Structuring the Work Programme to change society: Serco's Richard Johnson debates and deliberates

Managing Director of Serco Welfare to Work, Richard Johnson, writes for Indus Delta's Debate and Delibrate section.  Examining the structure of the Work Programme, Richard argues that it will require a two-tier contracting infrastructure. He maintains that it will be absolutely crucial that the distinctions between the roles and capabilities of organisations in the different tiers are understood if the Work Programme is to be procured appropriately and delivered effectively.

Structuring the Work Programme to change society

The potential of the Work Programme is quite extraordinary - using savings generated in benefits to extend services to millions of more people currently excluded by unemployment. Locked out of society as a result of their worklessness. Trapped in a dependency on benefits that is debilitating, depressing and so horribly destructive.

The Work Programme has a potential that could transform families and communities. It is a model that could fundamentally change the relationship between the state and the frontline services which the state commissions/purchases. It has applications far beyond welfare to work, and is of considerable interest too way beyond these UK shores.

But if we are to realise that potential, I believe we must accept that it requires a fundamental shift in thinking.

There is a sense in some parts of the welfare to work ‘industry’ that the Work Programme is simply an extension of existing services with a greater emphasis on outcome-based funding. These are, of course, aspects of what is being proposed. However, they are a small part of an idea which is actually about the creation of a new structure, in which the state defines the desired product or impact of the frontline service and then contracts with an organisation to deliver those outcomes. In the process, the state shifts risk to that contractor, with potential reward as compensation. 

If an organisation is to take on this risk/reward contract, accepting a funding model that requires upfront investment in services with payments linked to long-term employment outcomes, they are clearly going to have to have three significant capabilities. These have been clearly set out by Ministers over the last couple of months:

• A financing vehicle that can a) act as a bridge between upfront delivery and outcome-based funding, and b) manage the transition between existing funding mechanisms and this new model;
• A network of service provision that will provide geographical coverage as well as meet the wide range of complex needs that will be presented by this extended group of service users. It will also benefit from alignment with associated services such as health and justice;
• Supply chain capability, once this network has been established, to maintain the wellbeing of suppliers, to facilitate their development, to professionalise the industry as a whole and to deliver continuous performance improvement.

I believe this implies that we are creating a new tier of contractor in order to deliver on the Work Programme. 

A key characteristic of the Serco model for Flexible New Deal is the clear separation between us as prime contractor and our subcontracted provision. I believe this enables us to have a ‘cleaner’ relationship with our subcontractors, objectively engaging with them on behalf of the jobseekers.

There is also a clear delineation in terms of our skills set. Clarity over respective roles is at the heart of constructive contracting.

Where this separation does not exist, in some of the welfare to work areas not managed by Serco, we continue to see poor relationships between prime and subcontractors, with consequent deterioration of service quality. The Merlin Standard is an attempt to ameliorate this, and I have sat on the steering group for the Standard. However, these relationships are principally determined by how things are procured from the outset and the contractual context within which they operate.

At Tier 2 it is obviously vital that we have a wide, diverse market of provision. In Serco’s three current operations we have over 60 subcontractors, and these are just delivering FND. Using multiple providers mitigates risk for us, should one of our subcontractors underperform or fail. It is a wider base from which to identify innovation and best practice, which we can then promulgate. Specialist expertise is brought in, as well as local knowledge and contacts. It utilises existing infrastructure, reducing start up costs. We are also able to use competition between providers to drive higher performance, underpinned by transparent performance reporting.

At Tier 1 we must be careful about applying the same assumptions. Is there any benefit to be gained from duplicating the infrastructure costs of the prime contractor within a region? If there were two Tier 1 organisations per region, there would be considerable overlap in their Tier 2 provision. In many instances they would be subcontracting to the same provider for precisely the same service in the same location.

It should be possible at some point to replace the Tier 1 contractor, with service delivery seamlessly continuing at Tier 2, as the prime contract vehicle is changed. To unlock the potential of the Work Programme concept, this is about a thriving, high-performing market of frontline provision and a separate layer of risk-carrying financing/commissioning.

This is not to say that we must not carefully monitor and benchmark performance. This can be achieved, however, through national comparisons, including identifying roughly comparable labour markets from within different regions. In the early transitional years of the Work Programme it is almost certain that the funding levels will have to be reset periodically, facilitated by open book accounting. Multiple Tier 1 vehicles within regions will not add any value to this process or to the wellbeing of the frontline services.

It is, of course, necessary to have some choice at that Tier 1. But sufficient, appropriate choice – given the nature of these contracts – can be provided if we have between three and six Framework Agreement contractors nationally with only one per region (and with any one managing no more than five regions in total). This is, for example, how the markets are managed for the electronic tagging and court escorting which Serco delivers, where there is no sense to have in-region competing provision but nonetheless a desire to maintain some diversity within the potential contractors come contract re-bid.

There is clearly a political will to include the voluntary sector in the delivery of welfare to work. I certainly agree that there is expertise and commitment within this sector that can bring a great deal to the table. Around a third of Serco’s FND subcontractors are currently voluntary sector organisations. (We also, incidentally, subcontract to a number of public bodies.) In many cases they bring a very local perspective or offer a particular specialism that enhances our service delivery considerably.

If the differential pricing is structured well it will attach additional rewards to the outcomes for individuals who are furthest from the labour market. These people are likely to require the specialist interventions which the voluntary sector can deliver – prime contractors will be forced, or at least incentivised, to engage positively with the sector.

It would also be possible to stipulate a % of subcontracted provision (or % range) that must be let to the voluntary sector. (This might be difficult without clear Tier 1 and 2 separation.) I have suggested in the past that there is a role here for a strong Independent Regulator. The Regulator could be responsible for resetting the prime contractors fees, and also for overseeing the relationship (including financial) between primes and subcontractors.

The Work Programme offers us a unique opportunity to do so much. Its application could be far reaching and run deep into society. One of my colleagues described this to me as a life-defining year. However, unless we accept the fact that this is a new way of thinking along with a new way of procuring, with a new structure to be created for the market, then we run the risk of squandering that opportunity.

Richard Johnson

Managing Director

Serco Welfare to Work