Is the UK third sector ready for the new social contract between the Big Society and the Small(er) State?

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On 11th July 2011, the coalition government put forward the Open Public Services White Paper, setting out the principles for reforming public services by reducing the Big State and empowering the Big Society. The Paper sketches the new contours for public service modernisation along five defining principles: choice, decentralisation, diversity, fairness and accountability. In the PM’s own words, this is the much needed reform to an “old fashioned, top-down, take-what-you’re-given” approach to public service delivery that was adopted “with all the right intentions” but “is just not working for a lot of people” any longer.

And the Big Society was not short of a response. Leading figures from civil society put forward Civil Dialogue: Ideas for Better Working between Government and Civil Society, a collection of think pieces that go beyond praise of the ‘co-production model’ and identify some of the barriers to change in new public service delivery. For decades, government and voluntary organisations have operated largely dissimilar organisational and capitalisation models. Payment-by-outcome commissioning is having its fair share of critics, who point at overstretched third sector organisations struggling to access multiple sources of capital whilst keeping their commitment to high quality social services. Besides, the long-term nature of the third sector’s commitment to diverse yet increasingly interlinked social causes could run the risk of slowdown under frequent policy and regulatory changes. 

But, is this painting too gloomy a picture for the future success of the new social contract between the the Big Society and the Small(er) State? It probably does! The UK third sector has a long tradition of creating economic value for social causes by blending private enterprise with the public interest. And it has been able to do so by adapting to competitive market pressures from the private sector and managerial pressures from central government. 

Prior to the introduction of the centralised welfare system after the 1942 Beveridge Report, social services in the UK were provided locally, mostly by voluntary associations or mutually beneficial cooperatives and societies. With the gradual privatisation and liberalisation of large utilities (e.g. transport, energy, telecoms) in the 1980s and 1990s, the prospect of a more diversified supply market for public services began to emerge. And although the Blair government’s New Public Management introduced a heavily managerial system of performance measurements set by the central authority for procured public services, the third sector was able to diversify its organisational structure in order to create economic wealth for social purposes (largely under the 2004 Companies (Audit, Investigation and Community Enterprise) Act, in conjunction with the 2005 Community Interest Companies Regulations and the 2006 Charities Act). 

Under this regulatory regime – not without critics pointing at ex ante regulatory burdens – charities, social enterprises and voluntary associations in the UK have been able to adapt their organisational models to competitive pressures from the private and public sector, in order to reduce costs and create innovative social services. These emerging organisational models rely on five pillars, adopting the best of both worlds (commercial enterprise and standardised performance management in service delivery): 

1. Brand Legitimacy/Credibility: third sector organisations use their long tradition in social service delivery to consolidate a unique brand image, providing a credible platform for operating in clearly defined market segments (e.g. Cancer Research UK, Oxfam, BUPA, Nuffield Health, Places for People)
2. Service Diversification: third sector organisations show great ability to use multiple sources of knowledge and capital (voluntary labour, financial resources) in order to adapt traditional services to interrelated social needs and create new services to respond more efficiently to the root of social problems (e.g. The Social Investment Business identified the need to couple traditional funding services with commercially viable business support; The Big Issue designed a commercially attractive product to tackle the problem of homelessness).
3. Measuring Quality/Efficiency: most third sector organisations in the UK use or have developed internal standards for measuring efficiency of their services and ensuring a standardised high quality of delivery (e.g. Places for People uses the London Benchmarking Group Framework to assess the community impact of its business)
4. Working in Partnership: most third sector organisations in the UK have experienced growth by setting up partnerships for particular social causes to enhance the overall social benefit of their services (e.g. Divine Chocolate promotes fair trade and is owned by two networks of farmers’ cooperatives)
5. Dynamic (Corporate) Governance: most third sector organisations rely upon a dynamic governance structure, which allows them to grow sustainably by using multiple funding streams: public tenders, donations, operating activity, partnerships in key business segments (e.g. Comic Relief, the National Trust, Women Like Us). 

Overall, this model allows third sector organisations to fulfil their social mission and enhance their social impact whilst preserving commercially viable models to generate surpluses for service development and innovation. Instead of diluting their social mission, these organisations use their community interest or charitable status for competitive advantage in service development, drawing on wider social resources through diversification of their revenue streams and collaborations with private and public entities, as well as local communities in order to deliver higher quality services at lower costs. 

