Subcontracting in public employment services: the design and delivery of ‘outcome based’ and ‘black box’ contracts: analytical paper

There has been growing interest in Europe in employment programmes that fund providers on the basis of how many people they successfully place in employment rather than simply on the number of people to whom they provide services. This report reviews recent developments in such subcontracting practices with a particular focus on the impact of ‘black box’ contracting where private providers are given flexibility to use their skills to design and deliver services for jobseekers and where their income is largely dependent on securing sustained employment outcomes. This approach has been most developed in the UK and the report considers the design and procurement of the large scale British ‘Work Programme’ (WP) which has replaced a large number of categorical, fragmented and shorter term programmes. In June 2011 a network of 19 ‘prime providers’ commenced delivery and it is anticipated they will assist in excess of three million people over the initial five year contract period. This report explains how the WP is financed and how providers are paid for long term employment outcomes. It then reviews how WP providers have utilised the flexibilities given by black box subcontracting and considers the composition of the supply chains they have developed and the service delivery strategies that are being implemented. Implementation of the WP has been impacted by higher than expected levels of unemployment and at a minimum it will take some time for the new delivery system to deliver the expenditure savings and increased employment outcomes anticipated. Nevertheless, development of the WP has involved a series of innovations in the design, procurement, management and delivery of subcontracted employment services that may be of relevance to other European countries. In particular the WP may have lessons for policy makers seeking to inject more flexibility in service delivery whilst reducing complexity and procurement and monitoring costs. The approach also gives subcontracted providers more freedom to decide how to help participants; allows them a longer period to provide help; and lets them intervene sooner. The Department for Work and Pensions also has negotiated innovative funding arrangements with the British Treasury which means that providers are partly paid from the additional benefit savings they help to realise when they support claimants into employment that is sustained for up to two years. In addition, there are differentiated payment rates for claimant groups to encourage providers to focus on the hardest to help as well as on those who are relatively easier to place. The innovations in UK procurement, contract design and service delivery do, however, carry important risks. The report considers in particular how well WP design is likely to safeguard the Department and service users from the risks, and criticisms, of ‘creaming’, ‘parking’, ‘gaming’ and fraud, often associated with outcome based payment systems.