Payment by results, outcome-based contracts or social impact bonds all need to be more than the latest ‘must haves’ for policy wonks and public service providers, if they are going to work effectively, says Dan Corry

Imagine that instead of paying someone for providing a service, we only ever paid them for what we really care about – namely, the outcome.

So, we did not pay the car repair person for mending the car, but paid a travel services company for ensuring that we did arrive in Bristol when we said we wanted to.

We did not pay the restaurant for delivering a decent meal but a ‘good evening’ service company, which ensured we had a great time, got there and back comfortably, and our friends we were going out with behaved well.

It’s an enticing prospect. Focus on the outcome, let the service provider deliver it any way they want – ‘innovate’, in management speak – and only pay them if they deliver. No wonder then that this is rapidly becoming the holy grail of the Conservative-Liberal Democrat Government attempts to reform the public sector.

Payments by results, outcome-based contracts, even social impact bonds, to finance it all. No self-respecting policy wonk or public services provider can do anything other than try to jump on this bandwagon. Leaders of third sector organisations are busily trying to claim this is what they have always wanted, and are trying to prove how they hit outcomes cost effectively.

And, of course, there is a lot in this whole movement. Get a focus on what people really want, don’t get obsessed about the process itself. And, in different ways, try to get money upfront into things we know work, to prevent bad outcomes which cost the taxpayer a fortune – such as children in care and ex-prisoners re-offending.

So, the experiment under way in Peterborough to see if we can do some of this with re-offenders is intriguing and we all hope successful. Some of the same approach was used in welfare to work, under Flexible New Deal contracts, where providers were rewarded, at least to some extent, on the number of people they get back to work and is being continued in the Government’s Work Programme. But, as ever, when fads hit the public services, we also have to be careful. Over-excitement can obscure the real problems and, rather than a useful innovation which works well in a few areas, we get a whole lot of misguided activity that eventually leaves a lot of disappointed, disillusioned and stranded people and organisations.

Think back to the ‘great evening’ example. In fact, we do care how we get there. Maybe auntie Agnes does not like to go by car so, in fact, we want to specify something about the process. In public services that is often the case. Then, how do we measure ‘greatness’? It is hard even to agree objectively, in a way that rewards can be based on, as to whether the meal itself was good or bad – one only has to glance through website Tripadviser and its variants to know how varied people’s experiences of the same service can be.

Putting it all together to be a great evening is almost impossible – as in the great Monty Python sketch where a dirty fork might destroy the evening for some – leading to the over-the-top suicide of the manager – even if for others it would hardly blip on the happiness monitor.

More generally, there are then classic economic problems. Give a provider – especially a ‘for-profit’ one – a results-based contract which gives them more reward the higher the proportion of the unemployed they get back into work, and they will inevitably indulge in forms of what the jargon calls ‘parking and cream- skimming’.

They will want to try to avoid – ‘park’ – those who they can clearly see will never get into work, and to focus – ‘cream skim’ – on those easiest to find sustainable jobs for. Clever contract design can try to minimise this, but it will never eliminate it.

When one then gets into the world of trying to fund such contracts, it all gets a whole lot more complicated. The ‘social impact bond’ is beloved by ministers at present, not least as it seems to offer a way through the severe spending squeeze.

The aim is to try to see if the private sector will lend money to providers – including third sector ones – to undertake their activity on the basis of getting a return based on the payments the provider receives, when and if they hit the outcomes.

Given that the returns are likely to be low, especially with the risks involved, it is unlikely to attract anything other than philanthropy or socially-inclined investors, as discussion at a recent social finance conference in London made clear.

But, it also becomes essential to design a contract which rewards only for the differences that the provider makes to outcomes. That means being able to measure the outcome in a way that all sides agree to.

In areas such as services for vulnerable children, these demands are very hard to meet and the effort to do so can become so complex and involved as to disappear into worlds more loved by financial analysts and lawyers than people genuinely trying to solve a public policy issue.

None of this is to rubbish the essential motivation behind this thrust of policy reform. It can take us forward in several areas. But, this is just to wave a flag saying, ‘Use it where it can work, but don’t kid ourselves we have suddenly discovered the equivalent of the perpetual motion machine.’

Dan Corry works at FTI consulting, and is a former Treasury and Downing Street adviser to ex-PM Gordon Brown