oUtsoURCInG eMPLoYMent PRoGRAMMes

OUTSOURCING EMPLOYMENT 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: [email protected].

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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 quasimarkets 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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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 ‘creamskimming’, 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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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 required to ensure the quality of service delivery. There is also concern about the impact that poor provider performance has on the quality of service delivery, as cash flow is squeezed due to failure to secure outcome payments. These risks, including that of provider failure, are even greater when external economic shocks, such as the recent ‘Great Recession’, undermine earlier assumptions and outcome performance, even amongst the higher performing providers.

4.

PERFORMANCE BASED CONTRACTING IN THE USA

The transition to performance based contracting in employment programmes took place initially in the USA, following the implementation of the 1982 Job Training Partnership Act (JTPA) (Heckman et al. 2005). This legislation devolved funding and purchasing power to a national network of Private Industry Councils (PICs) and linked explicit performance outcomes with financial incentives to motivate agency staff. Annual performance target levels were set by the Department of Labor and the outcomes rewarded were designed to measure the return on public investment. High performing states could award PICs a bonus amounting to as much as 20 or 30 per cent of its regular budget which it could then use with more flexibility than allowed with its mainstream funds. These incentive systems were reflected in the contracts and payment systems between PICs and subcontractors, and, by the end of the 1980s, 80 per cent of PICs were making at least some element of payment dependent on outcomes (Felstead 1998). In time JTPA outcomes were amended to include placement in unsubsidised employment, retention for not less than six months in such employment, increased earnings, and skills acquisition, including basic skills and qualifications. Such standards were consolidated in the Workforce Investment Act (1998) (WIA), which replaced JTPA. The standards established under JTPA also served as the ‘prototype’ for their extension to other federal employment and training programmes, including the welfare to work programmes targeted at lone parent families (Heinrich 1999). Currently some 600 local Workforce Investment Boards (WIBs) are responsible for administering the WIA programmes in their areas, and for contracting with local organisations to provide services (Eberts 2009). Most WIBs subcontract programmes, services and ‘one stop’ centres to a wide range of public, for-profit and non-profit organisations. Local delivery areas and providers are usually held accountable for their performance against a combination of process and performance standards

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that include job placement rates, earnings, retention in employment and skills and qualifications obtained. Failure to meet these standards may result in financial sanctions, whilst high performance is rewarded. Surveys of welfare-to-work provision, funded through ‘Temporary Assistance for Needy Families’, suggest that nearly all states contract out at least some of their employment assistance services, and that several states contract out the delivery of case management services, employment programmes and the payment of cash benefits (GAO 2002, Jacobsen et al. 2005). One review of such welfare-to-work contracts distinguished between ‘fixed price’, ‘cost-reimbursement’ and ‘pure payfor-performance’ variants (McConnell et al. 2003). In practice many states used ‘hybrid contracts’ seeking to establish a balance between performance incentives, provider viability, and the delivery of particular services and outcomes. Even in the locality with the highest proportion of ‘pay-for-performance’, contractor viability was underpinned by a fixed monthly payment of 15 to 25 per cent of their budgets, irrespective of their performance (McConnell et al. 2003). Typical outcome measures used in such contracts include participation in work activities, employment placement, job retention, and wages or earnings. Other process standards measure, for example, the number of programme enrolments, completion of assessments, and accuracy of referrals. It is important to note that, in most parts of the USA, the proportion of provider income dependent on employment outcomes tends to be relatively low, ranging between 10 and 20 per cent. The key incentives in the US system concern the requirement that service providers meet a range of performance and outcome standards to remain eligible for funds or face the risk that a purchaser will choose not to renew a contract, in an environment where annual contracts or renewals are the norm. In Wisconsin, for example, a provider will be given a ‘Right of First Selection’ if they meet required performance standards with the contract only put out for competitive tender if the existing provider fails to meet such standards. It appears that the US performance system for skills training and welfare to work has, as with the earlier JTPA, tended to rely ‘more on procedural sticks than [outcome] carrots’ (Felstead 1998: 47).

5. WELFARE MARKETS IN GREAT BRITAIN, AUSTRALIA AND THE NETHERLANDS Other countries were influenced by US developments, and Britain was the first European country to implement ‘output related funding’. Training and Enterprise Councils (England and Wales) and Local Enterprise Companies (Scotland) were modelled on PICs and delivered a wide range of training and employment programmes. Introduced in 1987, these private sector bodies were funded through performance based contracts with an increasing proportion of funding dependent on job outcomes and qualifications gained (Bennett et al. 1994).


