Ian Hasdell: Payment by results leads to services people really need

The momentum is not just being driven by the financial context. The enormous challenges around funding, and therefore spending, are the critical current concerns, but the underlying issues of improving productivity and outcomes are of even greater importance. This new reality is going to require solutions that go beyond spending cuts and efficiency drives and while a number of different ways of working are being explored, payment by results is a theme with a lower profile than it warrants.

Despite the dramatically altered environment, public service reform has not yet – with a few noteworthy exceptions – been radical; the underlying structure and culture of the professions, institutions and management has not been fundamentally challenged.

Meanwhile those responsible for running many of our local services are being compelled to re-motivate demoralised staff while creating a sustainable culture of bottom-up, fast-paced and ambitious reform.

Greater innovation in the sector will benefit those who call upon these services and payment by results needs to be a big part of this innovation.

It has a role to play in changing the system across education, health, employment and myriad areas by incentivising providers to offer public services in a more cost effective and efficient manner, realising the huge productivity improvements that are possible.

To give some context to the scale of this “productivity deficit”; if public sector productivity growth in the last decade had kept pace with productivity growth in the private sector, the UK could have received the same quality and quantity of public service for £60bn less per year.

Payment by results offers a different way of doing things, which could help us to move on from the sometimes dysfunctional debate about public services where politicians compete about how much money is spent on this service or that and where services with poor efficiency can only lower cost quickly by slashing frontline staff.

If implemented aggressively and consistently, it can fundamentally change what is achieved from spending on public services. It’s a set of new principles that would allow politicians to decide on what to fund and achieve; it would set competitive prices for those results (the funding) and give suppliers the freedom to make the changes to deliver the results for the prices on offer.

Certainly the austerity agenda is encouraging public service providers to seriously consider new and different ways of ensuring services are delivered; maybe this context is a critical factor behind the recent adoption of payment by results in some cases.

For example, in the last few weeks, Leeds Prison announced that from next September an element of its funding, as part of a new Government pilot, will be allocated on a payment by results basis, with some of its income contingent on achieving reductions in the number of inmates who reoffend after being released.

Such an outcome-based focus is a great way to link good ideas with financial consequences and stands to fuse the historic disconnect between performance management and financial management, which remains poor and has undermined reform to date. Ultimately, the key to reform is shifting control from providers to their customers and from bureaucrats to enterprising professionals. Public service providers, whether public, private or third sector, should be given huge freedom to respond effectively to their customers and be incentivised to do so through payment by results mechanisms.

There is no doubt in my mind that more widespread implementation of payment by results across our public services would be a positive step towards enabling people to receive services that better meet their needs. This is why it should be the default, with the onus on commissioners of services to prove by exception why the default is ever inappropriate.

It definitely will not fit every context. It also presents many risks and will create a lot of turbulence.

But where it does fit, it is an important tool for tackling public sector productivity, empowering public service providers and altering prevailing approaches to public service performance management.

It is essentially payment for success.

Iain Hasdell is KPMG’s Leeds-based partner and UK head of local and regional government.