Sol and westerveld
2005).
Three particular risks are generally held to be heightened by outcome based or
‘pay for performance’ contracts (Koning and Heinrich 2010). The first is ‘cream-
skimming’, where contractors, paid by results, select more job ready or more easily
trainable participants who enable them to meet targets, rather than selecting those
who might gain more in the longer term. This is a particular risk when the group
eligible for a service exceeds the number of available places and/or when providers can
choose whom to admit to a service. The second risk concerns ‘creaming’ which can
occur even when the provider is required to take all designated participants. The risk
then is that a provider and front line staff may, self consciously, concentrate efforts
on those participants perceived as more easily trainable or likely to be faster placed
in employment. The third risk is ‘parking’ where more costly-to-help participants
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Dan Finn
receive only minimal services and make little progress in a programme. Arguably, the
most disadvantaged, those with the greatest employment barriers, are the most likely
to be ‘parked’. These risks are thought to be further exacerbated in the strongly ‘work
first’ welfare to work regimes of Australia, Britain and the USA.
Other risks involve the balance between the flexibility given to providers to
facilitate innovation in delivering contracted outcomes and the degree and form of
regulation and inspection...
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