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The subsequent New Labour Government, elected in 1997, made reforms and relied on the Employment Service to deliver its New Deal programmes, albeit more intensive provision was contracted out. The Labour Government subsequently tested different outcome based contracts in delivering services for the long term unemployed and those on disability benefits. Significant experiments were initially undertaken in outsourced ‘Employment Zones’, which were extended to cover most high unemployment inner city areas, and subsequently in ‘Pathways to Work’, where contractors delivered employment assistance to new claimants of disability benefits in two thirds of Great Britain (Griffiths and Durkin 2007, NAO 2010). In 2008, the Department for Work and Pensions published a comprehensive ‘Commissioning Strategy’ outlining how it plans to develop a British ‘welfare market’ to secure a ‘step change’ in performance (DWP 2008). The strategy envisages that the Department will procure most provision from a small number of ‘prime contractors’ who will be awarded long-term, five to seven year, contracts. Most of the funding will reward sustained job outcomes for employment that lasts for six months or longer. Prime providers will be expected to deliver services through their own ‘supply chains’ with smaller and specialist providers acting mainly as subcontractors. By 2011, the public sector will handle benefit administration and early job matching, with more intensive assistance being delivered through prime contractors delivering the new Coalition Government’s ‘Work Programme’ (DWP 2010). Outsourcing and payment for job outcomes have also been central to the design of the market based employment services systems that were introduced in Australia and the Netherlands in the 1990s. In 1998, the Australian Government created a fully privatised employment placement market. Conventional programmes were replaced by ‘employment assistance’, where ‘black box’ contracting gave providers flexibility to decide individual service provision within a system driven by job outcome payments. These were weighted to provide greater reward to more disadvantaged jobseekers (Considine 2000). Benefits continued to be paid through a public sector agency, ‘Centrelink’, which was also responsible for profiling the unemployed to determine early access to intensive support. A separate ‘Personal Support Programme’ was created for those unemployed people who needed assistance with pre-employment barriers, and specialist programmes catered for those receiving disability benefits. Over the subsequent decade the ‘Job Network’ moved from ‘radical experiment’ to established institution, with the design of the system, and the outcome incentives, changed as policy makers adapted the model to secure greater efficiencies, deal with unanticipated effects and, through successive ‘welfare reforms’, redefine services to ‘activate’ more working age claimants, who included lone parents and some people who would previously have qualified for disability benefits (Considine 2005, Thomas 2007). In 2009, a fourth contract came into force. The new ‘Job Services Australia’ (JSA) model has been designed to provide greater flexibility, integrate generalist 294

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and specialist provision for the unemployed, and create better linkages with skills provision. In the new system job seekers are categorised into one of four ‘streams’, with the most job ready referred to stream 1 and those with ‘severe barriers’ referred to stream 4. The principles of the JSA market and outcome-based funding system are similar to those which characterised the Job Network. The payment system comprises service fees paid during participation, access to an ‘Employment Pathway Fund’ to purchase services for the jobseeker, and job placement and outcome payments paid after evidence of 13 weeks or 26 weeks employment retention. The level of resource per participant, and outcome incentive for the provider, increases in relation to duration of unemployment and the severity of the barriers faced, as indicated by the service stream to which the participant is referred. In the Netherlands the ‘reintegration market’ was extended in 2003 when the UWV, the social insurance agency, and municipalities were required to contract out their employment assistance programmes. The UWV, the largest sole purchaser, has successively adapted the market as it has sought to improve the efficiency of its contracted provision, personalise support and target intensive services at harder-tohelp participants. The initial tendering system involved relatively small contracts designed to tackle the barriers of particular groups of unemployed and disabled people with prices and outcome payment terms differentiated according to distance from the labour market. The tender system has now been displaced by a modular purchasing framework and Individual Reintegration Agreements (IROs). These IROs give harder to help participants more personal control over services and pay contactors higher fees and outcome payments for working with more disadvantaged participants. Municipalities were under pressure to contract out their re-integration services for social assistance claimants but the formal requirement has now been dropped. This followed the introduction of a new central government funding system. An ‘income fund’ pays for means-tested assistance and is determined using economic and social indicators. A separate ‘work fund’ is designed to pay for employment or reintegration services and can only be used to pay for such services. Any surplus in the ‘work fund’ returns to the Ministry but, should the municipality pay less than it is allocated in the ‘income fund’, it can use the surplus as it wishes. In terms of delivery the municipalities act as local prime contractors and, using devolved budgets, provide employment services either in-house or through contracts with private agencies. More recently other countries, such as Germany, Denmark, France and Sweden, have implemented reforms and are experimenting with outsourcing and with contracts that pay providers for securing sustained job placements (Jordan 2008, Lilley and Hartwich 2008).


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6.