Moreover, the five pillars described above are not applicable solely to large-scale service deliverers in the third sector, who benefit from established revenue streams and strong brands. Rather, this organisational model originates from small-scale third sector service deliverers, whose strategy has been to provide innovative social services from multiple funding streams whilst developing new means to use knowledge and technology more efficiently in order to do more with a set level of resources.  

However, these new organisational models might be exposed to new types of risks, other than those associated with regulatory burdens or undercapitalisation. Most of these risks cannot be limited by ex ante or ex post regulatory measures, but by careful internal management that looks beyond traditional aspects of economic analysis such as capital investments, performance or market conditions. 

In order for the third sector to be ready for the new social contract between the Big Society and the Small(er) State, it needs to turn its attention to the microdynamics of sector specific services and the dispersed interactions of private and public agents tied in complex networks of partnerships, multiple revenue streams and contracted services. In order to succeed in the long term, the new organisational models put forward by the diverse members of the third sector need to be assessed as part of the complex system they operate in, rather than modelled on traditional economic forecasting that treat them in isolation. The UK third sector is capable to operate innovative business models because, not in spite of, the complex network of service providers. Understanding this complexity will unlock the unique position of third sector organisations in achieving the necessary balance between the Big Society and the Small(er) State.  

By Irina Iordachescu

The NHS Funding Future is Greek

The NHS funding crisis is going Greek— insolvency not just liquidity. In the short term the obvious threat is from cash flow and there is the long term problem of whether the old service model can deliver quality and solvency.

The NHS from 2000-2010 did not just get large injections of cash—it got addicted to them and built its whole service model around them. It is a high cost model based on big capital projects and highly paid staff. The NHS used to run on limited staffing and obsolete capital. Now that option is no longer possible. The aims of quality, access and innovation are widely shared but they cannot be met simply by reducing costs on the old system. The Nicholson challenge is the wrong way round --- a strategy for redesign has to drive savings. Without redesign, the smaller system will simply deliver lower productivity, lower quality and longer waiting times.  

There is a strong consensus that admissions can be reduced –for example in cancer services there are 100,000 unnecessary admissions of late stage cancer patients. There could be more options for end of life care at home and we do not have the staff to give quality of care to elderly patients with medical admissions. Reducing or at least containing admissions is essential to quality: it is also a condition for solvency in the local health economy as consortia cannot afford to pay for an ever increasing number of admissions.

There is an alternative model out there for the making.  Key stages are prevention, early detection, ambulatory treatment and care programmes. This is what the much abused term integration is really about. Where this has been tried, as in the NSF for Coronary Heart Disease, the model has produced results which have both raised outcome and lowered total costs. The model depends on improved communication with patients the right side of the digital divide and on the willingness of GPs and clinicians to take responsibility for care programmes not just for care fragments.

The Nicholson challenge has to be seen as the start of a five year strategy for making sure that patients can get improved service from the new model. It can contain costs but only if we offer a better service to the Pareto group --the 20 per cent of patients which generate 80 per cent of the costs. We also have to raise quality by concentrating high cost services on fewer hubs.

There is already some progress to the new model but this tends to be in areas like Cumbria and Nene where there are few large hospitals. It is going to be very tough to get any forward movement in the cities especially after the loss of the London strategy. The next eighteen months are the time for a new sense of direction.

The final clue on solvency comes from the long term outlook for public spending. The UK is running out of younger tax payers and there are expensive commitments to improving pensions. Indexation of pensions to earnings is likely to double the cost of price indexation. The Treasury has made very definite commitments to the IMF to reduce the debt. There is no room for any special treatment for the NHS within these IMF commitments. The NHS now has political priority far beyond its fiscal priority.

Service redesign is the key to a service that can live within its means. The NHS now has vast guaranteed funding—can it use it better? 

By Nick Bosanquet

The full version of  this article was published in the Health Service Journal, 14 July 2011.

Paul Ormerod on Hard Problems in Economics

This is a summary of a presentation I gave in Zurich in June to FuturICT,  which is one of  the candidate flagship European Union research projects, each worth 1 billion Euros.

1.    Financial markets is a very hard problem, issues of agent heterogeneity, networks, learning, financial innovation, regulation – all these and more are important.  Mainstream economics has largely avoided the topic, content to believe in the efficient markets hypothesis.  A great deal of distinguished work has already been done by econophysicists.

2.    Inequality: where does it come from? This is not just a matter of the distributions of income and wealth.  A major concern of policy makers on say, outcomes in health care or education across hospitals and schools, is that such outcomes are ‘unequal’ in the key sense that they differ at any point in time.  This seems inevitable in any complex system of interacting agents, but it is often a major concern to voters and hence to politicians.

