An Interactive Tool for commissioners, investors & providers

1C. Can payment by results stimulate innovation?

One of the main reasons that proponents of PbR champion the approach is because of its potential to stimulate new answers to old problems.

But do PbR schemes stimulate innovation?

New answers to old problems?

Politicians and social investors have made much of the potential advantages of payment by results for stimulating innovative approaches to entrenched social problems.

Perhaps the classic model of PbR is one where the commissioners stipulate the outcomes they desire and then wait to see whether providers deliver them, safe in the knowledge that if providers fail to meet the contract requirements, they will not be paid. This model typically espouses a “black box” approach where providers are free to design the service in any way they see fit. This freedom is the factor that facilitates the ability to innovate combined with the fact that providers will not need to invest time and resources in regular performance monitoring and meetings with commissioners, being judged instead solely on the outcomes they achieve.

The evidence

To date, the evidence on whether PbR stimulates innovation is very mixed. There are a number of positive examples:

However, these examples are in the minority. The DWP-commissioned study of the outcome-based contracting of the Work Programme did find innovation in provider-led pathways; but these were much more about reducing operational costs and achieving performance efficiencies rather than developing new, more effective ways of helping long-term unemployed people into work.

PbR can reinforce old methods

A number of research studies found that, especially when contracts were very tightly priced, providers felt pressurised to stick to tried and tested methods of working for fear that they would not get paid and their service (or indeed the parent organisation itself) would fail. This same attitude often applies to investors too when, as is frequently the case − especially in the US − PbR schemes are funded by Social Impact Bonds or other forms of social investment.

This "we can't afford the risk of being innovative" phenomenon has been found to be the case in an number of arenas:

The research has found that PbR encourages such close attention to measurement systems that the focus of commissioners and providers is often much more on numbers than on new ways of working.

What forms of innovation?

A review of PbR for the RSA argues that payment by results tends to encourage three categories of innovation:

  1. Identification of those beneficiaries for whom particular service models will work best;
  2. Creation of effective management processes (for example, through joining up fragmented supply chains) enabling services to be tailored to different classes of beneficiary; and
  3. Encouragement of much greater co-production on the part of beneficiaries.


In their comprehensive report on payment by results in 2015, the National Audit Office summarises this situation and acknowledges that current PbR models do not seem automatically to stimulate innovation and recommends that where commissioners are specifically seeking new ways of working, providers are likely to expect additional financial incentive.

In other words:

If commissioners want PbR to stimulate innovation, they need to pay for it.

If providers want to try an innovative approach, they need to make sure commissioners or investors fund it sufficiently and should consider piloting the approach first.




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