‘CREAMING’ AND ‘PARKING’ IN CONTRACTED OUT EMPLOYMENT PROGRAMMES

A number of detailed studies of US workforce development and welfare-to-work programmes have sought to assess the impact of performance incentives and the extent to which such incentives have led to ‘creaming’ and ‘parking’. Evaluations of JTPA found that state agencies responded to performance incentives, and that service delivery was organised to maximise measured performance, with federal incentives strongly reinforced in the performance based contracts given to providers (Heinrich and Marshke 2008). Detailed statistical analysis showed that strong performance incentives encouraged the selection of more job-ready applicants and less willingness to use more intensive and expensive training provision. Even when case managers indicated a desire to help the most disadvantaged, analyses of their referrals showed that the ‘probability of meeting the standard was the most statistically significant and numerically influential factor in selecting applicants’ (Heckman et al. 1997: 393). Other studies suggest that differences in JTPA participation reflected variation in programme awareness across different groups as much as any selection bias in recruitment (Heckman and Smith 2005). A factor limiting ‘creaming’ and ‘parking’ meanwhile was the ability, over time, of policy makers and programme administrators to redefine and improve performance standards. For example, JTPA initially included cost-performance measures, based on how much was spent to produce a job placement. These were phased out in response to findings which showed that the cost standards were limiting the provision of more intensive services. Similarly federal officials changed technical enrolment and participation rules after it became evident that implementing agencies were manipulating start and termination dates to boost employment rates (Heinrich and Marscke 2008). A study of outsourced US welfare-to-work provision reported that there was no evidence, at least at the time of the site visits, that ‘creaming’ or ‘parking’ were significant problems (McConnell et al. 2003: 42). Providers pointed out, for example, that it was difficult to favour participants who were more likely to become employed because they could not identify those people easily, and most of their participants faced significant employment barriers. Moreover, by typically including outcome and process measures in the contracts they designed, purchasers mitigated perverse selection incentives. Evaluations of the Australian Job Network found that competition between providers and the outcome-related funding system stimulated some innovation and focussed providers and their case managers on entry into sustained employment rather than on inputs and programme commencements. The funding model allowed providers to tailor services to different participants, provide continuity of support

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through case workers, test methods for motivating jobseekers, and provide various post placement services. Providers developed new practices to identify and tackle individual employment barriers, from the development of new assessment tools, through to counselling in job-search techniques, rehabilitation, and short job-focused training (APC 2002, NESA and DEWRSB 2001). The Job Network became mired, however, in controversies about ‘creaming’ and ‘parking’, about the ‘gaming’ of the system by some providers, and about increased rates of sanctions as some jobseekers failed to negotiate complex participation and reporting requirements. Such criticisms informed successive redesigns of the system involving, for example, ‘ring-fencing’ a proportion of provider funding that may only be spent on services to job seekers; loading performance measures towards outcomes for the most disadvantaged; and using a ‘quality’ key performance indicator that enables the purchaser to scrutinise activity levels with individual participants, especially the very long term unemployed, and to intervene through contract management and reviews where ‘parking’ is observed. The latest Job Services Australia contract extends these developments with greater incentives for providers to work with more disadvantaged jobseekers, but there is little information as yet on the impact of the new model. The Dutch reintegration market has also undergone successive adaptations. One detailed analysis of the impact of UWV contracts between 2002 and 2005, which had moved from partial to full job-outcome payments, found some evidence of ‘creamskimming’ and ‘parking’ of those on disability benefits. There had been a three per cent increase in job outcomes for the unemployed following the transition to ‘no cure, no pay’ contracts, but most of the additional jobs lasted less than a year. There had been no increase in job placements for those on disability benefits (Koning and Heinrich 2010). Criticisms of the standardised ‘trajectories’ provided through UWV contracts had led to the introduction of individual budgets where service users are allowed to exercise greater choice about the re-integration trajectory they participate in, subject to case manager approval. Alongside these IROs the UWV has also since changed its approach and rather than purchase whole trajectories it now contracts with providers for fixed price standardised service modules with outcome based funding limited to job placement provision. Under the new system ‘re-integration coaches’ have acquired a central role and they determine which programme elements participants are referred to or whether a participant can access an individual budget. The changes have increased the discretionary power of reintegration coaches and significantly reduced the role of job outcome payments and the flexibility previously given to providers. It is not yet clear how the new forms of discretion are being exercised but there is already evidence that the caseloads of re-integration coaches are higher than planned and available budgets are limited – factors which are themselves linked to ‘creaming’ and ‘parking’ within both public and contracted out systems. Many Dutch municipalities now implement ‘work first’ strategies where social assistance recipients must be engaged in work or work related activities immediately