3.    Shortages:  food/water/energy – how do we avoid/mitigate these key social, economic and security-related problems.

Both these very hard problems require trans-disciplinary teams.  For example, Elinor Olstrom showed how societies evolve ways of dealing with the ‘problem of the commons’ to give outcomes which are quite different to those predicted by economic theory.

4.    What does it mean for an agent to be rational in the world of the 21st century?  We face a stupendous number of choices, many of which are complex and difficult to evaluate and distinguish between them, and we are increasingly both aware of and influenced directly by the behaviour and decisions of others across networks.  A sub-theme of this is: how do agents cope with the massive explosion in information and turn it into useful knowledge.

The old concept of rationality is no longer in general valid. 

This has very deep and widespread policy implications. Almost all existing policy is based on a view of the world in which autonomous agents maximise subject to constraints. In a world of interconnected agents where maximisation does not make much sense, what becomes the basis of policy?  How will agents react?  What are better ways to get them to react in ways which policy makers want?

This involves matters such as, individual learning, social learning, the evolution of self-image, networks (the relevant topology; how they evolve; who/where/when agents might copy).

So a very hard task is: what is the new paradigm for agent behaviour, one which in principle is general across the social sciences.

By Paul Ormerod

Nick Bosanquet: face up to NHS budget foes

First Published 26 November 2009 | By Nick Bosanquet

As rising costs and a tidal wave of public expectations push the NHS towards a new funding crisis, managers would do well to study the lessons history offers

This is the fifth NHS funding crisis with the same drivers - rising costs and increasing public expectations - since 1948. In managing this crisis, it may help to review the previous ones, which occurred in 1951, 1968, 1976 and 1987. After all, those who forget history are condemned to repeat it.

A crisis in NHS funding occurs approximately every 10 years, so the current one was due in 1999-2000, but was postponed by the promised rise in spending. Increased spending bought time but left the deep problems to be faced.

In the first crisis, spending increased 70 per cent, from £253m in 1948-49 to £400m in 1951-52, helped along by public expectations at the start of the NHS. But rising costs and public expectations soon collided with budget constraints. The NHS faced strong competition from the Korean War re-armament programme. The response of the Labour government was to freeze NHS spending at £400m and introduce prescription charges. In this case, however, the cost and activity pressures were weak and the crisis was not repeated for a long time.

The next crisis, in 1968, followed the 1967 devaluation of the pound. Chancellor Roy Jenkins was committed to making room for exports by cutting back public spending. The main casualty here was capital spending, through the postponement of the hospital building programme, and higher prescription charges. Later, the 1976 crisis, with Denis Healey as chancellor, saw a new round of reductions in capital spending.

The 1987-88 crisis was brought about more by rising expectations than rising costs. A tragedy caused by long waiting times for heart surgery at Birmingham Children’s Hospital triggered a review that led to the introduction of the internal market and to a period of much faster growth in NHS funding.

Debate in previous years had brought to the fore the issue of the minimum funding required to keep pace with changing technology and an ageing population.

Today’s crisis:

The 2010 crisis follows a period in which both costs and patient expectations have risen strongly. These forces have increased spending, which is about to collide with the budget constraint. This is bound to happen eventually, given the infinite nature of medical demand and the limits to public resources that would emerge even without a recession.

An early move, as in the 1988 crisis, is to seek more activity from the supply side - a productivity miracle. However, at present, this productivity miracle has mainly an extracorporeal existence in the various quangos floating like barrage balloons above the NHS. The reality for the NHS is service scheduling, professional demarcations and now rising risk to staff reputations from quality standards, which are as laudable as they are uncosted.

All this makes any change in the traditional pattern a very difficult task indeed and one unlikely to have results in the short term.

All these funding crises have had the same causes, but the consequences for staff and patients have increased over time. The 1950 and 1968 crises were mainly at the political level. There was little sign of strong pressure for more spending and services at the local level. NHS staffing was less than half what it is today and there was much less media interest. The 1987 crisis showed a rise in tempo, with much wider involvement from patient groups and much more far reaching effort to change the supply side through the internal market.

The crisis of 2010 will be more far reaching still because there are higher public expectations, more programmes and the NHS is much larger. Our political leaders will have a natural inclination to ignore the unpleasant realities to come, but if we are to reduce the human and social cost it is essential to face up to them. The funding crisis is likely to lead to a covert rise in waiting times - rationing by stealth. In a service with rather rigid production systems and fixed funding, a 20 per cent increase in demand over five years is going to mean that queues return. The information revolution and more explicit quality standards will raise this crisis near the top of the political Richter scale.

