Spend to offend (the outsourcing of probation)

The Ministry of Justice has set out the proposed payment mechanism for the forthcoming “rehabilitation programme” contracts (http://www.justice.gov.uk/downloads/rehab-prog/payment-mechanism.pdf). The mechanism appears to be a relatively straightforward and robust funding model. However, despite the rhetoric about a “rehabilitation revolution” (https://www.gov.uk/government/news/12-months-supervision-for-all-prisoners-on-release), this is the outsourcing of probation, pure and simple. It has the potential to deliver more efficient and effective probation services but is unlikely to have a significant impact on recidivism rates.

The background

Under the “transforming rehabilitation” plans, the current probation services will be broken up. Roughly 20% will be kept ‘in-house’ as a new national public probation service. From Autumn 2014, this service will be responsible primarily for risk management in the new system: “carrying out the critical roles of providing pre-sentence advice to court, assessing the risk an offender poses to the public, and directly managing those……… who pose the highest risk to the public.”

The remaining 80% of staff and activity will be pushed into “newcos”, (i.e. new ‘companies’) and will be transferred to the prime contractors who successfully bid for each of the 21 regional “rehabilitation programme” contract package areas (CPAs). The contractors will be responsible for delivery of all actions required of offenders (other than the high-risk ones) by the courts, such as Community Orders, Supervision or Unpaid Work.

If this can be assumed to encompass the whole £1bn of current spend on community sentences including probation: £200m is kept to fund the in-house risk management core; and £800m is outsourced – with two key provisos.

Firstly, people who are sentenced to prison for less than 12 months currently receive no supervision on release. Rates of re-offending among this group are particularly high. A key commitment of the “rehabilitation revolution” is to extend supervision to everyone in this group. This adds another 10%, c. 20,000 offenders, to the annual caseload.

Secondly, in outsourcing these services, the Ministry is looking for a saving. They must, after all, deliver on: “the MoJ commitment to deliver annual savings of over £2 billion by 2014/15”. In 2011-12, the Ministry of Justice total spend was £8.55bn.

Estimates vary but it is widely assumed in the market that the Ministry is looking to achieve a 20 to 30% reduction in expenditure through this outsourcing. This is despite the need simultaneously to increase the service scope.

The competition

In order to understand how this will play out, let’s consider this from the perspective of a would-be prime contractor. We are interested in Contract Package Area F.

After stripping out the risk assessment and high-risk offenders, the ‘old’ probation service in Area F currently costs a total of £30m a year. They spend 5% of this on external suppliers, delivering additional services aimed to rehabilitate. The remaining 95% is on overheads and delivery of the core court orders.

If we are to win this contract, our tender will have to meet a quality ‘threshold’. But we are old-hands at this outsourcing game and know how to tick all those boxes. It comes down to price.

We know that the MoJ is looking for a 30% cost saving. We are going to have to bid at around £20m per annum. For this, we will take on all court-directed activity, including new supervision orders for people receiving sentences of less than 12 months. It is not going to be easy! But our Board are very keen indeed for us to secure this contract. They have, after all, agreed with the shareholders some stretching growth targets that can only be achieved through new contract wins.

We will inherit in Area F the ‘newco’ of transferring probation staff. In order to make it work, we will have to: strip out overhead; look for significant redundancies on the frontline; take the remaining staff through a radical cultural change programme, rolling out a new rigour in performance management; and also find ways to deliver some of the court orders differently (for example, using call centres instead of face-to-face contact). This transformation programme is going to cost us a lot of money, which is obviously going to have to come out of the £20m too.

If we win the contract, the £20m will be paid to us in monthly installments. Only, it won’t be fixed at £20m for every year of the ten-year contract. It will be reviewed each year to take account of any fluctuation in volumes of offenders. It will also be reduced year-on-year, to make sure we keep improving and growing in efficiency.

If we fail to deliver what the courts require, then MoJ will claw money back. If re-offending rates increase in Area F, then MoJ will claw money back.

In an attempt to focus us closely on rehabilitation, we will only be able to earn profit, i.e. anything over and above the agreed service fee of £20m, if we demonstrate a reduction in re-offending. If we have a massive impact on re-offending, they will even let us earn “super profit”, though it will be capped. MoJ are calling this the Payment by Results (PbR) element.

So. We have to take the existing service, plus some extra supervision orders, and deliver it for 30% less money. The MoJ drive us to find efficiencies and to maintain effectiveness with the risk of clawbacks. Additional interventions, over and above the core court-directed service, will have to be funded either out of the money for that core activity or be investment we make at risk, in order to generate a return from profits.

Our initial focus must be just the core contract. We have a massive transformation to achieve. Let’s get the ‘newco’ knocked into shape. Let’s drive for a much smarter core service, targeting a small reduction in recidivism to mitigate the risk of clawback. If we can deliver this for less than the £20m agreed, then that’s our profit.

To show willing to MoJ, we could propose investing some money at risk. But our Board aren’t going to like it. We’ll try to hand that risk down to subcontractors, offering purely outcome-based payments, but after the Work Programme debacle, MoJ are discouraging this. We could try to draw in social investment, but that’s not particularly cheap money and there is, to be honest, insufficient potential return in the PbR element.

Conclusion

If the sort of service transformation indicated above is possible, then the Ministry will have outsourced 80% of probation services, maintaining the effectiveness of that service (i.e. with no increase in re-offending) and achieving a significant cost saving (c. £300m per annum). Assuming it’s financially viable and contractors don’t bid too cheaply and go bust, the proposed funding model addresses concerns over things like volume fluctuation and contractors ‘gaming’ the system or trying to cut corners.

What this certainly is not is a rehabilitation revolution. It is not a mechanism to deliver a big decrease in re-offending. In order for that to be the case, real returns would have to be possible from the introduction of entirely new services over and above court orders. This conflicts with the objective of cuts. Payment by Results or outcome-based funding does not necessarily mean additional results – when combined with simple cost-cutting it generally just means de-risking public expenditure through shifting to cash-on-delivery.

What a rehabilitation revolution requires is a ‘spend to save’ model. The savings are clearly there to be made. The MoJ cite the 2010 National Audit Office report, Managing Offenders on Short Custodial Sentences, which estimated that in 2007/8:

• The total cost to the economy of crime committed by recent ex-prisoners was between £9.5bn–£13bn;
• Of this, the cost of crime committed by offenders released from short prison sentences was around £7bn–£10bn a year.

To cut this waste, it is necessary to track the savings resulting from reduced re-offending and use a share of that saving to reward the investors who risk the spending in order to achieve it.

The biggest systemic challenge appears to be the fact that savings sit in different budgets. In this case, much of it actually sits within MoJ anyway, albeit within different silos of service delivery, such as the police, legal aid, courts, criminal injuries compensation and probation itself.

It is not helpful to pretend that this will be achieved within the outsourcing of probation. It could be commissioned hand-in-hand with that outsourcing but it demands a different contracting framework.

If it isn’t commissioned, the slashing of the budget will mean reduced spending delivers short-term savings. The jury will be out for some time on whether that level of spend also risks long-term rises in offending.

Courtesy of Richard Johnson at Buying Quality Performance