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after they claim social assistance (Sol and Castonguay 2007, van Geuns and van Gent, 2007, also see Castonguay and Sol in this thematic issue). Since 2006 they have also been able to decide which parts of their local provision they wish ‘to make or buy’ either through in-house provision or through contracts with external providers. A report for the ‘Council for Work and Income’ indicates that many municipalities have brought case management and initial assessment back in-house and no longer contract out full trajectories. In common with the UWV, the municipalities still contract out reintegration services but have developed a ‘modular buying strategy’ where they purchase shorter duration interventions whose results are easier to monitor and measure (Corra and Plantinga 2008). Assessments of outcome-based contracting and differential pricing in Britain have reported mixed results. Training and Enterprise Councils (TECs) had a complex funding system with differential payments for special needs trainees and higher cost training. The introduction of greater payments for sustained job outcomes for adult unemployed trainees was associated with improved performance (Coopers and Lybrand 1995). After a full outcomes-based system was extended, however, it was reported that providers became more selective, leaving specialist non-profit providers with ‘harder to place’ participants, thereby undermining their viability. Other problems also emerged about TEC-related payment systems with critical National Audit Office and Parliamentary reports (NAO 1995, 1996). These highlighted poor audit practices and ‘gaming’ in the system with duplicated and incorrect payments, inadequate supporting evidence for claims from some providers, and high level TEC reserves (Bennett 1994). There were high profile cases of providers registering non-existent trainees and placing trainees in temporary employment for a short time to trigger job outcome payments (Jones 1999). There were also criticisms of the governance of particular TECs, and in 1999 they were replaced. Employment Zones were subject to rigorous evaluations and these typically contrasted zone impacts with those of more standardised ‘New Deal’ interventions for the long term unemployed. The zone model was found to have somewhat better outcomes, largely attributed to their flexibility, the greater continuity and discretion of zone case managers, and the performance funding model. A synthesis report found no evidence from the evaluations that zones achieved their better performance through ‘creaming’ or ‘parking’ participants than did comparator New Deals (Griffiths and Durkin 2007). The Pathways programme, for people on disability benefits, was far less successful. A National Audit Office report found that providers were underperforming and struggled to secure job outcomes and revenue in an economy which, at the time of implementation, had just entered recession. The problems had been exacerbated by the speed with which the programme was introduced and by a poorly designed procurement process which had enticed providers to ‘bid low and promise high’ with the Audit Office concluding that the programme delivered ‘poor value for money’ (NAO 2010: 12). 298

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7.

CONCLUSION

The findings from the four countries reveal that contracting-out employment assistance services is not a simple option and that the systems have been in flux over time. In each country the implementation of performance and outcome-based contracting has been dynamic, and purchasing authorities have frequently had to revise performance standards and contractual terms as problems arise and conditions alter. There have been varied combinations of process and outcome payments, with some evidence that ambitious designs that pay more for job outcomes are associated with ‘parking. Securing the delivery of government objectives through contracts is prone to similar implementation problems experienced in public sector delivery systems. In the context of limits to the available funding, the availability of job opportunities and the tractability of the barriers faced by some disadvantaged jobseekers, it is inevitable that front-line agencies and case managers, in both the public and contracted-out systems, will prioritise those who they work with most intensively. In this sense ‘creaming’ may enhance the efficiency of the system but the challenge is in seeking to minimise the negative ‘parking’ consequences of such selection processes. In each of the national systems purchasers of employment services have sought to design contracts that reduce ‘creaming’ and ‘parking’ and target services at the hardest to help in a variety of ways. Such efforts may include requiring that providers accept all service users referred to them, whether by front-line advisers or by random assignment, thereby reducing the potential to ‘cream’ the most job ready. Purchasers may also mandate providers to service all participants and then scrutinise the delivery of such requirements through regular contract monitoring and/or customer surveys. They may set specific performance standards for assessing employment barriers and referring those who need specialist assistance to appropriate support. Provision may be targeted at the most disadvantaged within general contracts, through differential payments, or through separately procured programmes. Such separate provision typically offers different prices, funding arrangements and performance standards, during which participants are prepared for work and/or entry to ‘work first’ provision. Such programmes may offer rewards to providers for achieving performance milestones and/or employment outcomes. In general contracting, some purchasers also use differential pricing to provide an enhanced payment to a provider as a necessary incentive to work with more disadvantaged participants. Such differential prices are commonly calibrated with the characteristics of disadvantaged service users, as in the ‘streaming’ system now used in Australia. The evidence reviewed demonstrates that minimising ‘cream-skimming’, ‘creaming’ and ‘parking’ remain significant challenges in contracted out service systems but it appears that such risks may be reduced through careful design and oversight. The design of differential prices, the balance between service fees and outcome payments, and inclusion of measures related to job retention, wages and benefits, and earnings gains, for example, may all help diminish any incentive European Journal of Social Security, Volume 12 (2010), No. 4

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to ‘park’ the harder to help or place participants into poor quality jobs. Measures indicating completion of assessments and activities and regular surveys of participant and employer experience help limit the ability of providers to service participants differently. The challenge is to design such pricing, process and outcome measures in ways that protect service users whilst enabling providers to exercise flexibility to drive innovation and efficiency in how they secure sustained employment outcomes.

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