The remedies lie in explicit priority for patients with serious illness, giving more power and responsibility to local managers and professionals for getting more value out of the immense health budget, and more choice and competition.

The economic recession: where are we now, and how bad has it been?

The world economy as a whole is roaring away.  The 5 per cent real GDP growth on 2010 is almost the highest annual growth rate seen over the past 20 years.  And even in 2009, world output fell by only 0.5 per cent.

The problems have been almost exclusively in the developed world.  Looking at annual growth rates in 17 countries since 1871, the current recession can be placed in the context of 140 years of data.

Quarterly data is now routinely available, but for most of this period, this was not the case.  It only started in a few countries in the late 1940s, and gradually spread.  But for long term comparisons, we have to rely on annual data.

We can define a recession in two ways.  First, the successive periods in which (annual) real growth is less than zero.  Second,  the periods in which the level of GDP is below that of its pre-recession peak. 

I published statistical analysis of recessions 1871-2010 in Risk Management in 2010, which is on the papers section of the website, and I have extended it for a conference in Kiev in honour of Simon Kuznets in the ‘new’ section of the site.

Looking at the economies of  Western Europe, Canada, the US, Japan, Australia and New Zealand, the falls in output started to happen in the period from the third quarter of 2007 (2007Q3) to the second quarter of 2008 (2008Q2).  In almost all the 20 economies, growth had resumed by 2009Q4, and often earlier in 2009.  In Portugal and Spain growth resumed, albeit very haltingly, in 2010Q1, leaving Ireland as the only exception. 

So on this conventional definition, the recession was short, entirely in line with historical experience: over 90 per cent of all recessions last no more than 2 years.  The size of the recession across the sample of 20 countries varied substantially, but overall it was a pretty big one, with the average fall in output being arouind the third quartile of all recesssions.

Despite the size of the recession and the financial nature of the crisis, in 9 of the 20 countries, by 2011Q1 (the latest data), the level of output had exceeded its previous peak value.  This group includes America and Germany.

This perspective indicates that the recession was a serious one.  Even on this measure, very few recessions last for longer than 3 years, yet it has already lasted this long.  Some economies, such as France and the Netherlands, are close to their previous peak output levels.  There is a group (Denmark, Finland, Italy, Japan, Portugal, Spain, UK) where the level of GD remains 3 to 6 per cent below its previous peak – Ireland  again is the exception.

But overall, even the economies of the developed world have demonstrated great resilience in the face of a financial shock which had the potential to turn into a repeat of the 1930s.

By Paul Ormerod

Hybrid for happiness (because wellbeing matters, too)

Charlotte Alldritt, Senior Consultant and Hybrid Organisation Expert Panellist guest blogs on the importance of happiness and wellbeing in the workplace for Microsoft's The Hybrid Organisation.

Hybrid for happiness (because wellbeing matters, too)

Volterra supports HSR in the UK

The Transport Select Committee is currently taking evidence at the inquiry into High Speed Rail (HSR) in the UK. Volterra supports the development of an HSR network in the UK. With only 70 miles of high speed track, the UK lags behind countries such as Morocco with 422 miles and Saudi Arabia with 342. By 2025 Network Rail predicts that Japan, the first country to introduce HSR and with a similar geography to the UK, will have over 3,750 miles of track. International examples show us that HSR typically pays for itself through fares, quickly exceeds demand forecasts, delivers significant economic and regeneration benefits and reduces the demand for car and aviation trips.

The UK has historically underinvested in infrastructure – specifically transport – and it is vital that this is rectified if we are to continue to be globally competitive and to grow our way out of the recession. Volterra has long argued that cities are crucial to the UK’s economy, they are places where innovation and knowledge transfer can take place. We argued the concept of agglomeration in the context of Crossrail, this resulted in changes to the way transport investment is evaluated in the UK. Yet the evaluation methods still don’t capture everything, effectively assuming that the economy is a zero sum game – benefits in one place must be at the expense of somewhere else. The government’s case for HSR, even using the existing guidance along with conservative demand forecasts, still result in a strong case with a good return on the proposed investment. Investing in transport which can relieve capacity constraints on routes that are already creaking is crucial to maintaining the future competitiveness of the UK and its cities.

By Ellie Evans