11 August 2011 | Rebecca Ellinor

David Smith and John Michalski tell Rebecca Ellinor about the crucial part played by procurement in delivering an essential piece of the UK government’s welfare reform

The Department for Work and Pensions (DWP) has, it believes, just set a new gold standard against which all future public sector procurements will be judged. Together with colleagues outside procurement, the commercial team has transformed a political wish into reality in just 12 months. It has struck what it calls a ground-breaking commercial deal, with minimum cost to the tax-payer, and says this work is now an exemplar of procurement.

The proposition was to get people off benefits and into work. Instead of spending so much money on benefits to support people who are out of work, the idea was to redirect some of it to help them back into employment – and pay only for results. So if suppliers don’t get people into work, they don’t get paid, and when they do, it’s out of the benefit money that’s been saved.

“What’s truly ground-breaking on a government contract of this scale is it’s the first financed by outcomes. Providers don’t just get paid when they get a customer into work, it must be sustained work,” explains DWP commercial director David Smith (left).

While most people who sign up for unemployment benefits find work again quickly, some need more help. The Work Programme, which went live in June, is a £3.3 billion deal that replaces 13 older schemes and covers the whole range of client groups. There are eight categories of client and the Work Programme is for all of them, including those who are hardest to help.

System benefits

Under the scheme, there are at least two lead suppliers in each region and Jobcentre Plus divides clients between them. Those providers are challenged to get the jobless off benefits and into sustainable work. Over time, the more successful providers will be assigned more clients. Previously they were paid by activity, so just trying to get people into work was enough – but not anymore. Now they get paid in three ways. There is a small attachment fee for taking an individual on (phased out over time), then once a client has a job, the supplier gets a placement fee and, after several weeks, monthly payments for up to two years provided that person stays in work.

“For those organisations that are willing to invest, there is a healthy profit in this for them and a tail of two years’ worth of payments,” says Smith.

DWP also makes provision for a certain number of customers who will naturally find work. Another change is that instead of prescribing what suppliers should do and when, the DWP has put ‘black box’ arrangements in place. This means it’s up to providers to decide how to best help that individual back into work. Suppliers, therefore, have to be able to cope with any type of customer, quickly assess their needs and refer them to a suitable sub-contractor – which could be anything from a local charity to a small- to medium-sized business – to provide the right type of help. This might be confidence, skills, CV-writing or job-readiness training, or individuals might require help with social skills. This assistance requires upfront investment by the providers and means the risk is held by them – if they don’t succeed in getting people into work, they don’t get paid.

“They’ve got to pay all this money up front, hire staff, put infrastructure in place and there’s no guarantee that, other than the attachment fee, they’ll get any reimbursement unless they get people into work,” says John Michalski, head of strategic sourcing (right).

Even so, there was no shortage of companies who wanted to sign up. “We got 170 bids in for 40 contracts,” Michalski confirms. “There’s bigger risk, but a greater reward because if they get someone into work, there’s a revenue stream for two years, if they do their job right.”

Several existing providers have become prime contractors and sub contractors, with new suppliers also coming on board. Blue chip names include G4S and Deloitte.

DWP sought prime contractors with good supply chain management as it’s anticipated that around 1,100 third-sector and SMEs will deliver elements of the programme. This is because they’re expected to be better able to deliver a personalised, local service. It’s also in line with government policy.

“They had to be able to source, support and manage SME and voluntary sector suppliers,” says Smith.

Meanwhile, Michalski points out that small organisations based in one town are needed to specifically target hard-to-help people. “A big part of this is how you align these organisations and how the bigger ones will manage the supply chains,” he says.

Savings yield

The opportunity cost-saving alone of the new arrangements is £250 million. That accounts for the discount negotiated with all organisations for the administration fee. The department does not yet know how much more will be saved.

“You could argue that if the value of this contracting is £3 billion, that’s how much benefit payment we will not have to pay,” says Smith. “Plus there are huge soft, social benefits. When people are in work, they’re less likely to use the NHS or end up in the penal system.”

Michalski adds that rather than paying that money in benefits, it’s funding training and making people job-ready. And where previously there were around a dozen deals the DWP had to manage, there is now one, which gives the team time to carry out more strategic work.

Fewer customers for DWP leads to other “downsizing benefits”, says Smith. “As part of the government’s austerity measures, we are significantly reducing our headcount in this department – there are far fewer commercial people than before. This [the Work Programme] helps us to do this.”

While some of the old, legacy programmes came to a natural end, in other cases a large amount of negotiation was required to bring them to an early close. For the DWP, it was a huge commercial challenge to put the whole new process in place.

“There was a political ambition to deliver it quickly,” says Smith.

Ministers began discussing their plans in June 2010, shortly after taking office. Since then, DWP has gone through two significant procurements: the framework of prime contractors delivering employment-related support services, and the procurements within that. To do it quickly, they had to find a new way of working. “We had to sit down with policy colleagues just to work out the commercial solution for how we were going to do it,” says Michalski.

“That initial phase was quite different for us. Normally, they would say: ‘This is what we want.’ Here, we were saying: ‘Let’s work this up.’ We spent a lot of time with policy and ministers. We had a couple of ideas and suggestions that we put to them, pulled them apart and put them back together, and then went back to them. It was an evolutionary process.”

Alan Cave, delivery director at DWP and one of the key internal customers of the commercial directorate on this project, says: “We wouldn’t have had a chance of achieving this if we hadn’t have had that closeness from day one.”

Once it was clear what was wanted, the commercial team set the procurement strategy timetable and worked out how it could get new providers on board and support them with investment.

“The commercial community in this department and other colleagues worked hard to generate interest and investment to bring in new players,” says Smith. “We also worked with the financiers and the finance market to generate the enthusiasm and interest to invest in some of those existing providers, plus the many new ones coming in to the market. We believe our market management has invested £500 million into the sector.”

The challenge now is to meet an expectation that future DWP procurements can be done as quickly.
“I think we’ve set a new standard,” says Smith, also the deputy chief procurement officer for government. “I spend half my life in the Efficiency and Reform Group doing other things. I know the Cabinet Office minister sees this as a ground-breaking piece of procurement because of the
pace at which it was carried out.”

So why haven’t they done it before?

“In many instances we have, but not on this scale,” Smith answers. “That’s because of the ministerial desire, enthusiasm and actual support – ministers have been working on this on a daily basis.”

And he embraces this new, heightened expectation, adding: “Our spend and profile is significant. We want and have to be the pioneers of procurement excellence in the public sector.”